The Rt. Hon. Sir John Major KG CH

Prime Minister of Great Britain and Northern Ireland 1990-1997

1990Chancellor (1989-1990)

Mr Major’s Comments During Autumn Statement Debate – 23 February 1990

The text of Mr Major’s comments during the Autumn Statement debate, made on 23rd February 1990 in the House of Commons.

The Chancellor of the Exchequer (Mr. John Major) I beg to move, That this House approves the Autumn Statement presented by Mr. Chancellor of the Exchequer on 15th November 1989; welcomes the continuing reduction in the share of national income taken by public expenditure, and the provision of substantial extra resources for priority areas; congratulates Her Majesty’s Government on its policies of sound financial discipline and supply side improvement which have been the foundation of record growth of employment, investment, and business formation; and commends the Government’s determination to maintain downward pressure on inflation and to bring further improvements in economic performance.

Mr. Speaker I have selected the amendment in the name of the Leader of the Opposition.

Mr. Major This is probably the last occasion that the House will have to debate the economy before the Budget, which I can now inform the House will be on Tuesday 20 March.

I am grateful that we are aided in the debate by a very comprehensive and helpful report on the Autumn Statement from the Select Committee on the Treasury and Civil Service, under the chairmanship of my right hon. Friend the Member for Worthing (Mr. Higgins). The Committee is to be congratulated on the thoroughness and the speed with which it dealt with the comprehensive range of matters covered in the Autumn Statement. I have taken careful note of its recommendations, I am studying them, and I hope that I shall be able to respond in full before the House debates the public expenditure White Paper in a short while.

In its report, the Committee also focused on the broader issues, and I wish to concentrate on those this afternoon. The annual Autumn Statement effectively serves two main purposes. It provides a mid-year forecast of the prospects for the economy, and it gives the opportunity to set out the Government’s plans for public spending for the coming three years.

Our general attitude to public spending has not changed one iota since we were first elected. We believe, as do an increasing number of people throughout the world, that an economy in which the state takes and spends an increasing share of the national wealth cannot be successful – nor, by definition, can it be sustained.

Proper control of public spending – tight control – remains central to the Government’s economic strategy. It has enabled us to reduce the ratio of public spending to gross domestic product to less than 40 per cent. in recent years. That is nearly 10 percentage points below the level in the mid-1970s and 8 per cent. below the peak in the early 1980s. In the next two years, the ratios will be unchanged from our plans announced last year, and by 1992–93 the ratio is expected to fall still further, to its lowest level since the mid-1960s.

Mr. A. J. Beith (Berwick-upon-Tweed) The right hon. Gentleman has said that a policy under which public expenditure as a proportion of gross domestic product increased year by year, could not be sustained. Does he think that a policy in which it is decreased year by year as a proportion of GDP can be sustained?

Mr. Major That depends upon the amount of growth in the economy. Provided that growth in public spending is proportionately less than growth in the economy, there will of necessity be a decline in the ratio. That is what has happened in recent years. I shall return to that subject, in terms of the quantum of public expenditure, in a few moments.

The fall in the proportion of national income – the point that the hon. Member for Berwick-upon-Tweed (Mr. Beith) specifically referred to – has not been at the expense of real growth in spending on priority services. One of the great myths of fashionable opinion in recent years is that we have starved important public services, such as education and health, of funds. However, when more than £1 billion a week is going to social security, over £0.5 billion to the Health Service and nearly £400 million a week to education, that is a hard case for the hon. Gentleman to sustain.

Mr. John Home Robertson (East Lothian) rose –

Mr. Major In my last speech I gave way on more than 20 occasions. I shall give way in due time, but a large number of right hon. and hon. Members are waiting to speak, so I shall be more stringent with interventions today than normal, if the hon. Gentleman will forgive me.

