Mr Major’s Comments During the Economic Policy Debate – 31 October 1989

October 31, 1989 admin 1989, ERM, Inflation, Interest Rates

The text of Mr Major’s comments during the Economic Policy debate, made on 31st October 1989 in the House of Commons.

Mr. Speaker I must announce to the House that I have selected the amendment in the name of the Prime Minister. In view of the number of right hon. and hon. Members who wish to participate, I propose to put a limit on speeches of 10 minutes between 7 and 9 o’clock.

Mr. Dick Douglas (Dunfermline, West) On a point of order, Mr. Speaker. I hesitate to interrupt the flow of remarks, but when you impose that stricture, will you take cognisance of the fact that on recent occasions Front Bench spokesmen have consumed large proportions of the time allocated? Therefore, if Back Benchers are properly to be constrained by your ruling, Mr. Speaker, the same strictures should apply to Front Bench spokesmen.

Mr. Speaker As the House knows, I have no authority at the moment to limit the length of speeches made by Front Bench spokesmen. Nevertheless, I hope that what the hon. Gentleman has said will be borne in mind today.

Mr. John Smith (Monklands, East) I beg to move, That this House condemns the continuing confusion and disarray in the content and conduct of government economic policy; notes with deep concern the absence of full agreement on economic policy between the Prime Minister and the former Chancellor of the Exchequer; and deplores the continuing commitment to high interest rates which are causing such harm to industry and to the people of Britain. Since we last discussed economic policy in the House only a week ago, there have been some changes – some changes in the team. It was only a few weeks ago that the Chancellor of the Duchy of Lancaster – the chairman of the Conservative party – gave us the theme for the period to the next election. In his speech – the speech before Agincourt – he said: We must work together as a team. A team in the Cabinet: a team in Government. That was at the beginning of his speech. More attention appears to have been taken of an ominously prophetic quotation towards the end of his speech – in his peroration. He said: He which hath no stomach to this fight, Let him depart. We know that there has been a departure – the departure of the former Chancellor. He departed because he found it impossible to work in a team in which the captain does not support the leading player. In his resignation letter, the right hon. Member for Blaby (Mr. Lawson) said: The successful conduct of economic policy is possible only if there is, and is seen to be, full agreement between the Prime Minister and the Chancellor of the Exchequer.

We should do the right hon. Gentleman the credit of accepting completely what he said. Although his letter was short, it contained a terse but electric message: no Chancellor can carry out his arduous duties without the full support of the Prime Minister. In the case of the right hon. Gentleman, that support was withheld because of a preference for a part-time unelected adviser who spent only a minority of his time in this country. We are invited to believe – if we are to accept some of the curious answers given in the Prime Minister’s Walden interview on Sunday – that the right hon. Member for Blaby resigned because his head had apparently been turned by tittle-tattle got up by the press and that in that confused condition he had unaccountably and quite irrationally abandoned an unassailable position to leave the Government for no good reason.

The truth – as the former Chancellor told us – was that he was entitled to expect “full agreement” on economic policy and proper support. In this curious Government. he neither got it nor was seen to receive it, and not unnaturally he went – a victim of the confusion and disarray which is, in my submission, the inevitable consequence of the subversion of Cabinet government in which the Prime Minister has been engaged for the past 10 years.

There are two crucial areas of economic policy in which the acute divisions of policy are all too sadly evident and destructive of the public interest. Those are the approach to the possible accession of Britain to the exchange rate mechanism of the EMS and domestic economic policy, particularly in relation to the management of the exchange rate. For some time, the official stance has been that the Government would join the ERM when the time was right.

The Deputy Prime Minister restated that in an important speech on Saturday night. He said: Thus the position that we took in Madrid – one which the Prime Minister, Nigel Lawson and I all agreed – was the right one. We said ‘yes’ we want the existing EMS to be strengthened, ‘yes’ Britain should join and will join the exchange rate mechanism. We defined the conditions that would make the time right: Liberalisation of capital movements in the Community, headway in the battle against inflation – itself the crucial objective – and substantial progress on the single market. He added: We committed ourselves to stage one of the Delors report. As we all know, that envisages all member states participating in the exchange rate mechanism.

The right hon. and learned Gentleman went on: That was the position in June. As the Prime Minister, Nigel Lawson and I have repeatedly stressed in the House of Commons, it remains the position now. It is of the highest importance that Her Majesty’s Government is seen to remain committed to that position, clearly and in good faith. He added for emphasis: It is important – not just for the credibility of our common European commitment but for the economic health and political strength of Britain”. Note how important he envisages good faith – crucial to our economic health and our political strength.

I dare say that that speech in any normal situation would not have attracted as much notice as it did, as many observers would have believed it to be a perhaps enthusiastic, but certainly not inaccurate, statement of what Government policy was thought to be. The Deputy Prime Minister, however, must have felt some twinge that it might be more significant. He apparently consulted the new Foreign Secretary and the new Chancellor of the Exchequer, but he did not consult the Prime Minister; nor did he issue the speech through his Government office or even through the Conservative party news service. He issued it on plain, unheaded notepaper.

I hazard the guess that the right hon. and learned Gentleman did not consult the Prime Minister or use official or party channels because he did not wish there to be any impediment to the delivery of his message. His instincts were probably correct because, not long before he had spoken the words at 9pm on Saturday night, on Saturday afternoon the Prime Minister had recorded the interview on the Walden programme, which we saw on television on Sunday.

