The Economy

HL Deb 12 February 1991 vol 526 cc31-104

4.43 p.m.

The Minister of State, Department of Trade and Industry (Lord Hesketh): rose to move, That this House takes note of the current state of the economy.

The noble Lord said: My Lords, much has been written and said about the present state of the economy. However, I suggest that little attempt has been made to put recent developments in context. That is my purpose in calling this debate. I want to set the record straight and in particular to distinguish between the cyclical position of the economy and its underlying health.

First, I shall deal with the cyclical position. The reality is that from a very high level of economic activity, reflecting cumulative and sustained growth during the previous nine years of nearly 30 per cent. in total, output has been falling for the past six months or so. There is no shying away from this on the part of Government—business conditions are tough, tougher than they have been for years. Cyclical downturns when they come, as they inevitably do, are painful. Some jobs created during the upswing are lost and some firms which were started up when times were good go out of business. These developments are not welcome but they have to be faced up to rationally and recognised for what they are—part of the necessary dynamic process in a free market economy.

In the 1980s the UK's trend, non-inflationary, growth rate recovered from the depths plumbed in the mid-1970s to stand at about 2.75 per cent. per year. Noble Lords may be interested to know that, according to IMF and OECD studies, of the G7 major industrial countries, the UK is unique in achieving a potential growth rate back at its late 1960s level. No other G7 country has seen such a recovery; neither Japan nor the US. The potential growth rate of the UK economy is now above that of France or Germany.

In the four years to 1988 the actual economy, as opposed to the theoretical economy to which I have just been referring, grew at an average annual rate of 4 per cent.; that is the fastest four-year growth period since the Second World War. That rate could not be sustained. The economy was living beyond its ability to deliver the goods despite the big increase in productive potential resulting from the Government's supply side policies. Something had to give in the face of the excess demand, and that something was the rate of inflation. By 1986 we had succeeded in getting inflation down to 3.4 per cent., but it reared its ugly head again following a period when, it is clear with hindsight, monetary policy was allowed to become too lax. Inflation is, to borrow the phrase used by the noble Lord, Lord Callaghan, in his autobiography "the enemy at the gate". It wrecks stability and confidence and destroys the prospects for long-term growth and prosperity. That is why we have never shirked from taking whatever steps are necessary to bear down on inflation.

Those with short memories have suggested that we are currently in the grips of a recession of the 1980–81 variety. Others, of a more apocalyptic frame of mind, have drawn parallels with the 1930s. Both descriptions are wide of the mark. In the 1980s the UK enjoyed an unusually long period of growth reflecting major improvements in the underlying performance of the economy.

I wish to point out to those who would accuse me of being selective with my figures that the record since 1979 has also been impressive. GDP has increased by about a quarter in real terms. Business investment has increased by twice that, by more than 50 per cent.; and with greater quantity has come greater quality, evident from the return to profitability in recent years. That investment has been undertaken by more firms than ever before, with about a third more businesses operating in 1990 than in 1979. More firms employ more people than ever before. In the third quarter of 1990 total employment was 2 million higher than in 1979.

That list is by no means exhaustive but it indicates that companies are now more resilient and better able to cope with an economic downturn than they were a decade ago. Therefore, it is not surprising to find that in a recent survey of the largest UK companies 80 per cent. said just that. It will take more than a cyclical setback to wipe away these gains of recent years.

The gains have been given a firm foundation by the Government's continuing commitment to policies to reform the supply-side of the economy—policies directed at removing the straitjacket of restrictive practices and low incentives which by the 1970s had left the UK economy too ossified to respond to the changing structure and pattern of world demand. As a result, we seemed condemned to an ever falling share of world trade and a seemingly irreversible decline in relative standards of living.

I should like to pinpoint five key elements in the transformation under this Government. The first is the reform of trade union law. Managers have been given back the right and ability to manage. Industrial relations have improved out of all recognition. The number of industrial stoppages in 1989 was the lowest since 1935, while the number of working days lost in the year to last November was one sixth of the 1970s average.

The second element is tax reform. Five major taxes have been abolished—NI surcharge, investment income surcharge, capital duty, capital transfer tax and development land tax—and two more are to be abolished. Those are stamp duty on share transactions and (as I know my noble friend Lord Boyd-Carpenter will be the first to remind the House) composite rate tax on interest.

The remaining taxes have not escaped our attention. The basic rate of income tax has been slashed from 33 per cent. to 25 per cent., and the top rate from 83 per cent. to 40 per cent. The UK corporation tax rate at 35 per cent. is now one of the lowest in the industrialised world. The 1984 reform of the corporate tax system means that investment decisions are no longer governed by the availability of tax breaks: companies now have a clear incentive to choose between worthwhile and worthless investment. People are once again rewarded for taking risks, working hard, and investing in themselves.

The third key factor is deregulation. The Government have swept away the mass of unnecessary rules and regulations, and the red tape which distorted decisions and hampered enterprise. It is astonishing to recall that under Labour companies had to obtain permission before they invested abroad; to submit pay settlements to the pay board for scrutiny; and to seek clearance for the payment of a dividend.

The fourth factor is the help for small business that has been instrumental in rekindling the entrepreneurial spirit. The enterprise allowance scheme has encouraged over 440,000 people to start up on their own. The small firms loan guarantee scheme has helped to finance around 20,000 businesses.

Lord Bruce of Donington

My Lords, I am grateful to the noble Lord for giving way. Will the Minister explain how what he has been saying for the past eight minutes relates to the current state of the economy?

Lord Hesketh

My Lords, I am sure that the noble Lord, Lord Bruce of Donington, will be speaking later in the debate in your Lordships' House. One of the reasons the debate was called is that it is important to remind noble Lords of the foundations created in the past decade which have sometimes been overcome by smoke in more recent times.

The structure of capital transfer rates for small companies is now the most favourable in the EC and has been to the benefit of all. The massive increase in the number of those entering business on their own account and the continuing rise in the number of firms, despite the current downturn, shows that the entrepreneur, a species close to extinction in the 1970s, is once again alive and kicking. This Government's approach has given entrepreneurs renewed confidence to invest and take risks. The venture capital industry also was non-existent in 1979; but in 1989 members of the British Venture Capital Association invested 1.65 billion.

Last, but certainly not least, competition has been extended and encouraged wherever possible. By far the most dramatic restoration of the market has come through the privatisation programme. The fruits of the transformation are there for all to see in the return to profitability and growth in productivity throughout the public sector, and beyond. Indeed, across the entire manufacturing sector such have been the productivity gains that on average someone working in manufacturing now produces half as much again as he did in 1979.

It is well worth looking behind those aggregate figures at the transformation wrought in specific industries; for example, the United Kingdom motor industry. For a long time it epitomised all that was wrong with United Kingdom manufacturing. In the 1950s it was an internationally competitive industry with a large trade surplus. But the industry lost its way in the 1960s and 1970s. Market share fell in both domestic and export markets and eventually the trade surplus turned into a deficit as the industry reeled from the blows inflicted by poor productivity and poor industrial relations. Government policy only served to make matters worse through promoting a series of misconceived mergers, and eventually the only remaining major United Kingdom-owned car maker, British Leyland, had to be rescued by being taken into state ownership.

The story of the past few years has been very different. Productivity growth in the 1980s averaged 7 per cent. a year, an increase of some 80 per cent. in total. Days lost through strikes have fallen dramatically; the level in the second half of the 1980s was running at only one-tenth of that in the second half of the 1970s. Moreover, the state got out of the business of vehicle manufacturing by returning Rover Group and the other constituent parts of the old British Leyland to the private sector. And they have been very successful in producing cars that people want to buy both here and abroad, and producing them efficiently. Rover is now one of the most productive vehicle manufacturers in Europe, with output per employee more than three times as high as in 1979.

In common with other industries, output for the domestic market has declined recently as the economy has slowed. In response, manufacturers have switched their attention abroad: car production for export increased by a massive 45 per cent. in 1990 leaving total output virtually unchanged. Market shares have stabilised after decades of decline; that is clear evidence of the new-found resilience and flexibility of our motor industry.

Looking beyond the current downturn, prospects for the UK motor industry look very good. Substantial investment in recent years, in particular by Japanese manufacturers, means that we can expect to see a sharp rise in UK production capacity over the next few years. New plant capacity for at least half a million cars a year will be up and running by the middle of this decade. And, contrary to the jibes which we sometimes hear, these are not just assembly plants using imported components. It is expected that the cars produced by Japanese owned manufacturers in the UK will quickly move towards a local content of 80 per cent. Sunderland-built Nissans, Burnaston-built Toyotas and Swindon-built Hondas should all in time contribute to a further substantial fall in the UK's trade deficit on cars.

The counterpart of those improvements in the supply side is an increase in real incomes. I have already made mention of the increase in profits but for the majority of people it is earnings that count. Real take-home pay for the average family has risen by almost one third since 1979. As real incomes have risen over time, so have the marketed wealth holdings of all groups in society; up by 60 per cent. on average in real terms since 1979. And the greater wealth of the nation is much more evidently and widely spread. Seven-and-a-half million more people than in 1979 have net assets worth more than £5,000 in real terms. There has been a three-fold increase in the number of shareholders since 1979. Privatisation, not to mention ESOPs and other schemes—from which about 2 million employees have already benefited—have helped in encouraging one-in-four of the adult population to become shareholders. Since 1979 owner occupation has risen steadily. Now more than two-thirds of British houses are owner occupied. The Right to Buy programme has transformed the council house sector; 1.5 million public sector dwellings have been sold.

However, progress does not stop at the front door. According to a recent study, almost all homes in the UK now have a colour television; a further 25 per cent. more than in 1980. Nearly three quarters of all homes have central heating; 10 per cent. more homes than in 1980. And one quarter more of all homes have a washing machine. Many in this Chamber will remember when those were unattainable luxuries for all but the few. Innovation fuelled by growth has brought them within the reach of the vast majority of families in this country.

This increase in prosperity is not unique to the UK. Other free market economies have seen their living standards rise. But in the UK they have recently been rising faster, reversing the trend of decades. Put simply, we have stopped the rot. In the 10 years to 1990, UK growth in GDP, investment and productivity was faster than in Germany, France or Italy. As a result, in terms of GDP per capita, the latest figures show that by 1989 we had significantly narrowed the gap with Germany and France, and put space between ourselves and Italy.

I have spoken at some length about past achievements. But what do those achievements count for now? They suggest forcefully that our current difficulties will not amount to a repeat of what we experienced in 1980–81. That is neither likely nor necessary. Then a severe world recession coincided with a long overdue restructuring of British industry. Now, as I hope I have made clear, the main problem is to squeeze out the consequences of the unsustainable rapid demand growth of 1987 and 1988. Over the past two-and-a-half years the commitment to bearing down on inflation has been unwavering. As in other areas, events in the Gulf make immediate prospects uncertain but the trend in inflation is manifestly downwards. Our current forecast for 5.5 per cent. inflation by the fourth quarter of this year is not just achievable but is at the pessimistic end of the range of current independent forecasts.

Joining the ERM has reinforced our anti-inflation policy and demonstrated plainly the Government's absolute commitment to get inflation down. Over recent months some people, including some who initially welcomed our decision to join, have begun to question our resolve to abide by our ERM obligations. But there can be no doubt that we joined at the right rate, and a rate at which British companies can compete in Europe. The excellent export performance of the motor industry highlights that fact. Indeed our central rate in the ERM of 2.95 deutschmarks is close to the average real rate over the previous decade.

There will always be calls for devaluation when the economy slows, whatever the level of the pound. But devaluation creates problems rather than solves them. Devaluation would throw away the benefits of lower inflation and can only undermine industry's competitiveness in the long term. In the 1970s, the pound depreciated by one-third. But United Kingdom competitiveness deteriorated by 20 per cent. because prices and labour costs rose more rapidly in the United Kingdom than in competitor countries. The Government have made a firm commitment to stick with the discipline of the ERM. The experience of other members shows that over time this will bring inflation down to the level of our European competitors. We are confident that low inflation will bring with it a return to sustainable growth. Past experience points to this outcome and the increased efficiency and flexibility of the economy increases its likelihood. And once inflation is decisively down we will be able to build on the achievements of the past 11 years and grasp the opportunities that those foundations have provided for the betterment of all in this country. I beg to move.

Moved, That this House takes note of the current state of the economy.—(Lord Hesketh.)

5.3 p.m.

Lord Peston

My Lords, I thank the noble Lord for his speech. Having heard it, I am in great difficulty: obviously, like other noble Lords, I did not know what the Minister was going to say. In the past 20 minutes I have not had time to rewrite my speech. Therefore, I hope that noble Lords will forgive me if I say that the economy the noble Lord described seems to bear no resemblance whatever to the economy I intend to talk about. It is as though we were discussing two completely different countries.

I hope that my remarks will be realistic, even sombre. I do not apologise for that. As I shall try to demonstrate, the present position is extremely bad. No government—I underline those words—can put matters right without taking decisions that will fall harshly on probably all members of the community. We read in the newspapers—and the noble Lord has confirmed my fears—that the Government will cut and run on the back of a successful conclusion to hostilities in the Gulf. I hope not. We also read of possible pre-election budgetary sweeteners. Again, I hope not. Indeed nothing could be more dangerous. The public must be told. We on our side will certainly tell them that there are no costless ways out of the position we are in. That does not mean that the problems are insoluble; merely that there are no quick and easy fixes.

I shall endeavour to present the problems in as professional and dispassionate a way as possible. If we can agree on what the problems are, there may be some meeting of minds on the solutions. Although I shall not hesitate to criticise the Government, it is not my intention to engage in political knockabout by saying. "You were worse than us." I am simply not going to waste your Lordships' time with that. Little of my contribution is devoted to the European Community. We have had such debates. I believe that EC matters are in danger of ruining discussion of more pressing issues. Noble Lords may choose for themselves, but I shall concentrate on the UK economy.

The present position may be summarised under five headings. First, inflation is too high. It is falling, but even on the most optimistic forecast it will stabilise at a level above what is compatible with stable membership of the ERM let alone any entry into EMU. Secondly, unemployment is too high. It is rising rapidly. It is impossible to forecast with precision when it will cease to rise or how it will ever start to fall again. Thirdly, the balance of payments on current account is still strongly in deficit. The deficit is falling but too slowly. It is not at all apparent when a surplus will emerge. Fourthly, output is falling. It should start to rise later this year but again it is difficult to see when we shall get back to a satisfactory long-term growth path. Fifthly, our underlying rate of growth, as the noble Lord said, has been restored to the level of the late 1950s and 1960s. However, it is still below what is desired. We have a long way to go on productivity.

All these difficulties are inter-related. I reiterate that any government, whether the next Labour or the present Tory government, will be unable to avoid them. All I can do today is to make some suggestions about how the problems might be solved. In doing so I shall concentrate largely on the short to medium term leaving the long-term questions, especially concerning growth and efficiency, to my noble friend Lady Blackstone.

I shall now say a few words about objectives. Clearly, we must do something about the problem of chronic inflation. At the same time unemployment on the scale of the past 12 years—followed by recent increases which look to take the figure well past the 2 million mark in the next couple of months—again reflects badly on the whole nation no matter what the political hue of its government.

The Government sometimes talk as though they give 100 per cent. weight to the inflation problem and zero weight to unemployment. I find that odd. It means that they would allow unemployment to rise to any level in order to deal with inflation. Others, including myself on occasions, have talked as though only unemployment matters. But that too is not a sensible position. We could not—even if we wanted to—protect full employment without paying due attention to accelerating inflation. That was the point of the remark made by my noble friend Lord Callaghan which the Minister quoted. Therefore, the question is: what weight should be attached to reducing inflation and what weight should be attached to reducing unemployment? I hope that the Government have now learnt to avoid the weasel words, "If you only concentrate on inflation, unemployment will take care of itself satisfactorily". Surely they must have learnt something—although listening to the noble Lord I am beginning to wonder —from the experience of the past 12 years.

When talking about objectives I wish also to say something about the external side. Surely we must agree that the current account has to be moved into surplus within the next five years, if not sooner. We need to restore the position of our net foreign assets. It is a commonplace to point out that the current account is related to a sustainable rate of exchange. I shall trespass for a moment on the territory of my noble friend Lady Blackstone. Investment in both the public and private sectors needs to be raised and kept high. I refer not only to plant and machinery but also to research and development and what is called investment in human capital; that is, training and education.

I shall not spend a great deal of time flooding your Lordships with numbers. It is interesting however, to consider a few calculations. If we start from the present level of gross domestic product and assume that it grows by its underlying or average rate over the next five years, it will be about 13 per cent. higher after that interval of time. It seems to me a pretty modest target to suggest that the current account should be in surplus by then. But for that to happen, four of those 13 percentage points must be transferred into the current account. If, then, investment is also given high priority—there is, I believe, no difference between any of us on that—and is encouraged to grow at, again, a modest rate of 5 per cent. per annum, that will take another five percentage points of the 13. The result is to leave only four percentage points of growth of GDP for consumer expenditure on the one hand and for central and local government current expenditure on goods and services on the other. That leaves the following problem.

If government current expenditure on goods and services grows at the same rate as GDP, private consumption expenditure cannot grow at all. Equally, if consumption grew fairly modestly, say, at 2 per cent. per annum—much less than in the past decade, which was excessive—then government current expenditure on goods and services would have to fall. Moreover, if transfer payments, whether on child benefit, pensions or the disabled, were to be given priority, even less would be available for consumption expenditure out of the income of those at work.

These figures will not be news for the Minister's Treasury advisers. I see that at least two former Chief Secretaries are present for the debate. The figures are not very different from the kind of material they used to get when they were in positions of power. Therefore, in drawing them to your Lordships' attention I do not claim novelty. I am simply addressing noble Lords in an endeavour to get them to see things realistically. Let me add that I am addressing noble Lords on my own side of the House at least as strongly as I am addressing noble Lords on the other side. I hope that noble Lords have understood the nature of my argument. I regard what I have said as fairly moderate. It would be no difficulty whatever for me, wearing my true professor of economics hat, to paint a much bleaker picture than the one I have just presented.

I must say a little more on inflation. We must tie the economic system down in an anti-inflationary way. Monetary targeting has failed; in my view, it could never have succeeded. Incomes policy appears to be unacceptable, although I remain an unapologetic supporter of it, albeit in a more sophisticated form than we have used in the past. We return therefore to a fixed exchange rate system with the exchange rate mechanism. It may be that the rate we have chosen is too high—whatever that means—and that the bands, as noble Lords know, are too broad. I have said that a slightly lower rate within the ERM with narrower bands would have been more desirable. But that is now all bygones; it is done. In that respect I strongly agree with the noble Lord, Lord Hesketh. Having done it, anti-inflation policy—our credibility—requires us to stick to the rate and convince people that we intend to do so. Whatever government are in power, if they say they regard devaluation as a viable option they are also saying that they accept that this country is inflation prone. Curiously therefore, devaluation would actually cause the Treasury to have to deflate the economy even more in due course.

What follows is that if we have lower interest rates in these circumstances, in the absence of dealing with the institutional forces which make us inflation prone, we must have a tighter fiscal policy. Given both the indigenous and exogenous pressures—they do not come from just our side of the political spectrum: they come extremely strongly from the other side—if we have these pressures for higher public expenditure, taxes must be increased. That is another way of saying that consumption must be reined back.

It was a mistake to lower taxes in the first place. Doing so was one cause of our present inflation. Despite some siren voices, we cannot lower them again now. As a Keynesian, I am amused to notice a new Keynesianism in the Government and in those supporting the Government. They say that the correct way to finance the Gulf war is by borrowing. They say that a budget deficit is acceptable in a recession especially if we are also engaged in hostilities. If they take that view I have to say that they cannot also advocate lower interest rates. In present circumstances, if monetary policy is eased, fiscal policy must be tightened; otherwise the present reduction in the inflation rate will be reversed before very long.

On the subject of siren voices, I cannot refrain from referring to the monetarists, who had better be nameless, who do want reductions in interest rates and taxes immediately. Keynes must be laughing in his grave. In fact he would accuse them of imprudence just as much as I do. More to the point, Professor Friedman must be wondering why he ever bothered with British monetarists and the British economy at all.

In this connection I note how modest is the Government's inflation target. The Treasury still seems to be content with reaching 5 per cent. per annum, which is above the EC average. Certainly the Germans seek to do better and will do better. I repeat that if we are to survive in the ERM, let alone enter EMU, 5 per cent. inflation is not a long-run viable position.