It is true that we have reduced public spending in a number of areas. In particular, we have returned loss-making companies to profitability and transferred them to the private sector. For example, British Steel was making a loss of £800 million a year in the early 1980s and yet it is now a successful private sector company. Is not that better than keeping it as a public company, drawing £800 million of taxpayers’ subsidies and perhaps taking resources that might otherwise have gone to the Health Service? As nationalised industries have improved productivity and profitability, their subsidies have also been reduced. Services have been contracted out at a lower cost to the taxpayer. A number of executive functions within Government Departments have been set up as agencies under the Next Steps initiative. That motivates people within the agency to provide a better service – and to provide it more efficiently – and it promises to be a great success.

Of course, the whole expenditure survey process is essentially about ensuring that we are getting the best possible value for the money that we spend on behalf of the taxpayer. Not least, that means taking as hard a look at pay and running costs as any private sector employer. The private sector meets pay costs out of its own money; the Government meet their pay costs out of other people’s money, and we have to balance the taxpayer’s interest too. We must also ensure that the money that we provide for public service is spent predominantly on services, and not on unjustified pay increases at the expense of the services for which it was provided in the first instance.

We need to review priorities constantly, and sometimes to change them – for, as an economy grows and prospers, the demands on it necessarily change as well. As output and activity increase, more freight moves around the country; with average real take-home pay over a quarter higher in real terms than it was 10 years ago, more people have cars and wish to use them. As medical science advances, more costly remedies are sought, and, in a society that is experiencing real growth in wealth, the disadvantaged and the elderly should benefit too.

Those are among the reasons – although they are not the only reasons – why spending on the National Health Service has increased by over a third as much again in real terms compared with 1978–79. Between this year and next year, it will grow by a further £2,400 million. With income generation and cost savings, the increase in resources will not be £2.4 billion, but the equivalent of £2,600 million – a 5.5 per cent. increase in real terms. A great deal of that money has been provided to finance improvement in services to patients, to allow an additional £200 million for hospital building and other capital spending and to enable the important Health Service reforms to be implemented and thus improve the service that the NHS offers our nation.

Mr. Home Robertson The Chancellor makes great play of the expenditure on the Health Service. What is the good of investing money on improvements in the Health Service if health authorities – or, in Scotland, health boards – cannot then commission the new facilities? Is the Chancellor aware of the special problem affecting Lothian health board, in my part of the country? A shortfall of £12 million in the current year’s budget has led the board to consider closing no fewer than six hospitals. Who is the Chancellor kidding?

Mr. Major As the hon. Gentleman will know if he studies the position across the entire Health Service, the growth in provision over recent years has been continuing year-on-year in each and every part of the United Kingdom. I welcome that, and the Government have provided the resources necessary to ensure that it continues. That has been our policy, and undoubtedly – by any yardstick that the hon. Gentleman chooses to use – that is continuing and will continue in the future.

There has also been a substantial increase in spending on social security since 1979. Not only that, but we have managed to target that spending better than was the case in the circumstances that we inherited. Spending on services for the elderly has increased by £5 billion in real terms, and spending on the long-term sick and disabled has almost doubled in real terms – again, I am taking account of inflation. This year, we have announced real increases in benefits to help 1.5 million of the less well-off families. My right hon. and learned Friend the Secretary of State recently announced changes in benefits for the long-term sick and disabled. When the improvements in that package are fully implemented – that is, by 1993–94 – they will add a further £300 million to expenditure on that group, helping an extra 850,000 people. There is also an additional £250 million over two years for a new initiative to tackle homelessness.

Mr. John Garrett (Norwich, South) Will the Chancellor give way?

Mr. Major I will give way, but I must tell the House that after that I wish to make some progress.

Mr. Garrett Does the Chancellor agree that the relative price effect on the National Health Service in the last two expenditure programmes, to which he has referred, is a rise of 10 per cent. or more in costs? To that extent, his “extra funding” for the Health Service is significantly overstated – a point made in the report on the Autumn Statement by the Treasury and Civil Service Select Committee.