As we all know, that interview was an event of enormous political significance, a revelation of the Prime Minister’s style and approach to the problems of government, as an example of which it could not be bettered. It will be as indispensable to historians as it is to those of us who view these matters in a more contemporary frame. But it is also acutely relevant to the Prime Minister’s, and therefore the Government’s approach to accession to the exchange rate mechanism.

At first the Prime Minister appeared to take the normal line: We shall join the European Monetary System on the conditions we laid down in Madrid. There was nothing fudged about them” – curiously, no one alleged that there was anything fudged about them – they were quite clear. Let us recollect that the Deputy Prime Minister had told us – and he was Foreign Secretary at the time – that there were three conditions: liberalisation of capital movements, progress on reducing inflation and substantial progress – no more than that – on the single market.

That was not enough for the Prime Minister. On she went, throughout almost the entire second section of her interview, expanding conditions and extending time scales with gay abandon. Not only are exchange controls to be removed, but investment requirements on pension funds and insurance funds in all member states have to go. What is called – [Interruption]. Hold on. What is called liberal economics – with a small “I”; I suppose that we might call it Manchester school liberal economics – must be practised in all countries. A “higgledy-piggledy” system in which no one else plays by the rules must be transformed.

It can all be summed up by saying that, if all the other member states have adopted Thatcherite policies and the Prime Minister has personally inspected them all, looked to see that all the economic fingernails are clean, we might, just might, consider joining the exchange rate mechanism.

I observe in passing that the Prime Minister has noticed that Thatcherism has not crossed the English channel – how fortunate they are – and nor is it likely to do so. Why on earth would the other Community countries want to import the equivalent of a £20 billion balance of payments deficit and rates of inflation and interest rates much higher than obtain in their countries? But the clear message that the Prime Minister is giving is that, so long as she is Prime Minister – and that is until the next general election – Britain will not join the exchange rate mechanism.

Mr. Tony Marlow (Northampton, North) The right hon. and learned Gentleman deservedly has a high reputation. Would he care to enhance that reputation by putting on one side the humour and tittle-tattle and telling the House which of the Government’s conditions precedent to joining the ERM – conditions that have been set out at various times by the Government and on Sunday by the Prime Minister – the Labour party accepts and with which it disagrees?

Mr. Smith The hon. Gentleman knows well that we have repeatedly set out the conditions – [HON. MEMBERS: “Answer.”] He knows perfectly well that time and again we have proposed that Britain should join the ERM on certain prudent conditions which the Labour party – [HON. MEMBERS: “Answer.”] The difference between the two sides of the House is that we are clear about what those conditions are, whereas the Government side – [Interruption].

Several Hon. Members rose – [Interruption]

Mr. Speaker Order. The right hon. and learned Member for Monklands, East (Mr. Smith) is clearly not giving way.

Mr. Smith We do not know, on the Government side, what the conditions are, or what time scales are in operation.

Mr. Robin Maxwell-Hyslop (Tiverton) Answer the question.

Mr. Smith I can understand why the Conservative party wants to – [Interruption].

Mr. Speaker Order. There is great pressure to speak in the debate. Hon. Members should allow the right hon. and learned Gentleman to get on with his speech.

Mr. Neil Hamilton (Tatton) rose –

Mr. Cranley Onslow (Woking) rose –

Mr. Smith The fundamental problem – [HON. MEMBERS: “Answer.”]

Mr. Speaker Order. The House knows the rules.

Several Hon. Members rose –

Mr. Speaker Order. I say to the Government Benches that if the right hon. and learned Gentleman does not give way, hon. Members who are attempting to intervene must resume their seats.

Mr Maxwell-Hyslop Further to that point of order, Mr. Speaker.

Mr. Speaker Order. There was no point of order. I was reinforcing a ruling.

Mr. Maxwell-Hyslop Further to the point that was raised with you, Mr. Speaker. May I ask if it is not a fact –

Mr. Speaker Order. No point of order was raised with me. I rose to say, and I repeat, that if the right hon. and learned Member for Monklands, East does not give way, hon. Members who are standing must resume their seats.

Mr. Maxwell-Hyslop On a point of order, Mr. Speaker. The right hon. and learned Member for Monklands East (Mr. Smith) gave way. Questions were asked and certain answers were given – [Interruption]. You know as well as I do, Mr. Speaker, that if a Front Bench spokesman – [HON. MEMBERS: “Sit Down.”]

Mr. Speaker Order. The hon. Member for Tiverton (Mr. Maxwell-Hyslop) has been in the House for a long time and knows as well as I do that I am not responsible for questions that are asked, provided they are in order, and answers that are given, provided they also are in order.

Mr. Maxwell-Hyslop Further to my point of order, Mr. Speaker – [Interruption].

Mr. Speaker Order. [HON. MEMBERS: “Name him.”] I will hear what the hon. Gentleman has to say if it is a point order, but not if it is a point of argument.

Mr. Maxwell-Hyslop I assure you that I rise on a point of order, Mr. Speaker – [Interruption].

Mr. Speaker Order.

Mr. Maxwell-Hyslop I will continue when you can hear me, Mr. Speaker. We are all aware that if an hon. Member is speaking and gives way and is asked a question – [Interruption]. I will wait until you can hear me, Mr. Speaker.

