The text of Mr Major’s speech to Conservative Central Council, held at The Spa, in Scarborough, on Friday 17th March 1989.
CHIEF SECRETARY TO THE TREASURY:
At the beginning of this debate Michael Normington admirably moved a Motion calling on the Government to bring down inflation and not to be deflected by short term pressure over interest rates or the balance of trade. Both of these matters are important of course but Michael was surely right to single out inflation as the principal concern.
Our commitment to controlling rising prices is well known. Ten years ago, we inherited a broken backed economy with endemic inflation that pushed the annual rate to over 20 per cent in 1980. We brought that rate down to an average of 5 per cent a year over the last 5 years. The measures we took to achieve that were often controversial and unpopular at the time. But their success was reflected in the remarkable election mandate we received in both 1983 and 1987. The fact is that the British people do not like inflation and they will support measures to bring it down.
In the last few months demand pressures have caused prices to turn up again in this country, as they are doing elsewhere. At their present peak of 7.5 per cent they are almost one-half the average rate under Labour and that is not tolerable for a Conservative Government. They will rise a little further before turning decisively down.
That rise from 5 per cent is disturbing but the first thing to recognise is that the present situation is not remotely comparable to that of the 1970s and early 1980s. And we are determined it will not become so.
Let us all be clear about one thing. We shall take no risks with inflation because it is vital to reduce it. Some people may regard a cosy level of inflation as bearable. But it isn’t. Inflation is nothing less than an economic evil. It can rapidly destroy savings. It can end the carefully accumulated security of a lifetime of sacrifice and prudent budgeting. It is the unfairest and most arbitrary tax of all. It bears down most harshly on those with least. It damages business confidence. Costs jobs. Promotes disorder in the wage market. And it is the raw material of militancy. Those are some of the reasons why we cannot tolerate it.
For we know that inflation is not an abstract problem. It must be solved and there is no pain free way to do it. But there is a way that will work. And that is to raise interest rates to bear down on inflation.
They have worked before, and they will work again. In fact, I believe you can see from the signs emerging in the high street, and in house sales, that they are doing so already. What is more they are well targeted at the problem.
I know that higher interest rates, which mean higher mortgage repayments, are not popular. It would be surprising if they were. And I understand only too well the hardship they cause. They are uncomfortable for many people. But to them and to others I must say – in recent years we have all been through too much to bring inflation down to risk letting it rise again. That would not just be uncomfortable. That would be unthinkable.
But what do the Opposition offer as an alternative? They have no policy, so all they can offer is abuse. Messrs Smith and Brown, the Don Quixote and Sancho Panza of economic policy-making, desperate to find windmills to tilt at, even more desperate to keep up the noise level to disguise the lamentable lack of content. They deplore inflation, but they attack the tight monetary policy that will cure it. They propose credit controls, and then admit that they don’t work. They say demand is too high, and then suggest increasing it with higher public spending. But we should give them some marks for consistency. They are still the party of high inflation. Still the party of high taxation. And still the party of uncontrolled public expenditure.
When I said earlier that the present position was not remotely comparable with earlier problems I did not only mean that we have taken action early enough to contain and reduce inflation before it caused too much damage. I also meant that today Britain has the strongest fiscal position of any major nation in the world.
I do not simply assert that. I can prove it. For generations successive Governments borrowed more than they should and spent more than they had. None racked up debt more recklessly than the last Labour Government that borrowed the equivalent of £158 billion between 1974 and 1979. Indeed, if we borrowed as much as the Labour Government did in a single year we could live off those borrowings and abolish income tax entirely.
Over the centuries public sector debt has built up inexorably. As a result this year we will pay £18 billion in interest payments alone on that debt. That is the equivalent of around 10p on the basic rate of income tax. That money has gone for today’s taxpayer. They pay it but they see nothing for it. It is not there to build road or railways, improve the NHS or education or defence. It simply pays the interest on past debts incurred by past Governments. Consider that: 10p in the £ on income tax simply to pay interest on past debts.
Outside times of national emergency, I do not believe that Governments should continually spend more than they are prepared to raise honestly in taxation. It is unwise economically – and, I think, wrong socially – to spend too much today and leave the next generation to pay the bills. Living today and paying tomorrow is not an attractive philosophy for Government and nor is it a Conservative philosophy. We are determined we will not do that. We will maintain a balanced budget.
At the moment we are doing more than that. We are repaying debt in large sums. By the end of March next year we will have repaid a total of £31.5 billion which will reduce the outstanding stock of debt built up over more than 200 years by around one-sixth. It means a saving on debt interest of around £3 billion a year – each year and every year. £15 billion saved in the space of a Parliament. And those £3 billions we don’t pay in interest on debt will be available for roads or schools or hospitals or to cut taxes or to further reduce debt. That is how it is possible for us both to cut tax rates and increase expenditure on the services we care about. And that prudence is the right policy. It is right for us – it is right for the taxpayer – and it is right for the next generation who deserve better than to be saddled with past debts.
Balance of Payments
I know that some people are concerned about the trade figures but I do not believe we should be too distracted by them. It is quite wrong to compare the present deficit with those that caused such problems in the 1960s and 1970s because there are key differences between them.
