Tag: ERM

  • PMQT – 27 June 1991

    Below is the text of Prime Minister’s Question Time from 27th June 1991.


    PRIME MINISTER

     

    Engagements

    Q1. Sir Michael Neubert : To ask the Prime Minister if he will list his official engagements for Thursday 27 June.

    The Prime Minister (Mr. John Major) : This morning I presided at a meeting of the Cabinet and had meetings with ministerial colleagues and others. In addition to my duties in the House, I shall have further meetings later today. This evening I shall depart for Luxembourg for the European Council meeting tomorrow.

    Sir Michael Neubert : Does my right hon. Friend agree that a vast expansion of the Common Market regional fund would do little or nothing to bring about a convergence of the European economies, but would merely make the poorer parts of the Community dependent on hand-outs from Brussels? Is he able to say how much such a proposal, which is supported by the Labour party, would cost the average British family?

    The Prime Minister : I am not able to give my hon. Friend a costing on that, because it would depend on the scale of the funds transferred from north to south, but I can confirm that expanding regional funds would certainly involve increased taxation in this country and in a number of other northern countries. The only credible way to bring about economic convergence is control of inflation and the right economic policies.

    Mr. Kinnock : In view of the fact that the Bundesbank decided today not to raise German interest rates, does the Prime Minister agree that now is the time to cut British interest rates?

    The Prime Minister : That is an odd question from the right hon. Gentleman, when the right hon. and learned Member for Monklands, East (Mr. Smith) said only last Thursday :

    “we will not be using interest rates for controlling demand.”

    Mr. Kinnock : The Prime Minister should try to answer a very basic question–especially since every responsible organisation and person concerned with the fate of British industry and British home buyers is calling for a reduction in interest rates. Did the Prime Minister read the reports published earlier this week from Shelter and the Council of Mortgage Lenders, stating that repossessions are at a record high, that hundreds of thousands of families are in deep mortgage arrears and that, in the words of the council’s director, “Worse is yet to come”?

    The Prime Minister’s policies are hitting every class of people and every corner of the country–[ Hon. Members :– “Speech.”] Yes–on behalf of every mortgage payer in Britain. How can the Prime Minister justify continuing with policies that punish the British people for the failure of his own policy?

    The Prime Minister : The right hon. Gentleman neglected to mention that, because we have succeeded in reducing inflation and have moved prudently, we have been able to cut interest rates five times, by a total of 3.5 per cent., without risking an inflationary devaluation in the exchange rate mechanism. That has meant about £50 a month off the average mortgage for mortgage holders.

    Mr. Kinnock : Unemployment is rising, firms are closing and the recovery about which we have heard so much is now going to take longer and be much slower than anything the Prime Minister has promised. How many more homes and how many more enterprises must be lost before the right hon. Gentleman stops pushing the country further into a slump?

    The Prime Minister : The right hon. Gentleman should return to the real world and recognise the commitments that he made when he committed himself to the fact that the exchange rate mechanism was the right policy. On the one hand, the right hon. Gentleman wants to say that it is right to have exchange rate stability, but on the other he makes the inconsistent claim that he wishes to reduce interest rates whenever he finds it convenient to do so.

     

    Q2. Mrs. Gorman : To ask the Prime Minister if he will list his official engagements for Thursday 27 June.

    The Prime Minister : I refer my hon. Friend to the reply that I gave some moments ago.

    Mrs. Gorman : When my right hon. Friend goes to speak to the women’s Conservative conference later this afternoon will he bear it in mind that its delegates are delighted with the measures that the Government have been taking to improve the lot of women? The steps that we have taken include flexible working hours, more flexible nursery arrangements and better tax arrangements. Will my right hon. Friend the Prime Minister and the Government continue to acknowledge the great contribution that women make to this country, not least by increasing women’s representation in the honours list —

    [Interruption.]

    Mr. Speaker : Order. We do not refer to the honours list in the Chamber.

    Mrs. Gorman : Does my right hon. Friend the Prime Minister realise that, in recommending women in this country for honours he assures the women of Britain that the Tory party is a girl’s best friend?

    The Prime Minister : As my hon. Friend knows, the vast range of policies that we have followed in the past few years clearly shows the importance that we give to the contribution made by women to this country. We shall continue to promote such policies.

     

    Q3. Mr. Austin Mitchell : To ask the Prime Minister if he will list his official engagements for Thursday 27 June.

    The Prime Minister : I refer the hon. Gentleman to the reply that I gave some moments ago.

    Mr. Mitchell : As the Prime Minister struggles to get his deck-chair up in a busy day of deck-chair wrestling, will he think about this week’s trade figures, which show a large and increasing deficit? Can he cite any country which, when in the depths of a recession, showed an increasing balance of payments deficit?

    The Prime Minister : As the hon. Gentleman should know, first, the trade deficit is on an improving trend and secondly, the underlying export volumes in the quarter to May were at an all-time high–3 per cent. up on the previous quarter and double the rise in import volumes.

     

    Q4. Mr. Mans : To ask the Prime Minister if he will list his official engagements for Thursday 27 June.

    The Prime Minister : I refer my hon. Friend to the reply that I gave some moments ago.

    Mr. Mans : Does my right hon. Friend agree that it is Conservative policies of competitive tendering, housing action trusts and the abolition of the national dock labour scheme that are coming to the aid of the city of Liverpool and clearing up the mess that successive Labour and Liberal administrations have inflicted on that city?

    The Prime Minister : Conservative legislation certainly offers Liverpool a much better deal. What has happened to Liverpool has been because it followed Labour policies for so long–often, I fear, with the assistance of the Liberal party. The effects of that can be seen by everyone in Liverpool and beyond.

     

    Q5. Mr. Morley : To ask the Prime Minister if he will list his official engagements for Thursday 27 June.

    The Prime Minister : I refer the hon. Gentleman to the reply that I gave some moments ago.

    Mr. Morley : What hope can the Prime Minister give to constituents who work for as little as £1.70 per hour? Why is it that under the Government boardroom fat cats like the chairman of Wessex Water have had their salaries increased from £47,000 to £100,000 per year while the charges for consumers have increased by 28 per cent? Is Majorism simply extortion by the few and exploitation of the many?

    The Prime Minister : A few days ago I made perfectly clear my opinions of people who provide themselves with undesirably large increases. As for people on very low incomes, a minimum wage would leave them with no income but unemployment.

    Mr. Peter Griffiths : Has my right hon. Friend had time today to note the report in the press of a Nottinghamshire miner who earned £35,000 last year, being among the one in three in that area who earned more than £20,000 last year, much to the credit of the miners, their union and their work rate? What would be the effect on that miner’s take-home pay if the Labour party’s spending plans were put into practice?

    The Prime Minister : I am certainly aware of the very high earnings of many Nottinghamshire miners, which I welcome. Much of that is the result of increased productivity, and it is well earned. It is unfortunate that those miners would face extra taxation as a result of their hard work and success if the Opposition’s tax policies were ever put into operation.

     

    Q6. Mr. Fatchett : To ask the Prime Minister if he will list his official engagements for Thursday 27 June.

    The Prime Minister : I refer the hon. Gentleman to the reply that I gave some moments ago.

    Mr. Fatchett : Further to the Prime Minister’s reply to my hon. Friend the Member for Glanford and Scunthorpe (Mr. Morley), may I ask the right hon. Gentleman whether he has seen the report in today’s issue of The Daily Telegraph that John Baker, the chief executive of National Power, has enjoyed an increase of £115,000 since 1 April, which is an 85 per cent. increase in his salary? The Prime Minister has condemned such increases. Will he use the powers in the Government’s prospectus for the sale of National Power and PowerGen, or is the right hon. Gentleman yet again all talk and no action?

    The Prime Minister : The hon. Gentleman should read the prospectus more carefully. It makes it perfectly clear that we have given an undertaking not to interfere in the commercial decisions of a company. It is interesting to note that the hon. Gentleman thinks it a light matter to break the contract into which we have entered.

     

    Q7. Mr. Anthony Coombs : To ask the Prime Minister if he will list his official engagements for Thursday 27 June.

    The Prime Minister : I refer my hon. Friend to the reply that I gave some moments ago.

    Mr. Coombs : Will my right hon. Friend confirm that it is widely accepted that minimum wage legislation would destroy upwards of 1 million jobs? Will he also confirm that such minimum wage legislation would have an impact upon the weakest in society–the disabled, the unskilled and the young, precisely those sectors of society which Labour professes to champion but which it is now so cynically betraying?

    The Prime Minister : I entirely agree with my hon. Friend, and I think that the vast majority of people also agree with him. The latest staging post for the Opposition’s stance on this matter was set out rather hilariously in a letter this morning from the hon. Member for Sedgefield (Mr. Blair), who said :

    “I have not accepted that the minimum wage will cost jobs … I have simply accepted that econometric models indicate a potential jobs impact”.

    Those words would make a weasel blush.

    Mr. Wigley : Is the Prime Minister aware of the dismay in Wales last week when the Government published their Green Paper on the future structures of government? That dismay arose because there was nothing in the Green Paper about the all-Wales level of democracy, despite the fact that the Assembly of Welsh Counties, the Association of Welsh Districts and every political party in Wales except the Conservatives support that, and that three of the six Welsh Conservative Members also support such a policy. Will the Prime Minister look at this again to try to get some all- Wales democracy?

    The Prime Minister : I am interested in what the hon. Gentleman says. As he knows, our policy has not been to go in the direction that he proposes. I shall examine and discuss the matter with my right hon. Friend the Secretary of State for Wales, but it is unlikely that we shall change our present posture.

     

    Q8. Mr. Peter Bottomley : To ask the Prime Minister if he will list his official engagements for Thursday 27 June.

    The Prime Minister : I refer my hon. Friend to the reply that I gave some moments ago.

    Mr. Bottomley : Will my right hon. Friend turn his mind to the fate of 12-year-old Maria and 10-year-old Anna Gordievsky? Will he continue to take every opportunity to make plain to the President of the USSR, to visiting Russian Members of Parliament and to the world’s press that one of the ways in which we shall judge the new USSR is whether the KGB will let those two young children come to Britain to join their father?

    The Prime Minister : I assure my hon. Friend that I have personally taken this matter up with President Gorbachev in the past. I shall do so again when next we meet, and the matter is frequently raised by my right hon. Friend the Foreign Secretary with his counterpart and at official level with the Soviet authorities.

    Mr. McMaster : Is the Prime Minister aware that in a recent answer to a parliamentary question, the Under-Secretary of State for Scotland with responsibilities for industry, the hon. Member for Eastwood (Mr. Stewart), revealed that 76 per cent. of manufacturing jobs in the Paisley postcode area had been lost between 1979 and 1989? He will be aware that things have become far worse since. Does he agree that that is an unacceptable level of economic and social disaster, or does he agree with the Chancellor of the Exchequer that it is a price well worth paying?

    The Prime Minister : All levels of unemployment are a matter for distress and regret. The only way to ensure that we create jobs that are permanent and are sustained is to have the right economic policies to get inflation down, and to keep it down. There is no other way of ensuring job security for the future. It may sometimes be difficult and uncomfortable, but it is the right policy, and it is the policy to which we shall stick.

     

    Q9. Mr. Cash : To ask the Prime Minister if he will list his official engagements for Thursday 27 June.

    The Prime Minister : I refer my hon. Friend to the reply that I gave some moments ago.

    Mr. Cash : Does my right hon. Friend accept that he will go to the summit tomorrow with the good wishes and goodwill of all Conservative Members? Given the clearly expressed views of the House yesterday and his own views against the federal super-state, does he agree that the Opposition abdicated their national duty by dividing the House on the matter yesterday?

    The Prime Minister : I am always grateful to have my hon. Friend’s support on these matters. I agree about the irrelevance and irresponsibility of the position that Opposition Front-Bench spokesmen took yesterday. It was adequately described in many national newspapers this morning.

  • PMQT – 18 April 1991

    Below is the text of Prime Minister’s Question Time from 18th April 1991.


    PRIME MINISTER

     

    Engagements

    Q1. Mr. Leighton : To ask the Prime Minister if he will list his official engagements for Thursday 18 April.

    The Prime Minister (Mr. John Major) : This morning I presided at a meeting of the Cabinet and had meetings with ministerial colleagues and others. In addition to my duties in the House. I shall be having further meetings later today.

    Mr. Leighton : Has the Prime Minister noticed the growing chorus of concern and complaint, from organisations like the London Chamber of Commerce and the London tourist board, about the shabby state of London, the increasing congestion and the deteriorating quality of life? Why is it that London, alone among the great cities of the country and among the capital cities of the western world, has no democratic authority to give strategic guidance or leadership to the city? For example, should we bid for the Olympics? There is no forum in which to discuss the matter. Does the Prime Minister agree that it is time for new thinking? Surely the Prime Minister, who has had a number of addresses in London, should put his mind to this question.

    The Prime Minister : If parts of London are scruffy, as the hon. Gentleman suggests, it is because they have Labour local authorities.

    Sir Peter Hordern : Is not this a very sad day for the Leader of the Opposition–

    Mr. Speaker : Order. I remind the hon. Gentleman that he is putting a question to the Prime Minister.

    Sir Peter Hordern : Is not it the case that the rate of inflation is falling fast, that mortgages are being reduced as of today, that sterling stands firm in the exchange rate mechanism and that the largest rescue operation in modern times–the one to assist the Kurds–is now going strong? Are not these things due entirely to the initiative and leadership of my right hon. Friend the Prime Minister? Does not the right hon. Member for Islwyn (Mr. Kinnock) face another five years of hard and fruitless labour?

    Mr. Speaker : Order. Will the Prime Minister answer only the hon. Member’s first question?

    The Prime Minister : I am grateful to my hon. Friend for his remarks. I think that he underestimates the record of the Leader of the Opposition. The right hon. Gentleman has lost practically a record number of elections and will in due course lose another.

    Mr. Kinnock : On the question of records, may I ask the Prime Minister whether he agrees that today’s record rise in unemployment is a personal tragedy for those people who have lost their jobs and a personal failure for him? Does he agree that anyone who has been the cause of so many other people losing their jobs should lose his?

    The Prime Minister : I certainly share with the right hon. Gentleman very considerable concern about the people who have lost their jobs ; we all share that concern. However, although the right hon. Gentleman is against unemployment in principle, he supports in practice policies that would create it–not least, as a Welsh Member, failing to be here earlier this week to vote for the Cardiff Bay Barrage Bill, which would provide 25,000 jobs.

    Mr. Kinnock : The reason why I was not in the House on that occasion was that Her Majesty did me the enormous honour of inviting me and my wife to spend the night with the royal family at Windsor Castle. I thought that the Prime Minister’s many advisers might have drawn his attention to the Court Circular.

    I heard what the Prime Minister said in his efforts to rebut the charges relating to unemployment. Since he became Prime Minister, 330,000 more people have lost their jobs, all as a direct result of his economic policies. Is not it obvious that he is truly the Prime Minister of unemployment?

    The Prime Minister : I trust that the right hon. Gentleman will now confirm to the House that he will support the Government Bill on Cardiff Bay which will provide 25,000 jobs. While he is about it, perhaps he will explain why he wants to introduce a minimum wage, which would cost 1 million jobs in this country.

    Sir Peter Blaker : Is not it significant that the first group that my right hon. Friend was able to persuade of the merits of his bold initiative for safe havens in Iraq was the Heads of Government of the European Community? Did not that strengthen his hand a great deal in persuading President Bush, who was initially reluctant to agree to that initiative? Does not that show the potential and importance of European political co-operation?

    The Prime Minister : We have worked very closely throughout this matter with the European Community, the United Nations and the President of the United States. I believe that that coalition of forces has now provided the right answer to deal with the immense tragedy that we are currently seeing in Iraq.

     

    Q2. Mr. Norman Hogg : To ask the Prime Minister if he will list his official engagements for Thursday 18 April.

    The Prime Minister : I refer the hon. Gentleman to the reply that I gave some moments ago.

    Mr. Hogg : Is the Prime Minister proud of today’s unemployment figures? Do they represent what he calls the bottoming out of the economy or the bottom falling out of the economy? Which is it? Does he have any bold and heroic initiatives to help the growing army of unemployment?

    The Prime Minister : The policies that the hon. Gentleman and his party support would create a level of unemployment never previously seen in this country. The way to ensure secure employment is to bring inflation down and keep it down, and that battle we are winning.

    Mr. Bill Walker : Is my right hon. Friend aware that the people of Scotland realise that there are more people in work today in Scotland than at any time and that they are earning much more money, their take-home pay in real terms being 30 per cent. above what it was in 1979? There is no point in hon. Members shaking their heads ; these are facts.

    Is my right hon. Friend further aware that the British people respect the leadership that he has provided during the Gulf war and in proposing policies which have resulted in troops being assembled to provide safe havens for the Kurds?

    The Prime Minister : The people of Scotland also know that across the United Kingdom there are substantially more jobs now than there were in 1979, that the rate of unemployment in this country is below the European average and that in the past year we have had more jobs than we have had for many years– [Interruption.] –and far more than we ever had under the last Labour Government.

     

    Q3. Mr. Martyn Jones : To ask the Prime Minister if he will list his official engagements for Thursday 18 April 1991.

    The Prime Minister : I refer the hon. Gentleman to the reply that I gave some moments ago.

    Mr. Jones : Will the Prime Minister find time today to consider the problems of the upland hill farmers in my constituency and elsewhere who, on top of crippling interest rates and pitifully low livestock prices, are now having to face paying for the disposal of the carcasses of their dead animals? What does he intend to do for family farms to keep employment in the countryside in my area and elsewhere?

    The Prime Minister : As the hon. Gentleman will be aware, some time ago my right hon. Friend the Minister of Agriculture, Fisheries and Food announced substantial increases in hill livestock compensatory allowances. They were well received by the agricultural community and should specifically help farmers similar to those in the hon. Gentleman’s constituency.

    Mr. Michael Brown : Does my right hon. Friend agree that it was this Government who gave the opportunity to trade unionists to vote in secret ballots, this Government who gave the opportunity to council house tenants to buy their homes, this Government who gave people the opportunity to opt out of local education authority control and this Government who gave people the chance of better opportunities generally?

    The Prime Minister : My hon. Friend is entirely right. The only opportunities that people will get from the Opposition is the opportunity yet again to do what their trade union leaders tell them to do, what their council leaders tell them to do and what any future Labour Government might tell them to do.

     

    Q4. Mr. Grocott : To ask the Prime Minister if he will list his official engagements for Thursday 18 April 1991.

    The Prime Minister : I refer the hon. Gentleman to the reply that I gave some moments ago.

    Mr. Grocott : Will the Prime Minister take this opportunity finally to dispel allegations of dithering by announcing decisively what the country wants to hear, which is that there will be a June general election? If, as I suspect, he is still not clear in his own mind on that subject, will he be issuing a consultation document?

    The Prime Minister : I can tell the hon. Gentleman crisply that when we hold the election we shall win it.

     

    Nuclear Test Veterans

    Q5. Mr. Higgins : To ask the Prime Minister, further to his answer to the right hon. Member for Worthing on 4 December 1990, Official Report, column 170, when he intends to complete his consideration of the case for compensation for British nuclear tests veterans and their widows ; and if he will make a statement.

    The Prime Minister : An independent study is currently being conducted. The Government’s position is that they are ready to pay compensation if there is firm evidence that participation in the United Kingdom’s nuclear test programme caused the cancer.