As for pensions and benefits, a higher rate of inflation applies to the expenditure of the very poor on, for instance, food and housing than to the heavier spending of the rest of society on consumer durables. Is not the Chancellor also exaggerating the increase in benefits? Would he care to enlighten the House by giving the true figures?

Mr. Major I do not share the hon. Gentleman’s pessimistic view of what has happened. As relative price indices turn up from time to time, it is certainly true that they go back to the days when we had volume increases in expenditure and lost control of public expenditure. Whatever indices the hon. Gentleman legitimately uses, it is undeniable upon the figures available that there has been a real and genuine increase in what can be purchased by the groups I have mentioned with the resources that the Government have provided.

We recognise no less than do Opposition Members the importance of maintaining and improving the basic infrastructure in Britain in a period of growth. What is more, we have produced the growth in the economy that has enabled us to afford to do so, unlike the 1970s when most capital programmes were cut. For example, there has been a 40 per cent. real increase in spending on motorways and trunk roads, adding nearly 1,000 extra miles. The new plans announced in the Autumn Statement include significant further real increases. Capital spending on roads will increase by about 25 per cent. over the next three years, and capital spending on railways by 75 per cent. in the same period. British Rail has now embarked on the largest programme of capital investment since the change from steam to diesel. Investment in London Underground will increase by £440 million, including the announcement that we will build an extension of the Jubilee line through Docklands to Stratford in east London.

None of those improvements would have been possible without a growing and successful economy. Without that we would have faced the cuts in capital expenditure that occurred in the second half of the 1970s.

Mr. Graham Riddick (Colne Valley) I certainly appreciate and accept that the Government have pumped a great deal more money into British Rail. Does my right hon. Friend agree that as long as British Rail is in the public sector, the increased efficiency and investment that we all seek will never come about? We must therefore move towards privatising the industry and get British Rail away from the dead hand of state control as quickly as we possibly can.

Mr. Major I certainly share the medium-term aspirations that my hon. Friend sets out. I very much hope that the new chairman of British Rail will look carefully at ways of improving the commuter service, particularly in the stress areas around London.

The investment in London Underground to which I referred incorporates all the necessary safety elements illustrated in the Fennell report, which I know the House will welcome and will wish to see carried out as speedily as possible.

The growth in the economy during the 1980s has not only financed those increases in expenditure, but has produced material changes in the prospects of large numbers of our citizens as 2.75 million new jobs have been created over the past six years. No other nation in Europe can match that rate of job creation. There has been a 40 per cent. increase in business investment in just the past three years. Both those achievements are without precedent for a generation. For eight years there has been strong and steady growth of output – a clear demonstration of the very much improved supply side response which was the aim, and has been the result, of our policies to reduce direct taxation and Government intervention in industry, and to revive and deregulate the economy.

The supply side of the British economy has performed admirably in recent years. The decline in our share of world trade that had lasted for decades has been stopped. It is now almost certainly in reverse. But even in a faster growing economy, domestic supply has not kept pace with domestic demand over the past couple of years, and that has caused the increase in inflation and a rise in the current account deficit.

With hindsight it is clear that we should have acted earlier to restrain this excessive demand growth. Indeed, we acted on our concerns as early as August 1987, when my right hon. Friend the Member for Blaby (Mr. Lawson) raised interest rates by 1 per cent. But that preceded the stock market crash, and the associated risk of recession, shared by Opposition Members, led us, along with all other major nations, to reduce interest rates – certainly, with hindsight, a mistake, but only with hindsight. At the time all the outside commentators agreed that policy loosening was appropriate, as did Opposition Members who were, in fact, urging far greater relaxation of policy. The right hon. and learned Member for Monklands, East (Mr. Smith) was in the vanguard in expressing that view – effectively, “Cut interest rates, boost demand.” That is what the Opposition wanted at that time.

Mr. Giles Radice (Durham, North) Did not the Treasury and Civil Service Select Committee in April 1988, also warn the then Chancellor of the risks of overheating?