This takes us back to the central question of economic policy. How are we to maintain full employment subject to the constraints of not deviating from the inflation rates of our chief competitors? The Government have had a dozen easy years to solve this problem. I would emphasise how easy it was for them. They had North Sea oil; they had a big majority in Parliament. They had a dozen easy years to solve the problem. They have failed. Whether they failed wilfully or otherwise I shall not venture to say. They thought that attacking the unions or reducing the relative size of the public sector would solve the problem. They thought that administering the short, sharp shock or the blunt, long shock of large-scale unemployment would solve the problem. But none of it has worked. In every case they have failed.

The noble Lord is right to ask us to distinguish the short-run cyclical position from the long-run position. It is apparent that any attempt to run the economy flat out or get close to full employment leads inexorably, despite the Government's efforts, to an excessive inflation rate. It looks as if we have a choice between permanent widespread unemployment or massive inflation and, as I hope will be recognised, a new government who will tackle all this in a different way.

The trade unions have indicated that they are again willing to talk about these matters. They have said that they are willing to approach again the question of wage bargaining on a national scale and in a way which will be helpful. They were turned down out of hand by the Government last year when they made such offers. I am happy to say that the Prime Minister has reversed many of his predecessor's policies. Indeed, the political climate seems to be such that his predecessor had never existed. Now is the time for Mr. Major to extend the hand of friendship to the trade unions.

I have said that fiscal policy must remain relatively tight for the foreseeable future. I must add that where it is eased it must be to help investment and not consumption. How tight it needs to be depends upon how close we can get to, and how rapidly we dare approach again, full capacity working. Again, I reiterate the point. The improvements we have had so far in inflation and in the current account are cyclical in nature. In other words, they will not be permanent unless the Government announce that from now on they regard the figure of 2 million and more unemployed as being permanently acceptable.

There were those who argued that there was no trade-off between inflation and unemployment. They convinced Ministers of this, with the result that we now have both high inflation and very high unemployment. Worse than that, the desirable decline in unemployment, which we had until last year, went hand in hand with a rapid rise in inflation. Now we have a government-induced rise in unemployment to deal with the added inflation. Therefore, the unemployment-inflation trade-off remains; all that has happened is that the Government have made it a great deal more disadvantageous.

There must be a better way which would enable the economy to grow and keep itself near to something which could validly be called full employment, without giving rise to high inflation and large current account deficits. Efficiency measures which improve the quality of the labour force, improve the infrastructure and restore the position of manufacturing industry would help, but ultimately we must find a more rational way of settling nominal incomes.

In my view we can construct a set of institutions which would allow all sides of industry to set broad nominal income and expenditure guidelines but within which decentralised bargaining could take place. As I said, several trade unions tried to move us into that position last year. They were rebuffed. However, it is not too late. Even if this Government will not consider it, the next Labour Government will. The prize is too great to be thrown away. I say that because the prize is the restoration of full employment in a non-inflationary environment.

I cannot speak for those on the other side. But we on this side—that is, I, my noble friends and my friends in another place—will go for the objective of full employment without inflation from the moment we take power. Above all, we believe that the public want to be told the truth about our parlous economic circumstances. They do not want to hear false promises about how easy it is to improve matters. Harsh decisions need to be made and we on this side are certainly ready and able to make them.

5.22 p.m.

Lord Jenkins of Hillhead

My Lords, there is no doubt that our new Prime Minister, who in many ways has made an attractive and hopeful start, has inherited an economy which is in a most dreadful mess. One is inclined to feel some sympathy with him on that account. But then one pauses and asks from whom he inherited it: who was Chancellor of the Exchequer for the past year—admittedly not the period when the worst faults were made; but not a period of heroic correction either—and who was Prime Minister for the past 11½ years?

This Conservative Government, in their 12th year of untrammelled power, feel forced to throw everything into controlling a rate of inflation which is out of line with the world and which is entirely their own creation. They have to do this against a background of a cumulatively pathetic balance of payments performance and, still more serious, on the treacherous ground of a dangerous recession at home which, aided by the nervous psychology produced by the war, could easily spiral out of control. Meanwhile, favourable comparisons with the performance of other countries, which always depended largely on the statistical trick of pretending that the years 1980 and 1981 did not exist, look increasingly tawdry. I remember how the noble Lord, Lord Young of Graffham, in days that now seem almost infinitely remote, used to regale us from the Dispatch Box with a Panglossian view of Mrs. Thatcher's economic miracle.

The strategic fault was that inflation ought to have been attacked when the boom was running high and not left to be dealt with in the much more dangerous circumstances of bankruptcies, mounting unemployment and falling profits and confidence. But that was certainly not the mood of 1988 and 1989. I hesitate, as always, to introduce political controversy into your Lordships' House, but I must say that it is one of our more extraordinary national myths that the Conservative Party is the party of sound finance. All of our most profligate Chancellors have come from that party.

When I was at the Treasury there was an ingrained sense of official guilt that they had allowed that most amiable figure, Reggie Maudling, to do what he had done in the Budgets of 1963 and 1964, and a corresponding determination (about which there was not much need to worry) that I should not do the same in 1970. Then we had the noble Lord, Lord Barber, who was hardly a Gladstonian figure. He turned round every indicator for the worst, produced the highly unstable Barber boom and a most dismal end for the Heath Government. Then, most generously making the sins of his predecessors look like peccadilloes, we had Mr. Nigel Lawson and ultimately the position in which we find ourselves today.

There has been some tendency to seek an alibi in the exchange rate mechanism and to blame everything on four months of membership. To be fair, there has been no hint of that from Mr. Lawson or M r. Major—I suppose that they could hardly say so—but both the old and the new anti-Europeans have been hard at it. I notice that my very old friend Lord Wyatt of Weeford was among them in The Times this morning. He contributed the piercing thought that, Mr. Major has handled the British war effort precisely as Mrs. Thatcher would have done". I must say I regard that as being well within the category of the Duke of Wellington's famous remark apropos Mr. Smith. In other words, anyone who would believe that would believe anything. But, apart from that, he attributed a large part of the blame on the ERM for the economy being in a worse mess than it need be. The case is that the date and circumstances of our belated adherence to the ERM defy a respectable rational explanation. So many more favourable opportunities had been allowed to come and go. Of the 139 months which have elapsed since the establishment of the European monetary system, I would say that October 1990 was among the 20 per cent.—if not 10 per cent.—least favourable months in which to enter. I say that mostly because of the prevailing exchange rate with the deutschmark and because German interest rates were being forced upwards by the new responsibilities of the Federal Republic in the East. The only considerations on the other side were a shift in the balance of power within the Cabinet and the desire to produce an interest rate cut on the eve of the Conservative Party conference. I suppose that they could be regarded as rational reasons, but they were hardly respectable from the point of view of the national interest.

I have not the slightest doubt that earlier membership would have benefited us both in lower inflation and in lower interest rates. The same will be true in the medium run. The trouble is that we desperately need an interest rate reduction in the short run. Otherwise, the repercussive effects of the downturn in activity may become devastating for business confidence. It is ironic that the worst effects of the present slump should be concentrated upon the flowers of the enterprise culture, especially in the South-East, which has been so much the apple of the Government's eye. Yet there are, I suppose, some compensations in that; for it will make the Conservative Party more sensitive than most of it was to the industrial devastation, mainly in Scotland and the North of England, which was such a feature of the first half of the 1980s and which was left to sweat itself out, principally in Opposition constituencies.

The Government had to kill their own monster of inflation at 10 per cent. in a largely non-inflationary world, but I doubt whether it is right to concentrate on only one part of the dial on the panel, as the Prime Minister came near to doing last Sunday. It is generally a mistake to try to fly an aeroplane with such a narrow gaze. It is also, unfortunately, a little reminiscent of the concentration on the monetary madness—as I always regarded it—of the early 1980s when M1s, M2s, M3 and then MO—the indefinable in pursuit of the unattainable, as it was once described —now forgotten, were treated as eternal deities.

The Government will have to balance a number of different objectives, including some stimulus of the economy and of business confidence: a tightening of fiscal policy, combined with a slight loosening of monetary policy, which I regarded as right a year or so ago. Whether that is a possible combination, the recession having been left to reach its present position, I am not as sure as the noble Lord, Lord Peston. Nor am I as sure as he and the Minister that there might not have to be some readjustment of parities within the EMS. It would be the first for about seven years, although previously there were quite a number —11 altogether, I believe, carried through smoothly, and rightly not regarded as the traumatic equivalent of a Bretton Woods' devaluation.

It could conceivably be that, having gone in at the wrong time and probably the wrong rate, we shall need a settling-in one, but it should not be more than that. It could not be regarded as a vote of confidence in the state of the British economy, if we come to that, if we were the only country for seven years to need one. However, fortunately we are not being asked to give a vote of confidence today. Indeed, a vote of sympathy would be a good deal more appropriate, both to those who have to defend the Government's mismanagement which has taken place and to its victims throughout the country.

5.34 p.m.

Lord Stevens of Ludgate

My Lords, perhaps I may first apologise for the fact that I have to leave before the end of the debate. Unfortunately I did not realise that it would be starting so late and I have a long-standing commitment of which I am the host. Perhaps unfortunately for those present, I have to make another speech.

We are asked to note the state of the economy. I do not believe that many of us would dispute that it is in recession. It may not be productive to spend time discussing how we got there. However, let me just say that after the stock market collapse of October 1987 I went on public record stating that the fall in the stock market should be ignored. The reasoning behind that was simple: it was caused by a panic and what I described at the time as a "computer glitch"—basically, a larger than normal desire by investors to sell stocks worldwide was met by the virtual refusal of dealers to deal. The Government's view was that a collapse in the market must be telling us something, and the reading which they made—mistakenly—was further to inflate an economy which was already fast expanding.

A stock market collapse affects the economy most directly if private shareholdings are a substantial part of the market, because that affects personal wealth. Many commentators referred to 1929 which was irrelevant. In 1929, in the United Kingdom, private investors' shareholdings amounted to some 60 per cent. of the market capitalisation. Today, private investors directly own 20 per cent. A stock market collapse does not, therefore, have the impact on private wealth that it had many years ago. Having over-inflated the economy, we are now suffering the consequences.

The golden scenario, where again many commentators—and not only commentators—said that the national debt would be repaid by 2000; that income tax rates would drop to 20 per cent. or 15 per cent.; and that Government expenditure would continue to decline as a percentage of GNP, seems to have disappeared.

The reliance solely upon interest rates to control the economy is a mistake. They are too blunt an instrument. They take too long to have an effect, and, furthermore, this country is used to relatively high interest rates. Unless those rates, therefore, are maintained for a considerable time they will have little effect because everyone assumes that they will be reduced in the relatively near future, and so consumers do not adjust their spending habits. We should have used credit controls and fiscal means to restore the balance. There are, of course, ways around credit control as there are around high interest rates. Higher interest rates directly affect less than half of property owners Mortgage periods can be extended. There are low-start mortgages. Some building societies put their rates up only once a year.

One has only to look at the effectiveness of monetary policy in Germany and Japan to see that there are other means of controlling the economy. The administrative guidance issued by the Bank of Japan since the middle of 1989 is a fine example. Known as "window guidance", that credit control device reduces bank lending growth by imposing a limit relative to total loan growth in the corresponding quarter a year earlier. The limit currently stands at 66 per cent. As a result, hank lending in Japan has slowed dramatically and is having the desired effect on activity. The consequence is that although interest rates have been raised, they are much lower than in the United Kingdom.

Every time that this country has a major recession, as in 1980–81 and now, a portion of our manufacturing business is destroyed, making it even harder to climb back up the other side. That is why our trade deficit represents such a large proportion of GNP and is yet again at an unsustainable level. The same problem will arise when the Government reflate the economy this time, unless they take measures to encourage savings and capital investment.

However, having said that, I believe that thanks to this Government—I endorse the speech of my noble friend the Minister—we are in a better position than in the past to recover from the recession. Productivity has increased substantially over recent years and is capable of further improvement. Labour restrictions have almost disappeared. Management can manage. Substantial and vastly increased capital investment has taken place. The Government have encouraged savings with PEPs and TESSAs. They should continue doing so. They should not be deterred by the fact that the initial reaction is one of switching from less tax efficient means of saving. We must raise the savings level in this country, although a substantial improvement from 3 per cent. to 8 per cent. has been seen recently.

Thanks to this Government, therefore, the framework exists for a recovery from the present recession, but we should be in no doubt that the economy —to use a phrase often quoted —"fell off a cliff last summer". It was already falling rapidly before the Gulf war, but we should not allow ourselves to use the war as an excuse, or our judgment may well be clouded. It remains for me to say that I hope the policy of encouraging savings and encouraging the private investor—that probably means by fiscal means—will be continued and improved upon. Means will have to be found to encourage investment and to control credit and money supply more effectively in the future. We cannot use the ERM as a palliative to make up for our own failures in controlling inflation. However, there comes a point at which it may be better to have a modest degree of inflation and some growth rather than high unemployment and no growth. Our rate of unemployment on the whole is below that of the rest of the EC—considerably below in some cases. Sadly, it is probably true that in order to control inflation and return to a period of lower but steady expansion, unemployment would have to rise to nearer the EC level.

I believe that, for the reasons I have given, the recession, while severe, may be a temporary pause in a long-term expansion of the UK economy. However, a reduction in interest rates, which must occur sooner rather than later, will take time to work through. Lower rates may not encourage borrowing if industrial output is still declining and costs are being cut. Nor will it do so if the general mood is very depressed. Lastly, it will not do so if the banks are not prepared to lend. Businesses cannot change their current position—which is one of cutting costs as rapidly as they can, freezing recruitment and laying off employees—to one of expansion at the turn of a switch.

In my opinion, the economy will therefore continue to be in recession for some considerable time. The worry must be that if consumers start to feel more confident their requirements can only be met by imports which will compound the problem in the future. The aim must be to avoid the violent fluctuations and achieve steady and consistent growth.

5.40 p.m.

Lord Donoughue

My Lords, it is quite clear from every economic statistic published every day that the Government are in an economic mess. That is not a partisan point, it is a matter of objective economic numbers and, subjectively, of hardship and suffering for millions of people in our society. The CBI's latest survey of industrial trends graphically describes the bleak plight of British industry. It concluded that the prospects for production and employment are the worst since the recession of 1980–81. For exports, investment and profits are the worst for many years.

Output in the economy will surely fall by 1 per cent. or 2 per cent. this year. Investment in the third quarter was down 8 per cent. on the previous year; export prospects have turned massively pessimistic and unemployment is rocketing, probably towards 2.5 million by the end of the year; as bad on comparable numbers as in 1981. Business confidence has slumped. That is not simply part of a worldwide slump. The UK for example, is the only major country where production, investment and employment are falling. It is not because of the Gulf war; all those figures were collapsing before the war began. The detailed evidence of this economic failure is clearly set out, even in the Government's own announcements. I shall not continue with it and bore the House, I believe that there is no argument about it.

I wish to focus on two aspects of the present situation: how the Government slid into this predicament; and what are the economic policy alternatives to get the country out of the mess? The explanation of the economic failure is not difficult. It involved four successive phases of policy misjudgments between 1986 and 1990. Together they constitute, I am afraid, total monetary mismanagement.

Phase one was the deregulation of building societies in 1986 which, as the Bank of England has just admitted, released a credit bonanza. That was before the Stock Market collapse. I agree with everything the noble Lord, Lord Stevens, said on credit control. Phase two was the phoney boom generated for the 1987 general election, when existing monetary laxity was converted into profligacy in order to create the false mirage of the economic miracle. Where is that miracle now? Phase three was Chancellor Lawson's error in linking sterling to the deutschmark in 1987–88 at absolutely the wrong time. The German economy was then flat and needed the boost of lower interest rates. In Britain, already suffering from the monetary laxity to which I referred, the result was ballooning credit and inflation. The fourth, fiscal phase, was the final boost to inflation imposed by the poll tax and other Government-inspired social charges.

This mixture of monetary and fiscal ineptitude basically caused the present economic plight. The huge scale of the monetary failure has led inevitably to the huge scale of the credit crunch which is necessary to correct it. Millions of British people are paying the price in record bankruptcies, record mortgage debt and we are now heading for intolerable levels of unemployment.

What is the Government's policy in order to get out of this mess? It is not an easy task and my noble friend Lord Peston was honest in the way he faced that fact. The Government are boxed in, as I have said before. They need to cut interest rates to deal with the recession, for political reasons. However, they cannot reduce interest rates much and at the end of the year inflation will come tumbling down; but interest rates will not tumble far with it. The Government cannot reduce them far; they need to maintain the rates because it is necessary to squeeze wage rates and to keep sterling in line with the deutschmark in the ERM.

By targeting an exchange rate as we have done, especially at a perilously high level, we have lost room for domestic monetary manoeuvre. Like my noble friend Lord Peston, I agree with keeping to it now that we have it. However, there is a price to be paid for having entered the ERM at the wrong time and at the wrong rate. I agree with all that the noble Lord, Lord Jenkins, said about that.

Moreover, we have once again, as in 1987–88, targeted the deutschmark at a time when the German and British economies are out of phase. That is important: one is expanding, the other contracting. In 1987–88 this led Britain's credit boom, because our interest rates were forced lower, to become out of control. In 1991 it is pushing us deeper into recession by keeping our rates punishingly high.

Thus the Government are boxed in. In our debate in November, the noble Lord, Lord Hesketh, pulled my leg nicely by stating that there was no lid to my box. All right, I accept that. However, let him tell us how the Government will leap out. Let him show us that, contrary to appearances, the Government's policy is not lying dead in the economic coffin.

Of course, the Government could try some tricks: devaluation would temporarily ease the pressure on interest rates, but that would be an embarrassing confession of failure in the ERM. I was pleased that the noble Lord, Lord Hesketh, commendably rejected that. A quick khaki election might ease political pressure but that would be a fraud, not an economic solution. Either would duck the problem, not solve it.

What is the Government's policy? It appears that it is simply to wait until inflation and interest rates fall —as they will temporarily later this year—and hold a quick election as if the problems were solved. However, that would not be an economic solution; nor is it an economic policy. All it would show is that inflation can be reduced to 6 per cent.—still above the EC average. The balance of trade deficit can be reduced to £12 billion or £14 billion—which would still be worse than under any previous British Government—provided the economy is pushed into recession with 2.5 million unemployed. We know that. We have always known that we could do that; but I do not think that we want it. It does not constitute a proper economic policy. This country needs an economic policy which can achieve strong growth, high investment with low unemployment and without suffering rocketing inflation and trade deficits.

I listened to the Minister's remarks and I shall listen to what he says at the end of the debate. What the Government now apparently offer is a roller-coaster of credit booms and slumps with elections craftily slotted in between. Presumably, if pressed to define their economic policy, the Government would say that it was the same as the policy adopted over the past 15 years: that is, Thatcherism softened at the edges by Mr. Major's genuine social conscience which we all welcome. We know that that Thatcherite approach, which is similar to Reaganism in the United States, places emphasis on individualism, competition, deregulation, private consumer satisfaction and low public expenditure.

During the early 1980s that approach produced a number of benefits. It definitely encouraged an entrepreneurial spirit and it attacked the corporate lethargy which afflicted the public and private sectors. I have always welcomed those benefits but they are long in the past. The disadvantages of the Thatcher-Reagan approach, which possibly can be crudely misrepresented as a kind of jungle individualism, are more evident each day both here and in the United States. It encourages short-termism and the seeking of immediate profits rather than the adoption of a long-term strategy and investments. It elevates finance over industry and it leaves our social infrastructure in decay. The consequences of Thatcher-Reagan individualism are clear. Britain and the United States—they are the two leading exponents of this individualist approach—have the worst trade deficits, the worst genuine domestic deficits, the lowest investment and savings ratios, the worst training and education records and the most bankrupt financial systems in the advanced world. That is where that individualist approach has led this Government and this country by 1991.

I shall conclude on a more constructive note by saying that there is an alternative economic policy. It is not Marxist socialism which has been bankrupt for even longer than the American banking system. I believe that only the remote Siberian frontiers of British politics support that approach. The alternative to Thatcherite individualism lies within the boundaries of market economics but it accepts social and collective responsibility. Its priority is long-term economic growth through high private and public investment and a well educated workforce. It accepts that some planning and regulation are desirable. It knows that monetary and credit policies must be sound and it accepts that trade unions have a positive role to play. It accepts that management must invest for the long term and not suffer constant take-over harassment. It accepts that the provision of good social services is a higher priority than deceitfully low nominal direct taxes. Above all, it accepts that our society has values and priorities which supersede individual greed.

Both Europe and Japan have versions of that alternative model of market economics conducted with social responsibility. It is not a coincidence that those countries exhibit superior long-term economic performances to those of Britain and the United States. Fortunately, the Labour Party's economic policies now follow that broad approach. In my view that approach offers the best way forward for Britain. While the Government are stuck with the outdated theology of Thatcher and Reagan I am afraid they will remain in their present economic mess.

5.54 p.m.