    Mr. Higgins : The Prime Minister will recall that in answer to a previous question he gave a sympathetic and urgent reply in response to the plight of haemophiliacs. This case is clearly more complex, although in many respects it is even more deserving. Hon. Members who, at their surgeries and interview evenings, see constituents suffering from appalling cancers who were given no protection from the atomic tests in the south Pacific, believe that action is long overdue and that compensation should be paid urgently. Will my right hon. Friend proceed with his inquiry with the greatest possible speed?

    The Prime Minister : I assure my right hon. Friend that we shall proceed in that fashion and try to ensure minimum delay. The practical problem is the limited number of appropriate medical experts. Nevertheless, I shall do what I can to ensure that the report is produced as speedily as possible.

    Mr. Orme : If the Cabinet agreed this morning on the poll tax provision–

    Mr. Speaker : Order. I am afraid that this is a definitive question.

    Mr. Orme : But, Mr. Speaker–

    Mr. Speaker : I do not think that it would be right to have a second bite at it. The question before the House is about nuclear tests. Perhaps we had better move on.

     

    Engagements

    Q6. Mr. Maclennan : To ask the Prime Minister if he will list his official engagements for Thursday 18 April.

    The Prime Minister : I refer the hon. Gentleman to the reply that I gave some moments ago.

    Mr. Maclennan : Can the Prime Minister explain, in the light of the discussion that he had this morning, how any local tax which combined the poll tax and the rates could possibly be related to ability to pay?

    The Prime Minister : The hon. Gentleman may be interested to know that we propose to publish early next week, with exemplifications, the way in which we think that we should proceed in terms of local government taxation. He will find no difficulty in seeing the answer to his question then.

    Mr. Gerald Howarth : Does my right hon. Friend agree that with the Soviet Union still in turmoil it would be folly for the United Kingdom unilaterally to dispose of its independent nuclear deterrent so long as other potential aggressors possess theirs? Does he agree that those who in the past have been passionate supporters of unilateral nuclear disarmament should not be trusted by the British people with the defence of our country?

    The Prime Minister : I agree entirely. The maintenance of an independent nuclear deterrent is absolutely vital to the future security of our country. I am surprised that some others are less consistent in their principles on this point.

  • Text of the 1991 Budget – 19 March 1991

    Below is the text of the 1991 Budget, held on 19th March 1991 and presented in the House of Commons by the Chancellor of the Exchequer, Norman Lamont.


    Budget Statement

    Mr. Deputy Speaker : Before I call the Chancellor of the Exchequer, it may be for the convenience of hon. Members if I remind them that, at the end of the Chancellor’s speech, copies of the Budget resolutions will be available to hon. Members in the Vote Office.

    The Chancellor of the Exchequer (Mr. Norman Lamont) : Like, I suspect, most Chancellors, I have found the preparation of this, my first Budget, very exciting. As usual, I have read a huge amount of speculation in the press over the past few weeks about the contents of the Budget. I have also learnt a number of interesting things. For example, I was surprised to read last Wednesday that I am almost as well known as Desert Orchid – and I have not yet run in the Gold Cup. Actually, Desert Orchid and I have much in common : we are both greys; vast sums of money ride on our performance; the Opposition hope we will fall at the first fence; and we are both carrying too much weight. The crucial difference is that Chancellors are never favourites.

    I have had the advantage of serving at the Treasury under two Chancellors : my right hon. Friend the Prime Minister, who last year delivered a notable Budget for savers, and before that my right hon. Friend the Member for Blaby (Mr. Lawson). If I may make a personal observation, working for my right hon. Friend the Member for Blaby was always stimulating and exciting, and I am extremely grateful for his encouragement over the years. My admiration and respect for him remain undimmed. [Interruption.]

    Mr. Deputy Speaker : Order. I know that this is an exciting day in the House, but perhaps we should try to behave like the mother of all Parliaments.

    Mr. Lamont : I intend to carry forward my predecessor’s work. My central economic aim is to bring inflation down and keep it down. Beyond that, my objective is to encourage enterprise by creating a broadly based tax system that allows markets to do their job with the minimum of distortion and Government interference.

    Although there is no scope this year for an overall reduction in taxes, my Budget today will include measures to help business through the recession in the short term and to encourage it to invest for the longer term. It will provide assistance for families. It will also further the process of tax reform and make some radical changes in the tax system.

    As usual, I shall begin with a review of the economic situation and prospects. I shall then deal with monetary policy and public finances. Finally, I shall present my tax proposals.

    The “Financial Statement and Budget Report”, together with a number of press releases filling out the details of my proposals, will be available from the Vote Office as soon as I have sat down.

    ECONOMIC SITUATION AND PROSPECTS

    I refer first to international developments. The past year has brought recession to a number of major industrial countries including the United States, Canada and Australia. Growth in Germany has been sustained by reunification ; but elsewhere in Europe, activity has slowed and industrial production has fallen in recent months in Spain, Italy and France. In five of the seven leading industrial nations, industrial output is now lower than it was a year ago.

    The basic cause is the same everywhere : very rapid growth in the industrialised world during the 1980s led to the re-emergence of inflationary pressures. A period of slower growth was needed to stop inflation taking hold again.

    In the autumn, the slowdown was magnified by the Gulf crisis. Business and consumer confidence were badly dented, first, by the uncertainties and the sharp rise in oil prices that followed the invasion of Kuwait, and then the prospect of war. Travel and tourism were especially hard-hit.

    Mercifully, the war was brief and the outcome successful. Confidence is recovering and that will strengthen the economic upturn when the time comes ; and the fall in oil prices has already improved the outlook for inflation.

    So although 1991 as a whole will show little growth in the seven major economies – a 1 per cent. increase in industrial production compared to 5 per cent. in 1988 – the slowdown is unlikely to last long. Inflation is already moderating in those countries that are in recession, and activity should start to recover later this year in north America, helped by continued expansion in Germany and Japan. In the United Kingdom, the recession came after eight years of growth averaging 3 per cent. a year. This sustained growth bred confidence and that in turn led to a quite unprecedented rise in borrowing. Personal borrowing increased by nearly 40 per cent. in 1988 alone, to reach £54 billion – and a new record for the ratio of debt to income. This produced a sharp drop in the personal saving ratio, which coincided with a massive boom in investment by companies.

    In itself, the rise of investment – nearly 80 per cent. between 1981 and 1989 – was welcome, but the economy could not go on expanding at that rate. Some firms and individuals became over-extended and we saw a deterioration in the current account and a wholly unwelcome rise in inflation.

    It is easy, with the benefit of hindsight, to say that policy should have been tighter; and, once the problem became clear, policy was indeed tightened. We ran a large budget surplus. Interest rates were raised, and they had to stay high until there were unmistakable signs that excess demand pressure had been removed. That took longer than we – or outside commentators – expected, and the delay meant that the adjustment, when it came, was all the sharper.

    Since the middle of last year, individuals and companies have been taking steps to reduce their borrowing. Consumer spending has fallen back, and the saving ratio has risen sharply to 10.8 per cent. Firms have found it hard going. Profits have weakened, caught in the pincer of low turnover and rising costs, and the burden of debt taken on in the late 1980s has proved a heavy one.

    It is not surprising, therefore, that business investment has fallen from the heights of 1989 and early 1990. Stocks are now being reduced, and companies are making strenuous efforts to cut costs. That has led to a sharp increase in unemployment during recent months, although there are welcome signs that firms are continuing to invest in skills and training. I expect output in 1991 as a whole to be about 2 per cent. less than in 1990. Much of that fall, of course, has already happened. It is largely behind us and, as I shall be explaining in a moment, the resumption of growth should not be long delayed.

    The process of retrenchment has been painful, as it always is, but it has been necessary and is now producing results. The current account deficit has improved sharply – especially the balance on manufactures – even though world trade has been weak. Imports have fallen, while exports in some sectors, notably cars, have continued to grow strongly – testimony to the fact that industry is immeasurably better placed today than it was 10 years ago.

    No one can doubt that inflation is on the way down. There has already been a fall of 2 percentage points since the peak last October, and there is widespread agreement that the fall in inflation will continue through 1991 and into 1992.

    The prospects are now better than they appeared at the time of the autumn statement. The February survey by the Confederation of British Industry showed that the balance of firms expecting to increase prices was at its lowest level ever. The forecast published today, taking account of the effect of the Budget measures, is for inflation to fall to an average of 4 per cent. in the last quarter of this year and below 4 per cent. in the first half of 1992. The prospect, therefore, is that we will narrow the inflation gap with Europe remarkably quickly.

    In the mid-1980s, we did get inflation briefly below 4 per cent., and we saw the advantages that followed. We are about to do so again, and again we will reap the benefits. Lower inflation, and the lower interest rates that go with it, will be a powerful force for recovery.

    One of the lessons that I have learnt from years of grappling with economic statistics is that it is difficult to be certain about the past, let alone about the future. It is always especially difficult to predict the timing of turning points in the economy. However, there are good reasons to expect that the recovery will begin around the middle of this year, although initially it may be slow. As we found 10 years ago, confidence revives as inflation comes down. This time, the ending of the Gulf war will give the revival an added boost. Just as falling consumer spending contributed to the onset of recession, so returning consumer confidence is likely to lead the recovery. At the same time, the reduction of stocks is likely to slow and the United Kingdom will benefit from the upturn in the United States and elsewhere in the world.

    As a result, I expect output to stabilise in the next few months and then to increase by about 2 per cent. between the first half of this year and the first half of 1992. Looking further ahead, our projections show growth of about 3 per cent. a year as the economy recovers further.

    The easing of demand pressures has already brought a marked improvement in our current account. As the House will have noticed, there can be lags not just between policies and their effects, but between the effects in the real world and their appearance in the official statistics. As a result of the recent revisions of the figures for invisible imports and exports, the current account deficit for last year is now estimated at under £13 billion, £2 billion less than forecast at the time of last year’s Budget. This year, I expect the deficit to be halved to £6 billion, about 1 per cent. of national income.

    Regrettably, unemployment is likely to go on rising for a while yet, even after the recovery has started. How far and how fast it rises will depend, in part, on the speed with which pay settlements come down – and come down they must, eventually, to the levels prevailing in other ERM countries. There is no escape route through devaluation, and firms know this.

    Fortunately, a sharp fall in inflation is in prospect, and the reforms that we have introduced over the past decade have led to more pay flexibility. Some firms have already deferred pay settlements or agreed pay pauses. The more firms that follow their lead, the sooner we can reverse the trend in unemployment, and start creating jobs again.

    To sum up, the prospect for the year ahead is for an end to the recession, growth of about 2 per cent. in the 12 months to the first half of 1992, and inflation below 4 per cent. This does not seem to me an unpromising outlook.

    For the longer term, there is every reason to be optimistic about the United Kingdom in the 1990s. Recessions are always painful, but they are an inescapable feature of market economies – and they are temporary. Longer-term growth depends on having a thriving competitive private sector. That we now have, thanks to the reforms of the past 10 years.

    If I may confess it, I do not believe in miracles, but I do believe that the right policies, courageously and consistently applied year by year, can produce a transformation in an economy, and that is what happened in the 1980s.

    So now we can build on real achievements : a record number of new businesses, faster growth in manufacturing productivity than in any major industrialised country, and faster growth in investment than in any of those countries except Japan. These achievements have helped us over the past seven years to maintain our share of world trade, after 30 years of decline. They made the 1980s the first decade since the war when the United Kingdom grew faster than Germany and France.

    MONETARY POLICY

    There is one proviso – and it is a crucial one. We must get inflation down, and this time we must keep it down. The overriding lesson of the past few years is that the battle against inflation is never won. It is fatally easy to miss the warning signs, and hard decisions have few friends.

    The costs of even a temporary reverse are high. Squeezing out inflation means high interest rates, frustrated hopes, bankruptcies and lost jobs. But the costs of living with inflation are even higher – as those who remember the 1970s know only too well. Inflation makes our industry uncompetitive; it destroys savings; it creates uncertainty and strife; and a high rate of inflation can quickly get out of control. High rates of inflation are never stable.

    Frankly, after the experience of recent years, it surprises me how many people are urging me to let up on inflation. It may not seem much of a threat for the next six or 12 months, but I am concerned with the year after that and with the rest of the decade. The Government’s decision to join the exchange rate mechanism last October provides a more secure framework for combating inflation in the future. That is its real significance. Linking sterling to other currencies with a proven track record of low inflation will be an added discipline on monetary policy.

    We committed ourselves to that discipline after lengthy debate, and our decision was widely supported on both sides of the House, and in the country at large. The time has now come to apply ourselves wholeheartedly to the task of making our membership a success. So far, it has been. Sterling has traded comfortably within its band during a difficult period. The sterling index is much where it was just before ERM entry, and our patient approach has meant that recent reductions in interest rates have been well received by the markets. They have recognised that they are consistent with our ERM obligations, as well as fully justified by the domestic economy. Our entry into the ERM means that I have had to reassess the role of domestic indicators in guiding monetary policy. It should go without saying that interest rates will be set to honour our commitment to stay within the ERM band, but there is still a most important role for domestic monetary targets. All the major countries within the ERM take the same view.

    Over the past year, M0 – the narrow measure of money–has continued to provide timely evidence of monetary developments. Its annual rate of growth has been on a downward trend since last May. Since August, it has been within its target range of 1 to 5 per cent. For the year ahead, I propose to set a new, slightly lower target range of 0 to 4 per cent. That is consistent with my determination to exert further downward pressure on inflation. I shall also continue to watch closely other indicators of monetary conditions, especially M4 – the measure of broad money – and asset prices.

    There should be no sustained conflict between domestic monetary indicators and our ERM obligations. By far the best way of minimising the risk that conflicts will arise in the future is to build up credibility within the ERM. The policies that are necessary to defeat inflation and to sustain the exchange rate are the same.

    For the time being, I have no plans to move to a narrow ERM band. That remains, of course, our longer-term intention, but the timing of the move must depend on the progress we make in reducing inflation.

    PUBLIC FINANCE AND FISCAL POLICY

    I come now to the public sector finances.

    Over the 1980s, my predecessors transformed our public finances and made them the envy of fellow Finance Ministers throughout the world. They first reduced and then eliminated our budget deficit, and in the last three years they repaid £26 billion of debt. The ratio of public sector debt to gross domestic product has been reduced from 50 per cent. in 1979 to under 30 per cent. now, to the benefit of this and future generations.

    I am not going to fritter that legacy away. The firm control of public expenditure remains at the centre of our strategy. I will continue to aim for budget balance in the medium term. It is a simple rule, which is well understood and requires the Government to finance their spending honestly.

    Our entry into the ERM does not alter the requirement for fiscal policy to buttress monetary policy and play its part in curbing inflation; so sound public finances will remain central to our strategy for the 1990s.

    However, it is one of the more reliable laws of economics – not that there are so many – that the budget balance varies markedly over the economic cycle. When activity is growing strongly, tax revenues rise relative to income, and lower unemployment brings lower social security payments. We saw this in operation in the late 1980s when we ran large budget surpluses.

    Those forces go into reverse when the economy slows down. That is why the Budget surplus has shrunk over the past two years, and why we are now likely to see the temporary re-emergence of a public sector borrowing requirement.

    Those cyclical swings in the budget balance can play a useful role in offsetting the swings in private sector borrowing, and in stabilising the economy. They come about automatically, without the need for difficult judgments about the state of the economy. It is entirely consistent with the medium-term approach that I have already outlined to tolerate those swings in the fiscal position, but I am not persuaded of the case for going beyond that.

    In 1990-91, the Government’s finances have been affected both by the onset of the recession and by the Gulf war. However, as a result of the assistance we have received from our allies, the net effect of the war on the PSBR has not been as great as we feared. The outturn on the public expenditure planning total is expected to be a little lower than we forecast in the autumn statement. Overall, despite the war, I expect to achieve a further debt repayment this year of approaching £1 billion.

    For the year ahead, I judge that a deficit of £8 billion can fairly reflect the strength of cyclical influences. For the same reason, I think it will be right to tolerate a somewhat larger deficit in 1992-93, for it takes time for the effects of lower activity to feed through fully on to revenue. The most notable is corporation tax, which is both highly sensitive to the economic cycle and paid in arrears.

    Those deficits will disappear once output has returned to normal levels – just as the surpluses of the late 1980s did. Prudence dictates that I base my fiscal plans on a gradual recovery in output to its long-term trend. This implies a correspondingly gradual return to budget balance, but in practice the speed with which this happens will depend on the exact course of the upturn.

    To summarise : for the year ahead, I am budgeting for a PSBR of £8 billion, 1 per cent. of GDP, and I expect a somewhat larger deficit in the following year. These deficits reflect the effect of lower activity on the public finances and are fully consistent with the aim of a balanced budget over the economic cycle.

    In order to hold to this prudent fiscal stance, my Budget today will have a broadly neutral effect in the coming year, but will produce a modest increase in revenue in 1992-93.

    BUSINESS TAXATION

    I now turn to my tax proposals. In preparing this part of my speech I have been guided by great Finance Ministers of the past – first, by Gladstone, whose advice on delivering tax proposals to the House of Commons was :

    “Get up your figures thoroughly and then give them out as if the whole House was interested”.

    Secondly, I have perhaps been influenced by Colbert, the French Finance Minister, who said :

    “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.

    In framing my tax proposals, I have also sought to address a number of the concerns which have been put to me and to carry forward the process of tax reform initiated by my predecessors. Above all, I have produced a Budget for business. I therefore begin with business taxation.

    In this country, there are 50,000 large companies paying the main rate of corporation tax, nearly 1 million other companies and 3 million unincorporated businesses, many of them very small, employing a handful of people at most. We should never forget those firms. My measures are designed to benefit businesses in each of those categories.

    I have been particularly concerned about businesses which are experiencing cash flow problems, often made worse by late-paying customers. I shall therefore be announcing measures which should give immediate help to businesses’ liquidity.

    My first proposals concern the value added tax regime. For 18 years, ever since VAT was introduced, the rule has been that businesses become liable for VAT when they send out bills, not when they are paid, so some traders end up paying VAT even though their customers never pay them. In his Budget last year, my right hon. Friend the Prime Minister introduced an entirely new system for giving traders relief on bad debts. That comes into effect on 1 April and extends relief to all bad debts which are at least two years old. Many business organisations have complained to me that that waiting period is too long. I now propose to reduce it from two years to one. This will enable businesses to claim relief next year on the bad debts that they incurred in 1990-91 and 1989-90. The new scheme will boost businesses’ cash flow next year by some £340 million. Actually, for the smallest firms, the problem of reclaiming VAT on bad debts need not arise in the first place because they can use the cash accounting scheme. That allows smaller firms to pay no VAT at all until they receive payment from their customers. Well over 100, 000 traders are already using the scheme, but we estimate that a further 300,000 could do so.

    Customs and Excise will therefore be taking steps to publicise the cash accounting scheme more widely. There is another aspect of the VAT regime which I know causes concern – the operation of the serious misdeclaration penalty, which came into effect last April. There have been widespread complaints that the automatic penalty that it imposes – 30 per cent. of the tax wrongly declared – is too severe and unfair to those who make minor mistakes.

