The Economy: Inflation (Hansard, 17 February 1997)

§ Lord Mackay of Ardbrecknish
My Lords, the annual rate of underlying inflation currently stands at 3.1 per cent. However, the Government expect this rate to fall back in 1997. The latest government forecast of underlying inflation was published in the Financial Statement and Budget Report, and showed that inflation was expected to be 2½per cent. in both the second and fourth quarters of 1997.

§ Lord Ezra
My Lords, I thank the noble Lord for that information. However, will he not bear in mind that some doubts have been cast on that forecast and that in the January figures, although the underlying rate of inflation has remained at 3.1 per cent. as he indicated, the headline rate, much against expectation, rose from 2.5 to 2.8 per cent.? That includes mortgages. In those circumstances, and bearing in mind that the underlying rate in the UK is now running at above the rate on the Continent—for example, the rate in France is 1½ per cent.; half the British rate—does he not agree that the advice from the Governor of the Bank of England was prudent; namely, to have a small increase in interest rates now in order to avoid a larger increase later?

§ Lord Mackay of Ardbrecknish
My Lords, I am interested to note that the noble Lord, Lord Ezra, presumably on behalf of the Liberal Democrat Party, would like to see an increase in the interest rate. My right honourable friend the Chancellor takes the view that the economic conditions he sees now are the best we have seen in this country for a generation. Mortgage rates are close to their lowest level for almost 30 years. We are the number one choice for inward investment in Europe. Our unemployment figures are coming down. All those factors seem excellent. My right honourable friend the Chancellor and the Governor between them have delivered the best inflation record this country has had for 50 years. Low inflation remains part of our future.

§ Lord Eatwell
My Lords, that was all very impressive. However, will the noble Lord confirm that in the inflation figures published last week the Government have told us that of the 15 countries in the European Union only three have a higher inflation rate than the UK and the rest have a lower inflation rate? Will he also confirm that over the past year not only has our inflation rate been higher than the European Union average, but it has slowly become higher and higher relative to the European Union average? Will he please explain that lamentable performance?

§ Lord Mackay of Ardbrecknish
My Lords, I am not sure whether that was the party opposite asking for an increase in interest rates. I must point out to the noble 453 Lord, Lord Eatwell, that five out of the six wise men have said quite clearly that they do not see any need for a rise in interest rates. That was exactly the point of the question. The noble Lord, Lord Eatwell, underlines the point that we need to keep on top of inflation in this country. In the past we have too readily allowed inflation to get out of control. This Government are determined not to allow that. The Governor of the Bank of England and the Chancellor are clearly almost of one mind because the difference of one quarter of 1 per cent. seems to me to be hardly significant.

§ Lord Brabazon of Tara
My Lords, does my noble friend agree that I find this a somewhat curious argument? We are arguing about differences in inflation of perhaps 0.2 or 0.3 per cent., and differences in interest rates between the Governor and the Chancellor of ¼ per cent. Yet I can remember—as other noble Lords no doubt can—when, under the party opposite, inflation rates were 10 times higher than we are talking about.

§ Lord Mackay of Ardbrecknish
My Lords, my noble friend Lord Brabazon of Tara is quite right; our inflation record has hugely improved and we are determined to keep that improvement on track. That is why my right honourable friend places such importance on meeting inflation targets. It is also why we are determined to keep government spending tightly under control and why we are determined to make this country an attractive place for people to invest in and produce goods and services in order to sustain the economic recovery we have seen.

§ Lord Barnett
My Lords, given the excellent situation the Minister has described, will he explain why we have such a high real interest rate?

§ Lord Mackay of Ardbrecknish
My Lords, the position is of course that the interest rate has to take account of all the various factors in the economy. Last autumn my right honourable friend the Chancellor and the Governor of the Bank of England discussed these matters and were a little concerned about inflation two years from that time. Despite people saying that my right honourable friend the Chancellor would not increase interest rates, he was prepared to do so. We believe that the current interest rate is sufficient to keep the inflation target on course.

§ Lord Wyatt of Weeford
My Lords, does the Minister agree that, if the party opposite came to power, instead of having a strong pound which is a powerful brake against inflation, we would have a weak pound and inflation would soar?