Lord Ezra

My Lords, from the speeches which noble Lards have already made in this debate, it is unfortunately clear that Britain is now in the throes of a recession that is equivalent in intensity to that of 1980–81. According to the latest CBI quarterly survey, business confidence is at its lowest level since October 1980. That is particularly true of small firms. The noble Lord, Lord Donoughue, referred to this fall in business confidence.

I suppose that the main evidence for the recession is to be found in the growing rate of business failures and the rapid increase in unemployment. However, there are two features which distinguish the present recession from the previous one of 10 years ago. The first is that whereas in the recession of 1980–81 the main negative features were concentrated in the manufacturing and construction sectors, on this occasion the recession is spread throughout all sectors of the economy. It stretches from financial and other services right through the spectrum of manufacturing industry and construction.

The second distinguishing feature is that evidence of the recession was to be found in Britain—and indeed uniquely here—before it extended to the Continent. It is still the case that the evidence of recession is more intense in Britain than it is on the continent of Europe. According to most estimates we are now faced with a 2 per cent. reduction in growth in 1991 as opposed to the 2 per cent. increase forecast as recently as last November in the Government's Autumn Statement. The deterioration since November has been more than noticeable.

The noble Lord, Lord Donoughue, gave a clear analysis of how we have got into these difficulties. However, I wish to express the matter in a slightly different way. I feel that the fundamental reason for our present difficulties is that during the past decade the level of productive investment has been too low, and the level of personal consumption has been too high. My noble friend Lord Jenkins reminded us of earlier occasions when booms had been created with consequent recessions.

If we turn to manufacturing industry, we see that the output in the UK industry has admittedly increased by some 7 per cent. since 1979. However, that rate of increase in capacity compares poorly with that of most other developed countries, and in particular with Germany where the increase has been in the order of 18 per cent., and with Japan where the increase has been no less than 50 per cent I hope I may dare mention Japan. Capacity, in addition to productivity, counts strongly. This critical situation of the juxtaposition of relatively low industrial capacity with increased expenditure on personal consumption was created—the noble Lord, Lord Hesketh, stated this—by the credit boom which took place particularly in 1987 and 1988. That credit boom led to a demand which far exceeded the capacity of British industry.

Therefore, in spite of the benefits of North Sea oil, major balance of payments deficiencies ensued and inflation once more began to spiral. We have thus returned to the stop-go situation of the earlier post-war period. As we know—many noble Lords have mentioned this—the Government's answer to this problem has been to use the single weapon of interest rates. They considered that to maintain interest rates at a high level would restrain demand and thus reduce inflation. However, the unfortunate part of the matter is that while curbing personal expenditure, that policy has also curbed industrial growth and investment and has led directly to the present recession. The Government are in the difficult predicament that, having allowed the economy to overheat, they have adopted a remedy which is cooling it too much.

Thus it is becoming clear that urgent measures are needed to deal with this situation. Without any question the first measure is to seek to reduce interest rates. However, that will not be easy in the present circumstances, particularly in view of the most recently announced increase in factory gate prices in January. Those prices rose a further 1.5 per cent., moving in quite the wrong direction from what was anticipated and hoped for.

The main point that I want to make is that in addition to the earliest possible reduction in the interest rate, it will be necessary to take other measures. The most important of those other measures is to stimulate investment. We are now seeing a massive reduction in investment expectations which if continued too long could be seriously damaging. The CBI estimates that in the manufacturing sector alone investment is likely to fall by 16 per cent. in the year to mid-1991. That is catastrophic. Unless countermeasures are taken, the fall in investment could last for much longer than we could cope with.

Measures that could be taken without harming the economy could include direct stimulus to reinvestment in plant and machinery. There is a growing consensus that a tax advantage could be allowed for up to 40 per cent. of such investment. That tax remission should be increased in the case of smaller firms. It is recommended that in their case there should be a facility to write-off investment up to a given sum as current expenditure for tax purposes. The sum of £50,000 in a year has been mentioned. In addition, stimulus should be given to investment in training and innovation. Fiscal benefits could be given to firms whose expenditure in those respects exceeds an agreed norm.

In addition to those measures, there is the question of what will happen to personal expenditure once interest rates come down. There is a possibility that excessive personal expenditure could be reactivated. The noble Lord, Lord Peston, suggested that in order to cope with that situation there should be a tight fiscal policy and that higher taxes would be needed to provide restraint. I should prefer to approach the problem another way: by offering a substantial incentive to saving.

I am not a believer in high taxes. I feel that high taxes inevitably lead to even higher taxes. High taxes could lead to an undesirable situation, particularly compared with the lower tax levels which pertain on the Continent. Therefore, a further major effort, in addition to the measures introduced in the last Budget, should be made regarding personal savings.

It is important to ensure that the public understand more clearly the credit facilities being offered to them. According to latest estimates, up to 5 million households are suffering from over-indebtedness for one reason or another. Not only have those people to be assisted in their predicament, but the best remedy is to ensure that they do not get into that situation in the first place. Guidance should be given to young people before they get into debt beyond their means, and there must be more extensive advisory services and assistance.

Finally, I should like to make this suggestion. There has been increasing unease about the role of the Department of Trade and Industry. There is the feeling that we should have a more clearly defined industrial strategy in this country. The Department of Trade and Industry is increasingly becoming a regulatory body as well as being responsible for industry. I suggest that there should be a single department of industry which would have the task of developing a policy framework for the reinvigoration of British industry and of pursuing that policy throughout the years. Without such a clearly defined departmental function in government I very much fear that the policy pursued for industry could continue to lead us into difficulties such as we are currently experiencing.

6.4 p.m.

Lord Cockfield

My Lords, I found the speech of my noble friend Lord Hesketh a most interesting tour d'horizon. However, I do not agree with his views on the present state of the British economy, on the reasons for it or on how we extricate ourselves from our problems. Nor, if it is of any comfort to my noble friend, do I agree with the approach of the noble Lord, Lord Peston. Least of all do I agree with the noble Lord, Lord Donoughue.

My objective is not to engage in the small change of argument over figures or statistics. Having no longer any responsibility in these matters I would much rather look at the fundamental causes of the malaise of the British economy, a malaise which goes back over many years.

I believe that the present recession is bad and will get worse. All the evidence indicates that once such a recession starts it takes a great deal of time before one is extricated from it. There is no such thing as a soft landing or a shallow recession except in the imagination of politicians, particularly those in office.

The primary responsibility for our present troubles rests firmly and squarely on the shoulders of the TUC and the CBI, the one for demanding wage and pay increases beyond the capacity of the economy to sustain and the other for agreeing to wage increases of a kind which cannot be afforded. The result is to be seen in unemployment for the one and bankruptcy for the other. The Government, of course, have some measure of responsibility but it is a secondary rather than a primary measure. It is a question of whether they have acted correctly or incorrectly in relation to the problems with which they are faced.

There is not the slightest doubt that our present problems were triggered by mistakes of policy committed under the chancellorship of Mr. Nigel Lawson. Mr. Lawson has explained that it is all somebody else's fault: that is not a matter that I propose to pursue this evening. Nevertheless, it was relaxations in fiscal and monetary policy which enabled both the CBI and TUC to cast all restraint upon one side; the fons et origo of our present difficulties.

There is every reason, theoretical and practical, to suppose that all economies fluctuate, that they go through periods of growth and recession and that that is part and parcel of the process of adjustment to change. I do not go as far as the late Dr. Dalton, as he then was, in regarding inflation as the lubrication of change in the national economy. Nevertheless, I do not believe that one can stop fluctuations in the economy altogether. That is not an issue which I regard as of crucial importance. What matters is why our experience in this country is worse than the experience of other advanced industrial countries; worse in terms of fluctuation in output and worse than Germany, Japan or the United States in terms of inflation. That is the crux of the problem.

Ultimately, the answer lies in differences in what in these days is described as culture. Culture has nothing to do with "culture" in the sense that it is commonly understood. It is simply a convenient phrase to sum up differences in outlook, in attitudes and in approach on the part of both sides of industry, of management as well as of the workforce, towards problems of pay, productivity and prices. However, we tend to start from a much higher datum line than our competitors. And that is what, in the end, results in inflation, in uncompetitive prices and in a deficit in our balance of payments. It is those things which ultimately call into play government intervention.

The situation is extraordinarily interesting. Listening to some of your Lordships, I could have shut my eyes and believed that we were back at any time in the last 45 years. It was the Labour Government of 1945 which sought to solve all these problems on the basis of a planned economy founded on the doctrines of Lord Keynes. That came to nothing. We then had Mr. Rab Butler and the period of free-for-all. That also ended in disaster.

There followed Mr. Harold Macmillan who set up the original National Economic Development Council. I was one of its original members, appointed nominally on the basis that I was an industrialist. In fact, I was put there to look after the interests of the Conservative Party. But that is neither here nor there. The whole purpose of the original Neddy approach was to try to achieve a consensus between management, the unions and government.

After a general election, we had Mr. George Brown who immediately got rid of me for reasons best known to himself. All of Mr. Brown's reasons were best known to himself. But the Neddy experiment, which started off with such high hopes, came to nothing because Mr. Brown tried to use it as a new instrument for achieving the supremacy of the trade unions. The experiment got nowhere.

We then had Mr. Heath and the prices and incomes policy, a policy imported exactly as it stood from the United States of America. It was one of the earliest examples of what is described as the special relationship between this country and the United States. As your Lordships know, I was very closely involved as the chairman of the Price Commission. A prices and incomes policy works admirably for about 12 months or, at the most, 18 months. That is a period in which one hopes that attitudes and outlooks will change; but they did not. We had a general election, and that was the end of that one.

We then had, as noble Lords will remember, a Labour Government and Mrs. Barbara Castle, now the noble Baroness, Lady Castle of Blackburn, with her policy described as In Place of Strife. If we want to know what happened to that, we need to ask the noble Lord, Lord Callaghan of Cardiff. Whatever else it achieved, we had the winter of discontent and the victory of a Conservative Government under Mrs. Thatcher.

We then had—and I was directly involved as a Treasury Minister in your Lordships' House—the strict application of monetary policy. That succeeded. It broke the inflation. It did so at a very high price, both in terms of unemployment and in terms of output. But, at least, it did succeed. Tragically, of course, as soon as the economy began to expand again, we had Mr. Nigel Lawson. The rest of the story is well-known to your Lordships.

The point that I am making is that nothing very much has changed. We face fundament ally the same problems. We have tried almost every conceivable solution. We find exactly the same solutions, all of which have a proven record of failure, being trundled out again as though they represented something new. Unless we can change the fundamental outlook of our own people, we will never succeed in getting out of this bind in which the British economy find itself.

My own support of the European Community did not derive essentially from the pleasure of quarrelling with Mrs. Thatcher at all. It arose from the fact that I felt that our membership of the Community might provide the channel through which we could alter perceived attitudes in this country. I am not now talking about consensus politics. I am talking about the fundamental attitudes of people on both sides of industry and the reaction of the Government to the situation which arises. Unless we can alter those attitudes, we will simply find ourselves back on the treadmill of what used to be described as stop-go and these days as expansion followed by recession.

When 10 years ago we were debating exactly the same subject in your Lordships' House and I was then speaking from the Government Front Bench, I quoted something which had been said by Marlene Dietrich. Lord Elwyn-Jones, who was then sitting on the Front Bench opposite, questioned the relevance of Marlene Dietrich to the British economy, apart from the fact that she probably knew more about life as it is lived than the average politician. The point was the refrain of that song, which was a well-known one, "When will they ever learn?" That is the fundamental problem that we face. Will we ever learn?

6.18 p.m.

Lord Barnett

My Lords, the noble Lord, Lord Cockfield, began by disagreeing with most of the preceding speakers. On the contrary, I want to say how much I agreed with the noble Lord, Lord Cockfield, and with some of the previous speakers. I shall return to that. But I find it difficult to agree with much of the speech of the Minister. I suppose one has, at least, to say that in that speech given to him by the Treasury one has got away from it all being the fault of a blip to it now being, as he said, a cyclical setback and due to the fact that monetary policy was too lax. I could have agreed better with him if he had given the speech back to the Treasury and tried something himself. But I want to concentrate briefly this evening on possible solutions to the situation that we face.

The facts have been well set out by a number of previous speakers, but it is important, first, to summarise what I consider are the essential problems that we face, most of which are long standing. I agree with the noble Lord, Lord Cockfield, that no Government, including the one in which I had the honour to serve, seriously tackled those problems. I say that despite the long list of selected facts that the noble Lord, Lord Hesketh, gave us from his brief, which showed the situation, basically, as marvellous and demonstrated that all will come right in due course. Some of the problems are short term, and I shall come to those, but first it is important that we put the situation in perspective. We are not a poor country but, again as the noble Lord rightly said, relative to others we are doing badly and the situation is getting worse. That is the basic fact which we face.

Let me come to the short term. Inflation has been much discussed in the speeches we have heard. Of course the Government are right in wanting to bring down the rate of inflation. It would be a very foolish policy to aim at keeping inflation hugely above the levels of our competitors abroad and clearly that is not a solution to any of our problems. But it is never a real solution to solve one problem: it is always easy to solve one particular problem if you do not mind too much about what you are doing with the rest. Of course that is precisely what this Government are now doing. I fear that the fundamental danger is the damage that is being done to the basic structure of the economy. That is the real problem we face now.

On unemployment, whatever we do and if, as I should like, we reduce interest rates in the near future, unemployment will rise over the next 12 months at least, almost regardless of what any government do, whether it is a Labour government just coming in or anybody else. Unemployment, because of the basic underlying situation—and it is very sad—is doomed to rise.

I should like to turn to the real problems that we face as a nation. They are virtually all long term or, as the noble Lord, Lord Cockfield, rightly said, they are problems we have never really dealt with. As to economic growth and manufacturing output, putting the matter in perspective, manufacturing output in this country, as the Minister could well quote, has risen in the last 12 years. Indeed, it would have been astonishing if it had not, but considered relative to almost every one of our major competitors, and indeed some others, it has risen to only a derisory extent. That is demonstrated by one important figure: manufacturing imports have risen by 236 per cent. in the same period. That speaks volumes for the way this Government have handled the economy over the past 12 years. Our manufacturing economy has fallen behind those of France and Italy and indeed it is falling to the level of an economy the size of Brazil's. That is a big country, but it is still a third world country. So how much further we fall, and the length and depth of the fall, will depend very much on what action we start to take now.

The other major long-term problem we face is that of relative unit wage costs. They are very bad now and, frankly, there is no sign of them improving, although of course that does not apply to all companies. One is bound to generalise, because some Japanese managements have done very well with wage costs in this country and indeed so have some British manufacturers. But overall, by any relative examples, our unit wage costs have continued to get more and more out of line with those of our competitors. Industrial investment, as has been said by many speakers—and figures have been given so I shall not repeat them—has been falling relative to that of our competitors.

On the infrastructure, one has only to look around the country to realise the huge amount of money that needs to be spent on our infrastructure if we are to give our industry a chance to compete. On education and training, we now have fewer college and university students than Korea. The Government's own head of training had admitted that at every level we are at the bottom of the league table in the training of management, of our young people and of everyone you care to think of and in every area you care to think of. How on earth can we hope ever to compete without action in that regard?

I am afraid it is all very depressing, and I stress again that the underlying core problem has been there for a long time—long before 1979—although I am bound to say with particular sadness that the last 12 years have seen a great opportunity missed, with the benefits of North Sea oil and therefore without a balance of payments problem such as has beset every government prior to this. Nothing has basically been done with the privatisation proceeds: nothing has been done about the fundamentals referred to by the noble Lord, Lord Cockfield.

As I have said, I want to concentrate on possible solutions, both short term and long term. In the short term I would certainly want to see some cuts in interest rates because inflation is set to fall. I believe the markets have already discounted the value of the pound inside the exchange rate mechanism and that we could now make a start on cutting interest rates. Making a start will not affect the downturn over the next 12 months very much. Of course, if the change is too great it will result in some pressure on the pound inside the exchange rate mechanism but, in spite of all the statistics one has read in recent months about the fact that we went in at the right rate—and we had the Minister telling us again today that the rate was right, although I personally do not believe it and I do not think that most people who have looked at the matter really believe that the rate was anything other than too high—let me say that I believe, with the noble Lord, Lord Peston, that it would be very wrong and would compound a very serious situation if we now sought to devalue the pound inside the exchange rate mechanism. If we did so it would destroy whatever credibility we have got or will be getting, although, as the noble Lord, Lord Jenkins, said, if we can get a realignment—which is perhaps a little overdue—I should not object to that. However, I doubt if many inside the Community, especially Germany, would be in a hurry to give us the pleasure of doing that, although the Chancellor might he more inclined to do so now with the present Prime Minister than with the previous one.

Leaving that aside, I certainly would not devalue, because our credibility inside the exchange rate mechanism is of crucial importance to this country and, for example, to inward investment. So I would not devalue. I would start to spend more on infrastructure and incentives for industrial investment, allowing the borrowing requirement to rise to some extent. That will start quickly to have an impact on the otherwise inevitable downturn in business over the next 12 months. However, we should honestly concede that whatever we now do we are not going to be able to have an immediate impact on the economic situation. What we can do is to try to prevent the situation getting dangerously worse.

Let me now turn briefly to the long-term problems. It is quite clear that more resources are needed for education and training. Indeed the right honourable gentleman the former Secretary of State for Employment, Sir Norman Fowler, said only the other day that we have a mountain to climb in this area. Few who have looked at the figures would dispute that. As I have said, we need to spend more on infrastructure and on capital investment. It becomes what I would call a simple question of priorities in expenditure. In practice, from my five-and-a-quarter years as chief secretary, I realise that it is not a simple matter to choose priorities in expenditure. That is because, if one chooses items of expenditure as a priority, what nobody else will accept is that other items have to be given a lower priority. That makes matters very difficult and indeed little or nothing would be left over for the improvement of living standards. As the noble Lord, Lord Peston, rightly said, improved expenditure on the National Health Service, housing and so on that we all want to see would have to wait.

In those circumstances I am bound to say to the noble Lord, Lord Ezra, that to try when consumption is falling, to solve the problem by providing incentives for savings is a little unlikely to be successful. However, leaving that aside, I am afraid that, if we do not deal with this question of priorities, we shall slip further and further behind our competitors.

In one sense, the solution is comparatively simple. At least we have it in the hands of a government to choose priorities: that is in the Government's own hands, but the problem of relative unit wage costs is more intractable. The noble Lord, Lord Cockfield, sought to blame it on the CBI and the TUC.

With respect, the one thing that this Government claim as the great miracle of the past 12 years is to have totally removed all the powers of the trade union movement. That is the one success that they claim all the time. The plain fact is that, despite having done that, our unit wage costs are still relatively so far out of line. I believe that it was the noble Lord, Lord Hesketh—someone else said so too —who emphasised that management can now manage. Well, it has managed. It has managed to get us wildly out of line with our competitors. Who pays wages? Management pays wages and management has paid wages while not achieving the increase in output that should have been obtained. So it is no use constantly blaming trade unions—as has happened in the past—for demanding too much.

Unlike some people I do not pretend to have a solution to the wage problem. It is not a simple solution in this case. Certainly I know that what I would not do is again to go for an incomes policy. I believe that it was the noble Lord, Lord Cockfield, who said that that works for 12 months. I am not sure that it even works for as long as 12 months. Certainly it is not a permanent solution to this problem.

But what we do expect of a government is first to recognise that there is a major problem. And there certainly is a major problem. I do not have a simple solution but I believe that we must return to talking to both sides of industry in the hope of persuading them, perhaps with incentives where appropriate, that it is management and trade unions (the noble Lord, Lord Cockfield, was quite right) which have to face up to the problem. Government cannot resolve it.

I should like briefly to sum up. My long-term solutions require either a major change in attitude on the part of management and trade unions—and I am afraid that I am not optimistic about that—or large sums of money with a major reordering of priorities. The trouble with the latter is that the economic and political pay-off is very long term. I therefore take a much more sombre view than does the noble Lord, Lord Peston, who said that as a professor of economics he might have taken a more bleak view. I thought that he was still a professor of economics but perhaps he did not want to be too bleak.

However, the plain fact is that, if we are to get right our fundamental situation, we shall face a very bleak situation. On top of that there is now a situation in which the economic and political cycles are wildly out of kilter for the Government. What will they do? We know what they will do. Once again they will take the wrong decisions for what they see as the right reasons: to win a general election. So I am afraid that I am not optimistic about the prospects.

I spent five years as Chief Secretary to the Treasury with some responsibility—I apologise for what I did not do—in this field in government. I began as an optimist and I finished as a pessimist about our economic prospects. After 12 years of this Government I see nothing to persuade me that anything fundamental has changed. It is depressing and sad, but I regret to say that I remain a confirmed pessimist about our economic prospects.