    I accept that the penalty in its current form is an unnecessarily blunt instrument. We will therefore undertake a thorough review so that the SMP system can be reformed in the 1992 Finance Bill. I have also asked Customs to make some immediate changes to the rules, giving traders more time to put mistakes right themselves without incurring a penalty. I do not wish to pre-empt the review but, while it takes place, I am reducing the rate of penalty from 30 per cent. to 20 per cent.

    Accounting for VAT can be an onerous duty for small traders. When VAT was introduced, we exempted firms with the lowest turnovers from registration. Since then, the registration threshold has been indexed.

    European Community constraints have meant that, in the past, we have not been able to increase the threshold by more than the rate of inflation. At the end of last year, however, we pressed the case with the Commission to increase the VAT threshold. It responded very positively, and I therefore feel able to go far beyond indexation and to increase the turnover limit for registration by no less than 40 per cent. to £35,000, taking it to its highest level in real terms since the introduction of VAT in 1973. This will benefit up to 150, 000 traders. The cost of raising this threshold will be £25 million in the first year, rising to £40 million in 1993-94.

    I have two further deregulatory measures to announce, which will benefit very small businesses. At present, all employers have to pay over the pay-as-you-earn and national insurance contributions that they collect from their employees 14 days after the end of each month, but the burden of collection falls unevenly. Large firms are amply compensated for the trouble and cost of collecting the tax by the benefits of holding the money for this period, but small employers are not.

    I have a proposal that will reduce the burden on some 700,000 smaller employers. From May onwards, employers making PAYE and national insurance payments of less than £400 each month will pay quarterly, not monthly. This will reduce the administrative burden on firms and help their cash flow, at a one-off cost to the Exchequer of £210 million.

    I have one further measure to announce to help very small businesses account for tax. Last year, for the first time, businesses with a turnover below £10,000 were allowed to send the Inland Revenue a simple three-line statement instead of detailed business accounts. This is an important deregulatory measure which cuts out time-consuming paper work for up to 1 million people. From April 1992, I propose to raise the £10,000 limit, so as to allow up to million more people to benefit.

    There is a case for making a more radical simplification of the taxation of the self-employed. The Inland Revenue will shortly be publishing a consultative document containing our proposals. I am concerned that the system of income tax appeals can sometimes operate unfairly, in particular because there is no provision for the award of costs. My noble and learned Friend the Lord Chancellor and I want to deal with criticisms by the Council on Tribunals about the absence of proper rules for hearing tax appeals. We shall be publishing a consultative paper which will include proposals about the award of costs where either party has acted unreasonably. I have one proposal to limit the impact of capital gains tax on entrepreneurs and on our growing venture capital industry. I have in mind particularly those who may give up safe managerial positions to set out on the risky road of running their own business. For those people, the possibility of a large capital gains tax charge can be a deterrent. I have considered whether it would be suitable and sensible to introduce specific rules for venture capital, but I have concluded that that would be extremely difficult.

    However, one way in which we can help business men and women to reap the rewards of their efforts is to improve the relief available to them when they retire and have to realise the asset that they have created. That is why I propose to reduce the qualifying age for capital gains tax retirement relief from 60 to 55, and to raise the limits on it. From today, the first £150,000 of capital gains and half of the next £450,000 will be exempt from capital gains tax. This will be a powerful incentive to entrepreneurs to start new businesses.

    I have one other important change relating to capital gains tax on small businesses. Under existing law, only companies can offset their trading losses against their capital gains. I propose to give unincorporated businesses similar treatment. This will help small businesses if they wish to sell off assets to help themselves through a difficult period.

    In addition to the measures that I have announced for small business, I wish to propose some changes to corporation tax. In his Budget last year, my right hon. Friend the Prime Minister raised the profit limits that govern the corporation tax rates paid by smaller companies. He increased the ceiling below which single companies pay corporation tax at 25 per cent. from £150,000 to £200,000, and the upper limit above which they pay the full rate from £750,000 to £1 million.

    I propose this year to raise the limits again by a quarter. That means a total increase of 150 per cent. in three years. As a result, companies will need to be earning profits of more than £250,000 before they are liable to pay more than 25 per cent. Companies will not have to pay the full rate of corporation tax until their profits reach £1,250,000 a year. This will benefit 30,000 companies. In 1984, my right hon. Friend the Member for Blaby made a radical reform of corporation tax. In his time as Chancellor, the main rate of corporation tax was reduced in stages from 52 per cent. to 35 per cent., thus boosting companies’ post-tax profits, encouraging profitable investment at home and overseas and increasing the incentive for overseas firms to invest in Britain.

    I believe that the philosophy behind his reforms – to widen the tax base, but to reduce the rates – was the right one. It is a policy that has been welcomed by industry. It allows business men, and not Governments, to decide how much to invest and in what to invest. It set the pattern for similar reforms in many countries throughout the world and ushered in an increase in investment of 50 per cent. between 1984 and 1990.

    I propose today to take a further step in that direction. Corporation tax rates have remained unchanged at 35 per cent. since 1986, but since then the basic rate of income tax has been reduced from 30p to 25p and the top rate from 60p to 40p. I believe that the time has come to cut the main rate of corporation tax again. However, I am also aware that cutting the rate of corporation tax only helps companies that are making a profit. Many businesses that have prospered in recent years have moved into loss this year. A cut in corporation tax does not help them and nor, in some cases, do existing arrangements for the carry-back of losses.

    I am taking two measures to improve company cash flow. I am cutting by 1 per cent. to 34 per cent. the main rate of corporation tax, applied retrospectively to profits earned in the financial year 1990. This will give an immediate boost to the cash flow of companies that were profitable in the year just ending. It will benefit not only companies paying at the main rate, but the 30,000 other companies with profits between the lower and upper profits limits.

    To help profitable companies that have just moved into loss, I propose to extend the carry-back period for trading losses from one year to three. That means that more companies making losses will qualify for tax rebates in 1992-93 – valued at £250 million – which will help them to carry on through this difficult period.

    My main concern in this Budget is to encourage profitable firms to go on investing in Britain’s future. The best way in which to do that is to increase still further the post-tax return on successful investment projects. For that reason, I am cutting the main rate of corporation tax on profits earned in the 1991 financial year by two percentage points, to 33 per cent.

    The two reductions in the main rate, from 35 to 33 per cent, will together cost £380 million in 1991-92 and £830 million in 1992-93. They will give us the lowest rate among our major competitors – lower than that of the United States, and the lowest in the European Community.

    SUPPLY SIDE

    The 1980s were years of remarkable progress in our economy, but even more striking was the change in attitudes. The crucial importance of the market is now widely accepted in this country, and even more widely accepted in the House. There is a much greater acknowledgement of the fact that market forces and competition play a vital part in shaping our economy. That remarkable change in ideas and attitudes is the lasting legacy and achievement of my right hon. Friend the Member for Finchley (Mrs. Thatcher).

    My right hon. Friend recognised that the key to a better performance by the economy in the long term lay in improving the supply side; and, over the past decade, that has been the aim of our tax policy, trade union and labour market reform, our competition policy, deregulation and privatisation. But, if the United Kingdom economy is to perform to its full potential, we still need a more flexible labour market and a better-skilled work force. I have a number of further measures to announce to that end.

    If wages are inflexible, the burden of recession falls disproportionately on jobs : it is the only way for employers to cut costs. There is a considerable prize if we can get pay to take some of the strain. In 1987, we introduced a new tax relief to get profit-related pay off the ground. There are now about 1,250 such schemes in total, involving nearly 300,000 employees; but there can and should be many more, so I propose to make the scheme more attractive.

    At present, half an employee’s profit-related pay is tax-free. From 1 April, PRP will be free of all tax up to the present limits. It is worth up to a full £1,000 to a basic-rate taxpayer. For some, that could be worth as much as 6p off the income tax rate.

    There is another way in which employees can and should enjoy a stake in the companies for which they work – through becoming shareholders in them. Employee share schemes have made a great deal of progress over the past 10 years. By the end of March last year, 2 million employees had benefited from shares or options worth more than £6.5 billion. Too often, however, employee share schemes have been directed solely at highly paid company executives. I believe strongly that valuable benefits of this kind should be extended to the whole work force.

    I have given serious consideration to limiting executive share schemes solely to companies with all-employee schemes in place, but I have instead decided to rely on the carrot rather than the stick. From January next year, the price of shares under executive options may be set at a modest discount of up to 15 per cent. of the shares’ market value if – but only if – the company has an all-employee share scheme.

    I also propose to increase substantially the limits on individual participation in approved all-employee share schemes, and to allow companies tax relief on the costs that they incur in setting up approved employee share schemes and statutory employee share ownership plans.

    Another aspect of the supply side that needs improvement is training. A well-trained labour force is an important element in any firm’s success. Employers know that and are acting on it. The 1990 labour force survey shows an 85 per cent. increase in the number of employees receiving job-related training since 1984. Despite the recession, the last CBI trends survey reported that over 75 per cent. of employers expected to spend at least as much on training in the next 12 months as they had last year and 29 per cent. expected to spend even more.

    However, more and more individuals are also choosing to take responsibility for their own training. Employers can get relief on the training they provide as a normal business expense, yet at present the tax system generally gives no relief to an individual who decides to pay for training to improve his or her skills. That cannot be right. If we want a better trained, more flexible work force, we should encourage people who want to help themselves. I propose to do just that. I am introducing a tax relief for the fees paid by an individual for training towards most national vocational qualifications and their Scottish equivalents. From April 1992, basic rate tax will be deducted automatically from the fees for qualifying courses, so non-taxpayers will benefit as well as taxpayers. Among those who stand to gain are women wishing to get back to work after having children.

    OTHER BUSINESS MEASURES

    Many hon. Members have pressed the case for helping two specific industries this year : shipping and films. While I sympathise with their aims, I have to say that there is a limit to the extent to which we can – or should – bend the tax regime to meet the special needs of any particular industry.

    The Gulf hostilities have reminded us of the important contribution which our Merchant Navy can make to our defence. I recognise that there is a strategic case for measures to encourage shipping companies to draw their crews from seamen in the United Kingdom, who would be willing and able to serve in time of war. Towards this end, I propose a further relaxation of the rules giving tax relief to seafarers working mainly overseas. This will mean that more seafarers will be exempt from United Kingdom tax on their overseas earnings. The film industry makes an important contribution to entertainment and culture in this country. The industry has put forward a number of proposals, but having studied these carefully, I am afraid I cannot accept them. However, I remain sympathetic, and if it has any alternative proposals that it wishes to put to me over the coming year, I will very happily consider them.

    I know that the tax treatment of foreign exchange gains and losses causes difficulties for many businesses. This is one of the most complex and intractable areas of the tax code. Our 1989 consultative document elicited a valuable response but no consensus on the way forward. I am publishing today a further document setting out my specific proposals for reform, which I trust will bring greater rationality to this very important and complex area of the tax system.

    I have also to correct one defect in the law affecting building societies. In a recent judgment, the House of Lords concluded that regulations covering the 1986 composite rate transitional provisions for building societies were technically invalid. If I were to take no action about this, there would be a windfall gain to building societies – not their depositors – of £250 million, distributed arbitrarily according to their accounting dates in 1985-86. I have therefore decided to include legislation in the Finance Bill to establish, as the Government and Parliament intended, that interest and dividends paid by societies in these transitional periods may be taxed at 1985-86 rates.

    TRUSTS

    I turn now to trusts. In 1988, as Financial Secretary, I announced a review of their tax treatment. Today, I am publishing a consultative document on possible changes to the income tax and capital gains tax regime of United Kingdom resident trusts. My proposals include an alternative structure of tax rates, which would bring the treatment of trusts more into line with the treatment of individuals. They would also help to streamline the administration of trusts, saving work for trustees and their advisers.

    We have also been reviewing the tax treatment of non-resident trusts. This raises an important issue of principle. In recent years, the use of non-resident trusts as a means of avoiding capital gains tax has increased. I do not think that it is right for a relatively small number of wealthy people to shift very large assets into offshore trusts simply in order to avoid United Kingdom tax. Such people have already benefited from the reductions in the higher rate of income tax. I therefore propose to introduce measures to counter this tax avoidance and to prevent a revenue loss of up to £100 million in a full year.

    CHARITIES

    I turn now to charities. While people’s real incomes have risen by over a third since 1979, charitable giving has more than doubled, partly as a result of the measures taken by my predecessors to encourage more giving. Tax reliefs for charities are now worth at least £800 million a year. Today I have some modest improvements to announce to the tax regime for charities.

    I have two measures that should boost giving by businesses. The first is a new relief from income and corporation tax to encourage business gifts of equipment to schools and to other educational establishments.

    The second concerns the gift aid scheme introduced last year. This allows companies and individuals to get tax relief on cash donations to charities up to a limit of £5 million a year, under the gift aid scheme. Company groups have found that the division of this upper limit between them prevents them from donating as much as they would like. To overcome this problem, I propose to abolish the limit altogether from today. In recent years, there has been a remarkable increase in corporate donations to charities. I hope that this further measure will encourage companies to give even more.

    I also propose to adjust some existing VAT reliefs for charities and to ease the conditions for the relief from car tax for vehicles leased to disabled people.

    SPORT AND THE ARTS

    I now come to a proposal to benefit both sport and the arts. Last year, my right hon. Friend the Prime Minister reduced pool betting duty, on the condition that the benefit was passed to the Football Trust. Following the success of that measure, a proposal has been put to me by one of the pools promoters for a new foundation for both sport and the arts.

    League football benefited from last year’s Budget measure, and racing benefits from the horse racing betting levy. This new foundation is intended to provide assistance to other sports and to the arts. It will be financed by contributions collected by the pools promoters along with the weekly pools betting stakes, and should raise some £40 million a year.

    On the understanding that all the main pools companies agree to participate and that the full amount would be passed on to a new trust established on satisfactory terms, I would be willing to reduce pool betting duty a final time – from 40 per cent. to 37 per cent. These arrangements would be subject to a review in four years’ time. They should make a further £20 million a year available – giving £60 million a year in total – to the foundation in order to support both sport and the arts.

    EXCISE DUTIES

    I now come to excise duties. First, I propose to raise the duties on alcoholic drinks to maintain their real value. That means that the duties will rise from 6 o’clock tonight by 9.3 per cent. – in line with the increase in the retail prices index in the year to December 1990. That will put about 2p on a pint of beer, 9p on a bottle of wine and around 56p on a bottle of spirits.

    I will also be legislating to change the basis on which beer is taxed. The existing system of taxing the so-called “worts” was introduced by my predecessor, Mr. Gladstone. It will now be replaced by one in which the end product, the beer itself, is taxed. The new system will relate the duty more closely to the alcoholic strength of the beer – with a higher tax levied on strong lagers than on low alcohol beers.

    I propose increasing all tobacco duties by 15 per cent. – well above the rate of inflation. This will add about 16p to the price of a packet of 20 king size cigarettes, and, I regret to say, around 8p to a packet of small cigars.

    There are strong health arguments for a big duty increase on tobacco. In recent years, the duty has fallen in real terms, and cigarette consumption, having declined in the early 1980s, has since begun to turn up again. Raising the duty will help to counter this unwelcome trend.

    The motor car imposes large costs on others in the form of pollution and congestion. I have decided therefore to increase the duties on petrol and DERV by 15 per cent, giving the private motorist a strong incentive to choose more fuel-efficient vehicles, and ensuring that those who pollute most, pay most. This is fully in line with the policy set out last year in the Government’s White Paper on the environment.

    A litre of leaded petrol will rise by nearly 4p, a litre of unleaded by about 3p and a litre of diesel by just over 3p. The tax differential between leaded and unleaded will increase, giving a further boost to the take-up of unleaded. I propose to freeze vehicle excise duty for private cars and light vehicles at £100, for the sixth year running, and also to freeze VED for all heavy goods vehicles.

    BENEFITS IN KIND

    Many motorists do not own their own cars but drive those provided by their employers. The scales for taxing the private use of company cars have been substantially increased in recent Budgets, but many employers continue to pay their employees in cars rather than in money. I propose to increase the car scales again this year by 20 per cent. This increase will yield £190 million in 1991-92 and £250 million in 1992-93.

    If people are paid in kind, there is no reason why they should be taxed more lightly than people paid in cash, yet our present system also gives employers an incentive to provide employees with cars rather than cash. Under our present arrangements, they avoid making any contribution to the national insurance fund on the benefit that the employee receives from private use of a car.

    I propose that company cars and fuel should now become liable for national insurance contributions, assessed according to the scale charges used for taxation. My right hon. Friend the Secretary of State for Social Security will introduce a Bill to that end. Employers will pay at the main rate, but there will be no change for employees.

    Employers’ national insurance contributions on cars and fuel will yield an extra £610 million a year of contributions. This will reduce an anomaly in the national insurance contributions system, making it more neutral between different kinds of payment, and will widen the national insurance contributions base.

    These new arrangements will take effect from April, but contributions will be collected annually in arrears, so employers will not be asked to pay their first contribution until June 1992. They are already familiar with the scale charges used for the tax so they should be able to make the necessary calculations with the minimum of extra work. They are already familiar with the scale charges.

    I turn now to what I regard as one of the greatest scourges of modern life. I refer to the mobile telephone. I propose to bring the benefit of car phones into income tax and to simplify the tax treatment of mobile phones by introducing a standard charge on the private use of such phones provided by an employer. Tax will be paid of £200 for each phone for 1991-92. I hope that, as a result of this measure, restaurants will be quieter and the roads will be safer.

    SAVING

    I have already drawn attention to the imbalance between savings and investment and its effects in the late 1980s. As companies found more and more opportunities to invest, we needed more savings; but instead, the saving ratio fell. In successive Budgets, my predecessors introduced new tax incentives to save. Many forms of saving now enjoy a highly privileged tax position.

    Last year in particular, my right hon. Friend the Prime Minister announced a new scheme, the tax-exempt special savings account. TESSA has proved a spectacular success since it arrived on the savings scene nearly three months ago, and has encouraged the savings habit among ordinary taxpayers. Already, over 1.5 million people have opened accounts.

    My right hon. Friend also announced in his Budget last year the abolition of composite rate tax. From 6 April, non-taxpayers will no longer have to pay tax on their accounts with banks and building societies. These are far-reaching reforms, which need time to settle down and take effect, so this is not the year to disturb the regime that we have just put in place, or to risk causing confusion with further schemes. My main concern has been to consolidate the system that we already have, although I have some modest changes to announce.

    I propose to raise the capital gains annual exempt amount to £5,500 and the inheritance tax threshold to £140,000 this year in line with inflation.

    National Savings continue to play an important role, particularly for small savers. This summer, I propose to introduce a new National Savings children’s bond for children under 16. There will also be a new issue of fixed-interest savings certificates, with a maximum investment of £5,000 compared with £1,000 on the last issue. Other changes to National Savings products will be set out in a press release issued today.

    I am also removing the restrictions on friendly societies writing tax-exempt life insurance policies for children, and increasing the limit on premiums for their tax-exempt policies generally from £150 to £200.

    Personal equity plans remain an important means of promoting direct share ownership. Since their introduction in 1987, about 1.2 million PEPs have been taken out, and over £3 billion has been invested. I have some further changes to announce.

    First, I intend to allow investment in European Community, as well as United Kingdom, shares both for individuals and for unit and investment trusts. Second, to promote the development of single-company PEPs, I propose to allow investors to put up to £3,000 a year in a single- company PEP, as well as up to £6,000 a year, as now, in a general plan. This will allow total investments of £9,000 a year.