§ Lord Mackay of Ardbrecknish
My Lords, it is certainly true that the high value of the pound helps to keep down inflationary pressures. Indeed the CBI today in a report on wages states that there is little pressure on wages at the moment. That, of course, is a helpful factor in keeping inflation under control. The noble Lord, Lord Wyatt, makes a valid point. Who knows what chaos 454 would ensue if the party opposite were to win the election? However, I am confident that we shall not be visited with that.

§ Earl Russell
My Lords, is there any party opposite the noble Lord, Lord Wyatt of Weeford?

§ Lord Mackay of Ardbrecknish
My Lords, I did not quite hear that question. I presume it is the usual one, asking me not to direct my fire only at one party opposite because there are two parties opposite. In that case my fire is directed at both of them.

§ Earl Russell
My Lords, I beg the noble Lord's pardon. I asked whether there was any party opposite the noble Lord, Lord Wyatt of Weeford?

§ Lord Mackay of Ardbrecknish
My Lords, from what the noble Lord, Lord Wyatt of Weeford, said, he sees the parties opposite the same way as I do.

§ Baroness Seccombe
My Lords, does the Minister agree that it was good to hear the noble Lord, Lord Eatwell, say that the figures given by my noble friend were so impressive? Does my noble friend also agree that this is the time to congratulate the Chancellor of the Exchequer on his excellent running of the economy? That is particularly highlighted in the horrific rise in unemployment on mainland Europe compared with our month by month reduction.

§ Lord Mackay of Ardbrecknish
My Lords, my noble friend makes a valid point. One has to look at many factors in the economy. One of the most important factors that used to concern the parties opposite—namely, unemployment—is certainly moving consistently in the right direction. That has been the case for a long period of time. Over the past year employment in our country has risen by 300,000 people. More of our people are in work than is the case with all of our major European friends. Our unemployment rate is significantly below that of Germany, France, Italy and Spain. In the past month or two we have seen some significant rises in unemployment in Germany in stark contrast to the falls in unemployment in this country.

§ Lord Eatwell
My Lords, has it not been clear that the main element in inflation we have seen this afternoon is the length of the noble Lord's answers, but what we have not had are answers to the questions asked? My noble friend Lord Barnett asked about real interest rates. Will the noble Lord explain why the long bond rate is 1.75 points higher in the UK than it is in either France or Germany? Will he answer my question and explain why our inflation rate is steadily rising higher and higher relative to the European Union average?

§ Lord Mackay of Ardbrecknish
My Lords, I am sorry if my answers are becoming longer. Part of the reason is I realised that the Question on dogs did not run for long enough and therefore I have plenty of time to answer all of the questions on this matter in some 455 detail. I have already referred to the fact that interest rates are arrived at for a variety of reasons—the state of the economy; how we look vis-à-vis our competitors; and the position in our competitor countries. There is no doubt that in this country over a long period of time, under governments of all complexions, we have not had a good record on inflation. Quite clearly the world market is still suspicious of us. We say clearly that we believe inflation should be kept under control and we are taking firm steps to do that. Perhaps the world markets are not quite so sure about the party opposite.

§ Lord Sudeley
My Lords, is the Minister aware that, in the view of the Christian Council for Monetary Justice, a basic cause of inflation is that the banks lend out more money than they have? That has been the position since the Tudors when the goldsmiths were the antecedents of our present banking industry.

§ Lord Mackay of Ardbrecknish
My Lords, my noble friend makes an interesting point. Not being a historian, I am afraid that I have no idea how the Tudors dealt with banking, or anything else for that matter.
However, the banks and financial institutions play an important part in the economy of this country. If my noble friend had been present at the debate on the City, he would have learned of the very considerable inflow of funds to this country thanks to the work of the financial institutions.

§ Lord Peston
My Lords, I had thought that the whole point of being a bank was to lend out money that it did not have; but that is by the way.
I always enjoy the Minister's long answers. However, I was puzzled by his response to the noble Lord, Lord Wyatt of Weeford. Is he saying that it is government policy to keep sterling as high as it currently is? Is that a state of affairs that the Government like? For example, is that the rate at which they would like to see sterling enter the monetary union if, when the time is ripe, we decide that entering monetary union is in our national interest?