Mr. Speaker Order. I get the drift of the point that the hon. Gentleman is making. It does not appear to be a matter of order for me. I suggest that we get on now.

Mr. Maxwell-Hyslop rose –

Mr. Speaker Order. I ask the hon. Gentleman to sit down.

Mr. Maxwell-Hyslop rose –

Mr. Speaker Order. For the final time, I ask the hon. Member for Tiverton (Mr. Maxwell-Hyslop) to resume his seat.

Mr. Smith It is a great pity that the House is not currently being televised, so that the whole nation could observe the organised wrecking tactics used by the Conservative party against the Opposition. [Interruption].

Sir William Clark (Croydon, South) rose –

Mr. Speaker Order. I repeat to the House – [Interruption]. Leave it to me, please. There is great pressure to speak today. I ask the House to listen without interruption. to what the right hon. Member for Monklands, East (Mr. Smith) is saying.

Mr. Smith The hon. Member for Northampton, North (Mr. Marlow) asked me about our conditions. Perhaps I may be allowed the opportunity which I have been trying to take for some time, of addressing that question, despite deliberate wrecking tactics from Conservative Members. The conditions applied by the Government will frustrate our efforts to join the exchange rate mechanism. The conditions that the Labour party attaches, apart from the important question of joining at the effective rate, are that there should be adequate swap arrangements between the central banks, that there must be a well-organised regional policy within the Community, and that the thrust of the economic policies within the Community should be for growth and not for deflation.

That approach has not only been approved by the other countries in Europe, but was substantially approved by the resolution of the European Parliament last week, for which the Conservative MEPs voted. Those MEPs, of course, have a problem in the European Parliament: no other MEPs will have them as part of their group. They feel a little detached from the Conservative party on this side of the Channel. No wonder! Perhaps “semi-detached” is an expression that may carry more menace for them.

In her interview, the Prime Minister’s clear message was that she had no intention of joining the exchange rate mechanism. She said of the timing that there had to be major changes by our errant partners – all the people who do not play by the rules and who are up to all kinds of dirty tricks. She said: Now all that should happen during … what is called the Delors first stage, the first stage coming towards monetary union. I hope it will but other countries have to catch up a long way before it happens. As she knows, there is no time limit to stage I of the Delors plan and she knows that the deadline for the single market is 1 January 1993. In so far as she claims that her conditions relate to completion of the single market, it would hardly be likely that she could make the judgment on their performance – a crucial part of her approach – before 1 January 1993. Let us remember that the last date for the next general election is June 1992.

I submit that the only reasonable conclusion to be drawn from that seminal interview is that there is no question of the Prime Minister agreeing to join the exchange rate mechanism before the next election. That position is hopelessly at odds with the view of the Deputy Prime Minister. Is it the Prime Minister’s policy that the Government do not anticipate joining the exchange rate mechanism? Is that the view of the Deputy Prime Minister, the Foreign Secretary or the new Chancellor of the Exchequer? The new Chancellor has an opportunity today to spell out his policy. If he does not, I fear that confusion will remain.

Let me remind the House of that crucial sentence in the speech of the Deputy Prime Minister: It is of the highest importance that Her Majesty’s Government is seen to remain committed to that position clearly and in good faith. The Prime Minister’s response may be clearer than the Deputy Prime Minister anticipated. However, does he believe that it can conceivably accord with the good faith that he believes to be of the highest importance and which is so important to our economy and our political strength? If it does not, can he accept what the former Chancellor could not – that a Government policy is undermined, and seen to be undermined, by the Prime Minister on national television?

When the Deputy Prime Minister refers to good faith, I believe that he has in mind good faith within the Government – rare though such a commodity must be – and good faith in relation to the other member states in the Community. It is worth reflecting on what those member states thought when they considered the patronising tone of the Prime Minister’s Walden interview. We can rest assured that there is one person who will not be worried by that. If the Prime Minister can feel sorry for all 48 other countries of the Commonwealth, why bother about a mere 11 in the European Community?

I referred earlier to divisions on domestic economic policy. To be fair, I believe that all members of the Government began with much the same position. In those early days, when monetarism was unchallenged within their ranks, the belief was firm that the exchange rate could be left to the market and that just controlling the money supply would keep inflation in check. Even the former Chancellor was in line then.

In a famous reply on 3 July 1980, when asked by my hon. Friend the Member for Liverpool, Riverside (Mr. Parry) what mechanism existed for medium or long-term alteration of the exchange rate, the former Chancellor replied simply, “Market forces.” That was the era of free floating when it was said that there was no stable or reliable relationship between interest rates and the exchange rate.” – [Official Report, 4 November 1980; Vol. 991, c. 537.] However, the former Chancellor learned by hard experience. He saw the irrational and wild oscillation in the exchange rates and began to move towards the position that he had adopted by the time of his resignation – that is, managing the exchange rate and participating in international agreements to stabilise exchange rates among the G7 nations through the Plaza and Louvre accords.

On the basis of his experience, the former Chancellor began increasingly to realise the potential value of participating in the exchange rate mechanism. Clearly he moved a long way, but the Prime Minister has not. The lady did not turn. She believed and she still believes, as she has told the House, “You cannot buck the markets.” That was her reason for demolishing the Chancellor’s policy of shadowing the deutschmark. It was also the reason why she summoned Sir Alan Walters back from the United States to be her adviser earlier this year. She apprehended that two issues were coming to the forefront on which, if she did not strengthen her position, she might lose out. Those were the arguments over the exchange rate mechanism and the desirability of seeking to manage the exchange rate.