    While single-company PEPs are available to any investor, I believe that they provide a natural home for shares acquired under employee share schemes. I therefore propose to allow shares acquired under approved all-employee share schemes to be transferred directly into the company PEP, with no charge to capital gains tax.

    Employee share schemes and PEPs have encouraged individuals to become shareholders, but many people have bought their first shares in big offers, mainly privatisations. The first of these to catch the public’s imagination was British Telecom. The Government currently still own some 48 per cent. of the shares, and I can announce today that I intend to sell part of this holding in the coming year.

    Privatisations have been a great success. The next step is to encourage people to invest in shares more generally. One problem is that, to the small investor, the stock market can seem remote, intimidating and somewhat expensive. The development of a genuine retail market for shares in high streets up and down the country would be highly desirable.

    To give this the boost it deserves, the Government are considering a change in the way in which they market privatisations. For future large flotations, I am today inviting proposals from the private sector for arrangements to distribute shares directly to the public through high street retail networks.

    I hope that there will be proposals both from financial institutions – banks or building societies – and from companies outside the financial sector. If satisfactory proposals can be developed in time, I will consider using such a high-street network in the sale of British Telecom shares.

    Such a high street network could be used for primary issues, not only by the Government but by private sector companies and, in the longer term, it could provide a cheap and accessible way for individuals to buy and sell in the secondary market.

    MORTGAGE INTEREST RELIEF

    The measures that I have just announced will encourage people to save, but there is another side to the story, for the fall in the saving ratio at the end of the 1980s was a result not of a fall in gross savings so much as an increase in borrowing, particularly mortgage borrowing.

    In part, that reflected the remarkable increase in home ownership over the last decade. That has been, and remains, a key objective of policy for the Government. A less desirable development, however, was the dramatic boom in house prices during the late 1980s, which fuelled borrowing and helped boost inflation. Many first-time buyers found prices rising much faster than their incomes. We need to do all we can to ensure that, when recovery comes, it is not accompanied by another bout of house price inflation, with the unwelcome consequences that that would have for inflation and interest rates. I propose to leave the ceiling for mortgage interest relief unchanged at £30,000, but from 6 April 1991 I propose that relief should be allowed only at the basic rate. That will yield £220 million in 1991-92 on the basis of current interest rates, and £420 million in 1992-93.

    I recognise that some people have arranged their affairs on the assumption that higher rate relief will continue. Therefore, to reduce the amount of extra tax they have to pay, I propose to increase the starting point for higher rate tax from £20,700 to £23,700, £1,000 more than required to match inflation. That will keep the number of higher rate payers broadly stable and mean that a married man will not become liable to higher rate tax until his earnings rise to nearly £29,000.

    My objective is to reduce the tax subsidy to borrowing without significantly increasing the average tax burden on higher rate taxpayers. Taking those changes with the changes to the personal allowances that I am about to announce, the typical increase in liability for a higher rate taxpayer with a £30,000 mortgage will be only around £1 a week. Of course, the main determinant of the cost of a mortgage is not tax relief, but interest rates. For a higher rate taxpayer with a £50,000 mortgage, the fall in the typical mortgage rate that has already taken place since last autumn fully offsets the change that I am making to mortgage interest relief.

    INCOME TAXES

    I now come to income tax. Income tax is never welcome, but paying tax unexpectedly is even less so. That is the position facing employees who were working in Kuwait and Iraq at the time the Gulf crisis began. They may now become liable to pay United Kingdom tax on their foreign earnings which they had expected to be exempt. I propose that employees who had intended to work in Kuwait or Iraq for a year or more but were forced to return home earlier by the crisis should not be taxed on their foreign earnings.

    I have no changes to make to either the basic rate or the higher rate of income tax. Our objective remains to move towards a basic rate of 20p, but I cannot make further progress towards it this year. Our priority must be to reduce taxes on business.

    I propose this year to uprate the personal allowance in line with inflation. It will rise by £290 to £3,295. The personal allowance for the over-65s will increase by £350 to £4,020, and for those aged 75 and over by £360 to £4,180. The married couple’s allowances for the elderly will also be increased in line with inflation, from £2,145 and £2,185 to £2,355 and £2,395. The income limit for the allowances for the elderly will increase by £1,200 to £13,500.

    However, I am not proposing to increase the married couple’s allowance for couples under 65 or the allowances that are linked to it. They will stay at £1,720.

    I know that there is a widespread view in the House and in the country that more should be done to help families with children. I propose to use the resources released by not increasing the married couple’s allowance for that purpose.

    There are some, I know, who advocate the reintroduction of child tax allowances. I have looked at that option carefully, but I am clear – especially following the introduction of independent taxation – that it would not be an effective way of channelling resources to those who need them. A better way of directing help straight into the pockets of mothers, whether they choose to work or not, is child benefit. It goes to all families – to the children of non-taxpayers as well as the children of taxpayers.

    I therefore propose to increase child benefit from 7 October by £1 a week for the first eligible child in each family, and by 25p a week for other children. These rises come on top of the increase announced by my right hon. Friend the Secretary of State for Social Security last autumn, which will be paid from 8 April. This means that, in October this year, a benefit of £9.25 a week will be payable for the first child, and £7.50 for each subsequent child.

    We will ensure that the increases benefit not only taxpayers but the very poorest families – those on income support and family credit. These increases will help 6.8 million families, and 12.3 million children. I should add that the Government have decided that the new levels of child benefit will be uprated in line with inflation next April and in subsequent years.

    CENTRAL AND LOCAL TAXATION

    The measures that I have announced today maintain a responsible fiscal policy, while giving help to industry and families. They also include some important reforms to the tax system. However, my Budget would not be complete if it did not address one other issue, which has attracted a certain amount of attention recently.

    My right hon. Friend the Secretary of State for the Environment will be announcing very soon the conclusions of our review of local government. I do not propose to anticipate his statement, but there is one announcement I want to make today.

    In January, we announced a £1 billion package to reduce the community charge for more than half of all charge payers. Since then, I have been considering whether the impact of local expenditure on the local taxpayer is too great for any system of local taxation to bear.

    I have concluded that local taxes are being asked to bear too large a burden, and that the level of the community charge is still too high. However, if local taxes are to fall, and if the standard of local services is to be maintained, taxes elsewhere must rise. I propose, therefore, to make a substantial switch from local taxation to central taxation. This will amount to about £4 billion in the coming financial year – 1991-92 – and will reduce the net yield of local taxation to about £7 billion. This large reduction in local taxation will take it to a level that the Government believe should be sustainable in the longer term.

    We shall introduce a Bill in the next few days to authorise payments of extra grant to local authorities, and to ensure that community charge payers will reap the full benefit in reduced charges in the coming year – 1991-92. The money will not be available to increase local authority spending. Domestic rate bills in Northern Ireland will be reduced as well.

    The Bill will also ensure that charge payers do not have to start paying their charges until the new and lower charges have been introduced. Later today, my right hon. Friend the Lord President of the Council will make a statement about the arrangements for the Bill. The switch requires a substantial increase in central taxation. I have decided that this should be achieved by raising indirect taxes – that is to say, taxes on spending.

    I am proposing, therefore, from 1 April to increase the standard rate of value added tax by two and a half percentage points to 17 per cent. VAT is a broadly based tax which falls on consumers rather than producers. Since much consumer spending is zero-rated, it bears less heavily on poorer households than on the better-off, so raising VAT is not only an efficient but also a fair way to raise the necessary finance; and raising taxes on spending rather than taxes on income will be better for savings, and consistent with our strategy for tax reform, first set down by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) in his 1979 Budget. Raising VAT will increase some prices, but the reduction in the community charge will more than offset that effect, so the switch will actually reduce the retail prices index. As a result of these changes, the community charges recently announced in England, Wales and Scotland will be cut by £140. On average, the headline charge will be reduced from about £390 to about £250 in both England and Scotland, and from about £260 to about £120 in Wales, while the amounts people actually have to pay, after allowing for relief and benefits, will fall to under £175 in Great Britain. The charge in Shetland will fall to under £1.

    PERORATION

    The measures I have announced are designed to meet the three main requirements of any Budget. First, they represent sound finance, and contribute to a firm counter-inflationary policy. My predecessors transformed public finances in the 1980s; my proposals will keep us on track to balance the budget over the 1990s. Secondly, they respond to the economic needs of the moment. I have cut taxes on business, both this year and next, to help it to weather the recession and take advantage of the upturn later in the year. Thirdly, they continue the reform of the tax system to improve the working of the economy in the longer term. In addition, in a year when resources are tight, I have been able to give additional help to families with children. Finally, I have made a decisive reduction in the burden of local taxation across the country, and cut community charges in the coming year by £140.

    This Budget is good for business, good for families, good for charge payers and good for the country. I commend it to the House.

  • Mr Major’s Speech to Young Conservatives Conference – 9 February 1991

    Below is the text of Mr Major’s speech to the 31st Young Conservatives Conference, held at the Spa Complex in Scarborough on Saturday 9th February 1991.


    [Text is from a Conservative Party News Release, some small portions are missing from the original speech]

    PRIME MINISTER:

    In each of the last three General Elections well over a million young people voted Conservative – three times as many first time voters supported us for every two who voted Labour in 1987.

    That is good, but not good enough.

    Why did we enjoy that support? It was because young people shared the values that we care about. I believe we want to strengthen and deepen that commitment.

    I want them to know that the Conservative Party is open to them and to their ideas.

    They will be welcome – and we need them.

    Their idealism.

    Their willingness to challenge accepted wisdom.

    Their readiness to try new ways. And we must respond to their hopes as well.

    To their concern for the sort of life they want to build for themselves.

    Today the world is changing at an unprecedented rate. We cannot be immune from that.

    Our principles and our philosophy are firm. But we must still adapt in order to thrive.

    We must be open to originality, to innovation, and to change. And so long as I am able to ensure it, we will.

    In a few moments I want to share with you some of my thoughts about our priorities for the future.

    But first I want to speak of one group who are uppermost in our minds at present – those in our armed forces in the Gulf.

    A few weeks ago I had the privilege of meeting many of them. They made a lasting impression.

    They had no doubt that the task they had been set was just. And they left me in no doubt that they were wholly equal to that task.

    And since then – night after night and day after day – we have seen them prove that with a skill and courage we can only admire.

    They deserve all the support they can get – and they will get from us all the support they need.

    And when they have done their job we will bring them back home – as soon as we can.

    For here, at home, there are deep anxieties faced by their families.

    I have received in recent weeks many letters from them.

    Some are worried. Some emotional. All proud.

    I believe the whole nation shares those feelings.

    We did not want this war.

    But we have it.

    And we face a difficult period ahead.

    But Saddam Hussein must know what he faces.

    He faces defeat.

    The timing maybe uncertain.

    But the outcome is absolutely certain.

    Because we intend to complete the job they have begun.

    The British people understand very well the key principle underlying the Gulf conflict.

    Throughout history the instinct of Britain has always been to defend freedom.

    To uphold the rule of law.

    That above all is why our troops are in the Gulf.

    For our troops back home and all over it is not enough simply to protect the rights and freedoms that we have inherited. We must look beyond the present.

    We must extend them.

    In the last ten years tremendous advances have been made. Now we must move forward again.

    We must look now at the opportunities that should be there and are not.

    At the choices we do not yet have.

    And at the people who have not yet benefited from change. The success of our Party since 1979 has sprung from our readiness to reform – our willingness to make the changes necessary to produce a better quality of life.

    And I promise you today that great programme of reform will continue in the years ahead

    In our Party we know you have to produce wealth before you can use it.

    Like many other nations, Britain faces economic difficulties at present.

    The next few months will be uncomfortable.

    I regret that.

    But short term expedients won’t do.

    They will only lengthen and worsen the problems themselves.

    We must follow a policy that will cure those problems, not simply mask them.

    That is precisely what people expect of us.

    Every time we have faced economic difficulties we have brought the country out of them.

    We have a good track record.

    And we will come through our problems yet again.

    The centre piece of any strong economy is low inflation. And in that there are good signs for Britain.

    Inflation is coming down, and will continue to fall throughout the year.

    It will halve from its peak.

    And we will still be driving it down.

    There are some who that say inflation doesn’t matter so very much.

    What that shows is that to them people don’t matter so very much.

    Well, people matter to me.

    I know that inflation is the enemy of personal security and peace of mind – for people of all ages.

    It gnaws away at the hard won savings of the pensioner. It disrupts business and destroys jobs.

    It betrays the basic trust in the value of money that lies behind every transaction in our daily lives.

    That is why we must and will defeat inflation as our first priority

    But, you know, when we talk of efficiency, of competition, and of economic success, we do it not for its own sake.

    Not for material reasons only.

    But for what we can achieve with the resources we create.

    In the year ahead we will set out our ideas for the 1990s and beyond.

    We have an agenda to work through.

    Some of those ideas will be tried and tested.

    Some will be new.

    Some will involve novel concepts.

    But all of them will have one thing in common – the long-term needs of this country and the people that live in it.

    Our Party exists to give more people more choice, more independence, more control over their daily lives.

    We know that the role of government should be limited. At present it is still too big.

    But let there be no question about one thing.

    We must never accept the contention that limited Government means lower standards.

    That state services must be second-best.

    I want to see an unending search for better quality in all our public services. When we deprive people of their money in never taxes, they have a right to ensure that it is never wasted in government.

    So I want to see new ideas flowing into public service. More privatisation, yes, of course.

    But also more partnership with the voluntary and private sectors.

    More use of the best private skills.

    For far too long we have tolerated public services that are just not good enough.

    Council house repairs that are shoddy and slow.

    Hospital appointments that take all day.

    Trains that run late and buses that travel in packs. Children refused admission to the schools to which their parents wanted them to go.

    In all of these areas we have been investing enormous sums – in health, in transport, and in education.

    But are we getting proper value?

    We must make those services operate better for the people who use them.

    And operate with the same efficiency within the public sector as we would expect outside the public sector.

    At the top of my personal agenda for the 1990s is education.

    Education is the key to opening new paths for all sorts of people, not just the most gifted and for doing so at every stage of their lives. And it is also the key to the Tory ideal of a mobile, dynamic and diverse society.

    So my objectives are straightforward – improving quality and standards.

    More pupils staying on in education after 16.

    Much more choice, and better training for all young people. I want to see more vocational options in schools of equal rigour and repute to the academic courses.

    And this must go hand in hand with greater coherence and quality in post-school training.

    There has been great progress over the last ten years. Some parts of our education system are unrivalled.

    But others clearly are not.

    Right back to the 60s and before, serious mistakes were made. Tried and tested methods were swept aside.

    Unproven theories were foisted on our children.

    And as a result, standards were lowered. And as a result of that the status of teachers was undermined.

    As a nation we cannot be proud of what has been done over the last thirty years for many of our children.

    Too many of them have been allowed to expect too little of themselves and too many other people have expected too little of them.

    Over a decade ago the Labour Party recognised all this to be true.

    They launched what they called a “great debate” about education.

    But of course it was not debate that was needed.

    It was action.

    As usual, it was left to a Conservative Government to take it up after 1979.

    In 1979 we set ourselves to tackle those problems.

    And since then, we have introduced a great range of reforms in our schools.

    Given more choice and influence to parents.

    More responsibility to governors.

    Set out the building blocks of a new system with better education in the National Curriculum.

    These policies are working.

    More pupils are getting more out of their education.

    There are now five 16 year olds staying on at school for every four just two years ago.

    Ten years ago only one person in eight went on into higher education.

    Now it is one in five.

    And soon it will be one in four.

    We have many more young people graduating from our universities than ever before in the past.

    Those are the real tests of success. And the policies of the Conservative Government have passed them in the last ten years.

    And we are passing them.

    So the 1980s have seen an opening of freedom and choice.

    But I for one have no intention of resting on the Government’s achievements.

    I want to bring the benefits of the best possible education to all. We cannot accept a situation where in some places nearly 40 per cent of school leavers get at least five higher level GCSEs, while elsewhere, less than ten percent do so. The Conservative Party has never accepted the notion that excellence for the few excuses mediocrity for the many.

    It is, of course, the teaching profession that must lead the drive to higher standards and aspirations in our schools. I want to see dedicated teachers rewarded fairly.

    But I also want to see more effective scrutiny of performance in schools.

    And I want the most rigorous standards applied in teacher training.

    We must ensure that every subject is taught to a high standard.

    Teachers may need to be better trained in the subjects they are going to teach.

    It is no good having hours of study of the theory of education if you actually fall down in the practice of teaching it when you get into the classroom.

    So we want to see an educational system that is the equal of anything abroad.

    Doing the basic things well.

    It is not only a question of reading and spelling.

    Although it is most emphatically a question of every child having the right to be taught how to read fluently and spell accurately.

    And it is also teaching to a good standard with the right combination of factual knowledge and critical understanding in every subject.

    And of training people for worthwhile qualifications in job related skills when they choose a vocational course.

    And so what is it we seek? In summary we seek a system of education and training able to equip the children of today for the twenty-first century.

    That is the objective that we will be seeking in our education policy throughout the 1990s.

    And we need that for a variety of reasons, we need it because we need that education, that excellence in education to maximise our success both domestically and in Europe. And also of course, because that education equips people so much better to enjoy all the aspects of life both in work and in leisure, that will be opening up before them in the years to come.

    Above all in the 1990’s we will face a competitive future in a world that is becoming increasingly competitive and most especially in a European community that will become increasingly competitive. There will be no hiding place for inefficiency, no hiding place for the shoddy and the second-rate once we get into the Europe of the 1990’s. That will all change as the reforms of 1992 increasingly come to place. Those who are well equipped and do well, work well, think well, produce well, are efficient and effective will be the leaders of the Europe in the 1990’s. And we are, and will remain, an important and enthusiastic part of the European community. It is simply not enough for some people to say, ‘I don’t really like Europe, but I will tolerate it’, for if we take that view about Europe we will never be the centre of it and can not lead it in the direction which we wish it to go.

    It may be true in some ways that we need Europe but by golly it is equally true that Europe needs us and we had better make sure we are a key part in it.

    It is not only the opportunities in Europe, though I will return to those in a moment. Look at the opportunities opening up in other parts of the world, the increasing democratisation of so much of Eastern Europe, a part of the world that for a very long time indeed we have seen subjugated, and unable to open itself up to a free enterprise system and all the opportunities that will flow from that.

    That is all changing and has been changing in the most dramatic fashion in recent years.

    And then you see the extent to which throughout the whole of South East Asia and elsewhere there are growing industrial giants with whom we will have to compete in the future and then there is the increasingly growing and important market throughout the whole of Latin America. Those are the opportunities that lie there for British industry, British commerce, and British people in the future.

    And to return to the central point, providing we have the education system, the skills and the enterprise we will be able to win in those markets and winning in those markets will mean a much higher standard of life and living for all people who live in this country in the future.

    And nowhere will that competitiveness be more needed than within the European community itself.

    And that is why I say again that we must remain an enthusiastic partner in Europe.

    It is not for nothing that we led the way in the drive for the Single Market. It was not without good reason that we took sterling into the Exchange Rate Mechanism. We propose to play a leading part in Europe’s future and no-one should doubt that for a single second.

    And Britain will have a strong voice in the new Europe. Strong because of our commitment.