Mr. Major My right hon. Friend tightened policy frequently during the period that the hon. Gentleman has just mentioned. The underlying essence is something that the hon. Gentleman cannot deny. At the time of the stock market crash it was the hon. Gentleman and his hon. Friends who wanted us to loosen policy far more than we did, and it would have been disastrous had we taken their advice.

Mr. John Townend (Bridlington) Does my right hon. Friend agree that, in retrospect, it is clear that it was a mistake to shadow the deutschmark and, thus become de facto members of the ERM?

Mr. Major I think that my hon. Friend is well aware of what happened during that period. I see no purpose in trailing over that matter yet again, and have no intention of doing so.

A moment ago the hon. Member for Durham, North (Mr. Radice) referred to the position in 1988. For his benefit I reiterate that monetary policy was tightened throughout the second half of 1988 by my predecessor, and it has been tightened progressively since then as it has become clear that demand has been resilient and that the inflationary pressures remain.

Mr. Robert Sheldon (Ashton-under-Lyne) The right hon. Gentleman says that his solution was to tighten monetary policy, but was not what happened at the time a relaxation of fiscal policy – in particular, in respect of higher-rate taxpayers?

Mr. Major Expressly not. I think that if the right hon. Gentleman actually studies what happened subsequently he will find it hard to say that fiscal policy was relaxed, as the public sector debt repayment grew inexorably year after year. If that is a relaxation of fiscal policy, by any yardstick I should be extremely surprised. The reality is that the cut in tax rates that I think the right hon. Gentleman has in mind produced a greater fiscal yield than do the higher rates at which fewer people pay tax.

Just as the problem took some time to develop, and even longer to become obvious, so it is bound to take some time to remedy fully. I have no doubt that the rapid growth of domestic demand has come to an end and that demand is now growing at a much more modest pace. The housing market, which was such an important factor in the upsurge in inflation, has cooled off; retail sales growth in the last year has been very modest indeed; and the trade deficit now shows signs of improvement, with our exports performing exceedingly well, but import growth moderating.

So no one should doubt that interest rates are working. There is evidence aplenty to prove it. But reassuring as those signs are, they simply tell us that we are turning the corner. They certainly do not yet tell us that we are back where we wish to be. That will take time, so I am afraid that there can be no question whatsoever of an early relaxation of policy. Interest rates will remain high for some time to come.

Mr. Roger Knapman (Stroud) As a partner in a building company, let me reassure my right hon. Friend that his policies are working.

Mr. Major I am grateful to my hon. Friend for what I take to be his endorsement.

The undeniable fact is that in our present circumstances it is right for spending and borrowing to be less attractive and for saving to be more rewarding. I understand that that message will be disappointing to home owners and business men, but it would be even more unfair to them, and to everyone else, to relax policy now and to risk the problem recurring later.

We need inflation to turn down decisively and to be confident that once it has done so it will stay down. No hon. Member wants to see a return to the 1970s and to the untold damage that runaway inflation inflicted on savers, on competitiveness, on families and on the weakest in our society. Lower inflation has been the essential foundation for success in the 1980s. Recently, inflation has risen. First we must bring it down, and then we must keep it down and get it lower still.

So I tell the House in as clear terms as I can that of course I look forward to the day when I can say that interest rates can come down, but I do not see that day as being imminent, and I do not think that it would be wise for anyone to act in the belief that it will be.

Nor is it any part of policy to restrain private spending only to let public spending grow out of control. Tight monetary policy must be supported by tight fiscal policy. Our fiscal stance clearly is tight, with the prospect of clocking up a further substantial surplus again this year, even if it is less of a surplus than once we thought.

The debt repayment this year now looks likely to be somewhat less than the £12.5 billion projected at the time of the Autumn Statement. Corporation tax receipts are lower than forecast, possibly – probably even – due in part to even higher levels of investment than were previously estimated, and local authorities’ debt repayment has been lower than expected. None the less, I repeat that there will still be a healthy fiscal surplus this year.