The Prime Minister also knew, as she told us eight times on Sunday, that the former Chancellor was “unassailable”. I could hardly believe it when she said that again today during Prime Minister’s Question Time. However, it was precisely because the Prime Minister assessed the Chancellor as unassailable that she set out to undermine him.

Only the truly innocent believe that Sir Alan Walters was just another adviser – one of those people who advise while Ministers decide. He was more than that. He was a crucial ally of the Prime Minister. In the knowledge of his fierce opposition to joining the exchange rate mechanism, frequently and publicly expressed on both sides of the Atlantic, he was recalled to serve in No. 10. It did not take long for Sir Alan to become the alternative Chancellor, and we know the sad eventual outcome of all that. The new Chancellor will not have Sir Alan around.

Mr. David Tredinnick (Bosworth) Will the right hon. and learned Gentleman give way?

Mr. Smith No; I hope that the hon. Gentleman will forgive me.

If the new Chancellor seeks to develop a policy of which the Prime Minister does not approve, he will encounter the same problems as were encountered by the former Chancellor. The new Chancellor must make up his mind, and he should tell us today whether he follows the previous Chancellor’s policy or whether he takes sides with the Prime Minister and believes that the markets cannot be bucked.

While the new Chancellor carries out his duties, I urge him to be careful about the Prime Minister’s praises. If she calls him brilliant, he should be wary. If he hears the words, “brilliant, brilliant”, especially if the call is uttered shrilly, he should be worried. If he is ever described as unassailable, he should start to tidy his desk.

There are echoes of the Westland affair in all this. Once again, there is a serious dispute over a European policy question. The right hon. Member for Henley (Mr. Heseltine) wanted a European solution to the Westland affair. The Prime Minister did not. The right hon. Member for Henley was undermined by the leaking of a Law Officers’ letter – a process assisted by unelected officials in No. 10. Business as usual, one might say.

In the Westland affair, the Prime Minister lost two Ministers. In the present crisis, she has lost thus far only one, albeit the most senior Minister in her Government. The Deputy Prime Minister, who lost his old job in the reshuffle earlier this year, should take especial care. So should the new Chancellor.

The new Chancellor’s crucial training for his new post was not so much the two years that he spent as Chief Secretary to the Treasury; rather, it was his three months as Foreign Secretary. After he had negotiated an agreed communiqué with the representatives of the other 48 Commonwealth countries at Kuala Lumpur, his efforts were completely overturned by the Prime Minister’s lengthy denunciation of the views of those very countries.

As we approach the Council of Europe meeting to be held in Strasbourg in December, the new Chancellor should be especially vigilant; otherwise he might have been Kuala Lumpured in October only to be Strasbourged in December.

As the new Chancellor faces the task of steering British economic policy over the next year or so, I beg him to abandon the foolish notion that a balance of payments deficit now running at an annual rate approaching £20 billion does not matter provided that it can be financed. We know to our cost the price of such financing – interest rates of 15 per cent. which are doing such deadly damage to business and industry and causing such misery for home owners from one end of the country to the other.

Sooner or later – I earnestly hope that it will be sooner – the balance of payments deficit must begin to be reduced. In debate after debate, and only last Tuesday, Labour Members have urged the urgent need for an industrial strategy to begin the task of refashioning and rebuilding manufacturing industry. Manufacturing industry is the indispensable wealth creator and the crucially international tradeable part of our economy.

It is interesting that, whenever we urge the adoption of an industrial strategy for manufacturing industry, the Conservatives do not believe that that is a policy. That says far more about them than it does about us. Right across the political spectrum, people are deeply worried about the future of our industry. Those who work in it, manage it, and advise it are all deeply worried. The only people who do not seem to worry about the crisis in manufacturing industry – it must be a crisis, if we have a £20 billion balance of payments deficit – are the Conservatives, and the Ministers responsible for the conduct of our economic policy.

We will urge this alternative again and again until the message gets home – not only the Labour party, but the whole of Britain wants a strategy for manufacturing industry.

Mr. Tim Smith (Beaconsfield) Last week the right hon. and learned Gentleman told us that he supported an industrial strategy. Will he be a little more specific? We are all concerned about the prospects. Is the right hon. and learned Gentleman talking about tax incentives or greater public spending? What policies does he have in mind?

Mr. John Smith I do not know whether the hon. Gentleman was present during our debate last Tuesday – he probably was – but I am prepared to accept his assurance that he is concerned about manufacturing industry. The Opposition have many more Conservative Members to work on.

Let me spell out, as I did last Tuesday, the three crucial elements of that industrial strategy – first, the repairing of the ravages of the neglect of education and training by a massive education and training programme; secondly, a policy to introduce new technology by Government support for research and development; thirdly, a strong regional policy to tackle the continuing decline of the under-used regions of this country. Once again, one may be told –

Several Hon. Members rose –

Mr. Smith Conservative Members should allow me to speak. Given what happened earlier, I have been reasonably generous in giving way at all to some Conservative Members.