    Strong because we have hard heads as well as soft hearts. Strong because Britain under a Conservative Government has firm principles and a very clear idea of where it wants to go and what needs to be done to get there.

    And we will also resist the unworkable.

    Set realism in place of impractical dreams and protect the diversity of Europe while removing obstacles to partnership and enterprise.

    Necessarily you in the Young Conservatives must look to the long-term, to the year 2000 and beyond.

    And so you should.

    It is your future for a good deal longer than it is mine. Your Government has the same instincts. We will set our sights on the same horizon and so we should because it is our responsibility to do so.

    Mr Chairman, I have a total faith in Britain and in its future.

    I don’t accept for a second the craven argument that we cannot compete with the Germans and the French.

    I don’t agree with the pessimists who always believe we must devalue in order to remain competitive and I despise the defeatists who run down this country and write off its future. Defeatism is always an excuse for doing nothing. But we have no intention of doing nothing. In the months ahead our agenda will unfold. Throughout the last decade Conservative Governments have proved successful to an extent beyond most peoples’ imagination. I believe that will be increasingly recognised.

    Throughout the past decade Conservative Government’s have shown very clearly what it is possible for the British economy and people in this country actually to achieve and do. That is a record that people will look back on, I believe, in years to come with some envy and with a considerable amount of pride.

  • Mr Major’s Exchange Rate Mechanism Statement – 23 October 1990

    The text of Mr Major’s Exchange Rate Mechanism Statement, made on 23rd October 1990 in the House of Commons.


    Mr. Speaker I have selected the amendment in the name of the Leader of the Opposition. Furthermore, as 39 right hon. and hon. Members have already submitted an application to speak, I propose to place a 10-minute limit on speeches between 6 pm and 8 pm. I am afraid that that may mean that some Privy Councillors will be called within that 10-minute period. In fairness to all, I hope that right hon. and hon. Members who are called will bear that limit broadly in mind.

    The Chancellor of the Exchequer (Mr. John Major) I beg to move, That this House congratulates the Government on joining the Exchange Rate Mechanism of the European Monetary System; notes the clear evidence that the Government’s tight monetary and fiscal policies are reducing inflationary pressures in the economy; and believes Exchange Rate Mechanism membership will reinforce the Government’s counter-inflationary strategy and help to strengthen the framework for a sustained improvement in economic performance. Sterling’s entry into the exchange rate mechanism is undoubtedly an important economic event and, moreover, an event which has long had the general support of the House, industry, commerce, the City and most, although inevitably not all, economic commentators.

    This debate is a welcome opportunity to set out the rationale for entry; the potential advantages and constraints that it brings with it; and to consider also the effects of standing aloof from membership. I wish also to address the details of entry: the rate; the timing; the bands; and the necessary discipline of membership. And, of course, I shall touch also upon how entry affects the wider question of economic and monetary union, which is, I know, of great concern to the House.

    It is now 12 years since the European monetary system and the exchange rate mechanism were established. At the outset, in 1978, the last Labour Government decided not to join the exchange rate mechanism. Since then the question whether and, if so, when we should join has been an important and contentious issue at the very centre of political and economic debate.

    Two years ago my right hon. Friend the Prime Minister set out our commitment to join the mechanism and the conditions in which we would do so. On the free movement of capital, the single market, competition policy, and the liberalisation of financial services those important conditions have effectively been met for some time. It is possible to quibble about them only if excuses are being sought not to enter the ERM.

    For some months the key remaining condition has been that domestic conditions – and our inflation performance in particular – should enable us to accept the exchange rate discipline. In economic terms, what mattered for that was not what happened in the months leading up to membership, nor was it the distortions in comparative inflation performance caused by different methods of measuring inflation. The important factor was that our inflation performance would enable us to converge and thus enable us to compete at the chosen exchange rate. It was for that reason that we did not join the mechanism until we were absolutely sure that our tight monetary policies were having their intended effect and inflationary pressures were easing.

    That is now the position. The evidence that this has now happened comes first from the monetary aggregates. The growth of narrow money, M0, has fallen in each of the last five months and is now back well within the target range I set for this year. M4 growth – broad money – has fallen steadily throughout 1990 and currently stands at its lowest point for nearly three and a half years. Bank lending has also decelerated sharply.

    In the real economy the picture is the same. The indicators show that the economy is slowing, as indeed it must if inflation is to fall. That is clear in the high street, it is clear in the housing market, it is clear in the figures for car sales, and it is clear in activity generally. It is clear also in the gradual and welcome recovery in the savings ratio, which hit its low point of 4.9 per cent. in the third quarter of 1988 and has now risen again to 7.7 per cent.

    It was those conditions – that amalgam of conditions which are now clear – which prompted me to cut interest rates by I per cent. at the same time as entry. Some external commentators claim that it was too early; others claim that it was too late. I am confident that events will justify the timing of that reduction in interest rates.

    If I had cut interest rates before joining the exchange rate mechanism, I believe that it would have been viewed by the markets and by commentators as driving the exchange rate down before entry or, alternatively, as a signal that entry was to be delayed. Both of those were wrong and both would have weakened the exchange rate and thus our anti-inflationary position. It was for those reasons that I announced both those steps at the same time to ensure that the markets were fully aware of our position as we entered the mechanism and were fully aware of what the immediate prospect was for monetary policy.

    Mr. D. N. Campbell-Savours (Workington) On timing, in so far as it is quite clear from a series of parliamentary questions given to me by Ministers that people in the Bank of England, senior civil servants and some Ministers knew of the Chancellor’s intention to make his statement at 4 o’clock on that Friday, and in so far as it is also known that Ministers and civil servants may well have met people in City institutions in the five days prior to that Friday, why cannot we now have a leak inquiry into how three separate markets in the City rose substantially in the 90 minutes before 4 o’clock, in conditions in which some people made millions of pounds in capital gains in a few minutes? Why cannot we have a leak inquiry into that? Let us have the truth.

    Mr. Major If the hon. Gentleman has any information whatsoever to suggest that there was advance knowledge of entry into the exchange rate mechanism – [Interruption]. Perhaps the hon. Gentleman would do me the courtesy of listening. If he will give that evidence to me, I shall ensure that it is placed before the proper authorities and that the appropriate action is taken. Unsubstantiated allegations do not help. If the hon. Gentleman really believes that there was a leak, he should provide the information so that it can be properly examined and not make widespread scatter-gun allegations for which at the moment he has provided no evidence.

    As we have seen repeatedly throughout the past 30 years or so, inflation is always one of the last measures in the economy to register that the growth of demand is falling away; and the rise in oil prices in the past few months has complicated the picture this time and, conceivably, may yet push up the headline total further. But I now have no doubt that we shall see inflation falling substantially throughout next year. It will do so particularly quickly from next April, and for two reasons: the underlying rate will improve and some of the unusual adverse factors that have artificially boosted the headline rate will drop out next year. Our inflation performance will improve therefore both in absolute terms, and, just as importantly for entry into the mechanism, relative to those of our European competitors. I shall make a detailed forecast in the autumn statement in due course.

    There was, therefore, no reason for further delay in meeting our long-standing commitment to join the ERM. There is a further point of some importance. The persistent market rumours of entry and non-entry were damaging to stability and created uncertainty for industry. Week after week some chance remark, some speculation, some unsubstantiated rumour changed the value of sterling. I wished therefore to end the damaging uncertainty at the earliest possible moment, and I believe it was right to do so.

    Mr. Harry Ewing (Falkirk, East) rose – –

    Mr. Major Perhaps the hon. Gentleman will forgive me if I do not give way for a moment.

    The House will remember that I answered questions on this matter for an hour a week ago. I shall be here at the Dispatch Box on Thursday and a vast number of hon. Members – [Interruption]. Perhaps hon. Members would listen for a moment. A vast number of hon. Members wish to speak today. I shall give way to a small number, but perhaps not as generously as I sometimes do.

    Mr. Harry Ewing I am grateful to the Chancellor for giving way. If the right hon. Gentleman is pleading that the reason that he took this country into the exchange rate mechanism was to get rid of all the rumours about whether we would or would not join, is not that the fault on the one hand of the Prime Minister, who constantly said that we would not join, and of the Chancellor himself on the other hand, who constantly said that we would join? Which of the two of them was the City and the country to believe?

    Mr. Major The hon. Gentleman will do well tomorrow to read my speech in Hansard. He will then see that I made it perfectly clear that we entered because I thought that the conditions were right for our entry. I set that out plainly. I also set out a subsidiary matter that weighed on my mind – that the essential reason for entry was that the market conditions were met and the preconditions that we had set out were now right for sterling to enter the mechanism.

    The belief that we should end the uncertainty and that we should enter early was also held by others. We got a great deal of advice. In June we were told: We do not urge the Government to wait until some unspecified rate of inflation or fulfilment of the Madrid conditions is attained. We urge them to commence discussions now.” – [Official Report, 15 June 1990; Vol. 174, c. 636.] That was not an overenthusiastic Member of the European Parliament speaking – it was the Opposition Front Bench in the persona of the hon. Member for Islington, South and Finsbury (Mr. Smith). Nor was that an isolated comment. In August the hon. Gentleman was strongly supported in that view by his right hon. and learned Friend the Member for Monklands, East (Mr. Smith), who said: I don’t think there is ever going to be a perfect time for Britain to enter the ERM, and I think therefore that we should take the opportunity to do so at the earliest time. That is what I have done and the reason why Opposition Members attack us is that they know that we have taken the right decision and they do not want to acknowledge it. They want to hide the fact that their party is split asunder on the issue. [Interruption]. Oh yes. Of course, Opposition Members want it both ways. If we had delayed they would have questioned our intention of going in. They would have said that my right hon. Friend the Prime Minister was preventing us. Now that we have gone in they question our motives and claim that my right hon. Friend has been pushed. The simple truth is that my right hon. Friend first stated our commitment to entry during stage 1 – over two years ago. She and I have been discussing possible dates for months. Four months after the start of stage 1 we found an appropriate date and honoured our promise. That is what Opposition Members cannot stomach. Their attitude is the typical triumph of expediency over conviction – [HON. MEMBERS: “Your attitude.”] That is their attitude.

    Now that we are in the ERM we need to be entirely clear about what it means. First, maintaining the exchange rate will be an important discipline. Tight monetary conditions will have to be sustained to put continued downward pressure on inflation. Joining the ERM in no way replaces the need for a tight monetary policy; it reinforces it. Indeed, making a success of the ERM means making a success of our own domestic monetary policy, not abandoning it. That is why joining the ERM is in no sense a soft option or a short-term one.

    The euphoria with which some people greeted the news of our entry seemed to me mistaken; and the argument that entry has short-term advantages and a long-term cost is wholly misleading. In fact, it is a complete misunderstanding of the ERM. In the short term, membership will require tough action to ensure that we achieve low inflation thereafter. The rewards are long term with that very low rate of inflation. That does mean making no further reductions in interest rates until it is prudent to do so.

    Mr. Anthony Nelson (Chichester) My right hon. Friend has referred to the prospect of reductions in interest rates. Is not it probable that, if we were within the narrower band of fluctuations within the ERM, as certain other European countries are, we would enjoy lower rates of interest, as they currently do? As it is a matter of enormous interest to millions of mortgage payers and others in Britain, can my right hon. Friend say a little about the conditions that must be precedent upon our becoming part of the narrower bands of the ERM?

    Mr. Major I shall turn shortly to the question of the narrow band.

    In case there was any misunderstanding a moment or so ago, I was saying clearly that membership means that we shall be in a position to make no further reductions in interest rates until it is prudent to do so. I hope that that point is fully taken on board. I shall turn to my hon. Friend’s specific point in a second or so.

    What we have undertaken is an express obligation to keep sterling within the bands around our central rate of DM2.95. We take that obligation seriously and we intend to meet it. We decided to enter the mechanism with wide 6 per cent. margins to give sterling an opportunity to settle down. It is a widely traded currency and it is necessary to give the markets some time to assess the implications for entry and the domestic response to it. But when conditions permit, and only then, we will move into the narrow 21 per cent. band to which my hon. Friend the Member for Chichester (Mr. Nelson) referred.

    I want to add a word about fiscal policy. Throughout the 1980s my two predecessors have successfully used fiscal policy to buttress monetary policy. That is precisely what we shall continue to do in future. But what we shall not do is to resort to fiscal fine tuning, the effects of which tend to be unpredictable and, in many cases, unworkable. I have no intention of returning to the era of mini-Budgets, but we will keep to our policy of a balanced budget over the medium term.

    Dr. Lewis Moonie (Kirkcaldy) rose – –

    Mr. Major If the hon. Gentleman will forgive me, I shall make a little more progress in the interests of several other hon. Members who wish to speak.

    It is clear that membership of the ERM will impose an extra discipline on the Government’s conduct of economic policy. But, equally, membership of the mechanism requires businesses and industry to take tough decisions of their own. Companies must understand the need to contain their costs – principally, but not, of course, exclusively, their wage costs. For them, joining the ERM means that devaluing our currency to bail out uncompetitive firms is no longer an option. It was never an attractive one and now it has gone. It is ruled out by our commitment to maintain a broadly stable exchange rate. If the costs of British companies rise, inevitably orders will be lost, profits will be squeezed, jobs will be shed, and companies will put their futures at risk. That has always been true, but ERM membership will make it even more apparent, for the devaluation option is no longer there.

    For business, staying competitive means relating wage rises to what is realistic and justifiable. That means what can be afforded by the individual company facing tight competition in the international market with no help from a falling exchange rate.

    Sir Anthony Grant (Cambridgeshire, South-West) On that point, does my right hon. Friend agree that the necessary exhortations to pay restraint would be very much helped if senior leading industrialists who are on performance-related pay related their pay to not only the profits but the losses that they sometimes sustain?

    Mr. Major I share that view strongly. Leadership in this matter must come from the top, and I hope that it will do so.

    Mr. Dennis Skinner (Bolsover) Is not the truth of the matter that the exchange rate mechanism is another name for a Common Market incomes policy? Why should people who work for a living, the real wealth creators, have a wages or incomes policy stuffed down their throats by the Government when the bosses got increases of 28 per cent. the year before last and 33 per cent. last year? In the past 10 years the wealthiest 1 per cent. in Britain have received cumulatively £26.2 billion in tax cuts; now they are calling upon the workers to bail out this Government, but they have no intention of doing so. Everyone who is fighting to get a living wage needs the support of Opposition Members to sustain that living wage.

    Mr. Major Well, so much for unity on the Opposition Benches about joining the ERM.

    On the substantive point that the hon. Gentleman makes, he will be aware that I have said before – I reiterated my remarks to my hon. Friend the Member for Cambridgeshire, South-West (Sir A. Grant) – that I share his view that the sacrifices that may need to be made on wages must apply to those at the top of industry as well as those elsewhere.

    The hon. Member for Bolsover (Mr. Skinner) should be aware, however, of the consequences of taking his theory a stage further. The consequences for people not obeying that necessary discipline will be lost jobs. I cannot compel people to negotiate sensibly, but I have an obligation to make it absolutely clear to people what the effect of not negotiating sensibly will be. That I am seeking to do, and that I am prepared to do; and I share the hon. Gentleman’s view that that applies to all people in industry and commerce and not just to those on the shop floor. What does that mean? It means negotiating what can be afforded by the individual company facing the international competition in the market. In essence, it is that which will determine our performance.

    There can be no more negotiating around the benchmark of the retail prices index as though that represented the minimum increase it was reasonable to expect. I know that that kind of inflationary psychology is deeply embedded in the consciousness of British industry. I believe that, over the years, it has damaged us greatly, and, if it continues, it will cost us jobs in the future. I do not for a second underestimate the cultural change that that will mean for many wage negotiators, but the sooner they make the change the better. That psychology needs to be shaken out of the system, for the Government cannot keep companies competitive – they can only warn them of the dangers that they face. Their fate is in their hands – the hands of those on each side of the negotiating table who will determine the future of their companies and their work forces in the next few years.

    Mr. Rhodri Morgan (Cardiff, West) I am grateful to the Chancellor for telling the House that the Government cannot bail out companies that persist in using the RPI as a benchmark for wage increases. If the Opposition accept that, will the right hon. Gentleman accept that he should not allow his Ministers to use the RPI as a benchmark for price increases in former nationalised industries now in private ownership? The electricity industry has not yet been privatised, but its prices are set to rise every year by an RPI-related formula. Is the right hon. Gentleman prepared to instruct the Secretaries of State for Energy and for Trade and Industry to give up that practice, which is applied to British Telecom, water and gas charges?

    Mr. Major Some of those increases are less than the retail prices index and many of the others are far more specifically related to investment performance than to anything else.

    Those are the constraints and restraints which management and work forces will need to accept if we are to make a success of membership of the exchange rate mechanism. I know that they are not easy, but I believe that they are worth while because they will help us to achieve lower inflation by reinforcing existing policies. I am delighted that, fully understanding those points, the CBI has given such a warm welcome to our decision to enter the ERM.

    In recent years, the average inflation performance of the countries participating in the ERM has been significantly better than that of all those outside the mechanism. Between 1979 and July 1990, inflation in countries within the mechanism fell by nearly two thirds; in European countries outside the ERM, by one sixth; and in OECD countries outside the mechanism, by two fifths.

    As inflation in member countries has come down, the prospects for steady, sustainable economic growth have improved, and that is the prize to be achieved. The growth rates in Germany, France, Italy and a number of smaller mechanism countries have increased in the last few years and the prospects for growth continuing at favourable rates in the future appear good. I believe strongly that that is a goal worth pursuing by us as well.

    Mr. Jeff Rooker (Birmingham, Perry Barr) rose – –

    Mr. Major I hope that the hon. Gentleman will forgive me if I do not give way. I have given way on a number of occasions, and I am conscious of the number of hon. Members who wish to take part in the debate.

    Moreover, maintaining a broadly stable exchange rate will assist British companies to plan ahead and to invest with greater certainty about the future. Since the mechanism has been in operation, there have been a few changes of parities, but there has been no substantive realignment since the beginning of 1987.

    That stability will enable firms to develop their business strategies in Europe and be well placed for the opportunities of the single market. They will no longer face the problems of exchange rate movements disrupting their plans by imposing on them unexpected cost increases or pricing their goods out of the European market. It will mean, in my judgment, that Britain will prove still more attractive to inward investors. We already attract more direct investment from abroad than any other Community country. Membership of the ERM can only add to that.

    During my statement last week, a number of hon. Members expressed concern at the exchange rate at which we had entered. For some of them the argument was a surrogate for outright opposition to entry at any exchange rate. But others are concerned lest the rate we have chosen is too high. That reflects a longstanding argument over whether devaluation is required for economic success. It is a legitimate argument which has a long political pedigree, but I believe that it is wholly wrong.

    I believe that our central rate can be sustained, and I will explain why. Some hon. Members fear that the exchange rate will damage exports and encourage imports. But experience in recent years suggests that other factors are more important. The volume of our exports, excluding oil and erratic items, is up 8 per cent. on last year, and our share of world trade in manufactures increased in 1989 and is likely to rise again this year. Japan and Germany, with the firmest exchange rates over the last decade, also have the best current account performance.