6.34 p.m.

Lord Boyd-Carpenter

My Lords, the late lain Macleod once observed that although proverbially money was the root of all evil, it was also the root of everything else. Because of the obvious Truth of that proposition I think that we should all be grateful to my noble friend Lord Hesketh for introducing this debate. This is the most important subject that faces our country today. I am sure that it was a good idea to secure an expression of opinion from all sides of the House, from a number of noble Lords with very great experience and knowledge in these matters. That is a proper function of this House.

The only difficulty is that so far in the debate no two speeches have agreed on almost anything. I find myself located physically between my noble friends Lord Hesketh and Lord Cockfield. I am bound to say that I find myself intellectually similarly rather between them. I am sure that my noble friend Lord Hesketh was right to remind your Lordships of a fact that no other noble Lord has since mentioned; namely, that whatever our present difficulties, we have behind us a period of considerable growth in our economy and much of what has been achieved over the past 12 years remains. Certainly there is the fact that the greater part of our population enjoys a higher standard of life than ever previously enjoyed. Of course, that is not true of everybody but it is true of a substantial majority. It is true that we have behind us a period during which large portions of the national debt were paid off, with resulting less demand on future budgets for financing what had been an ever increasing burden. There lies behind us a period of very great success.

However, what we now face, as all noble Lords have observed, is the combined problem of inflation and the unemployment which undoubtedly results from the measures that require to be taken to deal with inflation. I believe that the Government are right to treat inflation, and dealing with inflation, as of the highest priority. One has only to look around the world to see the mayhem which inflation over the past 15 or 20 years has inflicted on so many countries. For example, in South America, Germany and elsewhere one sees the appalling damage inflicted by inflation that has got out of hand. One does not need to recall situations in which people rushed on a Friday to spend their wages because they knew that by Monday the money would have halved in value. Inflation is the greatest of all evils.

Basically, there are only two methods to deal with it. One is high interest rates. The other, as has already been suggested by one or two noble Lords, is a policy of strict control of wages, strict control of the economy generally and high taxation. Faced with those two alternatives I believe that the Government have chosen the right one.

It is fair to say that, in a way, the effects of high interest rates are rather like the powerful modern drugs that are used to treat serious illness. Those drugs almost always produce side effects and it becomes a matter of nice judgment as to how long one can continue the treatment using those drugs without doing much damage, through side effects, to the patient. That medical analogy crystallizes the problem at present faced by the Government.

There is no question but that high interest rates are working. Inflation is beginning to turn down. But the question—one might say the 64,000 dollar question —is whether interest rates can be maintained at this level for long enough effectively to bring it down without inflicting inescapable other damage. Of course, the major damage is that done to employment.

At the conclusion of this debate I shall be interested to hear what my noble friend says of the Government's attitude, faced with that situation. Certainly it is not good enough to say, "We shall just soldier along with interest rates and damn the consequences". It will be necessary the whole time to judge the balance between the two; whether interest rates can be maintained at their high level with sufficient vigour to get control of inflation or whether absolutely intolerable consequences will make that increasingly difficult. As I see it, that is the dilemma which faces the Government, as it would face any government in power today.

I agree with the statement that was made by my noble friend Lord Cockfield in relation to the main source of inflation. It is undoubtedly the fact that employers have conceded, and continue to concede, excessive wage claims which have been made by the unions. The employers have less excuse than they used to have because one of the changes that has been effected in our society over recent years has been to alter and diminish the power of the unions. Therefore, the responsibility for inflationary wage increases lies increasingly on the employers. I hope that those employers who seek to criticise the Government will reflect on their own quite substantial part in the situation.

What are the Government to do? Government expenditure must be restrained because it has a direct effect on inflation. Equally, the Government must be very careful not to allow high taxation to damage incentives. It is no use appealing to people to invest and it is no use asking people to stay here and work successfully and ably if an ever larger proportion of their earnings are taken in taxation.

It is essential that one should not be panicked by suggestions that have been made to the Government to the effect that in order to deal with inflation taxation should be increased. An increase in personal taxation has one of two results: the incentive to effort in this country is diminished, or the incentive to leave this country is increased in order to work in a country where a high income can be earned with low taxation. Alternatively, one can retire to the Isle of Man or the Channel Islands where one does not pay high levels of tax. The revenue would be lost in that event.

The Government should realise that it is important to maintain the fullest incentive to enterprise and investment. I am in favour of some of the devices that have been mentioned in the debate for encouraging investment and savings. The PEP system is flourishing and more could be achieved if the Government were a little firmer with the Inland Revenue, less interested in immediate returns of revenue and more interested in encouraging the incentive to invest. I shall be interested to hear from my noble friend, when he replies, whether the Government have any such ideas.

There is another area, which has not been mentioned hitherto, where the Government are involved in the increase in inflation; that is, the inflationary effect of VAT. That is a tax which falls particularly on services. The cost of a great deal of work—for example, the repair of houses—is automatically increased in price by 15 per cent. In that respect VAT compares very badly with purchase tax, which it replaced. Under purchase tax, the great weight of taxation fell on luxuries. The tax on jewellery was 66⅔ per cent. whereas most of the necessities of life—for example, children's clothes—were free of tax. VAT falls broadly across the economy, inflating everything by 15 per cent., and it must contribute substantially to inflation. It is very disturbing that our friends in the European Community are urging this country to further increase the scope of VAT by suggesting that it should be imposed on air fares or transport charges. That increase would add to inflation. We must be extremely careful in regard to matters of taxation. It is the responsibility of Government, nobody else.

I share, nonetheless, the optimism expressed by my noble friend the Minister. I believe that this country has considerable powers of recovery. The output per worker, which used to be at the bottom of the European scale in terms of annual increase, is now at the top at an annual rate of 5 per cent. It is true that some of our industries are prospering and that there is a considerable spirit of incentive in many directions. It is up to the Government to give every possible encouragement to that incentive and to do nothing to make things more difficult.

In that context I should like to mention the Statutory Sick Pay Bill which deliberately increased employers' costs. I believe that the Government will come to agree very shortly —perhaps in his heart my noble friend agrees now—that that Bill was a great mistake and one which must not be repeated. However, I think that the general approach of the Government is correct. By encouraging individual incentive and enterprise and by ensuring that the spirit of enterprise is given full encouragement and no discouragement we shall bring this country through the present trouble as we have brought it through so many problems. I believe that with the right honourable gentleman, the Member for Kingston-upon-Thames, as Chancellor, we shall score a major success!

6.46 p.m.

Lord Bruce of Donington

My Lords, it is always interesting to follow the noble Lord, Lord Boyd-Carpenter, in a debate—an opportunity that has been denied me for some years. I was puzzled by the somewhat oblique criticisms that the noble Lord made from time to time against his own Government. The noble Lord is normally called into debate when the Government are in trouble. Today he inflicted upon them the insult of faint praise. During the debate that followed the first speech of the first Thatcherite Chancellor of the Exchequer, Sir Geoffrey Howe, I cannot recall the noble Lord objecting to the increase in the rate of VAT from 8 per cent. to 15 per cent. On the contrary, in his role as a former Chief Secretary he was pleased to congratulate the Government on prudent finance.

Lord Boyd-Carpenter

My Lords, I should be interested to hear whether the noble Lord can quote a specific reference by me to the increase in VAT—not to the general financial policies of the Government —because I do not think that he will find one.

Lord Bruce of Donington

My Lords, the noble Lord cannot wriggle out of the assertion that I made by challenging me to produce a particular detail. The noble Lord knows perfectly well that he was fully in support of the policies of the Chancellor of the Exchequer at that time.

If there was to be an effective indictment of the policies of the Government, in particular of the speech made by the noble Lord, Lord Hesketh, it was made, if I may say so in the friendliest respect, by my noble friend in the unofficial sense, Lord Cockfield. He almost completely demolished the Government's case in his criticism of the former Chancellor of the Exchequer, Mr. Nigel Lawson. It is clear that the noble Lord thought that the Government of that time made a grievous error during the period of that chancellorship. He might have noted, although he did not say so specifically—and one would not expect him to do so —that the present Prime Minister who was in the Cabinet of that Government and a close ally of Mr. Nigel Lawson, fully agreed with those policies. Therefore we accept the indictment of the noble Lord, Lord Cockfield, who spoke with the utmost cogency and honesty, of the criticism of the present Government.

When I listen, as I am privileged to do, to the contributions from the Government Front Bench I sometimes marvel at comments about the virtues of current governmental policy. I am amazed that Members always appear to try to impart the responsibility of anything that goes wrong with the economy—and from time to time things do go wrong —on everybody but themselves. For the record—and I hope that this will be the last time that it is necessary to outline the situation—this Government have been in office for 11 years; they have had a colossal and overwhelming majority in another place; their will in legislation and regulation cannot be gainsaid, not even in your Lordships' House; they have had the enormous power of patronage which they have been able to confer upon people in order to establish their will; they have had the benefit of £100 billion in North Sea oil revenues; they have had the benefit of the almost uncritical support of their favoured newspaper proprietors in order to accustom public opinion and to make it more amenable to government policies. They have had all those things; yet today, 11 years on, we are no further forward than we were in 1979. In fact, in many ways we are in a worse position.

I remember well the posters of the 1979 general election showing an unemployment queue and stating that Labour was the party of unemployment. Since then not once has unemployment fallen below that level; indeed, it is now rising. If the true figures were known, today employment be 3 million were it not for the statistical fiddles that have been accomplished in the meantime. So do not let us talk of any kind of government success.

Nor is it necessary to elaborate by reference to statistics on the current state of the economy which this debate is supposed to be about. The indictments already exist. The TUC does not have to publish them; the CBI has already published them. Most of the press is normally obedient to the will of She who must be obeyed—or used to be obeyed. It is now completely unanimous in its verdict that the economy is in a shambles. The quicker that the Government admit that to the country, the better it will be for all concerned and the cleaner will be the whole air of politics.

There have been two fundamental errors. One is long term and was recently referred to in a debate on the GATT negotiations that had to be truncated because it was fitted in at the end of the day. It is not generally realised in this country that as a proportion of GDP, and in relation to the rest of the world, our proportion of exports of manufactured goods has been decreasing. Since 1979 our share of world trade has decreased by between 9 and 10 per cent. That matter must be corrected before any endeavours can be made on a domestic level within the country to solve our problems. We must regain our share of the international trade in merchandise. We must arrest the decline in our share of the trade of international merchandise. As I said at the time, I agreed with the noble Lord, Lord Young of Graffham, in emphasising the gravity of the situation that would arise if the GATT negotiations failed.

The GATT negotiations began four years ago. Originally they provided for an increase of 1,000 billion dollars of trade throughout the world after a successful conclusion. There was to be a liberalisation of trade. The negotiations have become frustrated because the Government, who believe in the freedom of the market and in free competition, have been so supine in the EC Council of Ministers that they have tolerated the continued existence of the common agricultural policy in its present form. That is one of the most protectionist regimes in the world. If it is not changed, it may result in the breakdown of the GATT negotiations on which rests our share of international trade that we fundamentally depend on.

The Government have been remiss in meetings of the Council of Ministers because they have been so supine that they have not permitted their Ministers even to know what is happening. They have allowed the CAP negotiations to be conducted on behalf of the farming lobbies in the United Kingdom and Europe with the Treasury wiping its hands of the whole thing. Unless there is an attack on the whole common agricultural policy and the removal of the concept of fortress Europe there will be a failure of the GATT negotiations. Any endeavours that we make domestically to improve our fortunes will be of no use.

The position on the domestic front is entirely different. In that respect we were told 11 years ago that inflation was the be-all and end-all of government policy. The noble Lord, Lord Boyd-Carpenter, echoed it then and has echoed that down the ages in a number of classical speeches. It was said that inflation must be brought down. Why is it that after 11 years of power the Government have not brought it down? What in fact went wrong? The answer is simple and at last the Bank of England have admitted it. It was originated by the freeing of the whole of the financial services and the banking system.

Banks began to compete with one another to lend money that to some extent had been derived from the release of funds from OPEC and which had to be re-lent at a higher rate. There was competition to lend money but there was no question of advising borrowers to be prudent. The advertisements read, "We will give you a better percentage, a better service and better terms of repayment". Therefore, we in this country have arrived at a position where we grant mortgages of 100 per cent. of the value of the property. That is the highest rate in the whole of the industrialised world. Although Japan has a home ownership rate of 61 per cent., the banks will advance funds of only 60 per cent. against real property value. Our rate of home ownership is 64 per cent., based on giving 100 per cent. mortgages.

The Bank of England admitted that clearly there was a colossal expanse of credit and therefore a great increase in money supply; mortgage money was used to buy consumer goods, and so forth. The Government (who affect to blame everything upon wage increases) will be well advised to bear in mind that the Bank of England admits that the bulk of the inflation policy was caused by this almost Barber-like boom in the City of London.

When I look at some of my noble friends on the Liberal Benches—particularly the noble Lord, Lord Ezra, who believes that certain areas of banking and economic policy should be put in the hands of an independent bank—I wonder whether he and his colleagues meditate sometimes that it is far better that these matters be reserved to political parties, which can be brought to account, rather than being placed in the hands of banks.

Lord Ezra

My Lords, if the noble Lord will give way, I had the impression that he had already pointed out that political parties had not done the job very well. During the course of the debate, we heard that the advice from the Bank of Japan had been very salutary in the control of inflation in that country.

Lord Bruce of Donington

My Lords, on the contrary. We learnt from the experience of Japan that there are coherent planning policies followed by consensus between the monetary authorities, the government, employees and employers. That is a lesson we learnt also from Germany. There are lessons that we must learn. Another lesson that we in this country must learn is that the old policies of confrontation should be dead. There should be co-operation between trade unions, the CBI, the Government and the monetary authorities. But the Government must remain responsible.

One of the indictments of the Government, who claim that British industry has been left leaner and fitter—although many in manufacturing industry would say that they have been left thin and skinny —is that they still support, and, in the main, their supporters support, those in the City.

Lord Ogmore

My Lords—

Lord Bruce of Donington

My Lords, I shall give way in a moment. They support those rich people who have become meaner and slicker. And those are the people that the Government continue to support.

Lord Ogmore

My Lords, I have slightly lost track during that pause. The noble Lord has been kind enough to give way and I could not expect him to give way sooner. In my lay capacity I understood the noble Lord to speak of nationalised banks. Would he like to see banks in this country completely nationalised or is he referring only to the Bank of England, which is a government agency? My noble friend Lord Ezra referred to the Bank of Japan. I imagine that stands in a similar capacity to the Bank of England. Perhaps the noble Lord, Lord Bruce of Donington, can answer my question.

Lord Bruce of Donington

My Lords, I am all in favour of the maintenance, unamended, of the Bank of England Act 1946.

7.5 p.m.

Lord Cobbold

My Lords, the background to the present parlous state of the economy has been ably described in speeches from all sides of the House and many noble Lords have yet to speak. I will therefore be brief and address my remarks solely to the dilemma faced by the Government between the urgent need to reduce interest rates and the exigencies of the exchange rate mechanism.

Like my noble friend Lord Jenkins of Hillhead, I believe that the decision to join the ERM, while wholly welcome in principle, came far too late. Indeed, it should probably have been taken in 1986 when, as the noble Lord, Lord Hesketh, reminded us, inflation was at 3.4 per cent. However, now we are in the scheme we must play the game by the rules. It is too narrow, in my view, to look at the problem as suggested by the noble Lord, Lord Peston; purely as a UK domestic issue. We are now part of a Community-wide strict monetary regime and must learn to work within it.

To date it is clear that we have not achieved credibility. The pound is at the bottom of the system with the second highest level of interest rates. Incidentally, credibility is not helped by much of the comment in the serious press to the effect that a devaluation is now appropriate. I believe that there are step the Government could take, and may indeed be taking behind the scenes.

The market may well have discounted a small reduction in interest rates, as the noble Lord, Lord Barnett, suggested. However, a short term reduction in interest rates would be more easily achieved if it were done as a co-ordinated move in conjunction with our partners in France, Italy and particularly in Spain. The peseta currently tops the ERM and Spain has the highest level of interest rates. All these countries have similar problems to ours, albeit in differing degree.

As my noble friend Lord Jenkins suggested, if in more extreme circumstances a realignment becomes necessary, such a realignment should not be a unilateral devaluation of sterling but a co-ordinated operation which would be, and would be seen to be, a revaluation of the deutschmark relative to all the weaker ERM currencies.

Markets are well aware of the special circumstances—the external shock—that the absorption of East Germany has created for the German economy. Without that shock there is no doubt that the German rates and, by implication, other ERM rates, would be at lower levels than they are. A one-off mark-up of the deutschmark would be seen as a sensible response to reality and a sensible prelude to ultimate monetary union.

If the pound, franc, lira and peseta all retain their approximate parities, we will be seen to have stood our ground in the system, and at the same time to have improved the real economy. It might even improve our credibility.

7.8 p.m.

Lord Selsdon

My Lords, in moving this Motion my noble friend was no doubt being extremely courteous to your Lordships' House in asking for advice and guidance, which he has received in abundance. However, I hope that this time he may encourage his right honourable friends to accept the advice given by your Lordships' House. Had the advice given on many occasions over the past few years been accepted some of the economic difficulties we now face would not exist.

The Government have a difficulty. They have sought to withdraw from the economy, as they encourage greater and greater privatisation, and at the same time are faced with as great a responsibility as ever before, in that people believe they control and run the economy. It is as though those mandarins in the Treasury, who are now under increasing attack, are still able to play mah-jong with numerous pieces rather than some modern form of craps where their sole mechanism lies in interest rates. It is that aspect to which I address myself today.

We are all marginally confused. Many of the original economic dogma of life have gone out of the window. I was brought up to look at the daily rate of the pound against the dollar. We used to think that the economy was doing badly when the pound went down, but there it stands as high, at almost two dollars, as it has been for many a year. I was brought up to believe that there was some significance in gold. Many of my Middle East friends were advising me that the price of gold would rise very rapidly on account of the war, to perhaps 600 dollars an ounce, and it is now down to 350 dollars.

We also thought later that energy and oil prices had a major impact on our economy whether we were discussing our own reserves in the North Sea or attacking governments for having an artificially high energy policy which effectively encouraged inflation and hurt industry. Not so recently I believe I heard government Ministers say that they would be basing the economy on the price of oil at about 25 dollars a barrel, yet it is now down below 20 dollars and falling. Once more there is the belief that oil prices could come down as low as 12 or even 10 dollars. That was a factor that hurt us in 1974 which might even benefit us now.

There is no doubt that, as the impact of the Middle East war is felt worldwide and recovery takes place and regeneration is necessary, oil for spending will be pumped out of the ground by the OPEC and OAPEC nations. There will be pressures on oil prices to come down and stay down. Political unity within OPEC may be difficult. Therefore one of those pressures which was inflationary will seem to have disappeared and we need not be concerned about it.

As the noble Lord, Lord Cobbold, pointed out, when Germany reunified we all thought the burden of cost on West Germany might have a depressing effect on the deutschmark itself which the Germans have perhaps countered by raising interest rates. In a way that effect has gone also. So one wonders whether the only factor keeping interest rates up at the moment is our membership of the ERM. Why should we have boxed ourselves in and how do we get out of it?

I shall refer briefly to some of the initiatives that the Government have taken in relation to their own hard ecu. There is a possibility that it could play a greater role than was considered even a few months ago, where we finish with three great major trading currencies of the world—that is to say, the dollar, the ecu and the yen. But if the relationship of one currency to another is causing us our present difficulties, then we should think hard about what can be done.

I step back for a moment, not seeking to give economic advice, but to look at the matter a little from the outside. The economy (I could ask, "what economy?") is as flat as a Shrove Tuesday pancake. The private sector is the economy and it has created growth. The private sector is suffering. The Government have managed their affairs well and they can be praised for excellent housekeeping. As the noble Lord, Lord Boyd-Carpenter, said, we are repaying the national debt. I do not think that criticism can be levelled against the Government for the management of their own affairs.

The climate which has been created makes it very difficult for other people to manage their own affairs. We heard that about a decade or 12 years ago the linchpin of the Government's economic policy was to kill, destroy or reduce inflation. The linchpin of our defence policy was NATO. Yet 10 years later we hear the same story. It is our strategy to reduce inflation. Those in industry or any form of commerce who seek to build a business want to plan medium and long term. They do not like to think short term. As inflation came down and interest rates fell, so the enterprise culture took off. Taxation came down. Even today I believe that noble Lords on all sides of the House will accept that the level of taxation is fair. No one is calling loudly for greater cuts in taxation. Allowances were removed so that the ability to shelter or cheat went out of the window. There were few opportunities to avoid paying tax. The Government's tax stake grew.