As the hon. Member for Beaconsfield (Mr. Smith) will come to realise, perhaps before his colleagues on the Government Front Bench do, that is the essential precondition of any successful economic policy for this country. The Opposition have also urged the abandonment of the one-club golfing of exclusive reliance on interest rates and recommended the limitation of bank lending as a superior alternative to the control of demand, as long as that is necessary.

In addition, the new Chancellor should take the opportunity today to rule out tax cuts in the next Budget. He should use the Autumn Statement, again as the Opposition recommended only last Tuesday, to initiate regionally targeted public investment to strengthen education and training, and research and development, and to stimulate regional economies.

That is not only an alternative policy – it is the alternative policy which Britain desperately needs. It is a policy which will secure our prosperity not just for the year or two to come but throughout the 1990s. Let us never forget that the crucial folly of the former Chancellor’s policy was to lecture the Federal Republic of West Germany that its economic miracle was over and that ours had just begun.

When we look at the massive trade deficit and how it has gone throughout the whole of this decade, despite North sea oil revenues, which the Conservative party had and which they frittered away, we see an adequate commentary on the effectiveness of the Government’s policy. Let it not be forgotten that other countries of the EC, which, in the Prime Minister’s warped view of our continent, are so badly trailing behind, have superior economies and are much better fashioned societies than ours.

The purposes of economic policy are to be centred on four objectives – steady and balanced economic growth, control of inflation, the attainment of full employment, and reasonable equilibrium in our balance of payments. The last objective – the balance of payments – has been downgraded as we have seen a decade go by in which our North sea oil wealth has been frittered away and our economy and society made the laboratory for Thatcherite experiments in free market economics, social unfairness and the retreat of Government from their proper responsibilities.

Because of the conduct and content of Government policies, I fear that our economy has been gravely weakened and the social cohesion of our society put at risk. This country desperately needs a change in the style of Government and in the economic policies that have been pursued – a change in both the conduct and content of Government. But we are told that it is business as usual. The country received that statement as a threat, not as a promise. In an interview in the Daily Express, the Prime Minister told us that her convictions had to be seen in every piece of policy. That must have sent a shudder through every independent-minded Minister – if there are any left in this Administration. The Prime Minister’s convictions “in every piece of policy” tells us more about how the Government are run in this country than almost anything else. If it is business as usual, we will continue with a debilitating balance of payments deficit, and the highest interest rates and the highest inflation rate of leading industrial countries. I fear that, both economically and socially, we will continue to lag behind the rest of Europe.

This confused and divided Government cannot provide the leadership which Britain needs for the 1990s. They cannot do so, because they cannot change while the Prime Minister remains at their head. As the Financial Times editorial observed on Saturday As she has become pre-eminent her Government has become much more vulnerable. What concerns the Opposition is not so much the vulnerability of Government as the vulnerability of our country. What Britain needs is not a new Chancellor but a new Government – a Labour Government.

The Chancellor of the Exchequer (Mr. John Major) I beg to move, to leave out from “House” to the end of the Question and to add instead thereof: ‘congratulates Her Majesty’s Government on the determination with which it has pursued policies to bear down on inflation and improve the supply side of the economy; welcomes the sustained growth of output, productivity, investment, employment and living standards which the United Kingdom has enjoyed as a result; and endorses the Government’s resolve to continue with the policies which are in the long-term interest of the British economy.’. At the outset I wish to say how much I regret the resignation of my right hon. Friend the Member for Blaby (Mr. Lawson). I had the pleasure of serving with him in the Treasury for three years – for one year as Treasury Whip, and for two years as Chief Secretary. I enjoyed that experience enormously. I supported his policies and those of the Government when I was Chief Secretary. I believed that they brought increased prosperity to the country then, and I have not changed my view since then. Whatever the controversies of the day may be or may bring, I believe that history will record that few Chancellors brought about so many fundamental improvements to the economy of this country. Only the grudging and mean-spirited will deny that. My right hon. Friend was a great reforming Chancellor and will be remembered as such.

The right hon. and learned Member for Monklands, East (Mr. Smith) made his usual forceful speech – both forceful and his usual speech. It was good music hall. He has become the Jasper Carrot of parliamentary debate. For all the humour, however, it was an empty speech. It was empty of policy, it made no serious attempt to diagnose the problem, and it provided no solutions whatsoever. On the one single issue on which he was questioned by my hon. Friend the Member for Northampton, North (Mr. Marlow) it was not until some minutes had passed and someone had whispered to him that he actually provided the answer.

There is no difficulty at all about a diagnosis of the economic problem that we face at present. As a result of over two years of exceptional growth on a scale which no one expected, least of all the Opposition, we have seen the re-emergence of inflationary pressures. They are evident both in rising domestic prices and in the growth of imports.

Let me be quite clear about the main priority before us. It is progressively to reduce inflation and bring the economy back to the path of steady growth. There is no doubt about that. I know that inflation is not high by the standards of the 1970s, and it is still as low today as in the best month we ever saw during the period of the last Labour Government. I know, too, that some people argue that a little inflation is no bad thing, that one can live with it, that it induces a feeling of well-being and does no harm. Emphatically I do not share that view.

I do not share that view because inflation has two particularly destructive effects. First, it damages the economy – it brings uncertainty, it discourages investment, it breeds suspicion and conflict in industrial relations, and it puts a premium on playing safe at all levels of management. It is no coincidence that the past eight years, which have seen the longest period of sustained growth – strong and steady growth – since the war, has also been the period in which inflation has been reduced.