    The rate that we have chosen is also sterling’s recent market rate and the average real exchange rate over recent years after making adjustment for differential inflation performance. Other subsidiary information suggests that we have not put sterling at a competitive disadvantage. Independent analyses suggests that DM2.95 is sustainable. Indeed, a report by CBI economists only recently advocated entry into the mechanism at around the bands that we have chosen. Some comments that I have read have focused on the dollar. I would only make the point that our membership of the ERM does not in any way determine the sterling dollar exchange rate.

    Mr. Peter Shore (Bethnal Green and Stepney) The inflation-adjusted real exchange rate of DM2.95, or the right hon. Gentleman’s choice of that rate, is 20 per cent. higher – that is, an appreciation of sterling against the mark – than it was in the first half of 1987, which was the last time we were in current account balance with the rest of the world. We are now disastrously in deficit. We are going in at an exchange rate 20 per cent. higher against the mark than it was when we were last in balance. What does the right hon. Gentleman say about that?

    Mr. Major We are in deficit because of the growth of demand, which is self-evident from the change in our position during the past year as sterling has appreciated and the trade gap has begun closing. Therefore, there is no reason why British companies should not compete successfully in Europe at present exchange rates, and, in the medium term, with lower inflation, they will compete even more successfully.

    Although entry to the mechanism is part of our commitment to stage I of economic monetary union and the single market, it in no sense commits us to the Delors approach for stages 2 or 3. I assure the House that there has been no shift, no weakening in our opposition to the imposition of a single currency and a single monetary authority. We remain opposed to that, and I believe that our opposition has the overwhelming support of the House. That does not mean that we shall play a wrecking role at the intergovernmental conference – the IGC. We have no intention of doing that. We shall continue to advocate our plans for the development of the hard ecu.

    We believe that our proposals are practical, evolutionary and based on markets and choice. They offer a realistic solution that would enable the 12 to move forward together without risking damaging rifts in the Community. They leave open the possibility of the hard ecu evolving towards a parallel currency and then a single currency, but only if that were the wish of Governments and peoples. That is subject for ever to the check of the House of Commons.

    Mr. Paddy Ashdown (Yeovil) The House will have made particular note of the right hon. Gentleman’s use of the word “evolutionary”. The matter that isolates Britain in Europe, divides the Conservative party and splits the Cabinet is whether his hard ecu is to be regarded as the ultimate, final position or is a transition to a future European single currency. If in due course, his hard ecu proposals were to be used as a transition mechanism to a single European currency, would the Chancellor oppose that?

    Mr. Major If the right hon. Gentleman reads what I have just said, he will have his answer.

    Our proposals are those that I have set out on a number of occasions and are subject to the check of the House of Commons at future stages.

    Mr. Julian Amery (Brighton, Pavilion) While I fully understand the Chancellor’s reluctance to have anything to do with the date of 1994 proposed by the German Chancellor, cannot he say that if everyone were prepared to go ahead with the hard ecu in 1994 we should be happy to go along with them?

    Mr. Major We must wait and see how the IGC develops. But the only way in which this country could proceed would be on the basis of the hard ecu, for in my judgment there is no will in the House or country to surrender the use of sterling as our currency.

    During the past half an hour or so, I have set out in some detail what I believe will be the effect of membership of the exchange rate mechanism and our policies. I hope that in the next few minutes the right hon. Member for Islwyn (Mr. Kinnock) will set out his views with equal clarity. Judged by what he has said, there is more agreement between us than he may imagine. He shares my view that entry is not an alternative to the economic realities – he has said so – can work to the advantage of the British people – he has said so – and can help in securing stability – he has said so, and I agree with him about that.

    I hope, therefore, that as I have done, the right hon. Gentleman will set out his party’s policy precisely – on rates, bands, timing, and fiscal policy. He committed himself to entry some years ago, so he has had ample time to consider the implications. If he does not do so, the suspicion will arise that Labour’s commitment to enter the mechanism has been nothing more than a device – a clever device but a device none the less – which was intended to hide the fact that there is no real determination to tackle inflation at the heart of the Labour party’s policies.

    The conditions that they devised for entry into the mechanism are frankly incredible. They involve fundamentally subverting the whole purpose and structure of the EMS. The main reason why many people on all sides of the political spectrum have come to appreciate the benefits of the mechanism is that it provides a buttress and an anchor against inflation. That is precisely the feature of the mechanism which the Labour party planned to ditch.

    That could not have been clearer from the remarks made by the Opposition in the House last week. Time and again they made it plain that their inclination would always be to take the easy option and to go for devaluation. When the right hon. Gentleman replies, will he tell the House: would he devalue or would he fight inflation? He cannot do both, and if he is to be credible he must tell us which he would do.

    I noted with interest that the Opposition’s amendment commends credit controls similar to those in other exchange rate mechanism countries. I wonder which countries he has in mind, for France had credit controls, but abandoned them at the end of 1987, Italy had bank loan ceilings, which were last used in 1988, the Netherlands had an informal corset – it lapsed some months ago. Germany has never used credit controls proper, although it uses a reserve asset ratio, as we use Treasury bills. In Europe, only Spain, Greece and Portugal have credit controls. Perhaps the right hon. Gentleman can tell us whether he equates our economy to theirs, and what sort of credit controls he plans to introduce. Under a Labour Government no doubt that is the sort of economy that we might move to.

    The truth is that membership of the exchange rate mechanism involves maintaining an agreed range for the exchange rate and it requires tight monetary discipline to counter inflation. In short, it involves all the things that the Labour party has set its mind against.

    For us, the ERM stands for stability – for effective, reliable management; it stands for low inflation – for an end to ruining money. For the Opposition it means credit controls – and excessive restrictions on mortgages. It stands for all its old policies of expropriation, re-nationalisation and meddling. I commend our policy to the House.

    Mr. Neil Kinnock (Islwyn) I beg to move, to leave out from “House” to the end of the Question and to add instead thereof: while recognising the potential opportunities for economic stability afforded by the inclusion of sterling in the Exchange Rate Mechanism, notes the failure of the Government to achieve the reduction in inflation repeatedly stipulated by the Prime Minister to be the essential condition to be satisfied before entry; considers that political expediency rather than economic considerations prompted the Government’s decision to participate in the Mechanism from 8th October; regards the Government’s continuing refusal to use credit controls similar to those employed in other Exchange Rate Mechanism countries as imprudent; deplores the fact that the task of achieving economic success within the Single Market and the Exchange Rate Mechanism has been made immensely more difficult by Government policies which have resulted in the United Kingdom experiencing a large and persistent current account deficit, 10.9 per cent. inflation, rising unemployment and losses in domestic and world manufacturing market share; again urges Her Majesty’s Government to adopt policies that are essential to the achievement of a productive and competitive economy, particularly those required for improvements in the quality of and opportunities for education and training, for the development of a modern economic infrastructure, including an adequate transport system, for the promotion of sustained investment in civilian research and development and for the instituting of a vigorous regional policy; and concludes that if such policies, long advocated by Her Majesty’s Opposition and long resisted by Her Majesty’s Government, are not adopted, producers in Britain will continue to work at considerable disadvantage by comparison with those in other Exchange Rate Mechanism member countries and the nation will continue to lag behind the standards of economic success and social progress achieved in other European Community countries.’. May I begin by saying how grateful we are to the Government for providing the time for this debate on their decision to take sterling into the exchange rate mechanism of the European monetary system on 8 October.

    As the Chancellor said, that was a decision of immense importance; it will have effects on every person, family and business in Britain; it will have significant influence on shaping all future economic policy and very obviously, it can have major implications for the constitutional future of our country and of the European Community. There can be no one in the House or outside who does not regard the decision to enter the exchange rate mechanism as being truly worthy of the adjective “momentous”, and since that is self-evidently true, it is all the more difficult for us and the British people to understand the refusal by the Head of the Government who made that decision to participate in the debate. [Interruption]. Let the Prime Minister speak for herself. It appears that the Prime Minister has chosen this significant occasion, of all occasions, to become untypically reticent, to embrace a previously undisclosed shyness, to become – how shall I put it – a sort of crypto-Trappist.

    Today and on previous occasions since entry to the ERM, the Chancellor has made a characteristically suave presentation of the circumstances in which the decision to put the pound into the ERM took place. We heard a repetition today of the way in which he put it at the Mansion house last Thursday. There is nothing wrong with that at all. It is one way of demonstrating total consistency, but it is causing some problems on the Government Front Bench.

    Dame Elaine Kellett-Bowman (Lancaster) The right hon. Gentleman should take a look at his lot.

    Mr. Kinnock I look at my lot with great pleasure.

    In the Mansion house on Thursday the Chancellor said that inflation was definitely coming down. He said: There was therefore no further reason for delay in entering the mechanism. And it was, of course, those very same conditions that indicated that a reduction in interest rates was now appropriate. I decided, therefore, to announce the two moves at once. It was a smooth and soothing explanation – and absolutely unconvincing to everybody concerned. Hardly anyone believed the Chancellor. In the markets and in the newspapers the general and justifiable feeling has been that his action was far more political than economic. Mr. Robin Marshall, chief economist at Chase Manhattan, said: Major comes out of this looking like Mrs Thatcher’s poodle. Mr. Peter Spencer, chief economist at Shearson Lehman, said: The base rate cut was clearly dictated by No. 10″. I can see from the friends that they have in the City that Conservative Members are hearing exactly the same thing. Those economists were only two of many people in similar positions who put the view that agreement to ERM entry was nothing more or less than the price paid by the Prime Minister for the 1 per cent. cut in interest rates that she needed to take to the Tory party conference. Never has so much been done that affects so many to please so few. [Interruption].

    Mr. Speaker Order.

    Mr. Kinnock Of course, those accusations of political rather than economic motivations are serious and they could have serious consequences. They call into question the credibility of the Government’s commitment to the ERM. In spite of that seriousness, the witness whose testimony is essential simply refuses to be called. At the Dispatch Box where, on this momentous issue, the Prime Minister should speak we have merely a question mark. The reason for the Prime Minister’s unwillingness to speak is quite obvious. The right hon. Lady has been saying since 1985 that we will go into the ERM only “when the time is ripe” and she could hardly say in this debate, “Inflation is 10.9 per cent., we have a huge balance of payments deficit, the economic consequences of the Gulf crisis are unknown, output and investment are down, so the time is not ripe. In fact, it’s pretty rotten – but we have entered the ERM in any case, regardless of everything that I have ever said before.”

    Mr. A. J. Beith (Berwick-upon-Tweed) Does the right hon. Gentleman himself think that the time was pretty rotten? Or have his conditions been satisfied? Can he conceive that his condition that the ERM should be accompanied by a Europewide reflation will ever be satisfied?

    Mr. Kinnock Our case was never made in the way in which the hon. Gentleman professes that it was made. Our argument has been, and remains, that when, from time to time, Europe is faced with the threat of Eurosclerosis – the hon. Gentleman will be familiar with the term – the case for joint growth strategies exists and is widely accepted. [Interruption]. I realise that Conservative Members are very reluctant to allow any answer to be given to a Liberal Democrat on this particular day: there is a certain Eastbourne sensitivity about. None the less, I shall reply to the hon. Member for Berwick-upon-Tweed (Mr. Beith) – [Interruption].

    Mr. Speaker Order. We shall make very slow progress at this rate. The Chancellor of the Exchequer was heard in relative silence; I ask for the same treatment for the Leader of the Opposition.

    Mr. Kinnock Thank you, Mr. Speaker. A different order of decency and discipline applies on this side of the House.

    Mr. Phillip Oppenheim (Amber Valley) rose – –

    Mr. Kinnock I will respond to the hon. Member for Amber Valley (Mr. Oppenheim) if he will first permit me to reply to the hon. Member for Berwick-upon-Tweed.

    It is true that my right hon. and hon. Friends and I have been making the case for entry into the exchange rate mechanism, because of its basic attractiveness, to which the Chancellor referred. It gives the British economy the necessary stability, allowing us – together with other policies – to secure an advance in productivity and competitiveness. That is still our case for entry: for that reason we welcomed Britain’s entry on the date on which it took place, and will continue to argue that ERM membership is right.

    That stability, however, is put in jeopardy if the Government’s commitment and the sincerity of the Prime Minister are not even evidenced by the right hon. Lady’s willingness to come to the Dispatch Box. I am sure that the Government will have noted the reactions to the circumstances in which Britain entered the ERM, and the excuses that they presented for their timing. The fact remains that our ERM membership is legitimate, valid and to be worked on to the advantage of our country.

    Mr. Oppenheim rose – –

    Sir Peter Hordern (Horsham) rose – –

    Mr. Major rose – –

    Mr. Kinnock I will give way to the Chancellor, by all means.

    Mr. Major I am grateful to the right hon. Gentleman for his courtesy.

    A moment ago, the right hon. Gentleman had something to say about the interest rate cut and the timing. May I remind him of what he said three days before we entered the ERM? First – at the Labour party conference – he said that the Government should cut the very high interest rate and should be negotiating entry into the exchange rate mechanism of the European monetary system. That is precisely what we did. Why will the right hon. Gentleman not give us unalloyed credit for doing it at the right time and in the right way?

    Mr. Kinnock The Chancellor negotiated nothing, other than a little deal with the Prime Minister to swap a 1 per cent. interest rate reduction for ERM entry. That was the only bit of negotiation.

    Mr. Major If the right hon. Gentleman will permit me, I will correct the misconception in his mind. Uniquely – somewhat to the irritation of our European partners – I told them the terms of entry that we sought before I went to them. We obtained those terms of entry, absolutely and entirely. I think that that is quite a success.

    Mr. Kinnock I really do not think that obtaining DM2.95 to the pound in a 6 per cent. band required all that much negotiating skill.

    The Chancellor asked me about a speech that I made. Let me tell him precisely what I said. I said not only that we wanted entry to the ERM, and would certainly have brought it about had we been in office, and not only that we wanted a reduction in interest rates, which we would also have introduced, but that we would have accompanied those moves with two other policies essential to the proper working of our economy in an intensely competitive European Community and trading world.

    First, we should institute exactly the same form of credit controls as those still operated in comparable countries with great success, and which result in much lower interest rates. The Banque de France operated such a policy only last Wednesday, to ensure that France could retain its position within the ERM while lessening the burden of interest rates on the productive sector of its economy. Conservative Members know that that is precisely what happened. Secondly, and most important, we still want a commitment – and I shall again make the case for it this afternoon – to a proper, comprehensive, modern, supply-side policy, something which the Government have never introduced and will never introduce.

    Mr. Oppenheim rose – –

    Mr. Kinnock I must continue. I gave way to the Chancellor, who asked an interesting question which required a prolonged answer.

    The Prime Minister’s absence from the Dispatch Box is further explained by the fact that she came to the House in June 1989, from the European Community summit, and told us that she had made it clear that before ERM entry, We must first get our inflation down. She told me that One condition of entry depends on us”. It was that we get inflation well down”. She was saying that repeatedly during all the following 15 months, right up to and including her visit to Switzerland where, on 20 September, she said: The Madrid conditions won’t be changed and they include getting inflation near to the European average. Nothing could be clearer, nothing could be more absolute, nothing could be more implacable than those words from the right hon. Lady – the prima donna of the Madrid conditions.

    Against that background, the Prime Minister plainly felt that it was beneath her dignity to come to the House today to justify her abandonment of that paramount condition on inflation, while simultaneously standing on her head. That is why she will not speak.

    Mr. Quentin Davies (Stamford and Spalding) rose – –

    Mr. Kinnock I must continue. If Conservative Members have any questions, please address them to the Prime Minister – although she never provides any answers.

    The Prime Minister felt that she could not say that she knew that the whole Government – [Interruption]. Perhaps I could have some order, Mr. Speaker. She knew – [Interruption]. The people watching this exhibition will pay due regard to the continual interruptions by Conservative Members. They are not making genuine inquiries; they are trying to disrupt the business of the House. Everybody will understand that. The more that I pursue the question of the Prime Minister’s motivation, the noisier they are likely to become.

    The Prime Minister knew that the whole Government had been chanting that cardinal Madrid condition, but, because their policy of high interest rates was throttling the economy, interest rates had to be cut, even though the only way to do that, without sending the pound plummeting, was simultaneously to join the ERM and desert the Madrid conditions. It was not so much a case that the lady was for turning, as a case of the lady twisting in the wind – a wind of looming recession and greatly increasing political unpopularity.

    Of course, the Prime Minister and the Chancellor tried to make the best of the mess. The Chancellor said that the prospects were good and that the market conditions and the market rate were right. He said that there was an ideal conjunction of events – precisely the right conjunction of events. I note that he has not repeated those phrases in the House today, but I am sure that he will not disown them.

    The Prime Minister was similarly fulsome. She took out the portable pulpit that she has taken to using in Downing street and announced that it was suddenly possible after all to put sterling into the ERM because of the uncontestable signs that the economy is working in the way that we intended it to. Unemployment is rising, bankruptcies this year are up by 35 per cent., industrial output is falling, inflation is still rising, the business community is warning that there is recession in several industries and recession threatens the whole economy, but the Prime Minister describes all that as uncontestable signs that the economy is working in the way that the Government intended it to”. Could there be any greater self-condemnation of the Government? Could there be any clearer admission of incompetence and failure over 11 years? The Government could not even clip 1 per cent. off the highest interest rates of all major industrialised countries without joining the ERM – 10.9 per cent. inflation and all. What a mess.

    Mr. Teddy Taylor (Southend, East) On behalf of the Labour party and a future Labour Government, the right hon. Gentleman has said that the ERM will help to bring stability. On behalf of the Labour party and future Labour Government, will he give us some idea about what he thinks the ERM will help to stabilise and roughly how he thinks that will be achieved?

    Mr. Kinnock The exchange rate. That is the whole purpose of the mechanism. If the hon. Gentleman does not have that basic piece of knowledge, I am not surprised that he takes the view that he does. I am sure that he has. [Interruption].

    Mr. Speaker Order. It will be impossible to call all those who wish to participate if the Leader of the Opposition is continually interrupted. I notice that the three hon. Members who have recently been rising all wish to speak later.

    Mr. Kinnock Inflation is vexatious when it is as high as it is and so largely the result of the Government’s policies, but the Chancellor tells us that it is not the actual rate of inflation but the prospective rate of inflation that matters. When he went to the IMF meetings in Washington at the end of September he said What matters is less the difference between headline figures which measure what has happened over the last 12 months than the prospective movements in price levels from now on. Forecasts have always been important. Obviously they are essential to economic navigation. But now it seems that they have gained unprecedented significance. Not only do they matter more than the actual rate of inflation with which people have to live, but they are important enough to justify the most momentous of economic decisions, such as entry into the ERM.

    But if the Government have such boundless confidence in forecast inflation rates, I am bound to wonder why sterling was not put into the ERM a year ago. After all, at that time in his Autumn Statement last November the Chancellor told us that the prospective rate of inflation for this quarter of 1990 – the period that we are in now – was 5.75 per cent. He was just about 100 per cent. out in his forecast. He tried to correct that in the Budget in March, seven months ago, when he said that his 5.75 per cent. forecast for this quarter of 1990 had been revised upwards to 7.25 per cent. That was only 50 per cent. out on the actual rate of inflation that we are experiencing now.

    That record hardly fills us with confidence about the Government’s judgment, especially when the Treasury had to admit yesterday: Since forecasts of the RPI were first published in 1976 only one year has seen a larger error than the forecasts for 1988 and 1989. That is not much of a crystal ball, especially as an important indicator on which to base a judgment such as the Government’s abandonment of the Madrid conditions.

