The Economy: Rise in Consumer Demand (Hansard, 23 January 1997)

§ The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)
My Lords, the Government do not believe that the rise in consumer demand and house prices will overheat the economy. However, we will continue to take no risks with inflation.

§ Lord Ezra
My Lords, I thank the Minister for that assurance. Can he say whether he read with care—I am sure he did—the speech which the Governor of the Bank of England gave in Edinburgh two days ago? Is he aware that the strength of sterling, which has been regarded as an anti-inflationary measure, has recently weakened and that the level of inflation is still above the level which the Government are aiming at—namely, 3 per cent. instead of 2.5 per cent.? In all those circumstances, do the Government feel that there ought to be early intervention to curb such developments?

§ Lord Mackay of Ardbrecknish
My Lords, I believe that the noble Lord wants me to say that we will increase interest rates. I am interested to hear that that may be the policy of his party. However, so far as concerns this Government, I should point out that inflation fell in December and, as the Budget forecast shows, is expected to fall back further during 1997. In addition, I do not actually believe that consumer demand—especially in the light of the December figures—illustrates the kind of pressures that necessitate us taking immediate steps to raise interest rates. All the figures that we have seen this week vindicate the view of my right honourable friend the Chancellor of the Exchequer that for the moment interest rates can safely remain where they are.

Baroness Piatt of Writtle
My Lords, has my noble friend the Minister seen press reports today detailing the creation of 2,500 jobs and the excellent news regarding the replacement of the Royal Yacht "Britannia"? What a marvellous boost that will give to the shipbuilding industry.

§ Lord Mackay of Ardbrecknish
Yes, my Lords; I have seen those reports. Those figures are very important to set alongside all the other figures. I know that the party opposite does not like to hear about increasing 801 employment but today's newspapers show that Shorts in Belfast will be having an extra 600 Aerospace workers, that Parcelforce in Coventry will be creating an extra 700 jobs and that St. Merryn Meat in Merthyr Tydfil in Wales is looking towards another 663 jobs. Along with the excellent news that the successor to the Royal Yacht "Britannia" is to be built in a British shipyard, thus creating another 500 jobs, that makes 2,500 new jobs in a day, which is not bad going.

Lord Bruce of Donington
My Lords, does the noble Lord concede the inference contained in the Question that an economy where there are over 3 million unemployed can become overheated? Is he aware that most certainly some hundreds of thousands of people in our country found it difficult during the recent cold snap to get proper heating?

§ Lord Mackay of Ardbrecknish
My Lords, the noble Lord, as always, exaggerates the figures for unemployment. The latest figure of 6.7 per cent. is a good deal short of 3 million, and the number is falling. However, the noble Lord makes a valid point about the original Question. I do not believe the economy is overheating. We have steady and sustained economic growth thanks to the splendid policies of the Government.

§ Baroness Gardner of Parkes
My Lords, how many people have come out of negative equity? Is my noble friend aware how grateful these people are to see some movement in house prices to help mitigate their position?

§ Lord Mackay of Ardbrecknish
My Lords, I do not have the figure for the number of people who have come out of negative equity, but clearly a fair number have because according to the Halifax Building Society house prices in December were still 4.9 per cent. below their peak in 1989; but the figures month on month for house prices show that for the whole of 1996 the price increase change on the previous year was 8.4 per cent. While there will still be some people in negative equity as we are not yet back at the peak of 1988, clearly many people will have come out of negative equity during the past year.

§ Lord Monson
My Lords, does the noble Lord agree that we used to have something called, I believe, the regulator, which enabled the Chancellor of the Exchequer of the day to raise or lower excise duties, petrol duty and purchase tax, as it then was, by up to 10 per cent. either way to control consumer demand in the short term? Did that not have a much less adverse effect upon manufacturing production and exports than raising interest rates?

§ Lord Mackay of Ardbrecknish
My Lords, I do not believe that the economic record of the days when the then Chancellor of the Exchequer used a regulator was particularly encouraging. I rather like to think that over the past four years the mechanisms used by my right honourable friend the Chancellor in his discussions with the Governor of the Bank of England have proved much more successful. As I said, we are seeing steady, sustained economic growth well instanced by the 2,500 jobs to which I have drawn your Lordships' attention.

§ Lord Stallard
My Lords, following his reply to the noble Baroness, Lady Gardner, will the Minister give us some figures regarding how many people were put into negative equity by government policy?

§ Lord Mackay of Ardbrecknish
My Lords, obviously I do not have those figures to hand. Of course a number of people were put into negative equity when the housing market overheated in the mid-1980s. However, thanks to the recovery I have mentioned, thanks to controlling inflation—which we have done—and controlling government spending, we have seen the position improve greatly. Mortgage rates—the cost of mortgages—are now at their lowest level for 30 years. That has to be set beside the problem of negative equity.

§ Lord Clark of Kempston
My Lords, does my noble friend agree that the economic policy of this Government has reduced the rate of inflation? Although there has been a slight rise in consumer demand, does he agree that the increase in the employment figures in this country—that is, the reduction in unemployment—must help the public sector borrowing requirement and public sector expenditure, and consequently shows that this Government can control inflation without any overheating?

§ Lord Mackay of Ardbrecknish
My Lords, my noble friend is quite correct. Underlying inflation has been below 4 per cent. for over four years, which is the longest such period for over 50 years. A recent OECD Economic Outlook published on 16th December stated with regard to the United Kingdom: The prospects for achieving sustained output growth and low inflation are the best in 30 years". That is a credible performance by Her Majesty's Government and by this country.

Lord Eat well
My Lords, is the Minister aware that he has displayed the most extraordinary complacency in the face of what was a serious Question from the Liberal Democrat Benches? It is the Government's Red Book that tells us that consumption is expected to grow significantly faster than output as a whole over the next few years. Whenever that has happened in the medium term it has ended in disaster. That is what is happening now. What will the Government do to rebalance the economy?

§ Lord Mackay of Ardbrecknish
My Lords, I thought in the past eight minutes I had more than satisfactorily answered the questions put by the noble Lord. I am not complacent. I made it perfectly clear earlier that the Chancellor watches all these matters carefully. Indeed the figures vindicate his view that interest rates should remain where they are. I am equally surprised that the noble Lord did not notice what the OECD said. I shall repeat it for his benefit: The prospects for achieving sustained output growth and low inflation are the best in 30 years". 803 The highest independent forecast for 1997 for consumer growth is 4.5 per cent. We, and most commentators, perhaps with the exception of the noble Lord, Lord Eatwell, believe that that will not overheat our economy.

§ Lord Eatwell
My Lords, would the noble Lord care to read the OECD report on the British economy of 1989, where he will find that it said exactly the same at the time when the noble Lord, Lord Lawson, was leading the economy into disaster?

§ Lord Mackay of Ardbrecknish
My Lords, we now know that the noble Lord does not listen to, or believe in, anything that the OECD says. That is interesting. I shall note the next time he quotes the OECD on his side of the argument. As I have stated with regard to the statistics, they all look reasonable. Inflation is low, and is falling, and we are keeping it under control. My right honourable friend the Chancellor put up interest rates just recently to prevent any overheating. We do not believe there is overheating. We are confident that our economic policies under this Government will continue their successful course for many years to come.