The same companies which were encouraged to invest were contemplating a plan with interest rates in single figures. They were borrowing money and they were encouraged, often by a bevy of foreign banks with salesmen who sold money to them. They genuinely believed that they could plan for growth and invest. The cautious companies which had seen it all before had kept their money on deposit and did not invest or take risks because they were not prepared to take the risk of suffering in the future. However, as interest rates rose and inflation with it, so a great many of those people who made up the enterprise culture began to get hurt. Not only that but they found that their own banks and those who provided them with money were also being hurt. Their own ability to manoeuvre and support their clients had disappeared.

I was brought up to believe that very high inflation which was more than double the prevailing interest rates gradually destroyed the economy. Equally, when the amount of money that must be paid for borrowing is more than double the rate of inflation, that may be hurting the economy more than may be thought. This is where I see something happening. I have never been in an economic situation like this in my life and I have never contemplated it. There is money around, but it is not in the hands of the banks because any sound and prudent saver will think, "I shall place my money on deposit at high interest for the short term rather than invest in the long term". There is a shortage of liquidity. At the same time the Government created a new mechanism, the TESSA, which the young are falling over themselves to invest in. It is a great scheme of long-term investment which is beneficial.

If we are to try to live much longer with high interest rates, what will the impact be? There is a feeling of moral injustice abroad which causes me concern. Those who are the rebuilders of the economy in the private sector and who have borrowed are feeling shattered, nervous and worried about the future. The Government have applied a brake which is far fiercer than they probably realise. They often have to deal with historic information rather than the information of today. Often governments and their officials are out of touch with the real economy.

This is not just a cry for help for industry. There is a case for signalling to the private sector at large that interest rates are now on the way down. There is a feeling that we are past the worst. It is that signal that is perhaps more important than reducing interest rates in large chunks. The right course to take is a steady downward trend which is at least parallel to or perhaps quicker than the fall in the level of inflation in order that the gap between inflation and interest rates may be narrowed. I urge the Government to give consideration to that.

7.18 p.m.

Lord Stoddart of Swindon

My Lords, when the noble Lord, Lord Hesketh, opened the debate he may have wondered why there were gasps of incredulity from this side of the House. Those gasps of incredulity were because he was painting such a rosy picture of the economy. One would never believe that all the news we are hearing on television and through the other media, is bad, bad, and still bad, all the way. Where has the noble Lord been? Does he not see the reports that emanate from the Government and various other organisations?

Did the noble Lord not see the CBI Quarterly Industrial Trends Survey Summary which shows that in industry confidence is at the lowest ebb on record? Did he not see that? Did he not see the Central Statistical Office index of output for January which shows that manufacturing output in the three months to November 1990 was 2.5 per cent. lower than in the previous three months? Did he just not happen to pick up the employment statistics which show that total unadjusted unemployment in December rose by 122,000, putting us on the way to mass unemployment?

Did the noble Lord not see the state of trade enquiry for February issued by the Building Employers Confederation which shows that the building industry is facing catastrophe? That is why we were incredulous. We had read those things and we believed the people at the sharp end who know what it is al I about. We therefore wondered why the noble Lord was able to give such a rosy picture.

I wonder why we bother to have these debates. The Government never listen to what they are told. They never listen to any opinion other than their own. I make no apology for referring to the 1985 report of the Select Committee on Overseas Trade. The report identified the problems we were facing then. The noble Lord, Lord Selsdon, who was a member of the committee will know that what I say is true. The report pointed to a decline in manufacturing industry. That is still going on, after five years. It referred to failure to invest. We are still failing to invest. It mentioned failure to encourage exports and to provide import substitution. We are still not doing sufficient in that regard. It drew attention to the failure to provide a high level of education and training. Over the past few weeks and months we know how great that failure has been. It described the failure to maintain and modernise Britain's infrastructure. We know—we have seen it over the past few days—how behind, how old-fashioned, and how badly run our infrastructure is, certainly in respect of the railways. Those problems pervade our infrastructure services. And of course the report also said that we were maintaining sterling at too high a value against other currencies.

After five years the same problems are endemic in our economy and the Government have done nothing about them. The then Chancellor of the Exchequer, the architect of our present economic troubles as we have heard from all sides of the House, Mr. Nigel Lawson, decided to leave the sinking ship for other pastures. Perhaps we will have him here lecturing us on economic policy. Perhaps we shall all forget how disastrous his policies were and merely remember that he was Chancellor of the Exchequer and pay him due deference. But I detract from my argument.

Instead of treating the report, which after all was produced by a committee chaired by his noble friend Lord Aldington, with the respect it deserved, Mr. Lawson, merely sneered at the committee and insulted its members. But the chickens are now, coming home to roost. The problems could have been avoided had the Government not been so wilfully stubborn in holding to their own failed economic policies. Over the past two years my noble friends and I have tried consistently to help them avoid the mistakes which have led to the present recession which is now fast turning into a slump. Time and time again we warned of the consequences of an uncontrolled consumer credit boom allied to booming house prices which were becoming completely out of hand. Time and time again we warned the Government that sky-high interest rates would not only hurt home owners but would also result in recession, slump and huge numbers of business failures.

I regret to say that everything we warned of has come to pass. Had the Government listened to what we said our economy would not be in this trough and in this despondent state. They spurned our advice in the most cavalier fashion. They failed to understand that we were not simply party-politicking but trying to save our country's economy from going down the drain. They failed not only to listen to noble Lords on this side of the House; they failed also to take heed of their friends in industry, the CBI and the Institute of Directors. No one could be more pro-Tory than the Institute of Directors. But it was ignored and told to go away and play. The Government's own Back-Benchers have warned that the policies are leading to economic bankruptcy and political suicide. I do not mind the political suicide but I object strongly to the economic bankruptcy.

Even when it came to entering the ERM, in itself an act of sheer stupidity, the Government could not get it right. They entered just at a time when the economy needed a boost through sharply reduced interest rates and at a rate against the deutschmark which was far too high. Thus desperately needed cuts in interest rites are being delayed to maintain sterling at an absurdly high level within the straitjacket of the ERM. It is clear that there ought to be a realignment of currencies within the system. However, this has apparently been ruled out by Herr Pöhl, who now spends his time strutting around Europe telling everyone that they must all behave like Germans. So a realignment which would solve the problem is apparently right out of court.

The correct policy for the Government is to cut interest rates now, and substantially. That is the only way in which the confidence of industry and commerce can be restored. If that leads to our having to leave the ERM then quite frankly I am all for it, because it would help to save the British economy. And how we need confidence to be restored in industry! There is plummeting production. Sales and profits are such that a record number of firms, especially small firms, are being forced out of business while unemployment is rising sharply. The overall percentage rate of unemployment may be 6.3 per cent. but noble Lords should note that male unemployment is now 8.5 per cent. That is a very significant figure. Every time I watch the local news on TVS or Thames Television I see depressing reports of firms laying off workers or going out of business. Right in the Tory heartlands the recession is exercising its grip. It is savagely hurting people who have never been out of work before and who, for the most part, have voted Tory all their lives.

A relative of mine, a quantity surveyor, a qualified man who has never been out of work previously, now finds himself without a job and with no prospect of finding another within his profession for a very long time. Small shareholders have also been hit, especially those who invested in small businesses. Under this Government, they have seen the value of their shares drop by 33 per cent. in the past 12 months. They will not easily forgive the Government.

No scapegoats are available to the Government now. They can no longer accuse the trade unions of holding the nation to ransom; indeed, we do not hear the phrase now. The Government have so emasculated the trade unions through oppressive legislation that they are unable to influence very much what happens —certainly not as regards the course of the economy. Had the Government not so wilfully undermined the trade union movement, it is possible that the movement could have been an ally in preventing the slump, business failures and mass unemployment.

Finally, it is still much more lucrative to make money rather than to make goods and provide the real services which are needed. What incentive is there to invest in industry with a meagre 3.5 per cent. to 5.5 per cent. gross return when one can put one's money in any building society and receive a 14 to 15 per cent. gross return? Who will invest in British industry under those circumstances?

It is time for the Government to shake off their obsession with a total free market and to recognise the fact that if British industry and the economy are to revive and thrive, they must lead by applying adequate incentives to industry and by promoting partnership between them and both sides of industry. It is only in that way that we shall have sustained growth and lasting prosperity.

7.32 p.m.

Lord Holme of Cheltenham

My Lords, I must begin by apologising to the Minister for the fact that I shall, sadly, not be present in the Chamber to hear his reply. However, perhaps I may say how struck I was by his metaphor of inflation as the enemy at the gate. Shortly afterwards, the noble Lord, Lord Boyd-Carpenter, referred to inflation as being the greatest of all evils. I believe that the House and the country are entitled to ask why the Government opened the gate in 1988, invited this evil enemy in and asked him to make himself at home. We are still suffering as a result of that act by the Chancellor of the Exchequer; indeed, we are still trying to get inflation out of the other side of the gate. That is as far as I intend to venture in the field of macro-economics, where so many other noble Lords have lingered so informatively. I should like to address myself to one specific topic which has not so far been mentioned in the debate.

I should like to address the question of the relationship between the environment and the economy. There is a danger, as the noose tightens around industrial profits and as the recession veers perilously close to a slump—we must face the fact that we almost have a slump—that environmental excellence will be seen as a luxury which companies can no longer afford. There will be those who say that the extra costs involved in making products and processes cleaner have become intolerable in these bleak days, that good times can be green, but that the hard times are bound to be dirty.

However, I should like to argue the opposite case. My first contention is that high environmental standards and high added value go together. Secondly, I believe that environmentally pro-active and benign technologies could themselves be the source of economic growth and recovery. As to the first part of my proposition—namely, that high added value and environmental excellence go together—those who doubt it may care to consider the evidence from central and eastern Europe. There we have proof of the opposite. Over four decades economic failure and environmental degradation have gone hand in hand. There are also poor products, pervasive pollution, low living standards and low environmental standards. Today the people of East Germany, Czechoslovakia and Poland can all bear witness to that deadly combination.

I do not wish to compare the British economy with those which I have just mentioned. However, it is regrettably true that Britain, among the major industrialised nations, is characterised by a relatively low added value. I believe that higher environmental standards, along with other factors such as a greater focus on good design, better skills and quality in all phases of business operations, could be part of what would make British goods more sought after all over the world.

Under this Administration, I know that "industrial" and "strategy" are two words that dare not appear in public together in the corridors of Whitehall. However, perhaps I should say in parenthesis that, on a visit to Northern Ireland last week, it was very striking to note that the Province is standing up to this industrial depression a great deal better than are other parts of the United Kingdom. I wonder whether that has some connection with the fact that governments of all complexions have consistently taken a much more active role in the economy of Northern Ireland than they believed they should in the UK economy.

I, too, agree with the Government that industrial strategy in the sense of picking winners is very dubious. However, in the sense of helping British industry to add value, a rational industrial strategy would certainly recognise how widespread the world demand for environmental excellence has become. The Government can make the difference in that area. They can set standards on air and water pollution which are among the highest, not the lowest, in the world. They can also do the same in respect of vehicle emissions and really commit themselves to energy efficiency.

It is a great shame that the Government who a few years ago under the leadership of the then Secretary of State for Energy, Mr. Peter Walker, flirted with energy conservation, seems now to have become bored with the subject. It is an even greater shame to note that, although the last Secretary of State for the Environment rode bravely up to the fence of an energy tax under the tutelage of Dr. David Pearce, he refused the fence and rode away at the first murmur of protest from the Treasury. We on these Benches are ready to support the idea of an energy tax. We believe that the Government should be the source of high environmental standards. The best of British industry will respond. Indeed, the very best of British industry is already ahead of the Government. In what is undoubtedly a more environmentally conscious world not only will added environmental value improve the quality of life here but the respect and demand for British goods abroad will also be increased.

We should recognise specifically what has been recognised and encouraged by the governments of France and Germany: that there is a major opportunity for environmental clean-up products and processes, for new waste disposal methods; for new water and air cleansing processes; for new technologies to clean coal before it is burnt, and for ensuring better compression in the internal combustion engine. The examples are endless. The market for clean-up technology world-wide is vast and growing. It can be counted now in tens of billions of pounds.

The Government have always been eloquent in commending self-interest to us as the motor of economic behaviour. I suggest that they widen their horizons to embrace the idea of enlightened self-interest. Enlightened self-interest would put together Government leadership and standard setting with the initiative of the company, of the businessman and of the entrepreneur. In Britain we need a new synthesis of environmentalism and economic enterprise. Therefore, perhaps I may urge upon your Lordships the suggestion that we treat the green imperative not as part of the problem but as part of the solution to our economic predicament.

7.39 p.m.

Baroness Ewart-Biggs

My Lords, it seems a long time since the Minister delivered his robust defence of government economic policies. As my noble friend Lord Stoddart said, since then a rather conflicting set of pictures has emerged. They focus on the depth of the recession which the country now faces. The noble Lord, Lord Jenkins, said that he felt sorrow not just over the mismanagement of this country's economic policies but also for the victims. I should like to make one or two remarks about the human costs of some of the mistakes in economic policy.

A number of noble Lords have referred to unemployment, and the fact that this month's unemployment figures, which will be announced later this week, are expected to pass 1 million. It is unbelievable that job losses have been running at 1,000 to 1,500 a week from the beginning of this year. They can only be seen as one of the major human costs of government failures.

I should also like to make a few remarks about a group of individuals and families who, through no fault of their own, are suffering the results of present policies and are in debt. The NACAB and consumer bodies are a good barometer and show the extent of the problems that people face. By way of background, the NACAB reports, first, that in November 1990 outstanding credit amounted to an unprecedented £50 billion. That is believed to be five times what it was in 1979. Secondly, in 1989 bureaux dealt with 1.5 million inquiries about debt; and, thirdly, in 1989 2 million households had problems with repaying debts. A British household is just over 20 per cent. more in debt than its French and West German counterparts. That is astounding. Those figures show the serious problems which are facing many families today. They are families which have no savings to back them up.

When one looks at the causes of indebtedness, one sees that rent arrears are high on the list. The NCC reports that 1 million households have difficulty paying their rent. There is a growing of number of home owners who are either late or defaulting on their mortgage repayments. The NACAB tells us that repossessions increased from 13,740 for the whole of 1989 to 14,390 for the first six months of 1990. The 1990 figures are to be published on 14th February. We could be looking at figures which are 100 per cent. more than those of 1989. Reporting the six month figures in the summer, the Council of Mortgage Lenders firmly blamed interest rates for the increase.

It is of interest to note that increased competition in the provision of credit in the United Kingdom has not forced down the cost of credit—anything but. In 1989, the annual percentage rate of interest in the United Kingdom on loans ranged from 12.5 per cent. to 500 per cent. In contrast, in the countries which set limits to interest rates the rates varied: in France from 8 per cent. to 17 per cent.; in Germany, from 9 per cent. to 25 per cent.; and in the Netherlands from 9.5 per cent. to 18 per cent. That is quite a difference.

It is clear that housing expenditure, which is incurred through high interest rates, is a major cause of indebtedness. There are many other reasons. The citizens advice bureaux are assisting many people who have incurred multiple debts, including poll tax arrears, gas, electricity and water, which have become more expensive since privatisation, and Social Fund repayments which are a new form of debt for many people at the bottom of the income ladder.

One feels that it will not be long before student loans create yet another source of indebtedness that will come before CABs. The bureaux describe how difficult it has become to help people. As the scale of the bureaux' commitments has grown, their options have narrowed. What worries them most is that lenders are putting on the squeeze and their existing strategies for assisting clients in negotiations with lenders no longer work. The bureaux describe some worrying situations. The banks are refusing to freeze interest payments. A bureau reports a case in East Anglia where a bank refused to freeze the interest and bank charges on the £350 overdraft of a man terminally ill with lung cancer who had offered to repay the debt at £6 a week. Previously CABs were able to arrange repayment schemes with which the debtors were able to keep up, and which the lenders were able to ease on request. Such arrangements are now unfortunately coming to an end.

The CABs also give some worrying examples of the aggressive tactics and harassment used by creditors when they refuse to accept the repayment terms arranged by the CABs. With regard to the methods used for collecting debts, the NCC and the NACAB are becoming increasingly worried by the growing number of private bailiffs. They would like to see stricter controls applied to them. It appears that those bailiffs are used increasingly by magistrates' courts to collect poll tax, rent arrears and fines. Lady Wilcox, chairman of the NCC recently said: We believe that people who can't afford to pay their debts all at once should be enabled to manage repayments in a way which is fair to them and efficient in getting repayments to all creditors. Private bailiffs fail these criteria. In fact, using them may make the situation worse rather than better and plunge people already in dire poverty into deeper misery". There is supporting evidence from the CABs which endorses those remarks. The bureaux have given some worrying examples of how private bailiffs take over people's possessions and sell them sometimes at a low price. That it is a harsh system.

The situation regarding consumer debt, as reflected by the advice agencies, is critical. It can now only be exacerbated by the expected rise in unemployment. The NCC and other bodies feel that there are some measures which could be taken immediately to try to alleviate the problem of indebtedness with all its social consequences for the family, the marriage and children growing up. They feel, first, that the existing credit unions should be extended. They are saving co-operatives which provide small loans at a low interest rate. They are of enormous use to families on the lowest incomes who find themselves in debt and unable to repay it. They also feel that the Social Fund should be replaced with one-off grants, as before, to people in the greatest need. Otherwise the loan is deducted from the social security benefit, again putting people on the lowest income into terrible difficulties.

Lenders should give more facts to help borrowers understand the cost of credit. I see a rosy picture painted in the letters that my student daughter receives from her bank. They do not explain the financial problems she may eventually face. The agencies also feel that a system of credit management should be introduced, with restraints on bank lending. As banks themselves move further and further into trouble, surely they will need more and more profits from lending at high interest rates.

I end by saying that as regards consumer debt, we face a serious combination of events. On the one hand, people are borrowing more, enticed originally by the so-called economic miracle that the Conservatives promised. Secondly, they are suffering from high interest rates and high inflation. Thirdly, there is a greater financial burden on the poorest members of society. On the other hand, the lenders, the banks and credit card companies are much harder on repayment arrangements. This combination can only increase indebtedness, bringing more families into hardship and misery. That is an unforgivable result of the Government's economic policies.

7.50 p.m.

Viscount Caldecote

My Lords, I was particularly struck by one comment in the opening speech of my noble friend Lord Hesketh. He said, "The trouble is that we have been living beyond our ability to deliver goods. There has been excess demand". I imagine he meant that there had been excess demand relative to the output of manufacturing industry. That is a most relevant comment. Yet in his opening remarks the noble Lord, Lord Peston, said that my noble friend's speech was irrelevant. However, he himself spoke of airy-fairy concepts, of institutional forces, of monetary, fiscal and incomes policy but not a word about the added value created in industry which we so sorely need. Worse still, the noble Lord, Lord Peston, gave us three alternatives: high unemployment, high inflation or a change of government. If that is really the case, there is no hope for the future at all, for the alternatives are equally ghastly. However, there is a very good alternative: to press on with the Government's policies, albeit with some modification to meet the developing situation.

I was sad to hear my noble friends Lord Cockfield and Lord Boyd-Carpenter and the noble Lord, Lord Barnett, still referring to excessive wage costs. Surely that is an outmoded concept. It is no longer wages for workers, salaries for managers and fees for directors. We ought to get rid of that concept. Excessive pay costs for all of us are equally relevant to competitiveness in industry.

In another place on 30th January there was a debate on the recession in industry. The Secretary of State for Trade and Industry said during the debate: inflation is the consequence of excessive demand—demand which grows faster than output. Its cure must inevitably involve a period of slower growth of demand".—[Official Report, Commons, 30/1/91; col. 956.] I wish he had added, "and also faster growth in the output of competitive products for home and export markets". That is my theme for my few remarks today.

In pursuing it, I wish to make clear at the outset that the best of British companies are as good as any in the world and probably better than many. The trouble is that there are not enough of those good companies. Unless effective action is taken soon to reverse the contraction of our manufacturing base, when the economy expands again we shall be in real trouble with rising inflation once more and an increasing deficit on our balance in overseas trade.

Inflation is a serious disease which must be cured. As other noble Lords have said, high interest rates are already having their effect. There is greater competition all round. It is much more difficult to obtain contracts so many prices are coming down. That is all to the good. However, as the noble Lord, Lord Ezra, made clear, high interest rates continuing for such a long time create serious damage to industry. Worst of all, they damage investment and output which are both now declining.

It is also becoming quite clear that pressure on the sterling exchange rate is a major contributory factor in preventing us from reducing interest rates. The main reason is concern about overseas investments, about our balance of payments and the fear that we might one day be driven into devaluation. I do not believe that we shall. There is also a lot of hot money attracted by high interest rates which would soon disappear if we brought interest rates down too soon. In turn, the balance of payments deficit results from inadequate availability and output of competitive products in manufacturing industry.