    But at least one Government forecast will be right. The rate of inflation will come down. If any economy is squeezed hard enough for long enough, and this one certainly has been squeezed hard and for a long time, eventually prices will almost certainly follow demand in a downward direction. But the damage already done to the economy by the high interest rate squeeze, and the damage that will be done to the economy, has pushed Britain back, pushed costs and inflation up and weakened our productive industries in the approach to the single market. What a fine preparation for the coming of the single market at the end of 1992.

    Even if the crude recessionary slump contrived by the Government brings inflation down, it certainly will not keep inflation down. It cannot, as the Government have already proved. The Conservative party chairman’s absence today is notable – it may be because he can count his supporters in the Cabinet on the fingers of one finger – so unfortunately I speak in his absence. A few weeks ago in September he said that the Government’s interest rate strategy for bringing down inflation would work because they had done it “twice before”.

    But clearly, if the Government have used the strategy twice before and now have to use it a third time, it is not because it has worked; it is because it has failed. That must be the case. It will go on failing because, in the very act of being applied as an instrument against inflation, recession causes extra living costs, pushes up wage demands and imposes extra borrowing costs that bring bankruptcies, cancelled investment plans, instability and under-performance causing inflation to come back again, as it has.

    We have had 11 years of repeated use of those policies alternating with pre-election credit sprees, but the Government have not yet learned the error of their ways. The only response that the Government have ever made to a mistake is to repeat it and then call that being resolute. Despite his many charms, the Chancellor of the Exchequer is no exception to that rule.

    The Chancellor told us last week, and again this afternoon – it was an important point in his speech – that the only real problem afflicting Britain is excess demand. That, he said, is the single evil that causes inflation and the massive trade deficit. He says it with such charming bravura that he would convince anyone who did not know better that he had never been in a Government who had repeatedly generated excess demand for electoral purposes. Unfortunately, about the supply side the Chancellor says next to nothing.

    Mr. Jonathan Sayeed (Bristol, East) Will the right hon. Gentleman give way?

    Mr. Kinnock No, I am sorry. I have given way several times.

    I suppose that the Chancellor knows that if he did give real attention to the supply side he might have to do something more than undertake some City deregulation, some trade union legislation and give some tax handouts. If he really was interested in wanting Britain to succeed, he would do much more. If he really wanted to encourage enterprise and combat inflation, he would be doing what other ERM countries do and use more moderate interest rates in combination with credit controls instead of relying so heavily on high interest rates.

    If the Chancellor and the Government really wanted to attack the rigidities, the bottlenecks, the restraints on the productive economy, they would have followed the example of Governments of other countries in the ERM. Those Governments have ensured proper investment in modern transport. This Government have not. Those Governments have invested more in civil research and development. This Government have not. Those Governments have wisely invested more in education and training. This Government have not.

    Mr. Nicholas Bennett (Pembroke) That is not true. Look at the OECD figures.

    Mr. Kinnock I am not so interested in the OECD comparisons. Why does not the hon. Gentleman go to a school or college in Britain and see the results of under-investment?

    The whole country knows that the Government have failed to make the necessary investment. To see the results of the difference between both kinds of performance, it is only necessary to compare this country’s oil-rich economy after 11 years of Tory Government and those of other ERM countries, whatever the political colour of their national or regional government, and none of which has any oil. The difference is that the Governments of those other countries have enabled a productive economy, whereas the Government of our country have disabled a productive economy.

    Whatever our future may be in the European Community, that situation must change, so that our industries may have a fair chance under the exchange rate mechanism. Many tough, determined and enterprising people are saying still that they are not enjoying a fair chance by comparison with their competitors in other ERM countries. There is a great deal in what they say.

    It is not just a matter of the ERM, because attitudes towards the supply side must change as pressures build up within the Community to go beyond the ERM and stage 1 of the goal to which the Chancellor says that he is committed, of economic and monetary union. The Chancellor said also that movement towards a single currency is “not inexorable”, and he is absolutely right. That movement is the result of a deliberate decision by free countries. It is not a consequence of faith or of dictatorial imposition.

    If the Chancellor had said that, with the economy in its present state, monetary union was not in any case acceptable, he would also be right. Given Britain’s deficit, inflation rate, inadequate training and substandard transport systems, there is no possibility, without great change, that monetary union could be tolerated.

    The question that is increasingly posing itself is not whether monetary union is desirable to us but whether it is the ambition of others, including the strongest economies of the Community – with or without the United Kingdom.

    The plain fact is that monetary union is something to which those other member states aspire, and they are intent on achieving it – if not within the next five years, then not very long after that. That is a certain prospect. The consequence of all that is that our future will be more strongly influenced than ever not only by what we would prefer to do for ourselves but by what others prefer to do for themselves, and which they will do for themselves.

    Mr. Nicholas Budgen (Wolverhampton, South-West) rose – –

    Mr. Kinnock Just a moment.

    The European Community has not yet decided on the path to a common currency. There is much that we should and can do in this House and through government to shape the course of events. However, we are not helped much in that by the isolationism of the British Government – or at least that part of it that is controlled by the Prime Minister. Those parts of the Government that owe fealty to the deputy Prime Minister and to the Foreign Secretary are different, but I say to both Governments that, however we might try to influence events, it is imperative to ensure that the British economy is more productive and competitive, less prone to trade deficits and more resistant to inflation than it is now.

    The Government should be the ally of modern industry in a way that the present Government have never been, nor ever will be. The pre-conditions that I describe have merit at any time, but they are of extra importance now. Only by gaining those strengths can we achieve convergence with the higher performance standards of our neighbours and fellow members of the exchange rate mechanism. That effort of upward convergence represents a sensible strategy, and it is among the aims of the Labour party.

    Only by improvements in productivity will we be able really to choose between co-existing with monetary union if we choose not to join and thriving economically within currency union if we do decide to join.

    Mr. Jacques Arnold (Gravesham) Would Labour take Britain into monetary union or would it not? Will the right hon. Gentleman show some leadership?

    Mr. Kinnock When it comes to leadership, I am rather less susceptible to challenge than the Prime Minister at this precise time, so the hon. Gentleman would do well to keep his own counsel.

    Those are the facts of life that we must face. There is no refuge from them, in the blithe hope that our economy can make such a bound forward in competitive performance that Britain will suddenly be able to recapture great swathes of world markets and will thus push the European Community to the periphery of our interests as an important trading nation.

    Mr. Budgen Will the right hon. Gentleman give way now?

    Mr. Kinnock No, I will not give way, because of time constraints.

    Mr. Budgen rose – –

    Mr. Speaker Order. The hon. Member for Wolverhampton, South-West (Mr. Budgen) also has indicated that he wants to participate in the debate later. Perhaps he will get a chance to do so.

    Mr. Kinnock The hon. Member for Wolverhampton, South-West (Mr. Budgen) will acknowledge that there were a number of disorderly interruptions earlier, which took up time. I regret that, but I shall respond to the hon. Gentleman on a future occasion.

    There is no serious third way out of the stark choices that face us in the form of the Chancellor’s proposals for the so-called hard ecu. That is a clever illusionist’s trick from the right hon. Gentleman, but it is a trick nevertheless. The Chancellor claims to be against what he calls the imposition of a single currency, so he advocates a multiple currency system. He says that such an arrangement will consist of a hard ecu as a common currency, with all existing currencies used alongside it. However, he knows that the hard ecu, being almost incapable of devaluation, would render just about every other existing currency as redundant as the farthing and about as attractive as bent washers.

    The Chancellor might have bamboozled the Prime Minister with his hard ecu. He might even enjoy being patronised by others in the European Community. Nevertheless, if the hard ecu is ever adopted, the single currency that the Prime Minister so abhors would arrive not in the long term, as the Chancellor promises, but very quickly.

    Some members of the Government know that. Right hon. and hon. Members may have read in the Financial Times this morning a report quoting the Financial Secretary to the Treasury, who remarked in relation to the hard ecu: I would argue personally that the next stage of having a single currency could actually happen more quickly going down this path. I wonder whether the Prime Minister would say the same, or whether that is again a tale of two Governments.

    As there is a strong and developing consensus in several other Community countries in favour of currency union, I repeat now what I have told many colleagues in the Community and in the Commission for some years. That community of democracies should never support the creation of a so-called independent central bank. It is no more appropriate for a democratic country or a group of democratic countries to allow monetary policy to be handed over to an independent, unaccountable bank than it would be for fiscal, public expenditure and taxation policies to be given over to such a bank.

    If the Community seeks to achieve currency union between member states, then, whatever the implications for Britain, it will have to make arrangements for joint growth strategies, fiscal co-ordination and regional policies on an unprecedented scale. The regional policies would, by the very nature of currency union, require transfers between regions of the Community, just as transfers are made now between the German Lander, French departments and Italian regione, within their own national currency units. That is the dimension of the change that would need to occur if monetary union is to work to the advantage of the peoples of the Community. Even the most enthusiastic monetary unionist would recognise the truth of that.

    Our country has been taken into the exchange rate mechanism by a Government who have been in power 11 years, and who found themselves cornered by the approach of two crucial European summits and boxed in by the expectation that the Government themselves have created that entry into the ERM would occur this autumn. They were a Government trapped by the approach of the Tory party conference, which needed pleasing, and by a looming recession, resulting largely from their own policies. They are a Government who were besieged, and who are besieged, by their own political and economic errors and failures. They are a Government who sought to use a 1 per cent. interest rate cut and ERM entry as a political escape.

    They have failed in all of that. The interest rate cut is regarded with cynicism even by those people who yearn for relief from the crushing burdens of mortgage payments and business loans. The gush of City euphoria that greeted ERM entry went flat as quickly as the bubbles in the champagne that celebrated it. The Government’s decision and the Government’s timing are accurately seen as being determined by political expediency and concern for their own status and not by economic judgment made for the sake of the economy or the national welfare.

    They are a Government who have been found out and, as soon as the British people get the chance, they will be a Government who have been put out.

  • Mr Major’s Written Parliamentary Answer on the Exchange Rate – 22 October 1990

    Below is the text of Mr Major’s written Parliamentary Answer on the Exchange Rate on 22nd October 1990.


    Mr. Shore To ask the Chancellor of the Exchequer what conditions for the entry of sterling into the ERM, other than the DM2.95 central rate and the 6 per cent. margins, were sought by Her Majesty’s Government and agreed to by the other European Community countries.

    Mr. Major [holding answer 19 October 1990]: The central rates and fluctuation margins, which we proposed in exercising our right to take sterling into the exchange rate mechanism, were determined by mutual agreement. No conditions for entry were sought or agreed to.

    Mr. Shore To ask the Chancellor of the Exchequer now that the pound is in the ERM, what assistance, through the very short-term fund facility from the other central banks, is available to the Bank of England for the purpose of holding the rate within its agreed margins.

    Mr. Major [holding answer 19 October 1990]: The Bank of England has available very short-term credit facilities with the other participating central banks. These are automatically available and unlimited in amount for financing intervention at the compulsory intervention rates. They may also be made available by arrangement for intervention within the agreed margins.

    Mr. Shore To ask the Chancellor of the Exchequer who were the analysts who calculated the pound’s purchasing power parity at DM3.30, DM3.19 and DM2.95, respectively; and what publication of the International Monetary Fund suggested that industry would be competitive at the DM2.95 rate.

    Mr. Major [holding answer 19 October 1990]: The analysts were Phillips and Drew, Goldman-Sachs and the London Business School. The International Monetary Fund publication was “International Financial Statistics”.

  • Mr Major’s Exchange Rate Mechanism Statement – 15 October 1990

    The text of Mr Major’s Exchange Rate Mechanism Statement, made on 15th October 1990 in the House of Commons.


    The Chancellor of the Exchequer (Mr. John Major) I should like to make a statement about sterling’s entry to the exchange rate mechanism of the European monetary system, which took effect on Monday, 8 October.

    Sterling now has a fixed central rate against each of the other currencies in the ERM. The entry rate is set against the ecu and translates to a central rate against the deutschmark of DM 2.95. That was marginally above the market level when the decision to enter was announced on Friday, 5 October and is a little below the current market rate.

    Sterling is able to move by a maximum of 6 per cent. above or below the central rates. Our choice of the wider 6 per cent. margins is intended to allow sterling to settle into the system, and follows recent precedent. In due course, we will move to the narrow band of 2¼ per cent. margins. The terms of entry we have agreed with our partners are those that we sought.

    The Government have long made it clear that sterling would enter the exchange rate mechanism during stage 1 of economic and monetary union, which began in July. It has now done do, at the earliest appropriate time. I would like to explain how our decision fits into the Government’s wider economic strategy.

    It has become abundantly clear that policy is now reducing inflationary pressures in the economy. Monetary growth on all measures has fallen sharply, and the growth of narrow money is within its target range. The growth of demand has slowed. Although the rise in oil prices will continue to feed through for a while, the prospect is for a substantial reduction in inflation over the coming year. That will be so both in absolute terms and in relation to inflation in other European countries. It was for those reasons that we felt able to reduce interest rates by 1 per cent.

    A firm exchange rate is a vital part of our policy to maintain tight monetary conditions in order to reduce inflation. As I have repeatedly made clear, membership of the exchange rate mechanism will be an additional discipline for the United Kingdom economy. In no sense is it a soft option. Monetary policy will remain tight. I must emphasise that I will not make a further reduction in interest rates until I am sure that it is safe and prudent to do so.

    Membership has important implications for British companies and their employees. They must contain their costs. If they fail to do so, they will not be bailed out by a devaluation of the currency. That is the key message for those engaged in pay bargaining this autumn and subsequently.

    But in addition to acting as a discipline on costs, membership of the exchange rate mechanism offers significant benefits for British industry. It will help to provide greater stability of exchange rates with our main trading partners and thus the certainty that business needs to plan for the future. It will also make Britain even more attractive for inward investment.

    Although entry to the narrow band of the exchange rate mechanism will fulfil our obligations under stage 1 of economic and monetary union, it does not imply any change in our opposition to the imposition of a single currency. In the intergovernmental conference in December, we shall continue to argue against that plan and for the proposals that I first set out in June. As the House knows, they propose an evolutionary and market-based approach, based on the creation of a new European monetary fund and a common currency – the hard ecu.

    In summary, the mechanism has a proven record of success over recent years in producing greater stability of exchange rates and lower inflation. The Government believe that Britain too will benefit from membership. The exchange rate mechanism will reinforce our counter-inflationary policies, help to provide the stability and certainty that industry needs, and set the right framework for a resumption of soundly based and non-inflationary growth. I commend entry to the House.

    Mr. John Smith (Monklands, East) As the Chancellor is aware, the Labour party welcomes the decision that sterling should join the exchange rate mechanism, not least because of the potential benefit that a more stable exchange rate could bring to the process of Britain’s much-needed economic recovery. However, it will not of itself lead Britain out of the economic cul-de-sac of high and rising inflation, recession, increasing unemployment and serious balance of payments deficits to which the Government’s policies have led.

    I want to ask the Chancellor first about the celebrated Madrid conditions into which the Prime Minister entered in June 1989, and which she reported to the House formally on 29 June last year. At that time, the Prime Minister was in no doubt that the rate of inflation was too high for Britain to enter the exchange rate mechanism. In a reply to a question from my right hon. Friend the Leader of the Opposition, she said: On the exchange rate mechanism, our promise has been that we would go in when the time was right. I” – note, “I” – put conditions on that and made it much clearer that when those conditions were met we should be able to go in. One condition depends on us, which is that we get inflation well down”. Earlier, she said:

    we must first get our inflation down.” – [Official Report, 29 June 1989; Vol. 155, c. 1111, 1110.] Every time that she has been asked since then, the Prime Minister has repeated the condition. In July 1989, inflation was to be “significantly lower”. The Chancellor said on 26 March this year: we wish to see inflation fall before we enter the mechanism.” – [Official Report, 26 March 1990; Vol. 170, c. 117.] Only two weeks ago, the Prime Minister was reported as saying in Switzerland:

    The Madrid conditions won’t be changed and they include getting inflation nearer the European average. The Prime Minister’s role is crucial – she invented the Madrid conditions. They were not imposed on her by other members of the European Community. The present Chancellor was not in Madrid when these conditions were suggested by the Prime Minister, and neither was his predecessor, the former Chancellor. It was the Prime Minister herself, assisted by the then Foreign Secretary, who is now Leader of the House, and who accompanied her to the Madrid summit. Sadly, his views do not seem to coincide with those of the Prime Minister or of the present Chancellor.

    But if the condition is clear – and it could hardly be made more clear – that inflation had to be reduced before we entered the exchange rate mechanism, it is equally clear that it has not been fulfilled. Headline inflation in June 1989 was 8.3 per cent. and is now 10.9 per cent. If we take inflation on the basis that the Chancellor likes to take it – by excluding completely mortgage rates and the poll tax, which is a favourable estimate from the Government’s point of view – then, it was 5.8 per cent. and now, it is 7.9 per cent.

    I ask the Chancellor to explain why there has been such a humiliating U-turn by the Prime Minister who was the inventor of the Madrid conditions and is now their arch-destroyer. Is it not simply because the Government, due to their appalling mismanagement of our economy, have been forced to concede that they could not achieve the inflation target which they had set for themselves?

    Why does not the Chancellor admit this in his statement to the House, on television and elsewhere? Why does not the Prime Minister – whose role is so crucial in this affair that she must take part in the debate which we hope to have in the House – admit it? If our parliamentary accountability is as important as she frequently claims in this context, why is she reluctant to take part in the debate? Is it not because she would find it impossible to justify the abandonment of a commitment that she made to the House on 29 June last year?

    Would not the Chancellor have been wiser to admit that our economy is in dire trouble, rather than to pretend, as he did once again today, that all would soon be well and to claim, as he did on Channel 4 television on the day of his announcement, that at that time there was an ideal conjunction of events Ideal, when inflation was twice as high as that in the rest of the countries in the exchange rate mechanism? Ideal, when the economic consequences of the Gulf crisis are quite unknown? If these conditions were ideal, what were the Government waiting for during all the years when inflation was low and during all the years when there was no Gulf crisis?

    Does the Chancellor not understand that nonsense like this not only fuels scepticism in the markets and elsewhere, but fosters downright incredulity about statements by Ministers? Is is not clear that the Government, baulked and cornered by their economic failure, have joined the exchange rate mechanism as a last resort?

    Now that Britain has joined, will the Chancellor give us his estimate of the consequences for our economy? I hope that he will answer these questions directly. Given our serious balance of payments problems, is it his judgment that the rate at which we agreed to join is sustainable? What is his estimate of the effect on the balance of payments over the period ahead? Will the balance of payments deficit be progressively reduced? Is he satisfied that the arrangements through the central banks under the Basle-Nyborg agreements will be adequate to sustain the management of a currency as widely traded as sterling? Why did he not seek a strengthening of regional policy in the Community as one means of helping to bridge the gap between countries with more successful economies and countries, such as Britain, which are in difficulties?

    Finally, I wish to ask the Chancellor – [Interruption].

    Mr. Speaker Order.

    Mr. Smith This is an extremely important matter of economic and political policy, and the Government should not complain when they are asked questions by an Opposition whose function it is to do precisely that. The questions that I want to ask the Chancellor flow from how economic policy is to be directed now that we are subject to the disciplines of the ERM.