Ms. Clare Short (Birmingham, Ladywood) Given that inflation is destructive in all the ways that the right hon. Gentleman has described, why have the Government allowed it to rise?

Mr. Major The hon. Lady would have done far better to address that problem to her right hon. and learned Friend the Member for Monklands, East. She should also be aware that, if we were to see the implementation of the policies that her right hon. and learned Friend has in mind, inflation would be back in the stratosphere. I shall turn to that particular question in a moment.

Mr. Tony Banks (Newham, North-West) rose –

Mr. Major But the social effect of inflation is even more pernicious, as we saw during the period of office of the last Labour Government. It bears most heavily on those least able to protect themselves. In the last five years of the 1970s, with high inflation and low interest rates, pensioners saw the value of their life’s savings halved and their retirement security diminished. Indeed, many pensioners today may be on social security benefits, not because they failed to save and prepare for a secure retirement – often they did so at some hardship and sacrifice – but because the Labour Government lost control of inflation and destroyed their security. That happened because the Labour Government had neither the courage nor the foresight – or both – to pursue the necessary but occasionally unpopular policies to curb inflation.

The Opposition have learnt nothing since then – as the hon. Member for Birmingham, Ladywood (Ms. Short) should know. Their present policy is clear. They would reduce interest rates prematurely and relax monetary policy. They would increase spending massively, and undermine fiscal policy.

Mr. Tony Banks rose –

Mr. Stuart Bell (Middlesbrough) rose –

Mr. Major rose –

HON. MEMBERS Give way.

Mr. Speaker Order.

Mr. Major Labour would devalue the currency as each and every previous Labour Government have done – [Interruption].

Mr. Speaker Order. I must say to the House again – as I had to say to Conservative Members earlier – that if the hon. Member who has the Floor does not give way, hon. Members must resume their seats. It only wastes time to shout, “Give way, give way.”

Mr. Major I understand that the Opposition do not like being reminded about how their policies destroyed people’s security, but they deserve to be reminded because they are peddling the same policies again. The policies that they operate would not stop inflation. They would unleash hyper-inflation, with all the economic and social consequences that we saw before.

There is no conviction whatsoever in the Opposition’s concern about inflation. Their conviction is against the very policies that would curb inflation and bring it down. That is their concern.

We need to be quite clear about the need to bring inflation down and I have no doubt whatsoever that we are right to use all the practical levers at our disposal to do so.

Mr. Bell I should like the Chancellor to concentrate for a moment on the Government’s present policies. The OECD review stated that the Government have been raising interest rates to bear down on inflation and to stabilise the exchange rate. Is that still the policy of Her Majesty’s Government?

Mr. Major If the hon. Gentleman will wait a moment I shall turn specifically to that point. Indeed, I have already begun to do so.

In my judgment, we are absolutely right to use all the practical levers at our disposal to bear down on inflation. One of these – an important one, of course – is fiscal policy. One of the great achievements of my right hon. Friend the Member for Blaby has been the transformation of the Government’s financial position.

Public expenditure – [Interruption]. Opposition Members racked up debts day after day when they were in Government – we have repaid the debt that they racked up. Public expenditure remains under firm control, and we are now repaying Government debt – the debt that the Labour Government built up – on a massive scale. By the end of this financial year we shall have repaid roughly one sixth of the public debt accumulated over two centuries, at an annual saving of £3 billion in debt interest costs.

No one should doubt that my right hon. Friend the Member for Blaby had a tight fiscal policy, and no one should doubt that I intend to keep it equally tight.

The key lever on inflation is monetary policy – the use of interest rates. I understand very clearly that high interest rates are often unwelcome and often painful, but they are effective and they are having their intended effect now. Spending is slowing down, with retail sales in particular falling over the past three months; so are house prices, which rose much too fast over the past two years; and so is monetary growth, which is now moving close to its target range.

I understand very well that present levels of interest rates make things very difficult for some home owners, particularly young people who have large mortgages in relation to their incomes, but there are others who should also concern us. We also have to be concerned about those young people who could not afford to buy in the first place, because of the pace of rising prices – [Interruption]. If only for their sakes, there had to be a correction to rising house prices to prevent them being priced right out of the market. That correction is now happening – [Interruption]. It is clear that Opposition Members hate the thought of home ownership and the independence that it brings. The harsh truth is that too many people have been borrowing too much and saving too little, and high interest rates provide a direct incentive to redress that balance.

Interest rates have other important effects, however – not least on the exchange rate. A falling exchange rate directly raises the prices of things that we buy from abroad and reduces the discipline on British industry. That can only feed inflation. A firm exchange rate helps underpin the policy to stop inflation, and for these reasons it should be clear that I favour a firm exchange rate.

Mr. Eric S. Heffer (Liverpool, Walton) The right hon. Gentleman talks about the housing problem. Is he aware that the Government have been responsible for cutting council housing? They have encouraged the idea that people should buy their own homes and now they have implemented a policy of high mortgage rates, which means that the very people whom they encouraged to buy are suffering under their policies. How can the right hon. Gentleman explain why the Government should be so cruel to the people whom they encouraged to buy homes and why they are also leaving people without any houses at all?