It is no accident that the strength of the German and Japanese economies is based on competitive and efficient manufacturing with a big output and no balance of payments problems. It is no accident that the rise of South Korea, Taiwan and, to some extent, India, has come about not from the growth in the GNP through expanding service industries but from increased competitiveness, efficiency, and growing output in their manufacturing industries.

Over the past 10 years the Government have had a good record. Their policies have stimulated and rekindled the spirit of enterprise. They have curtailed the restrictive practices of the trade unions and increased productivity and profitability in industry. All those are essential; though it must be admitted that they were improvements from a low base. We need to do a great deal better compared with our competitors.

Much less satisfactory has been the slow growth of output over those years which is now only about 6 per cent. above 1979 levels. That is almost entirely due to a lack of investment in plant and innovation in manufacturing industry. It is, or should be, a matter of grave concern.

Alas, that does not seem to have been the case with HMG. They do not seem to have appreciated the vital importance of this factor of increased output in manufacturing industry. Last year I was so worried about it that I wrote to the then Prime Minister, Mrs. Thatcher, expressing my concern. In the first sentence of her reply, she said, "I do not share your concern for manufacturing industry". Again, not long before Sir Alan Walters left the service of the Government, I had the opportunity to ask him two questions: "Are you concerned about the huge deficit in overseas trade in manufactured products?" It was then running at the rate of about £20 billion per annum. I also asked: "Should we do something about it?" He replied with a simple and definite "No" to both questions. I earnestly hope that wiser and more constructive advice is now being offered to Her Majesty's Government and that they will take it. If they do not, we shall never achieve the essential change of attitude which was mentioned by my noble friend Lord Cockfield.

Many of your Lordships will remember the first line of Kipling's poem of the much travelled soldier: I've taken my fun where I've found it". The wheelers and dealers have had their fun in the 1980s in the welter of takeovers. Now that party is over and that is good. Very few of those acquisitions did anything for manufacturing industry or for national prosperity. Few added any value in the wealth creating process. Thus, I shall lose no sleep about the financial institutions crying, "Woe, woe", over the lack of merger and acquisition activity.

We have had too much emphasis on money, which is only a convenient means of exchanging wealth. We have had too little emphasis on adding value by manufacturing. In the fight to control inflation, I hope that the Government will pay due regard to that and ensure that every policy that is discussed and decided in government will be scrutinised for its effect on manufacturing industry.

Years ago there was an old saying in Birmingham, "Where there's muck there's brass". It is time that we put much greater effort into adding value to the brass. It is time we got down to the brass tacks of our economic problems by promoting greater output from manufacturing industry in every possible way by fiscal incentives and selective support, as has been very successfully done in Germany and Japan. That is the way to a stable, prosperous economy and towards the Prime Minister's admirable objective of opportunities for all.

8 p.m.

Lord Jay

My Lords, there has been only one speech in this debate today which seemed to me to have nothing to do with the present state of the UK economy and that was the speech made by the Minister in opening the debate. I do not myself believe, as someone suggested, that his speech was written for him by the Treasury. It sounded to me as if it was written for him by Tory Central Office.

I shall restrict myself to speaking about the present state of the British economy this evening. That economy is now in a state which one can only describe as one of near collapse. It is in a worse state than at any time that I can remember since 1945, as we are suffering from both rapidly rising unemployment and a huge balance of payments deficit.

The public were misled by well-meaning people last summer. Reckless statements were made that joining the exchange rate mechanism would bring us stability and lower interest rates, and that it would also help the economy. Incidentally those same arguments were advanced for fixing the pound at an overvalued rate in 1925. We were even told that there would be a golden scenario as a result of entering the exchange rate mechanism. Some of us argued that such a move would mean high interest rates and rapidly rising unemployment. In your Lordships' House on 20th July at col. 1167 of Hansard I stated: Interest rates would be raised, exports would flag, unemployment would grow". My only mistake was in predicting that the euphoria over the exchange rate mechanism would last about two months. In fact it lasted for about two hours in the City.

What has happened since we joined ERM in November at a 20 per cent. overvalued rate? Interest rates have stayed high; unemployment has started to rise at a rate of 70,000 or 80,000 a month and real output is falling as fast, if not faster, than at any time either in 1929–1932 or 1979–1981. Real manufacturing output in the UK fell in the last three months of last year at an annual rate of 10 per cent.

Strictly speaking we are not experiencing a recession at all. We are experiencing a deliberate deflation, as in 1979–1981, brought on by the Government's high interest rate policy and intensified by the unsustainable exchange rate. On present policies output is likely to continue to fall; the pound will fall to its ERM minimum and thereby keep interest rates high; factories and industries will close down; dividends will fall and unemployment will rise by 70,000 or 80,000 a month. I estimate that, on present policies, unemployment will reach 2.5 million by autumn 1991 and 3 million in the long promised utopia of 1992.

The high interest rates will cause unemployment by cutting real investment and the overvalued exchange rate will also cause unemployment, both by restricting exports and by increasing competitive imports. Deflation of this kind is cumulative. It does not necessarily stop of its own accord, and indeed it did not in the classical case of 1933. Each batch of workers thrown out of employment reduces its spending and so starts a new wave of unemployment as a result. That is plainly happening now. The inevitable result is a loss of productive capacity, which is likely to be largely manufacturing export capacity in this country.

It is now agreed by the statisticians that in the 1979–1981 disaster, we lost 25 per cent. of our manufacturing capacity. Most of that has been lost for good. I believe the previous speaker would agree with me when I say that one can destroy a factory and much of an industry by deflation in six months but one cannot rebuild it in six months. We discovered that fact in the early years of the last war. The permanent loss of real capacity through deflation has become so well recognised that the academics have invented a new word for it. However, I cannot pronounce that word.

It is bad enough to have a 20 per cent. overvalued exchange rate, but it is even worse if one starts with a huge balance of payments deficit. That deficit was still running last year at a rate of about £16 billion. It consists almost entirely of a visible trade deficit with the EC. It was not mainly caused by the consumer boom of 1988–1989, although that made it worse. However, it has grown continuously ever since we joined the EC in 1973. As a result of that deficit, we have in the past three years borrowed on a short-term basis from overseas something like £50 billion. The payment of the interest on those borrowings has now turned our invisible account into deficit, or near it. That makes the whole situation far more difficult.

Those who thought that joining ERM would give us stability seem also to have forgotten that we still carry out 50 per cent. of our trade with the world outside the EC. Fixing the exchange rate against the mark leaves it fluctuating against the dollar and yen and a whole lot of other currencies. In the past few weeks we have found that a fall in the dollar against the mark pushes up the pound against the dollar. That makes the position even worse for us as a result, particularly as regards our exporters and our employment situation.

Amid all this, the Government's only response—we heard it from the Minister again today—is to repeat continually that they are fighting inflation. To my mind the first irony of that phrase is that the Government themselves have stimulated cost inflation in all kinds of ways by raising transport charges, Underground fares in London, water charges, rents and mortgage interest payments. All those charges have contributed to pay inflation. I agree with the previous speaker that we should talk about pay rather than wages. There has been pay inflation.

In any case no intelligent economic policy can be built upon an obsession with one single aim. Economic policy must achieve a judicious balance between a number of objectives and not sacrifice all of them for one. If one is too cowardly or too incompetent to manage any kind of incomes policy, one is forced nowadays to choose between more unemployment or a further rise in prices. If, like this Government, one prefers any level of unemployment to any rise in price levels, one simply cuts down the real output, wealth and capacity of the country. We could achieve a zero rate of inflation by having zero output and zero employment.

In the case of our present economy, thanks to the ERM overvaluation, we cannot now easily reduce interest rates for fear of the pound falling below the ERM floor. We cannot let it fall below that floor because that is thought to be against ERM rules. In fact such a course is not even against ERM rules. We were always assured by those who wanted us to join ERM that it was possible to realign the rate, although only, it appears, by permission of the other members. Frankly, that is now the only way out if we are to tell the hard truth about the present situation. If we do not adopt that course soon, the risk is that we shall decimate much of British industry beyond recovery and finish up little more than an economic satellite of Germany. Incidentally, Germany has just raised its interest rate without in any way consulting us.

I only hope that we shall face and understand these hard facts in time and not waste six years in a long-drawn out and painful struggle as we did from 1925 to 1931. We shall have to lower the exchange rate in the end. The only question now is, when are we going to do it?

8.10 p.m.

Lord Boardman

My Lords, clearly the noble Lord, Lord Jay, did not like the speech of my noble friend Lord Hesketh, probably because my noble friend spelt out clearly the successes of the last 11 years and the strength of our economy. The noble Lord, Lord Jay, painted a very depressing picture of doom and gloom.

I shall refer only to one general statistic on which I believe there will be universal agreement. Over the past 11 years the standard of living has improved dramatically across the country. We should never forget that. However, I accept that today the economy is not as good as many of us would like it to be. I shall divide my speech into two parts. First, I shall say a few words about what I understand to be the causes of the present downturn. We should not turn the clock back but if we can learn lessons from those causes it would be valuable. Secondly, I shall say something about future action.

In large part the situation is caused by a general downturn in world trade. We have only to look at what is happening in North America and its importance to our economy to realise that we, as a great trading nation, cannot be immune from the impact of such downturns elsewhere.

A second cause is the expansion of credit, both personal and commercial. The expansion of personal credit has been due largely to the escalation in house prices and the increased borrowing capacity associated with it. Somewhat ironically, that was in large measure due to what was intended by Mr. Lawson when he was Chancellor of the Exchequer to be an act of kindness. Mr. Lawson has been much criticised in the debate today. He announced that tax relief on mortgage interest available to individuals would in future be available only on a property and allowed an interval of several months before that change took effect. In that period an enormous number of people took advantage and borrowed money to buy property. It was not just young unmarried couples. For example, five young men who worked together in the City might club together to buy a property for £150,000, getting full tax relief, when the property was probably worth only £50,000 or £100,000.

The escalation in house and flat prices resulting from that action, which was intended to be a kindness, was dramatic. It did not affect only those individuals. Neighbours who believed that their house was worth £50,000 saw the house next door sold for 150,000 and reckoned that they could borrow a lot of money to have a holiday, buy a boat and make other purchases. That measure had a major impact on the amount of personal credit granted.

The second and, in terms of figures, greater element was commercial credit. Demand during a period of rapid growth and expansion was considerable. Strangely, I agree with the noble Lord, Lord Bruce of Donington. There was a massive expansion of credit due to the demand arising from the expansion of the economy and the fact that there were some 400 foreign banks in London willing and happy to lend money. My noble friend Lord Selsdon also mentioned that point. An unfortunate consequence was the erosion of the relationship which had previously existed between a banker and his customer.

Viscount Caldecote

My Lords, before my noble friend leaves the point, does he not agree that the expansion of credit would have been much less damaging if there had been greater output by manufacturing industry to meet the demands resulting from the expansion of credit?

Lord Boardman

My Lords, I agree with my noble friend. Credit granted for investment purposes in order to produce more was well justified. The relationship between a commercial customer and his bank used to involve a full exchange of views. A loan would be made with prudence in the light of knowledge of a long-standing customer. Unfortunately that changed with the expansion of credit and with large numbers of foreign banks opening here. People who found that their traditional banker was unwilling to lend them further money, perhaps for very good reasons, would go round the corner and get credit elsewhere. That has led to some of the present problems.

It is worth noting, when considering the publicised failures which have occurred recently, that in almost all cases 20, 30 or sometimes as many as 100 banks have been involved as lenders. That has made it very difficult for the old relationship, which benefited both the customer and the bank, to continue. I do not suggest any government action in that respect, but it is a factor to be taken into account when looking at the causes of the expansion of credit.

Two years ago the political and financial writers, and indeed noble Lords opposite, criticised the banking world for not lending enough money to cover the expansion that was taking place Noble Lords opposite, including the noble Lord, Lord Bruce of Donington, called for a nationalised state bank as part of Labour Party policy so that there would be an instrument to lend money to commerce and those industries that were restricted by the lending policies of the time. The same people are today criticising the imprudent and improvident lending that took place.

A recent report from the chambers of commerce shows that 15,000 businesses have closed down in the last 12 months. We should put that report into perspective. We should take into account the number of businesses which have started up in the same period. That figure will be many times the number that have closed down. My noble friend referred to something like 400,000 businesses which have started up. I do not have the figure, but it will be in Hansard. If it is relevant he will no doubt deal with it in his reply.

The criticism which is made most frequently today is that the exchange rate is too high and has been maintained for too long. Linked with that is the criticism of our entry into the ERM; or it is said that we went in at the wrong rate. Yet the most important economic task concerns not the interest rate or the exchange rate but the inflation rate. My noble friend Lord Boyd-Carpenter said that above all priority must be given to controlling inflation.

The interest rate, the exchange rate and the inflation rate are very much linked. If that means that we have to keep the interest rate higher for longer than we would like in order to bring down inflation so be it. I would regret that, but inflation must be the top priority. I believe that a reduction in interest rates is anticipated. Therefore, a cut today or in the near future would not have the effect on the economy and on sterling, and consequently on inflation, that some fear. However, I am content to rely upon the far wiser judgment and the information available to the Government and the Bank of England.

High interest rates are having a severe and restraining effect on discretionary expenditure. However, it was a long time after those high interest rates were applied that they began to bite. Similarly, when they come down it will take a long time before retail sales recover. That may not be a bad thing in view of the impact on inflation. The same applies to investment. I agree with my noble friend Lord Caldecote. It is important to maintain investment, particularly in manufacturing industry. There is a time lag. When interest rates go up and people decide that they cannot afford to invest, it is probably two years before that cut takes effect. When interest rates come down and people can afford to invest, there is a similar time lag. So we must be aware of the time lags.

Then there is the worrying trend of unemployment. It is rising and will continue to rise; yet there is still continuing pressure for inflationary wage increases. The present cycle of downturn will pass, whether in six or 12 months' time, and it surely must be in the interests of employees to forgo—certainly to moderate—the wage demands that are now being made in order that they retain their jobs. The alternative of pricing themselves out of a job is one that has been widely publicised. I hope that the culture to which my noble friend Lord Cockfield referred has changed and that there is a greater recognition of the need for a different attitude. It is certainly apparent in some trade unions and work forces. In the present downturn, it is very much in employees' interests to moderate or forgo the wage increases which otherwise they would have demanded—

Lord Bruce of Donington

My Lords, the noble Lord has been addressing his remarks to necessary wage reductions or moderation of wage claims. Will he confirm that that ought to apply to pay generally, and in particular to the paid—many of us think over-paid —directors of boards of companies and of banks?

Lord Boardman

My Lords, I certainly do not intend to pick out any individual group as being particularly suspect. However, what I was going on to say before the noble Lord intervened was that this should apply across the board, and I include shareholders and their dividends.

We are going through a period when general voluntary restraint on both wage demands and dividends would be healthy, welcome and wise. We are going through a cycle and, if we can go through it without increasing our costs, we shall come out in six or 12 months' time able to continue the rapid, healthy economic growth in prosperity that we have enjoyed over most of the last 11 years.

I listened carefully to speeches from the Benches opposite. Some of the criticisms made were perfectly fair and some of the points were certainly valid. But I listened in vain for any constructive alternative, and I include the speech of the noble Lord, Lord Peston—

Lord Peston

My Lords, the noble Lord was present during my speech endless hours ago. I offered a whole set of policies which may be wrong but which were certainly constructive. I think that I did my best.

Lord Boardman

My Lords, perhaps I should have phrased what I said differently. I should have said that there was not a set of measures from the Benches opposite which could be hung together to make a sensible economic package that would help carry the country forward in the way the policies so resolutely being pursued by the Government are doing.

8.24 p.m.

Lord Dean of Beswick

My Lords, from what I have been able to hear when my other commitments permitted, this has been an interesting debate. But I should like to view it in a different way from other speakers. At present, as a nation, we are involved in a war on two fronts. While it may be said from all the reports coming back that we are doing rather well in the Gulf, it is obvious that in the economic war we are doing very poorly indeed and are losing the battle.

One has to ask: how has this come about? The three field marshals who have been in charge of our economic battle since 1979 were, first, the right honourable Geoffrey Howe, who has now disappeared from the centre after his act of political matricide. Then there was Mr. Nigel Lawson, whom I remember only a few years ago delivering a Budget in another place. To judge by the reaction of the back-benchers of the Tory Party in another place, who were waving their Order Papers, and by the eulogies which quickly issued from the Conservative supported press, saying that he was probably the best Chancellor of the century, one would have thought that the Messiah had come again. His successor was the present Prime Minister, Mr. John Major, who appears to have inherited a decline which other people foresaw and warned the Government would take place, but nobody listened.

How has this come about? It has come about because this present Government, since 1979, have had the benefit of more income, not derived from hereditary resources, than any other government in history. They have had over £90 billion of oil receipts, which none of their predecessors had. They have also had huge sums of money from the privatisation programme. But they have obviously made a complete cock-up of it.

What has happened to that money? Where has it gone? I remember the report of a Select Committee of your Lordships' House some years ago—it may have been referred to by previous speakers—on the manufacturing industries. It was barely printed before it was rubbished, quite rudely and offensively, by the then Chancellor, Mr. Lawson. I saw in the press this weekend that there had been a succeeding report by a committee whose chairman is the noble Viscount, Lord Caldecote, which is saying the same thing as that earlier report.

However, in my few remarks I want to talk about two industries which are suffering a great deal, and when they suffer so does the nation. I want briefly to refer to the building industry, which, as previous speakers have said, is the biggest employer of labour in the country. Only a month ago, the Building Employers' Confederation, which cannot be accused of being a supporter of my party, sounded further alarm bells in succession to what was said last year when the danger signs were showing.

Recent headlines have stated that the building industry is now suffering its worst recession in 40 years, and another 100,000 jobs could be lost in the foreseeable future. Prominent people in the building industry are saying that in the foreseeable future the workforce could be cut by half. When it is realised that the building industry will be the main industry to have the job of building and refurbishing in an industrial revival, that indicates a very poor situation indeed.

I am not thinking just about bricklayers, joiners and plumbers. I am thinking about professional staff. There are now serious redundancies among the professional people, who are the generals who run the building industry, such as architects, planners and quantity surveyors, and it is on record that an architect operating gainfully will provide 50 other jobs within the industry. The sad fact is that this group of people is being particularly savaged.

I took the point made by the noble Lord, Lord Boardman, about owner-occupiers. As one who has been interested in the building industry all my life, I have to say that last year 40,000 repossession orders were made against people who had not been able to meet their mortgage repayment commitments. These people are not speculators or people with two homes; they are mostly people who have put their life's earnings, or what they thought would be their life's earnings, into buying a house. It has gone into the wind, and it is a tragedy of enormous proportions. It seems to me the Government are rather underplaying this when they talk about what has been done in the owner-occupier sector and refer to the fact that over a million council properties have been sold. In effect, the percentage is infinitesimal.

I would say to your Lordships and to the Government that I am one of the lucky ones because I happen to be able to pay my mortgage and I own my own home. I would ask your Lordships to think of the situation of someone aged 40, with two or three youngsters whom he is trying to put through college. Suddenly his job disappears, or interest rates go so high that he can no longer meet his repayment commitments. That is an appalling tragedy which ought not to have been visited upon him. I do not think we should trivialise that situation by giving Answers in percentage terms at the Dispatch Box. It does no good because the objectives of most such families will have been trampled underfoot for life and there is no way, unless the parents win the pools or one becomes a highly paid professional snooker player or something like that, of ever recovering. That is a great tragedy.

I am myself an engineer by calling. Until I was privileged to be made a Member of the other place, I happened to work in engineering, wearing overalls and earning my living in the manufacturing sector. One of the things which has been grossly underplayed—I spoke about it in my first remarks today—is the importance of the manufacturing sector. The City of London can certainly make a contribution to the wealth of the nation but it is quite clear that, with our historical background—this has been brought out by the Aldington and Caldecote Reports—unless government, whether this one or the next, makes a determined and consistent effort to alleviate what is happening to manufacturing industry, matters will never improve.

Just before I sit down, let me give some figures. Throughout the whole economy productivity growth has fallen fast. It is true that between 1980 and 1983 our productivity grew faster than that of our major competitors: an average of 3.3 per cent., per year, according to the OECD figures.

But since the early 1980s our performance has deteriorated steadily. Between 1984 and 1989 productivity for the whole economy grew at an average rate of 1.3 per cent., while the EC average was 1.9 per cent.: Germany, 2 per cent.; France, 2.2; and Italy, 2.5 per cent. How is it that we get these Answers from the Dispatch Box that we were top of the league? According to the OECD, we came bottom of the list after the first year, compared with our nearest rivals—the people we have to compete with.