Today’s balance of payments deficit is entirely the result of spending by individuals and the private sector. It is not – as it sometimes has been in the past – the result of reckless public spending by the Government. It is decisions of the private sector – both individuals and companies – that have caused the deficit and in time they will reduce it. Because unlike spendthrift Governments, private companies and individuals do not have a near unlimited ability to borrow in order to overspend. They cannot mortgage future generations.
But there is a second crucial reason why the balance of payments is less of a worry today. While some of the imports represent spending on consumer goods, a much larger proportion represents investment by companies in intermediate and capital goods, to enable them to prepare for future expansion of output. It is not fanciful to say that today’s trade gap reflects in large part the confidence of industry to invest in new equipment, to provide for future growth, future exports, future jobs. Over the past six months for example, consumer goods accounted for only a quarter of total manufactured imports. And over the past 12 months the volume of imports of investment goods grew by 40 per cent more than consumer goods. These imports will add to the productive capacity, efficiency and growth of manufacturing industry. It is the unprecedented investment boom that is fuelling import growth and not a consumer binge.
The balance of payments deficit will come down. I can assure you of that. Panic reactions are not necessary. It will take time, but it will happen. And the greater productive capacity of industry will play a part. British industry will export more, and will replace imports with home-made goods, if, and only if, the right goods are produced at a price people can afford. That is industry’s task, and I am confident that our businesses are now healthy enough, and well-managed enough, to achieve it.
Some of you may recall that we had a Budget on Tuesday. I keep reading that it was a boring Budget. All I can say is that I remember lots of very exciting Budgets from Denis Healey, when taxes went up, inflation was stoked up, and incentives to work, save, and invest were squashed. It all made great headlines. It also made a terrible mess of the economy. There is an old Chinese curse – may you live in interesting times. I think we can all do without interesting times like those in the 1970s. The reality is that there were plenty of good, solid, prudent reforms in the Budget. Nigel Lawson has simplified and reformed our tax system more comprehensively than any Chancellor this century. In his previous Budgets he has reformed income tax and corporation tax. Reduced the rates of tax and the number of taxes. In this Budget he continued the themes of reform and wider share ownership and still made most people better off. He also produced a number of measures to eliminate unfairness in parts of the tax system.
The centrepiece of the Budget was the reform of National Insurance contributions. These reforms will mean that most employees are better off by about £3 per week, and that is of proportionately greater value to those on lower incomes. As a result, the real take-home pay of the person on average earnings will have increased by 36% since we came to office. That is an extra £52 per week. The person on half average earnings – that is around £7,000 a year – has seen his take-home pay rise by over 31%, or £25 per week. And remember that is after taking account of inflation. Under Labour, for many people real take-home pay did not increase at all.
The Chancellor has also introduced a number of measures which will be of great help to those who are retired. In particular he has abolished for good the unpopular Earnings Rule which was such a deterrent to many pensioners who wished to carry on with some form of full time or part time work. We simply should not assume that pensioners automatically wish to retire at the State retirement age. Many have a great deal to contribute and wish to go on doing so and we have now removed the rule that penalised those who did. We promised it would go. And it has gone and I believe we can wave it goodbye without any regret at all.
The Chancellor has also increased the Age Allowances so that the elderly can keep more of what they earn – whether through continued work involvement, or from the investments made from earlier savings. And he has reduced the rate of withdrawal of the allowance at higher retirement incomes. Finally, he has extended the Higher Age Allowance, previously only available to those over 80, to those over 75.
This last change is consistent with the social security change we announced recently that provides an extra pension supplement of between £2.50 and £3.50 a week for poorer pensioners that comes into effect in October.
But, above all for pensioners, we must keep down the rate of inflation. I have never forgotten what Labour’s rampant inflation averaging 15 per cent did for pensioners’ savings. Within a few short years the prudent savings of years of careful budgeting were rendered valueless because the Labour Government lost control of the economy and the currency. For them, it meant electoral defeat. But for the pensioners it meant the destruction of their retirement security. We must ensure that never happens again.
Mr Chairman, we are now only a few days away from the 10th anniversary of the decisive vote in the House of Commons that brought down the last Labour Government.
That Government subjected the British people to rising taxes and ever rising inflation.
It all but killed off enterprise with regulations and restrictions, hitting hardest those who strived to succeed.
And the country it left behind was demoralised. We laughed at ourselves at home and were laughed at by others abroad.
We have broken with that. It has gone. For five years out of the last six the British economy grew faster than any other economy in Europe. Faster than France. Faster than the miracle economy of West Germany.
Production is at an all-time high. So are exports. So is manufacturing output. Investment is growing twice as fast as consumption. Business is profitable again and 9 million of our fellow citizens are now share-holders in it.
More people are in work than ever before, unemployment has fallen by more than a million over the past two years and living standards are at record levels.
The last decade will, I believe, eventually be seen as a time when Britain finally turned the corner, when we stopped envying others and started out-performing them.
Our job isn’t finished yet. There is more work to do: not just to bring inflation down but to kill it off; not just to protect the enterprise culture but to spread it, not just to do better than our competitors for a year or two, but every year.
We have had too many years of success to be pushed off course by temporary difficulties. In the past this Government has shown time and time again that it has the determination to pursue the necessary policies through temporarily squalls. I can assure this Conference that we will do exactly the same again. We have come too far to throw it all away. With your support in explaining our policies, we can all again enjoy the benefits of continuous strong growth with low inflation. The British people deserve nothing less, and that is what we shall deliver.