§ Lord Mackay of Ardbrecknish
My Lords, the noble Lord knows well my arguments and answers on EMU: that we will indeed enter EMU only if we believe that it is in our national interest.
So far as concerns the level of sterling, that is one of the factors that my right honourable friend the Chancellor takes into account. But we do not believe that it is possible to make the level of sterling the primary objective of economic policy. As I have said on a number of occasions, we believe that meeting inflation targets is a vital aspect of keeping the economy on an even keel, with the prosperity increase and fall in unemployment that we have seen.

§ Baroness Farrington of Ribbleton
My Lords, will the Minister advise the House whether the increasing and prolonged trade deficit figures are a deliberate part of the Government's policy? How will those figures contribute in the long term to the overall battle against inflation?

§ Lord Mackay of Ardbrecknish
My Lords, we have moved a little away from inflation targets. However, the balance of payments is but one of the many aspects I have already mentioned that we have to look at when considering the economy and the policies that the Chancellor should follow. One of the important aspects about manufacturing industry in particular, but also the invisibles, is the considerable increase in inward investment in this country. If my memory serves me right, we gain about one-third of all inward investment coming from the rest of the world into the European Union. I believe that that is thanks to the labour market policies pursued by the Government.

§ Lord Taylor of Blackburn
My Lords, does the Minister agree that the price we have had to pay for lower inflation is very tragic? The number of people in gaol, the number of broken homes, the number of children taking drugs are all part of the social price that we have had to pay.

§ Lord Mackay of Ardbrecknish
My Lords, I do not agree with the noble Lord. I do not see any link between the number of people taking drugs and the inflation rate. What I see and appreciate is the fact that, thanks to the economic policies of the Government, we have seen unemployment falling month by month and year by year. The figure was down 300,000 last year in significant contrast to Germany, France, Italy and Spain whose unemployment figures are rising and are much higher than ours.

§ Lord Acton
My Lords, bearing in mind that we live in a global economy, does the Minister recall that on 27th January, in reply to a Question for Written Answer, I was told that the most recent International Labour Organisation rate of unemployment for the United Kingdom was 7.9 per cent., for the United States of America 5.2 per cent., and for Japan 3.4 per cent.? Should not the goal of this country be the American rate and ultimately the Japanese rate?

§ Lord Mackay of Ardbrecknish
My Lords, the noble Lord makes a valid point. If we consider the figures for Japan and the United States, we see the kind of targets for unemployment at which we should be aiming. The United States record over the past decade in creating new jobs is very impressive indeed. It is one that the European Union should be seeking to copy instead of appearing to go in the opposite direction. However, the fact is right: our unemployment is still above the Japanese and United States level. But the most recent figures that I have indicate that the UK is at 7.5 per cent., Germany 9.3 per cent., France 12.5 per cent., Italy 12.2 per cent. and Spain 22.3 per cent. It seems to me that we have something to teach our European friends as regards the labour market.

§ Lord Acton
My Lords, surely the question is how we are doing on global terms. To say that we are doing better than Weimar levels is no doubt admirable, but surely we should be doing as well as America or, if possible, Japan.

§ Lord Mackay of Ardbrecknish
My Lords, I absolutely agree with the noble Lord on that. I thought that I made that clear. We have to look at the levels of unemployment in the United States and Japan. That means considering how to create new jobs. I do not have the figures with me but the American creation of jobs in the past decade has been really impressive in contrast to the European figure.

§ Lord Dixon-Smith
My Lords, does my noble friend agree that the American record on unemployment is particularly impressive because its economy is dependent on a deregulated market in enterprise and, more importantly, a deregulated market in employment, both of which are inimical to a great deal of mainland Europe's practice?

§ Lord Mackay of Ardbrecknish
My Lords, my noble friend underlines the point I made earlier: that indeed labour market reforms in the United States have led to very considerable job creation which has not been replicated in Europe. However, at least one of the reasons that we are doing better than our European friends is as regards our non-wage labour costs expressed per £100 of wages. Our figure is £15 per £100; in Germany it is £31; and in France it is £41. It is no surprise that firms want to invest in this country, including firms such as Siemens which has announced an investment in the north east of England.