In 1989 Great Britain was the only major industrial country where productivity fell, and it fell by 0.3 per cent. In the first half-year of 1990 productivity remained at that level; but here is the most damning statistic of all—the manufacturing sector has been reduced from being able to account for almost one-third of GDP in 1979 to less than one-quarter in 1989. Need I say more? We have got to that situation, and the Government have been claiming that as a success, when a third of our real wealth was generated historically by the manufacturing sector of industry, from which I came as a workshop engineer. The level is now down to 25 per cent. and still shrinking. Unless the Government, whether this one or the next, reverse this trend, our standing in the world and our standing of living in terms of what we hope to do for our people in future, from the cradle to the grave, in terms of looking after children, education, housing, caring for old people, and so on, will decline. We have no chance of solving the problem unless the Government reverse what they have been doing. I am afraid that, on the performance of the past three Chancellors that we have had, including the present Prime Minister, that looks, at this point in time, most unlikely.

8.36 p.m.

The Earl of Gowrie

My Lords, even when the clouds on the international and national horizons are dark, we must, to borrow the phrase of Kipling's used by my noble friend Lord Caldecote, "take our fun where we find it". Speaking for myself, I certainly found it in the extremely clever device of my noble friend Lord Hesketh in putting down this Motion. For many years during the administrations of both Mr. Heath and Mrs. Thatcher, as well as in the years when we were in Opposition, I used to help conduct economic debates on behalf of the Government or the Opposition in your Lordships' House. I used to suffer the castigations that we have heard this evening. Occasionally I was the chap uttering them. But in all those years I never thought of putting down a motion of censure against myself, so to speak, and thereby spiking all the attempts of the Opposition effectively to deal with the situation. It was a brilliant stroke and my noble friend will go far in political tactics.

I also think he was quite right to remind us of the very solid achievements of this Government. My noble friend Lord Cockfield quoted Marlene Dietrich's query, "When will they ever learn?" I am a fan of Marlene Dietrich's but I am also a fan of a particular song by Ella Fitzgerald, of which the refrain is, "They can't take that away from me". One of the things that cannot be taken away from this Government is that for a time—and we could argue for exactly how long but in my view it was at least five years, from about 1982 to 1987—they produced the longest period of sustained growth with low inflation of any government since the war.

With respect to my noble friend Lord Cockfield, whose speech interested me and the whole House so much, I think that profound lessons were in fact learnt at that time. And the proof of that is to be seen in the present political platform of the Opposition, because if all was gall and wormwood at that time, why is the Party opposite shadowing those policies in the programme which it seeks to put before the public?

It may not be right for me to speak out of turn and I am not really competent to do so, but there have been dismissive references to my right honourable friend the former Prime Minister. It is no secret that the previous Prime Minister did have a serious policy disagreement with the then Chancellor, Mr. Nigel Lawson. From what I have heard your Lordships say, Mr. Lawson has come in for quite a lot of criticism. But I did not conclude that my right honourable friend was necessarily wrong in the argument that she had with him. The famous Iron Lady lost that argument and paid a heavy price for so doing. I am not sure that though she lost she was necessarily wrong. It is perhaps a matter for history.

However, my noble friend Lord Hesketh and the Government can be in no doubt at the end of this debate that the crisis which they now face is a very real one. Ministers in a parliamentary democracy are always faced with lobbying. The usual preliminary to a lobby is a few ritualised groans about how difficult things are. But this recession is real, like the war in the Gulf; and perhaps because of the war in the Gulf sectors of the economy such as tourism and the finance and leisure industries, which are normally able to provide relief in recession, are not providing it at the present time.

Successful companies, like British Airways, are being hurt as well as companies which have had it easy—perhaps too easy, as some of your Lordships have suggested. The credit-wise (to use a phrase of my noble friend Lord Selsdon) are trading as poorly as the credit-foolish. They can continue with doors open for business for rather longer but that is all. The groans of the Britons are real ones. This is not a recession through which we can all sit tight or hope to muddle through. The Government must respond to a crisis which is partly, though not wholly, of their own making. A definite and visible steer of policy is required.

In this debate criticisms of the Government have been made with which I agree—I particularly enjoyed the relish with which my noble friend Lord Cockfield outlined the litany of disasters that had befallen various public bodies with nearly all of which he had himself at some stage or another been associated. There have also been criticisms of the Government with which I disagree. But much more important than the criticism is the steer which the Government give from now on. If they give the right steer, the economy will start to come right quite quickly and, in my opinion, they will be re-elected too.

Although out of personal loyalties and interest I believe that that would be a good thing, I also believe that it is important, because the Labour party has not yet wholly accepted—though it has come some way—that the market is the arbiter in an open society. It is not the servant of society; it is society. The phrase "social market" which is sometimes used is a tautology. The words mean the same thing. Let us take a current example. Suppose you are poor and are having a bad time because you cannot afford to buy or rent accommodation. You have to sleep in the street in the cold. The immediate aim of policy must be to get you off the street and out of the cold. But, once that immediate aim is fulfilled, there still exists an immense cultural divide, so to say, between socialist economics and market economics as they seek to ameliorate your problem. Socialists want services for people; but in the way of the world those services become centres of power and authority, and above all cost, in their own right. By contrast, market economists want people to have money. That way they have the wherewithal to pick and choose among competing services, including accommodation. They become consumers, free men and women, and services at all levels must deliver to them or go under.

I do not apologise for making that brief ideological point because Britain will not flourish until there is an enduring consensus in favour of the market. There will be plenty of other less central matters about which we can wrangle enjoyably in our parliamentary system. The right steer for this economy now is for the Government to resist pressure, however loud and real, for any actions which jeopardise our competitive position in Europe. That means that our wage and price inflation must be in line with those of our competitors.

High interest rates reflect our relative rates of inflation. One does not stop a plane from running into a hill by tampering with the altimeter. As we come into line interest rates will fall. The price mechanism is the only efficient rationing system known to mankind. It is an unjust one, for this is a fallen world, but it is less unjust than the other kinds.

I grew up under food rationing but also under the black market. Credit controls in a modern economy mean a black market for money. I am in rather a good position in my businesses to observe the behaviour of black money all over the world. The first steer from the Government, therefore, must be the clearest conceivable signal that they will not under any circumstances whatsoever devalue the currency. I was doubtful of the wisdom of joining the ERM when we did because our rate of inflation was too high but now that inflation is coming down it would be the sheerest folly simultaneously to devalue ourselves out of it.

I am delighted to say that at present the Government are giving the right steer, but they could do a little more. The Prime Minister is a new and attractive figure on the world stage. His ability to combine modesty with self-confidence at a very testing time has made an immense impression. I know that from experience as I am an international commercial traveller. He has had a difficult act to follow. He should find an occasion to say on that international stage what he says so clearly here at home. Frankly, the world thinks that inflation may no longer be the judge and jury of the present Government and that the Government may ease up on the currency if the polls worsen.

So far, so much hair shirt. But, as I have said, the cries are real and present rates of interest hurt, especially as the underlying rate of inflation is falling while the rates of interest are not. That is where the pain lies. But the twin squeezes of high interest rates and unemployment are, alas, the only mechanisms known to the British economy to correct our tendency to confuse human earnings with human rights and to do so on an annualised basis. But I am not a masochist. If the Government cannot —must not—budge on the counter-inflationary front and on controlling money and credit by price, there is no reason, in my view, why they should not ease the passage of recovery by fiscal means through the tax system.

Nearly every speaker advocated greater investment, but, given the cost of money, we need to be careful of borrowing even to invest. We need the equity market. We shall not attract more individuals into the equity market with capital gains tax at a top rate of 40 per cent. and a standard rate of 25 per cent. Halve those rates or even abolish them, cheer up equities and give them a psychological boost.

Most speakers mentioned the pay problem. The noble Lord, Lord Peston, even suggested that a re-run of pay policies might be part of the programme of a Labour government. I was most surprised to learn of that and would welcome confirmation from the noble Baroness who is to wind up.

Lord Peston

My Lords, I was trying to raise the level of the debate above that kind of remark. I was trying to point out that, although I personally favour an income policy, it was not necessarily the policy of my noble friends. I emphasised that, if we are to get rid of inflation without massive unemployment, we must find another way. I was hoping desperately not to get involved in this kind of interchange because I, for one, have had enough of it.

The Earl of Gowrie

My Lords, I apologise to the noble Lord. I have not been able to come to the House for some time, but when I was attending regularly it was a reasonable supposition that a speech made from the Front Bench of the Opposition Bench was a declaration of Opposition policy. Obviously things have changed since I was last here.

Lord Williams of Elvel

My Lords, my noble friend Lord Peston stated that he was speaking personally. When people speak from this Dispatch Box personally, it means personally; it does not mean that what they say is necessarily a policy of the Labour Party. My noble friend made that perfectly clear.

The Earl of Gowrie

My Lords, I am very grateful for the last intervention because it is a tremendous relief to me, in case we should get a Labour government, that a pay policy is not to be part of its policy. Such policies cannot and will not work because they hit at essential freedoms; and pay bargaining in a free society is an essential freedom. I do not blame wage negotiators or the TUC for asking; I blame, as do many of my noble friends, managers for granting. I believe in dear money, if only because, if managers grant inflationary wage claims, they go under.

My noble friend Lord Cockfield was a little too gloomy in stating that people never learn. There is evidence across the pay scene at the present time that people are learning —witness the very welcome way in which the union side and management in British Airways have co-operated on a 50 per cent. cut during the present crisis in air travel. Some lessons are being learned.

One of the difficulties of current pay rounds is an own goal on the part of the present Government. If they were to reindex mortgage tax relief, at least for standard rate payers, marginally from £30,000 to £50,000 or make it apply at the current rate to wives as well as husbands, the bargaining process would begin to bear more relation to the economics of the real world and the firms which operate in it. In my view, the Government have rightly encouraged home ownership. Current pay demands in the South-East reflect a credit expansion in housing which has been the subject of remarks by many speakers in the debate.

What I am suggesting would not pave the way for a further credit explosion because house prices have stabilised, even fallen; yet people are paying high interest on their old borrowings at the original high purchase rates. True indexation of the £30,000 target for relief has been estimated as being £150,000. I am in no way suggesting that figure, but one-third of that sum would only reflect the new price stability and it could be restricted to standard rate payers. The success of that attractive lady TESSA should help compensate Her Majesty's Treasury for their horror of mortgage tax relief. They would very quickly see a reduction in pressure on the wage round. I should like to say to the noble Lord, Lord Dean of Beswick, and my noble friend Lord Caldecote that it would also cheer up the construction industry no end.

Supporters of the Government are right to endorse the views of my noble friend Lord Hesketh, that for four or five years this administration produced sustained growth at low inflation over the longest period since the war. In my language the Government cleared the way for the market to achieve that. The Government's critics, however, are correct in stating that the shadowing of the deutschmark and the post-1987 stock market crash expansion were disastrous. This was done with the best of intentions but, as my noble friend Lord Stevens demonstrated, it was devastating. We can return to the virtuous state on inflation. We are doing so. We are being punished now for our departure from virtue but as we progress the punishment will surely ease and growth resume.

8.55 p.m.

Baroness Seear

My Lords, it is a real pleasure, all the more real because it is so rare, to follow the noble Earl, Lord Gowrie, with whom many years ago I very much enjoyed crossing swords. Although there were some statements in the noble Earl's speech with which I can agree, I am left winded by his statement that the market is society. This is not the moment, at this time of night, to debate that matter, but if anything illustrated the gulf which lies between these Benches on this side of the House and the noble Earl and his friends on the other, it was that statement. Unlike noble Lords on the Labour Benches, we on these benches have always believed in the market, but we believe that the market is the servant, not the master, and that for social reasons it is frequently essential to intervene in the workings of the market.

When one brushes away the inevitable party slanging which has occurred from time to time this evening, there has been a great deal of agreement in this extremely interesting debate about some of the most important issues facing the economy. No one has questioned the danger of inflation, though it has not been sufficiently stressed that the people who suffer most from inflation are those least able to bear the cost. The people at the bottom of the pile feel the rise in prices most acutely, as well as the people higher up and the people who are trying to run industry. That situation has a further effect throughout the economy. Nobody during the debate has questioned the fact that inflation is a major danger.

There has been general acceptance that the accompanying rise in unemployment is something that we all deplore and wish to see avoided. There has been widespread understanding, if not support, for the cry from the CBI and small employers about the effect on them of high interest rates.

The battle to defeat inflation has to be fought and won. To the extent that it is necessary to keep interest rates high in order to do so, then the level of interest rates has to be supported. What is not accepted is that it is necessary to keep the interest rate so high and that there are no other ways in which some of the evil consequences of the present position can be alleviated. On all sides it is accepted that the plight of small industrial concerns and large-scale industry is grievous in the extreme. They are crying for a reduction in interest rates, and there has been a great deal of support for an attempt to effect a reduction.

I greatly doubt whether any realistic reduction in interest rates will be enough to do more than marginally assist in the problems that are being encountered by industry. The real size of reduction that industry needs, if that is to be the cure, is something that no one can accept if they are trying to face inflation. I see the noble Lord, Lord Peston, nodding his head, and I think that that is generally agreed. Therefore, I am surprised that there has not been more emphasis on other measures that the Government could take to help industry in addition to a marginal—it cannot be more than that—alleviation of the burden of interest rates.

First, with the Budget expected on 19th March it is not too late to look at ways in which the tax burden laid on industry can be alleviated. Corporation tax and stock values could be reconsidered. After all, in comparison with real terms, inflation has raised artificially the level of stocks yet taxes are being paid on those inflated stocks. The Government should give their mind to ways of helping industry in the Budget, thereby providing a quicker and more immediately effective way of dealing with some of the problems faced by industry and the consequent results on unemployment, though that would not cure them.

Secondly, it is also possible to reconsider the employers' national insurance contributions. Why cannot the Government agree that the employees' national insurance contribution should be paid above the level of £17,500 at which it now stops? The present position produces the extraordinary effect of paying a lower rate of gross tax when one is earning above that level. The Government should increase the level and reduce the amount that employers are required to pay. That would be an immediate and non-inflationary method of easing the burden now laid upon industry. There are other measures that the Government could take directly and quickly which would bring an immediate effect.

The current state of the building industry has been commented upon by many speakers on both sides of your Lordships' House. There is no question but that the building industry is in a powerless state and on its knees. However, people across the country are crying out for improvements in buildings in both the public and private sector. One need only look at the state of schools. At the moment one can drive a hard bargain with the building industry and get one's repairs done at a greatly reduced rate compared with a year ago. If the Government put money into essential constructional repairs there would be a multiplier effect of great importance. Not only would that help the building industry, the employers, but it would bring a number of people back into employment with a multiplier effect. That would be advantageous at the present time and would see the completion of jobs which have needed to be done for a long time. Any Member of your Lordships' House could list a number of essential building and constructional improvements which could now be done inexpensively.

They are only a few of the immediate measures that the Government can take in addition to a modest—and it can be only modest—reduction in interest rates in order to help industry's plight. They could also avoid some of the ridiculous measures that they are now taking which make life more difficult for industry. Only last week we battled with the Statutory Sick Pay Bill. I do not want to go over the argument again, but what a moment to increase the charges on industry, large and small, however modest they may be? Members on all sides of the House begged the Government to make a modest concession and to give some support rather than increase the burden now laying on industry.

I turn to the longer-term view that we might take if industry is to take off and succeed. There has been a great deal of self-congratulation and comment about how well this country has done during the past 10 years. Yes, there have been improvements; for example, in productivity which badly needed to rise. However, we must constantly remember that while we have been improving so have other countries. What matters is not how much we improve but how much our improvement compares with what our competitor s are doing. We must face the fact that we have not been keeping pace with them. The Government boast that our share of world trade has stabilised. It has, but it is bumping along at 6 per cent. and cannot fall much further without falling into a black hole. To say that it has stabilised at 6 per cent. is no great consolation.

Many of the figures that have been quoted in your Lordships' House, not only today but on other occasions, showing how well we have done are based on the fact that we start from a low level. It is easier to attain a high increase in productivity compared with a country which is doing better. It is easier to attain a 5 per cent. increase on two than it is to attain a 2 per cent. increase on 20. Such comparisons are continually being made without people pointing out the relative starting positions. We need to do everything that we can for the longer term.

I shall not speak at length about education and training, as I have done in the past. Comment has been made on that subject on all sides of the House. However, being practical and talking about immediate issues, I must say what a moment this is to cut money to the TECs. The Government have handed to them the enormously responsible job of raising the level of training in this country. We all know that we are abysmally behind in that respect. Rightly or wrongly, the Government have shuffled the responsibility onto the TECs, and some of us have made many criticisms of that; but it has been done and at least they should be given the resources to do the job. Instead money has been cut back and without money one cannot provide good training. Let nobody fool themselves, no good education or training was ever provided on the cheap. To cut that money now when we need to build for industry in the future is short-term folly of the first order.

There are several points of a different kind that one might make, apart from the immediate alleviation that could be given to industry without inflationary perils. One reason why our interest rates are kept high is that the world as a whole does not yet trust sterling. We are keeping the rates up in order to bolster world confidence in sterling. Therefore, the underlying problem is how to gain world confidence in sterling, thereby enabling us to lower interest rates without the danger of devaluing the pound. I have no interest in any policy which involves devaluing the pound; it might bring short-term relief but it would be a long-term disaster.

We want people across the world to realise that the pound is a sound and reliable currency; that it does not need to be boosted by excessively high interest rates. I suggest that we enter the narrow band of the ERM. That would give confidence that we mean business. Also—and I know that this separates me permanently and finally from the Labour Party, if anybody needed convincing on that point—we should indicate that we firmly back an independent central bank which will keep control over inflation. We must be prepared to keep control over inflation and show the world that we mean business in that regard.

I wish to make two other points. My noble friend Lord Ezra urged that there should be greatly improved incentives for savings to cut back excess spending among consumers. It is true that at present spending among consumers has fallen; but there is a danger that it could rise again. My party produced policies which are a half-way step towards an expenditure tax, with greater encouragement for saving. I believe that we should look again at ways in which real incentives can be given to check people from spending not only the money they possess but also a lot that they do not possess by encouraging saving rather than encouraging and supporting spending, which is what has happened over the past five or 10 years.

There is one matter on which I wish to speak not for my party but for myself. It is a point I wish to emphasise to the noble Lord, Lord Hesketh, and it is in direct contradiction to what I understood was being said by the noble Earl, Lord Gowrie. Many mistakes have been made, but one important mistake relates to mortgage interest relief. Mortgage interest relief has deflected money into house purchasing which should have gone into industry. It has had the effect of raising house prices with the result that people have been tying up far too much of their resources into house property. That is partly due to the fact that we do not have a proper rented sector either in social or private housing. It is also fuelling wage inflation. Noble Lords on the Labour Benches pretend that wage inflation is not happening; but it is. Wage inflation is fuelled by the need to pay high mortgage rates.

I believe that all parties are aware of that. However, mortgage interest relief is regarded as political dynamite and nobody will discuss it. I do not expect the noble Lord, Lord Hesketh, to give me an answer immediately, but surely it is time that the three parties conferred and agreed that mortgage interest relief is economic folly. They must consider what can be done to tackle the problem in such a way that the political dynamite is exploded. We can then face the problem in economic terms and forget the politics. If we dealt with that issue it would be a real step towards a recovery of the economy of this country.

9.11 p.m.

Baroness Blackstone

My Lords, this debate has been characterised by a considerable amount of anxiety expressed on all sides of the House in regard to the unfortunate state of our economy. I shall not repeat all the statistics which demonstrate so clearly the Government's failure to manage the economy properly.

I am happy to follow the noble Baroness, Lady Seear. As my noble friend Lord Peston indicated at the beginning of the debate, I, like her, will focus on the need to create a better economic environment for British industry in the future so that we are never again in the current appalling state that we are in today. Before doing that, I want to touch on the question of entry into the exchange rate mechanism, which has been raised by several speakers in the course of the debate.

I understand the hostility which some noble Lords, including some of my noble friends, have expressed towards the ERM. I can only say that I am totally incredulous that the Minister can claim that we entered at the right rate. I do not believe that any other speaker in the debate agrees with him on that matter. There is no doubt whatever that the Government displayed remarkable incompetence in their management of Britain's entry into the ERM. As the noble Lord, Lord Jenkins of Hillhead, suggested, the decision to enter the ERM and cut interest rates on the weekend before the Tory Party Conference was bound to result in deep cynicism over the Government's balancing of economic needs with political opportunism. That incompetence has cost and is costing this country dear. It has undermined the market's belief in the Government's commitment to the ERM; it has led to the imposition of higher rates on British industry and households.