Mr. Major The hon. Gentleman should bear in mind that under this Government this country has seen its greatest ever growth in home ownership – [Interruption] – and that will continue.

Not surprisingly, exchange markets were unsettled last Thursday, but less so than many imagined and far less than the Leader of the Opposition predicted. On Friday he said, “today when the pound plummets” – [HON. MEMBERS: “Disgraceful!”] But it did not plummet. And I hope that in future the right hon. Gentleman will keep his market predictions to himself and not seek to talk sterling down. Markets can see for themselves that policy has not been changed and will not be changed.

Mr. John Smith If the right hon. Gentleman believes that markets sustain the Government’s policy, is he aware that a year ago today the pound was valued at DM 3.15, but today it is valued at DM 2.90? Is he also aware that interest rates were then 13 per cent., but today they are 15 per cent.? What kind of market verdict is that on the Government’s economic policy?

Mr. Major Two years ago, markets were at almost precisely the same level as they are today, a point that the right hon. and learned Gentleman has overlooked. Markets can see that policy has not been changed and will not be changed, and no change in policy means just this. It means that I will set interest rates as high as is needed for as long as is needed to bring down inflation, and in this I will continue to be guided by a range of monetary indicators, including the exchange rate.

I will deal comprehensively with the Government’s approach to economic and monetary union and the Delors report in the debate on Thursday, but I shall say something now about the exchange rate mechanism of the European monetary system.

Mr. Jack Straw (Blackburn) Has she seen this speech?

Mr. Major As a matter of fact, my right hon. Friend has not seen the speech.

HON. MEMBERS Oh.

Mr. Speaker Order.

Mr. Major I am sorry to disappoint the Opposition on that point.

The exchange rate mechanism, as its name implies, is no more than a contrivance, a means for promoting a greater stability of exchange rate between Community currencies and greater price stability. However, it is not a recipe for problem-free economic management, and it should not be seen as such. We should recognise that it does not change the economic fundamentals. It does not reduce the pain of bringing down inflation. It does not mean that a country does not need reserves and can forgo intervention in the exchange market – far from it. It does not, and cannot, absolve a country from an adequately tight monetary policy. It does not insulate a country from high interest rates. Anyone who believes that early British membership would bring interest rates in the United Kingdom tumbling down would be sadly disappointed. Indeed, the very essence of the exchange rate mechanism is a strong commitment to set interest rates at whatever level is needed to keep the exchange rate within its bands.

Although it is no panacea, experience in recent years suggests that the exchange rate mechanism has helped participants both to bring about greater stability in exchange rates and to reduce inflation. I am in no doubt that in the right circumstances it would help us, too. But the circumstances have to be right if it is to be in our interest to join. The exchange rate mechanism will face new tests as exchange controls are abolished throughout the Community, and as the single financial market develops. In these circumstances, it would be very risky both for the United Kingdom and the present participants to introduce sterling – a currency which is traded much more widely than any other in Europe with the single exception of the deutschmark – when there is such a large differential between our inflation and interest rates and those in Germany.

Following the Madrid summit, the Government reaffirmed their commitment to join the ERM and specified precisely the conditions under which we will do so. The question is not whether we should join, but when. I repeat the conditions now for the avoidance of doubt. We will join the exchange rate mechanism when the level of United Kingdom inflation is significantly lower, when there is capital liberalisation in the Community, and real progress has been made towards completion of the single market, freedom of financial services and strengthened competition policy. That was the position that was set out at the Madrid summit and it remains the position today. There should be no doubt: when these conditions are met we will join – clearly and in good faith. Were it not a question of good faith, my right hon. Friend the Prime Minister would not have set out the conditions so clearly some time ago.

Mr. A. J. Beith (Berwick-upon-Tweed) How long does the right hon. Gentleman think will be a reasonable period of time within which to assess whether these things have come to pass?

Mr. Major As the hon. Gentleman will have understood from what I have just said, that is not wholly within our hands, for much of the action needs to be taken by other people, rather than us, so how speedily that will be done is in other people’s hands as well as ours.

Without those conditions being met, entry into the exchange rate mechanism would be neither in our interest nor in that of Europe. With them, membership of the exchange rate mechanism will bring benefits to this country as it has, in my judgment, to its present members. That is a further reason why economic policy must be addressed to bringing inflation down – both for wider economic reasons and as the necessary preliminary for entry into the exchange rate mechanism. We have set out our conditions for entry clearly. We are not hiding behind “certain prudent conditions”, as the Opposition sought to do.

Bringing inflation down is an important task, but it will be neither easy nor speedy. Inevitably, anti-inflation policy is bound to slow the economy down for a time. Therefore, I do not expect to see domestic demand growing anything like as fast next year as it has in recent years. Nor would I expect anything more than a fairly modest rate of output growth. With spending slowing down, businesses will have to take a hard look at ways to keep down their costs, including wages. If they do not succeed in that, the harsh truth is that jobs may be lost, needlessly. I hope that management and unions will ensure that that does not happen, and that Opposition Members will reinforce that message.

In recent months, much has been made of the rapid growth of our trade deficit, not least by the right hon. and learned Member for Monklands, East. It has grown.

Mr. Robert Sheldon (Ashton-under-Lyne) Does what the right hon. Gentleman is saying confirm that he does not believe that the exchange rate mechanism is a half-baked scheme?