The wider economic outlook for the coming year is for modest growth, with demand at home pretty flat. That is not, I know, the most appealing prospect, but the alternative, which is allowing the British economy to face the coming decade under a serious inflation handicap, would be quite unforgiveable. There are great opportunities for us in the 1990s, but they depend on our not squandering the achievements so hard won in the 1980s.

Those achievements have been considerable by any yardstick. Business investment as a share of national output has reached an all-time high. In fact, since 1980 it has grown faster than in all the other major EC countries, and in the G7 is outpaced only by Japan. Manufacturing investment, too, is at its highest level ever, having grown at an average of 8.5 per cent. a year since the low point in 1983.

Most importantly – this point constantly escapes those who take a never mind the quality, feel the width approach to investment – the quality of British investment is vastly improved. Following the corporation tax reforms of my right hon. Friend the Member for Blaby, unprofitable investment is no longer favoured by the tax system, and industry is earning a higher rate of return than for 20 years. That point is both true and crucial, and if anyone doubts it they should look at the position in eastern Europe. The starkest lesson of all from eastern European Socialism has been that massive quantities of inefficient investment in heavy industry gets one nowhere. In countries such as Poland and Romania, investment accounted for around one quarter or more of national income, significantly higher than in this country or any other advanced industrial countries. However, we know from the dire economic straits in which those countries find themselves, that the quantum of investment means nothing. It is the efficiency with which resources are used which is crucial for the growth of an economy.

Mr. Dick Douglas (Dunfermline, West) rose –

Mr. Major If the hon. Gentleman will forgive me, many right hon. and hon. Members wish to speak and I wish to make some more progress.

I regret that the tremendous improvement in investment performance receives little or no welcome from Opposition Members. Clearly, they will call for massive public subsidies to industry, whatever the state of British business. They have warned of bad times around the corner in every year that we have been in office, and I doubt whether their tune will change in the future.

Whether the Opposition can bear to admit it or not – I fear that they cannot – the fact is that British industry enters the 1990s in a vigorous and healthy condition that would have been unthinkable a decade ago. We have come a long way from the 1970s. Then we were at or near the bottom of every league and year after year we were falling further behind.

Mr. Tony Favell (Stockport) The sick man of Europe.

Mr. Major As my hon. Friend says, the sick man of Europe. That was the result of years of over-regulation, excessive union power, a culture of penal taxation and pervasive subsidy, a bloated and poorly run public sector and year upon year of runaway inflation. We know the legacy that that left at the end of the 1970s.

It has taken us a decade to put all that behind us. Doing so has had a dramatic effect on motivation, as the British economy – [Interruption]. It is interesting how little the Opposition like the successes that have been achieved by the Government.

Mr. Graham Allen (Nottingham, North) rose –

Mr. Major If the hon. Gentleman will listen. he may hear a little more of the successes.

Putting the legacy of the 1970s behind us has had a dramatic effect on motivation. The British economy, which had become a byword for low productivity, has outperformed Germany, France and Italy and the rest of the European Community on productivity growth since 1980. The Opposition dislike the fact that that has been achieved in the past decade.

Not only have British companies become more productive and profitable, there are simply far more of them. That is a point that the Leader of the Opposition failed to notice earlier. Self-employment has shot up and the small business sector has blossomed. Business start-ups have exceeded stops by 27,000 in 1986, 42,000 in 1987 and 64,000 in 1988. Even though interest rates have been in double figures for over 18 months, the growth continues apace. In 1989 Customs figures for VAT registrations – companies do not register for VAT unless they have to – showed that net business creation – that is, start-ups in excess of closures – was up, yet again, by over 25 per cent. compared with the year before, to another record.

That is a dramatic increase by any standards. That increase in the number of new businesses sharply contradicts the crude caricatures of our economic policies that we so frequently hear.