However, any suggestion that membership of the ERM is the source of Britain's current economic problems is wrong. After all, we entered the ERM in October only four months ago, and the huge economic problems we face today were not all created within the past four months. It is clear that the decline in our trade performance, particularly our performance in manufactured trade, has been a depressingly persistent characteristic of our country's economic performance for the past decade; a period of time in which until recently exchange rates have been free to float.

That takes me to my main theme. There can be only one criterion by which to judge the success of an economic policy. That is its consequences for the competitiveness of British industry. For on the competitiveness of our industry ultimately depends our ability to sustain employment, sustain growth and hence to sustain the standard of living of the British people. There is only one clear-cut criterion to judge competitiveness and that is our ability to increase or at the very least to hold our share of markets both at home and abroad. That, as they say in business, is the bottom line. As my noble friend Lord Bruce of Donington made clear, by that unambiguous criterion this Government's policies have comprehensively failed.

The noble Lord, Lord Boardman, suggests that our poor trade performance is the result of a decline in American trade. Can he really believe that when in the world market for manufactures our share has fallen since 1980 from 10 per cent. to 8 per cent., which is a fall of as much as one-fifth and that the share of manufactured imports in domestic expenditure has risen from 26 per cent. to 36 per cent? It is that underlying failure which is so much more important than even the follies of the Lawson boom, damaging though the consequences of these follies have been. At the root of Britain's economic problems is not so much an excess of demand as a failure of supply.

It is fundamentally wrong to assume that simply by bringing demand under control we shall solve our economic problems. That is why the Government's current economic policy of attempting to deflate the economy by high interest rates is so damaging to the long-run health of our economy. I very much agree with what the noble Viscount, Lord Caldecote, said about this. He is correct in saying that the Government's policy hits investment and in doing so hits our industrial future. The Minister says that the Government are fighting inflation. But high interest rates will not cure inflation, they will only suppress it. Without building comprehensive industrial strength any expansion of demand will always place unbearable pressures on our neglected industrial base. That is why the whole approach to economic policy-making in Britain must be changed now. It is no good waiting for Mr. Major's damaging recession to be over. We need now to start to build out of recession.

The future prosperity of this country can only be built on a commitment to the long term. The noble Lord, Lord Cockfield, made some unjustified criticisms of the Labour Government of 1945. Much of his speech was rather short of solutions. He might like to know that a recognition of the importance of the longer term is the central focus of Labour's policies for macro-economic stability and for supply-side dynamism. A stable macro-economic framework, a stable fixed exchange rate, stable interest rates at levels similar to those in competitor countries and a low rate of inflation have not been achieved by this Government's policies and they will not be achieved by them. We have had irresponsible financial deregulation combined with irresponsible Budgets and a devotion to one-club high interest rate policies which have bludgeoned the British economy into cumulative decline.

That is why a Labour Government will reinstitute reserve asset ratios in the banking system as a means of controlling the growth of bank credit. They will also introduce other credit controls to limit the excessive growth of consumer indebtedness. I was interested to hear the backing given to credit controls by the noble Lord, Lord Stevens of Ludgate. Such measures implemented now would underwrite the cut in interest rates which industry desperately needs while preserving the stability of the economy and the currency.

But just as important as Labour's policies for macro-economic stability are our policies for supply-side strength replacing the neglect of and antagonism towards manufacturing industry which has been a characteristic of this Government, and with a commitment to build manufacturing strength. Again, I was interested to hear the noble Viscount, Lord Caldecote, supporting Labour Party policy on those measures.

We must create a framework within which companies can invest with confidence for the long term in the market-place and in which the Government, with enthusiasm rather than reluctance, also invest in the long term. The noble Earl, Lord Gowrie, said that the market is society. As someone who studied sociology many years ago (like the noble Baroness, Lady Seear) I find that a truly extraordinary statement. I say to him and to the noble Baroness, Lady Seear, that the Labour Party accept the importance of the market. However, the past 10 years have demonstated that relying solely on the market simply does not work. It is quite absurd to expect industry to build railways, to conduct the necessary amount of scientific research alone, or to spread new technologies throughout the economy, especially to small and medium-sized firms. Technology transfer is a very good example of where government must play a part.

For the past decade British industry has attempted to compete while living under the constant threat of hostile takeovers. Research demonstrates that the supposed efficiency gains from takeovers are always negligible and often illusory. However, the losses are very real and permanent. Apart from the obvious waste of resources, management time and energy poured into takeover battles, the takeover mechanism emphasises the short term. That is an emphasis which, often internalised by industrial managers, leads to a permanent bias in investment in training and in research and development or in market development, all of which are fundamental to successful competition in the longer term.

Labour will change the criteria for takeover to bias them in favour of those companies which invest in the long term and against those which are interested in short-term gain at the expense of long-term competitiveness. We shall also be looking at other measures to alleviate the short-term pressures which currently exist in British industry, particularly those imposed on small and medium-sized enterprises by a financial system which is more interested in hurrying a small firm to market quotation than in building up its real productive strength.

But short-termism is not simply a characteristic of British industry. As my noble friend Lord Donoughue said, it is a characteristic of this Government. What could be more short-term than cutting support for training? What could be more short-term than cutting support for industrial research? My noble friend Lord Stoddart of Swindon and others have referred to the under-investment in infrastructure. What could be more short-term than persistent neglect of the nation's infrastructure, which the CBI estimates is adding £18 billion to industry's costs in the South-East alone. The story of the high-speed link to the Channel Tunnel says it all.

Anyone who takes a serious interest in the economic fate of this country cannot but be depressed by the persistent under-investment in all these things as well as under-investment in productive capacity. This is a Government who seem incapable of providing a framework within which British industry can compete in the long term. By contrast, Labour's economic policies are about building long-term strengths. For example, for the Labour Party education and training are the commanding heights of the economy. A well-trained, well-educated labour force is a necessary condition of the flexibility required for technology innovation. It is therefore the necessary condition for long run industrial competitiveness.

My noble friend Lord Barnett referred to our deplorable record on training. Perhaps I may give just one statistic. Seventy per cent. of the British workforce has had virtually no training since receiving a minimal amount on starting their first job. One of Labour's first priorities will be to rectify this. We have detailed plans for a training revolution in Britain. There will be new legislation which will prevent employers from taking on school-leavers without providing proper training. There will also be a legal obligation on all employers to spend a nationally specified percentage of their payroll on training with proper quality objectives and targets. Those who meet these criteria will receive a kite-mark and will not have to contribute to the national training efforts. Those who fail to do so will have to contribute at a level which relates to their own shortfall.

Economic debates are typically concerned with the grand macro-economic issues of economic policy, with interest rates, money supply, the exchange rate and other international financial problems, and with the overall problems of taxation spending, government deficits and surpluses. We invest these issues with theatrical grandeur; the flummery of Budget Day and the pink coats of the Bank of England.

In all of this we express a preference for macro-economics over industrial policy; that is, a preference for the "hands-off" approach to economic affairs, in place of the nitty gritty of detailed industrial policy which is so important if we are to have the growth and the efficiency which we need. The Treasury prospers. The Department of Trade of Industry contracts.

That neglect of industrial policy is a fundamental error in our economic thinking and in our economic policy making. It is an error which reached its most extreme form in the complacency of monetarism. It is an error which has done great damage to the economy and it is an error which has not been committed in France and Germany. Both those economically successful countries recognised the fact that in the modern world economic success requires both a stable macro-economic environment and very active supply-side policies. They committed themselves to providing the seed corn for industrial success and the long term environment within which that success could be forged. That is what we must do in this country.

I said earlier that we must begin now to build out of recession before it is too late. But what hope is there of that happening when we hear complacent speeches of the kind given by the noble Lord, Lord Hesketh, today or when Ministers can stand up, as happened in the House during Question Time only last week, and claim that we are enjoying economic prosperity? Let them say that to the firms who are going bust at the rate of 100 a day. Let them say that to the unemployed, many of whom have little prospect of obtaining another job for many months. In manufacturing industry alone, 5,000 people lose their jobs every week. That should not be seen as just another statistic, because behind those figures lies real human misery.

We should learn some lessons from our European neighbours. In the French recession of 1983–84 the French Government cut overall spending sharply and deflated the economy; but, at the same time, it increased spending on education, on transport and on the arts. That is the way to build out of recession. That is the approach which we should be taking. We must take a supply-side approach and an industrial approach. We must move away from the folly of relying solely on macro-economics. We must throw out a high interest rate policy. Finally, in order to attain lasting prosperity, we must throw out this incompetent Tory Government.

9.27 p.m.

Lord Hesketh

My Lords, the noble Baroness, Lady Blackstone, accuses the Government of complacency. I doubt that there are many matters in respect of which I have an advantage over her, but going out of business in the last recession is, I suspect, one of them. Indeed, there is no need for her to tell me about it. As I said earlier, the present downturn is bound to be painful. I made that fact clear in my opening speech. However, I also said that we are not witnessing a replay of the recession of 1980–81. That is one of the reasons why the necessary adjustment required is not nearly as great now as it was then.

Inflation reached an intolerably high level last year, but it was nowhere near as high as it was in the second half of 1979. At that time the underlying rate of inflation was nearly twice what it was in the second half of last year. Moreover, the gap between the United Kingdom and the EC average inflation rate in the second half of 1990 was less than a half of that in the second half of 1979.

Why am I referring to those statistics? I do so for one reason. The noble Lord, Lord Peston, in a delightful exposition of his hoped-for policies or those of a future Labour government—I am not quite sure which we were supposed to consider—referred to the dozen easy years of this Government. That remark made me realise that one should ask for the name of the happy and balmy shore from whence we set out on our voyage of discovery in 1979. We had an economy which had languished at the bottom of the European growth league. Investment and real take home pay for the average family had hardly increased. Public sector borrowing averaged over 5 per cent. of GDP. I suppose that if there is a governmental equivalent of the Official Receiver, it is that we had had to pay a visit to the IMF. We picked up the pieces, and we fashioned them into a modern, flexible, dynamic economy. It is worth looking at what we achieved following the traumatic but necessary adjustments of 1980 and 1981.

Lord Peston

My Lords, perhaps I may interrupt the Minister. He owes us, at some stage in his speech, a statement on the economy as it is at the moment. He does not owe us a repeat of the speech that he made, goodness knows how many hours ago. I have sat here listening to everyone, and I desperately hope that the Government will say something about the position in which we now are. I believe that I speak for many other noble Lords when I beg him to say something about the present state of affairs.

Lord Hesketh

My Lords, I understand the noble Lord's irritation. I am aware of the lateness of the hour, but the Government are entitled to lay down the playing field from which they can then decide how to play the game, and show the noble Lord the desires and aspirations that the Government may have.

It is worth remembering that investment has grown faster than in all other EC countries, bar Spain; that real take-home pay has risen by nearly one-third since 1979; and, most important, that £26 billion of public sector debt has been repaid in the past three financial years.

Current inflation has its roots in the upsurge of consumer spending, and, as my noble friend Lord Stevens of Ludgate pointed out, in the stock market crash. I remind noble Lords opposite that during my reply to the debate on the humble Address in the latter part of last year I drew noble Lords' attention to the fact that there was no man keener for a continuing reduction in interest rates at that time than the shadow Chancellor himself. It should not be forgotten that we took the economy from the sick bed to the recovery room. In the past few years, there has been a great increase in investment in the United Kingdom. That is a fact, whatever definition of "investment" one uses, and however much the prophets of doom concentrate on the current downturn.

If one looks at total fixed investment under the previous government, one sees that it grew at a snail's pace. Contrast that with the 10 years to 1989 when it grew by more than 3.5 per cent. a year. That is after taking into account the sharp cutbacks in 1980 and 1981. Between 1981 and 1989, total investment grew by two-thirds—twice as fast as total consumption. The noble Lord, Lord Ezra, was interested in the relationship between investment and consumption.

To avoid any charge of using figures selectively, I should add that the picture as regards business investment has been even better. That rose by 43 per cent. in the three years to 1989—the biggest increase over a three-year period since the war. Since 1979, the increase has outstripped that of any G7 country apart from Spain.

Let us also look at the quality. In the 1970s, investment decisions were all too often distorted by negative real interest rates, tax breaks and public sector subsidies. Indeed, the prevailing wisdom was that without tax breaks companies were unlikely to invest. That is hardly surprising perhaps given that the 1970s was a decade of falling profitability. The rate of return for non-North Sea companies in 1979 was not much more than half of what it had been 10 years previously.

I also point to a change in the economy which has not been mentioned today—the improvement in the quality of the product. The consumer is the arbiter. I am sure that most Members of your Lordships' House, comparing what one finds in a Rover showroom today with what was there 10 years ago, will agree that the product, which is what the consumer will decide upon, has been transformed.

Lord Graham of Edmonton

The Rover's Return!

Lord Hesketh

My Lords, the noble Lord the Opposition Chief Whip will no doubt have an opportunity to pay a visit there shortly. In my opening speech I singled out the motor industry, but that is far from being an isolated example. United Kingdom steel industry productivity nearly trebled during the 1980s.

Lord Stoddart of Swindon

My Lords, I am most obliged to the Minister for giving way. He mentioned the motor industry as one of the industries that has flourished and achieved better productivity. Does he realise that the Rover Group, which he admires so much, would have gone bankrupt had it not been taken over by the Labour government and had investment money pumped into it? It is that investment which has brought about the great improvement in the company.

Lord Hesketh

My Lords, I fear that quite clearly the noble Lord, Lord Stoddart, has not understood the reason I made my earlier point. It concerned the product. It is arguable that when the moment arose, the Morris Marina was the closest thing to a Trabant that the West had ever produced.

Lord Stoddart of Swindon

My Lords, will the noble Lord give way again? I understand the problem because I represented Swindon where there was a Rover works. The noble Lord does not understand that the investment put into the industry by a Labour government got rid of the Morris Marina and laid the foundation of the new models which are now in production and selling so well.

Lord Hesketh

My Lords, I am very grateful that the noble Lord, Lord Stoddart, is here because he, more than any man in your Lordships' House, is able to observe the huge investment being made by the shareholders in the Honda motor company in Swindon as we speak, without any incentive from the British taxpayer.

The outlook now is undeniably difficult. We know from recent experience that manufacturing production tends to be more cyclical than other aspects of the economy and is likely to be affected to a greater extent by any downturn. But a temporary halt in terms of output, productivity and investment will not undo the enormous progress of the past decade.

The noble Lord, Lord Donoughue, directly and other noble Lords indirectly—I beg their forgiveness if they were more direct than I suspect—referred to the recession as though in some ways it was limited to the United Kingdom. However, it is important that the United Kingdom is not the only country in the industrial world to experience a cyclical downturn. Among the G7 countries, the United States and Canada are also experiencing falls in GDP, as are Australia, New Zealand and Sweden of the smaller OECD countries. With the United Kingdom, these countries account for almost half of OECD output.

The other half are still seeing their output grow, but this should come as no surprise. It is common for different economies to be at different stages of the cycle. The former West Germany grew strongly economically in 1989 and 1990, by perhaps 4 per cent. a year. But in the previous four years when, I have to remind noble Lords, the UK's growth was 4 per cent. a year, Germany grew by only 2..4 per cent.

The one trend common to all OECD countries is that compared with 1989 all have either experienced or are expected to experience some slowdown in output growth. The OECD's own forecast for its member countries is for a halving in average GDP growth between 1989 and 1991. As with the UK this slowdown is a necessary part of the disinflation process after the build up of inflationary pressures in the late 1980s.

I shall attempt to respond to some of the points raised in the debate. The noble Lord, Lord Peston, asserted that the Treasury was content with 5 per cent. inflation. I can assure him that, as he well knows, our target for the fourth quarter is 5k per cent. We shall certainly not be content with it and hope to see it reduced greatly beyond that.

The noble Lord, Lord Ezra, referred to investment growing too little and consumption too much. I hope I covered that with my earlier points. I reflect that during the five years that preceded this administration, the level of consumption exceeded that for investment by a factor of seven.

The noble Lord, Lord Peston, said that it was a mistake to cut taxes. It is worth remembering that the PSBR average was reduced to 1¾ per cent. of GDP compared with 6¾ per cent. under the last Labour government. More important, there has been talk of "short termism". The last Labour government had a top rate of tax of 83 per cent. There is no greater incentive to creating fast money makers than that. There has to be a policy of low taxation if there is to be investment in the long term.

The noble Baroness, Lady Ewart-Biggs, referred to the Government doing more about making people aware of credit.

The Government expect lenders to market credit responsibly. I draw the attention of the noble Baroness to the regulations that came into effect recently which tightened up lenders' practices. My noble friend Lord Boyd-Carpenter asked about the Government's future attitude to interest rates. We believe that by reducing inflation we shall be able to reduce interest rates. That has to be supported by the remarks made by the noble Lord, Lord Cobbold, who said that the integrity of our membership of ERM was crucial to the credibility of that mechanism. That view was also reflected by many other noble Lords.

The noble Lord, Lord Bruce of Donington, said we must regain our share of world trade in merchandise. That trade stabilised during the 1980s, and in 1989 it rose. We believe that it will do so again in 1991. The noble Lord, Lord Cockfield, in a most interesting deployment of the history of the British economy since 1945, asked what the Government had learnt from their experiences. I like to think that the kind remarks made by my noble friend Lord Gowrie meant he believed the Government instituted this debate because they wished to listen to opinions, and therefore wished to learn from those opinions.

My noble friend Lord Boyd-Carpenter referred quite rightly to the two-way street that exists. He was quite correct to point out that the Government have reduced restrictive practices and have freed membership for trades union members. However, the Government cannot dictate pay rates. It is right to talk about pay rather than wages. It was quite rightly pointed out that management has just as great a responsibility as anyone else in ensuring that pay is held down across the board. As the noble Baroness, Lady Seear, will know well, a 1 per cent. restraint in pay across the board is worth a great deal more than a 1 per cent. reduction in interest rates.

The ERM rate was discussed by many speakers. Having received the benefit of the observations of many former Treasury Ministers, from a former Chancellor downwards, I am a lucky man. I also like to think that the spread of opinion across the Chamber puts the Government just about in the middle of opinion. I may be slightly wrong on the fine tuning of that, but the noble Lords, Lord Peston and Lord Cobbold, the noble Baroness, Lady Seear, and my noble friend Lord Gowrie confirmed the Government's position. Therefore I felt I was in the right place in the middle.

The noble Baroness, Lady Seear, referred to mortgage interest rates. I am the first to admit that I cannot give the noble Baroness the reply that she would like. I am also quite sure that she would not expect me to arrange the tripartite talks that she feels would cure the scourge that she feels exists. I am always rather surprised that in debates which concern inflation in the housing market, there is never any reference to the role played by the Town and Country Planning Act as regards the value of land. However, that may be a debate for another day.

The noble Baroness, Lady Blackstone, referred to the incompetence of the Government when joining ERM. There is possible evidence that I am in good company. The noble Baroness was right to point out that we joined ERM the week before the Conservative Party conference. That was also the week after the Labour Party conference where the Shadow Chancellor, Mr. John Smith, was ferocious in his demands for immediate membership of ERM. I like to feel that perhaps I am a member of a collective ERM.

Baroness Blackstone

My Lords, at the Labour Party conference the Shadow Chancellor did not ask the Government to join ERM at a rate that was so disadvantageous to the British economy. He said we should join at the earliest possible moment that was conducive to our good economic performance.

Lord Hesketh

My Lords, that may be true, but I had to read the Statement in your Lordships' House the following Monday. I remember asking officials whether or not the Shadow Chancellor had reflected the view that has just been referred to. However, there was no evidence of that.

I am deeply conscious that I may in some ways have repeated what was said earlier. I shall conclude by taking a view from the outside rather than from the inside. Whether through modesty or masochism we in the United Kingdom are often too quick to do ourselves down. I do not believe that habit is shared by thousands of foreign investors who invest large sums of money in Britain.

According to a recent OECD study, 46,000 million dollars of inward investment flowed into Britain in 1988 and 1989; nearly a fifth of all overseas investment in those countries and two-fifths of the total overseas investment in EC countries; nearly three times as much as France and six times as much as Germany. That total conceals an interesting breakdown. We received 62 per cent. of all US investment in the Community and 42 per cent. of all Japanese investment in the Community. West Germany invested more money in the United Kingdom than in any other country.

The real reason why other countries invest here is because the United Kingdom is now a competitive, high productivity nation where profitable investment can once again be made. It is a nation where the Government have removed the barriers to enterprise and endeavour; a nation with a motivated workforce which enjoys the fruits of its labours and which is willing to work for them. If we are to pay for a fair society which provides opportunities for success and for creative wealth creators I suggest that that is the prospectus that we require for the 1990s.

On Question, Motion agreed to.