Mr. Major The right hon. Gentleman may reflect on what I have just said. I have said that when the conditions are right we shall enter into the scheme. That is self-evident.

In recent months, the right hon. and learned Member for Monklands, East has made much of the rapid growth of our trade deficit. It has grown, and by far more than is comfortable. It cannot continue at present levels and it will not, as we have always said. In due course, it will come down as demand growth slows.

But the Opposition paint far too black a picture of the trade deficit. What they have never been prepared to admit is that much of it reflects investment and not consumption. Over the past two years, investment has grown by 23 per cent. – the fastest two years of investment growth on record – and over the whole life of this Government investment has grown far faster than consumption. This investment does suck in imports – often capital equipment – and it may widen the trade gap in the short term. That effect is clearly unwelcome. What must be understood is that in the medium term, to the extent that these capital imports build up extra productive capacity, that will play a part in reducing future deficits. Much of today’s problem is a preliminary to better performance tomorrow, and exports have been performing better and now stand at an all-time record level.

I suppose that it was a little optimistic to expect the right hon. and learned Member for Monklands, East to acknowledge the facts on investment. Business investment is a higher proportion of gross domestic product than ever before, but as far as the Opposition are concerned, that does not count. Why not?

In their view, it does not count because investment is not investment unless it is paid for by the taxpayer, because training is not training unless it is publicly financed by the taxpayer, and because the supply side of the economy cannot possibly be right unless it is managed from the centre. It would be a tragedy for industry if that form of thinking ever returned to the government of this country.

Over the last decade, under our economic policies, the underlying strength of the economy has improved and British industry is in fundamentally good shape. Our approach is working. In the past two years profitability has been higher than at any time since the 1960s. There is a record rate of new business start-ups – more than 1,600 per week so far this year, by far a new record. Productivity in manufacturing has grown faster in the 1980s in the United Kingdom than in all the other major industrialised countries. And that is after two decades in which we were bottom of the league, much of the time governed by a Labour Government. Moreover, employment has risen faster over the past five years than at any time since the war and by more in this country than in any other European country.

Mr. Graham Allen (Nottingham, North) As the new Chancellor of the Exchequer has put forward such a convincing view of how rosy the economy is, will he tell the House why in such circumstances his predecessor resigned?

Mr. Major I should have thought that the hon. Gentleman could do a good deal better than that. I suspect that my right hon. Friend the Member for Blaby (Mr. Lawson) will be able to speak for himself on that matter.

None of those improvements is accidental. Each and every one of them is a direct result of the policies that we have pursued over recent years. It may be that we shall face a difficult year ahead, but if that is to be so, industry is far better motivated and equipped to handle it than at any time in the 1970s.

Only the Opposition refuse to recognise the changes that have occurred in the past 10 years. Their persistent denigration of the economy bears no relation to reality. Business men, both here and abroad, are well aware of the improvements that have taken place. They know that this country’s economy is strong. That is why they are investing in this country at record levels. Work forces know this too. That is why workers, more involved than ever before in the success of their companies, have increased their productivity faster than in any other major industrial nation – and we have more people in work than at any time before in our history.

I believe that people recognise that we must deal with the short-term difficulties before us, and they expect us to do so. They know that our economic prospects have been improved out of all recognition in the past decade, and they expect us to build on that. The fact that the right hon. and learned Member for Monklands, East does not recognise it is a sign of how out of touch he is now and will be shown to be at the next general election. I have no doubt that the policies that we have been following are the right ones and I propose to continue them. I see no need for radical changes in policy.

We must never go back to the policies which nearly destroyed our economy in the 1970s and led to the inflation rate of a banana republic under the Labour Government. The Labour party is well aware of that. That is why it has invented Mr. Mandelson and his public relations gloss and disinvented Socialism. Socialism is rarely mentioned from the Opposition Front Bench except to deny that it exists. The Labour party knows what poison it is for most of the people in this country. Occasionally, even – [Interruption].

Mr. David Shaw (Dover) Listen, Kinnock!

Mr. Major If the Leader of the Opposition is back with us, I shall continue.

Occasionally, even BBC interviewers ask what Labour would do. The Leader of the Opposition tells them with delicious frankness that he has not a clue. But the Labour party’s policies, however it tries to hide them, seep out one by one. The Labour party is in favour of credit controls – just as everyone else is abandoning them. It would renationalise wherever it could. It would increase taxes on companies and individuals. It would abolish the trade union legislation. The Leader of the Opposition would reinvent sector working parties. A Labour Government would spend more – [Interruption].

Mr. Speaker Order. I do not need to remind the House of the pressure that there is to participate in the debate. I ask the House to give the Chancellor of the Exchequer a fair hearing for the rest of his speech.

Mr. Major The right hon. and learned Member for Monklands, East said a few minutes ago that he wished television were here in the Chamber. I wish that the public could see the behaviour of Opposition Members. They cannot bear the fact that over the past few years the levels of prosperity in this country have risen by an unprecedented amount and the people are well aware that that is the case. They know very well that the policies of the Opposition would take us back precisely to where we were in the 1960s. A Labour Government would spend more, borrow more and, yet again, they would devalue, as each and every successive Labour Government have done. The policies that they espouse are the failed policies of the 1960s. The electorate rejected them before and it will do so again. I invite my right hon. and hon. Friends to reject the motion and to support the amendment.