Mr. Roy Hughes (Newport, East) rose –

Mr. Major I wish to finish this point.

Far from being divisive, the economic and social changes that we have seen in the 1980s have positively eroded the “them and us” divide. To be an owner, a manager, or a business man is no longer the preserve of one class, one income group or one part of the country. It is now open to everyone. Masses of ordinary people, who once voted Labour, and never will again, have joined the ranks of those who work for themselves or run their own company, own their own home, have their own pension provision or shares. That is a remarkable social change in the past decade. It is the story of the past 10 years. Ownership of capital and financial independence is increasingly becoming the aspiration of, and the reality for, increasing numbers of our fellow citizens.

Of course, there is still a great deal more to be done. That is always the case and that is why we shall need a Conservative Government for many years – to continue to do it. We have still not yet exorcised the inflationary psychology of our economy, which was the curse of the 1970s – [Interruption]. I am surprised that the hon. Member for Brent, South (Mr. Boateng) finds inflation so funny. Perhaps he is insulated from it, but businesses and people are not. Although he prefers inflationary policies, we do not.

Mr. Roy Hughes Will the Chancellor give way on that point?

Mr. Major No. It is precisely because we do not prefer inflationary policies that we shall take action to make sure that we get inflation down. We recognise that we must not fall behind in the effort to match and to beat our overseas competitors. That means that it is essential to keep tight pressure on costs, particularly labour costs, and it means making sure that we maintain investment in fixed assets, innovation and training, as we approach the opportunities and the stiff competition that will come with the single market in Europe in 1992.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak) Does my right hon. Friend accept that many of us entirely agree with him that one of the great problems facing industry is the wage increases of 10 per cent. or more that are bound to be most damaging? However, does he agree with the Confederation of British Industry that taxes on corporate incomes in this country are about 4 per cent. of GDP, against 2 per cent. in West Germany and 3 per cent. in the EEC as a whole? Does he further agree that if we could get sensible wage increases and a proper basis for corporate taxation, which a Budget should bring about, industry would have a real chance to forge forward?

Mr. Major I certainly share my hon. Friend’s concern about the level of wages and the necessity for them to be affordable unless people are to price themselves out of jobs in a fashion that we would not wish to see them do. On corporate taxation, my hon. Friend knows that the CBI regards the corporate tax reforms that were introduced by my right hon. Friend the Member for Blaby as a remarkable step forward. The increasing investment and profitability that have followed them have made a remarkable difference to businesses’ prospects for the future.

The essence of what happens in business is not what the Government alone can do for business. We recognise that business men know better than Government what they need to do in the interests of their own businesses and I hope that in the months ahead they will have the sense of self-interest to ensure that they do it, in the interests of their own businesses.

Our prospects for the 1990s are excellent provided we stick to sound anti-inflationary policies. Britain has nothing to gain – not now, not ever – by tolerating a high rate of inflation or even a modest rate of inflation. That would be the worst possible thing for everyone – for business, for families, and for the weakest in our society.

Mr. Roy Hughes Will the Chancellor give way on that point?

Mr. Major If the hon. Gentleman will forgive me, I shall not.

That is the Government’s part of the bargain for the 1990s – to take whatever action is necessary to get inflation down. It cannot be done with hopes, nor with lurches in policy. But it can be done by the persistent and consistent use of monetary and fiscal policy, and that is what we shall do. To businesses, I say simply that they should look ahead, beyond the year of slow growth and depressed demand to the tremendous opportunities that exist in the 1990s. Vast new markets are opening up on our doorstep, and the changes of the past 10 years mean that British industry and commerce are better placed than ever before to capture those markets and to seize the opportunities that are open to us.

There should be no doubt in anyone’s mind. We will bring the economy back on track, as a preparation for prosperity in a decade of promise. The Autumn Statement sets out the policies by which that will be achieved, and I commend it to the House.