    First, is it not clear that, between now and the next election, responsible economic management will not permit cuts both in interest rates and in personal income tax? To build confidence over the period ahead, will the Chancellor today rule out the possibility of personal income tax cuts before the general election as too wildly irresponsible to be seriously contemplated by any sensible Government? Does he not yet understand that, in the new situation, the supply side policies advocated by this side of the House are even more crucial? Unless we end the debilitating neglect of trading, the collapse of regional policy and the failure to advance new technology – in short, unless we adopt an industrial strategy – is it not clear that we shall not succeed within the ERM, just as we have failed outside it?

    Mr. Major I am grateful to the right hon. and learned Member for Monklands, East (Mr. Smith) for his initial welcome for our decision. We both agree that it is the right decision for the British economy. He spent so much time on the Madrid conditions because he knows that we are right to enter the mechanism. As recently as a few weeks ago, he said: We believe that we should enter the ERM at an early date. The Government agree with him, and we have done so.

    Several conditions were set out in Madrid. The first concerned the abolition of exchange controls, which is substantially completed. The second related to the single market, and the majority of the measures are now concluded and more are in hand. The third related to progress on financial services, which is also nearly concluded. The fourth was progress on competition policy, on which the Commission, on this at least is acting firmly. The only remaining condition was the need for inflation convergence, and it is now clear that we are moving away from divergence in inflation to convergence in inflation. [Interruption]. If the hon. Gentlemen listen longer, they will learn a little more.

    The right hon. and learned Gentleman then asked why we were waiting for a conjunction of events and what they might be. We were waiting essentially for three events: first, the right market conditions and the right market rate, and that we had; secondly, a clear indication that monetary aggregates were coming into line, and that they have; thirdly, signs in the real economy of close and certain disinflation, and that we had. The combination of those factors made this the right time to enter the mechanism.

    The right hon. and learned Gentleman asked about the consequences for the economy. The first and most certain consequence is that entry of the ERM will reinforce monetary policy and help us push inflation lower, which is our central policy aim. He asked whether the rate was sustainable, and I share his view that that is an important question. I am confident that a central rate of DM2.95 is sustainable, for a series of reasons which I will set out now, if the House will do me the courtesy of listening.

    First, DM2.95 is the average inflation-adjusted real rate of the past decade. It is the recent market rate and, as a number of analysts have pointed out, the pound’s purchasing power parity – in essence, the rate at which the prices of our goods would be equal to the prices of German goods – is above DM2.95. Three analysts have calculated it specially: one at DM3.30, one at DM3.19 and one at DM2.95. Similarly, as the right hon. and learned Gentleman may know, the International Monetary Fund has released figures that suggest that industry will be competitive at DM2.95.

    Mr. Ron Leighton (Newham, North-East) When has it ever been right?

    Mr. Major When has the hon. Gentleman ever been right?

    I understand the concern that underlies the question. The truth is that the trade gap is the result of domestic demand outstripping supply and not an uncompetitive exchange rate. That is the reality of what has happened.

    The right hon. and learned Gentleman’s next question concerned the central banks. I am content that the central bank agreement is satisfactory and I think that the right hon. and learned Gentleman is aware of that. I did not regard stronger regional policies as necessary or negotiable in my discussions with my partners in Europe.

    On the responsibility for future economic management, the right hon. and learned Gentleman referred to the possibility of interest rate cuts and tax cuts. I made clear a few moments ago the position on interest rate cuts. Tax cuts are a matter for the Budget and not before.

    Mr. Terence Higgins (Worthing) My right hon. Friend the Chancellor is reported to have said that a remark by Mr. Delors that we joined the ERM in order to slow down EMU is “rather rum”. Is that not a good description of Mr. Delors’s position, given that we have been in the lead in implementing the single market and that my right hon. Friend’s proposals for a hard ecu are a far more practical, effective and better way forward than Mr. Delors’s proposals for stages 2 and 3?

    Mr. Major I am grateful to my right hon. Friend for those remarks. I agree entirely. The hard ecu moves us in the direction of a market-led approach, which I believe is the only sustainable way forward.

    Mr. James Molyneaux (Lagan Valley) As Parliament – both sides of the House of Commons – has rendered itself impotent on these matters, is it not imperative that there should be no further erosion of Britain’s position until the electorate have been consulted at a general election?

    Mr. Major With respect to the right hon. Gentleman, I do not agree with his underlying premise.

    Sir William Clark (Croydon, South) Now that the euphoria of the markets has subsided, will my right hon. Friend re-emphasise that joining the ERM is not a soft option, and that it is essential for us to keep tight monetary control? Does he agree that there has been a wide welcome for the fact that we do not agree with a single currency and that at the new meetings the hard ecu suggestion will be put forward?

    Mr. Major I certainly agree with my right hon. Friend’s final point, and I confirm it. I think that the euphoria of the markets was overdone both before and immediately after entry and, in some cases, the gloom is now being overdone. Entry into the exchange rate mechanism is an additional discipline to underpin monetary policy. It is that and no more.

    Mr. Peter Shore (Bethnal Green and Stepney) The Chancellor will be aware that this is one of the most serious decisions affecting the jobs and livelihoods of millions of people in this country. He maintains that he has got the right exchange rate. That view is not shared by the vast majority of experts, academics and others in this country.

    I shall ask two questions. First, if it turns out that the right hon. Gentleman is wrong on this vital matter, what powers does he have left to change the exchange rate now that it has been agreed with the ERM? Secondly, now that we are part of the ERM, taking account of all he said about tighter discipline, will he spell out what average increase in earnings in the United Kingdom is compatible with retaining what competitiveness we have already?

    Mr. Major On the final point, it depends on the individual company and the individual company’s productivity. On the substantive – [Interruption]. It is the question of averages that has got this country into so much trouble over the past 20 years. On the right hon. Gentleman’s central point of jobs and livelihoods, the most important thing for jobs and livelihoods in the future is, first, to obtain a firm downward pressure on inflation and, secondly, to keep it. That is the central reason for entering the exchange rate mechanism.

    On whether the rate is sustainable, I set out in some detail the arguments in favour of that a few moments ago. As to what opportunities will arise in the unlikely event of the right hon. Gentleman’s next premise being correct, we intend to stay within the bands to which we have committed ourselves. That was the purpose of setting the bands in the first place.

    Mr. William Cash (Stafford) Does my right hon. Friend agree that the acid test is to ensure that the British economy is as competitive as possible, and in doing so to remind the right hon. and learned Member for Monklands, East (Mr. Smith) that the views and expressions of Mr. Tuffin, in repudiating any attempt to hold down wages, are a prescription for our not being competitive? Furthermore, does he agree that the views of Mr. Sam Brittan in the Financial Times that he hopes that British monetary policy will be made in Berlin must be repudiated?

    Mr. Major As my hon. Friend says, the wages round is important. Wage settlements above that which is affordable would have a short-term effect on inflation but a far more fundamental effect on the number of jobs in the economy. That, essentially, is the message that employers and employees must grasp when deciding what increases should be. As my hon. Friends know, we have committed ourselves to stay within the bands that we have set and we shall use monetary policy for that purpose.

    Mr. Alan Beith (Berwick-upon-Tweed) Does the Chancellor recognise that inflation and interest rates would have been lower in this country in the past year if we had been in the exchange rate mechanism a year or more earlier, when Labour opposed it as strongly as the Prime Minister? Will he explain how he and the Prime Minister can continue to talk about tax cuts when the fiscal policy that may need to operate inside the exchange rate mechanism could require him to increase taxes in some circumstances? Does he rule that out? As the Prime Minister’s objections to joining the exchange rate mechanism before inflation was down to the level of our partners have been blown away like confetti in a gale, may we hope that her objections to a single currency and a more independent European central bank will go the same way?

    Mr. Major On the last point, I think the hon. Gentleman is unlikely to see that, and I think that he is unlikely to see that among my right hon. and hon. Friends either. On his first proposition, that inflation would have been lower if we had been in the exchange rate mechanism, if the conditions had been there for us to have been in the exchange rate mechanism, the hon. Gentleman might have been right, because the inflationary record of countries within the exchange rate mechanism is better than those not in it. The conditions for entry were not present. A year or so ago, monetary aggregates were not falling and the real economy was not slowing. We were heading for a position where inflation was going up, not down. Clearly, one could not have entered then.

    Mr. Teddy Taylor (Southend, East) Does the Chancellor recall that, when his predecessor joined informally, we had significant reductions in interest rates and inflation for several months, but a period of regular increases in interest rates to the present savage levels after that period of joy? That was apparently because Britain is almost unique in Europe in having a chronic balance of trade deficit with the EEC. Was not this confirmed by Hoare Govett, which has just published a splendid paper suggesting of the initial good news:

    As with all magic, it is hocus pocus – and would be unlikely to last for more than a year. If by any chance my right hon. Friend, who has our great respect, and the Government are wrong and such critics are right, what powers are available to the Government to do anything? Can we withdraw from the ERM? Can we realign the currency ourselves; or will we be stuck with a situation in which interest rates go up and down all the time depending on our relationship with the deutschmark?

    Mr. Major With great respect to my hon. Friend, the concerns that he expressed were expressed in a number of countries when they entered the exchange rate mechanism in earlier years, and subsequent events have shown that those concerns were not justified. I reiterate: those countries that have been within the exchange rate mechanism and have kept to the admittedly difficult disciplines of the exchange rate mechanism have had a better inflation record over a period than we have. I wish this country to have that better inflation record – for British industry, British commerce and the British consumer. That is why I believe that it is right for us to enter and why I believe that the move will be successful.

    Mr. Robert Sheldon (Ashton-under-Lyne) I accept the need for entry, so that we are not excluded from influencing developments within the Community, but is the Chancellor aware that, of itself, entry at an over-valuation will do nothing for our balance of payments, nothing for manufacturing industry, nothing to help us to get more skills in our enterprises and nothing for investment? Is he aware that what he has produced is just a panacea – a panacea of hope and nothing else?

    Mr. Major The right hon. Gentleman’s question is based entirely on a false premise. I am the last person who needs telling that entry into the ERM is not a panacea, because it was I who coined that phrase a year ago.

    Mr. David Howell Will my right hon. Friend accept that he took the decision that the pound should enter the ERM with considerable skill, and that he deserves warm congratulations on that, even though we shall have a tough struggle to keep the pound where it is? Entry into the ERM ends a long period during which the pound has been kicked around the exchange rate market like a football, and we should be thankful for that.

    Does my right hon. Friend recognise that, if the ERM discipline is to work, we shall require much stronger monetary methods and techniques than we have had in the past – techniques of the kind that he and his colleagues were considering back in January? Will he undertake to pursue methods of strengthening our monetary control in this country – including reviewing, and possibly strengthening, the status of our own central monetary authority, the Bank of England?

    Mr. Major I am grateful to my right hon. Friend for his remarks about our entry into the exchange rate mechanism. We are certainly clear in our minds that we need to ensure that monetary policy is a safe and secure discipline, and I shall certainly continue to do whatever I can to ensure that it is.

    Mr. Nigel Spearing (Newham, South) Does the Chancellor agree that when he uses the word “discipline” he means “decisions taken elsewhere”? And is it not a fact that a nation entering a fixed or near-rigid exchange rate mechanism with a heavy and persistent balance of trade deficit ceases to be a nation of that characteristic and, in the end, becomes a depressed area of a new economic nation?

    Mr. Major When I use the term “discipline” I mean no devaluation and no constant descent into the easy option. In the 1990s, we cannot afford the easy option and, we are determined not to have it.

    Sir Peter Hordern (Horsham) May I congratulate my right hon. Friend on providing a much-needed extra discipline for the control of inflation, and on putting an end to the widespread perception that wage costs could continue to increase for ever and that we could continue to be bailed out by a declining currency? I also congratulate my right hon. Friend on climbing into the driver’s cab of that notorious gravy train, the European Commission, with the prospect of putting an end to Mr. Delors’s ambitions.

    Mr. Major I am grateful to my hon. Friend for his comments about our entry into the exchange rate mechanism, and I share the views that he has expressed about it. On economic and monetary union, I share my hon. Friend’s concern about the destination for which some in the European Community are heading at present. I believe that our proposals represent the right way to proceed, and we shall argue for them very strongly indeed in the intergovernmental conference.

    Mr. Leighton Is the Chancellor aware that pegging sterling at nearly DM3 to the pound is virtually equivalent to signing the death warrant of British manufacturing industry? Is he aware that it is a crazy, stupid and misguided policy? I prophesy that he has it wrong and that the pound will not stay at DM2.95.

    Is the right hon. Gentleman also aware that going into the ERM makes absolutely no sense if we do not want stages 2 and 3 of the Delors plan? I am glad that the Prime Minister is paying attention, because she blusters, huffs and puffs, but in the end always gives way. That is what she has done again.

    Mr. Major I did not notice my right hon. Friend the Prime Minister giving way and accepting the European budget which the Labour party left us in 1979.

    With regard to competitiveness, I have a good deal more confidence in British industry than do Opposition Members. I simply do not understand why Opposition Members persistently talk down the capacity of our industry to compete.

    Mr. Michael Grylls (Surrey, North-West) Does not my right hon. Friend agree that the tightening of money since mid-1988 has done a good job – no one can ever say again that high interest rates do not work in bearing down on inflation – and that that is why he took his decision on the ERM last week? Does not my right hon. Friend also agree that the Opposition’s policy of trying always to suggest an alternative to high interest rates, such as discredited credit controls, proves again that the Opposition are wrong?

    Mr. Major I entirely agree. Our inflationary problem was substantially the result of the dramatic growth of demand. Monetary policy has brought that growth of demand down and will increasingly bring down inflation.

    Dr. David Owen (Plymouth, Devonport) Can we assume that the Government are opposed only to the imposition of a single currency and that they would go along with an optional single currency? Is not such flexibility over monetary union essential if we are to enlarge, as I think we must, to include Czechoslovakia, Hungary and Poland? By insisting on a single currency for everyone, we are effectively ensuring that the European Community will remain only a 12-member Community.

    Mr. Major On the second point, I entirely agree with the right hon. Gentleman. We believe that it is in the longer-term interests of Europe to ensure that the Community of 12 can become a larger Community to admit the increasingly emergent democracies in eastern Europe. We would be wise to do nothing to inhibit their entry at a later stage by decisions taken at an early stage.

    An imposed single currency is not only difficult in terms of the concerns of the House of Commons, with which I have full agreement, but also has real economic dangers for many European nations and we will continue to make those plain. For that reason, we believe that the market-led hard ecu approach is right.

    Mr. Ian Taylor (Esher) Does my right hon. Friend share my dismay about the fact that the right hon. and learned Member for Monklands, East (Mr. Smith) appeared to judge only one criterion of the level of inflation – the RPI – when a much better guide to the trend is the tightening of monetary aggregates? Will my right hon. Friend take credit for taking sterling into the exchange rate mechanism at the earliest possible time when it was clear that monetary aggregates would lead to declining inflation?

    Will he also repeat and underline the fact that, on a purchasing power parity basis, the DM2.95 central rate will not render British industry uncompetitive and that British industry must now take that rate into account when judging future costs and wage rounds?

    Mr. Major On purchasing power parity, my hon. Friend is entirely right. I quoted some figures earlier which are a clear illustration of that. I am grateful for my hon. Friend’s earlier remarks.

    Mr. Giles Radice (Durham, North) Despite the potential advantages of joining the ERM, is not the trouble with the Government’s decision of 5 October the fact that it was taken at the wrong time, for the wrong reasons and at the wrong rate? In view of all the suspicions and concerns of our Community partners, would it not be good for the Government to say that they intend to be a bona fide member of the exchange rate mechanism and that they intend to take a constructive attitude at the intergovernmental conference in November?

    Mr. Major We will take a constructive line at the intergovernmental conference in November, but a constructive line for the future of Europe does not necessarily mean agreeing to each and every plan that may be promoted by one part of the European Community. A constructive line may well mean standing up for British interests and what we see as the long-term interests of Europe. I give the hon. Gentleman an undertaking that we will do that. We will certainly be bona fide members of the exchange rate mechanism. I made it clear today that, as soon as it is appropriate, we will move to the narrow bands. I do not share the hon. Gentleman’s view that it was the wrong time to enter. I believe that it was the right time to enter, and that is why I did so.

    Mr. Ian Stewart (Herefordshire, North) Will my right hon. Friend confirm that it was his view that it was appropriate for a first reduction in interest rates to be made which led to his decision to enter the ERM at that time, and not the other way round, as has been generally suggested against his momentous decision? Despite the constraints of the EMS in future, can he assure us that he will do his best not to be pressed into any reductions in interest rates unless and until he judges that they are appropriate in the light of domestic economic and monetary circumstances?

    Mr. Major I certainly confirm the latter point. On the first of the important points that my right hon. Friend made, I think that it was the right time to cut interest rates and to enter the exchange rate mechanism. Indeed, the monetary conditions – first, the fact that narrow money is in its target range; secondly, the fact that broad money growth has fallen every single month since January; and thirdly, the fact that bank lending is now decelerating and the indications that one can see of the flat housing market and other matters in the real economy – were classic signs that interest rates needed to be cut by 1 per cent.

    I also felt that it was the right time to enter the mechanism. I also had to bear in mind the fact that, since an interest rate cut was clearly justified, if it had preceded entry, it might have been seen as an attempt to drive the exchange rate down in advance of entry or, alternatively, a signal that we were not going to enter for some time. Both of those would have caused market turbulence. Fortunately, it was the right time to do both, and we did.

    Mr. Harry Ewing (Falkirk, East) Is the Chancellor aware that it ill becomes Conservative Members who apparently cannot survive on £26,500 a year to lecture the workers of this country about the need to accept low wage increases in the present pay round? May I be the third hon. Member to ask the Chancellor – on two or three occasions, he has mentioned devaluing the currency – to spell out to the House and the country what powers are available to correct his own mistake if he has got it wrong? If he refuses to explain that, we can only assume that he has left himself without any power.

    Mr. Major On the hon. Gentleman’s first point, the requirement to spell out clearly the implications of unaffordable pay increases is clear. If people do not know that avoidably large wage increases will cost jobs, they may then negotiate wage increases that would create unemployment, and nobody wishes to do so.

    On the second point, I do not accept the hon. Gentleman’s premise that we have gone in either at the wrong time or at the wrong rate, and events will bear that out.

    Mr. Anthony Nelson (Chichester) I congratulate my right hon. Friend on the most welcome statement that he has made today. Does he agree that most people in this country, in addition to lower mortgage interest rates, want to be paid and to save in a currency which is strong, stable and valuable? Does my right hon. Friend agree that, having taken the momentous decision to join the exchange rate mechanism, we have taken a most important step towards economic and monetary union from which there can be no turning back?

    Mr. Major I am grateful to my hon. Friend for his kind remarks about our entry into the exchange rate mechanism. The exchange rate mechanism will play a significant part in assisting other aspects of policy to bring down the rate of inflation so that savings will have a secure value. I entirely share my hon. Friend’s view on that matter. I do not necessarily draw the same conclusion about future developments towards monetary union.

    Mr. Ted Rowlands (Merthyr Tydfil and Rhymney) If it is such a favourable exchange rate, does the Chancellor now expect a favourable balance of trade, particularly with West Germany?

    Mr. Major As I have pointed out on several occasions during the past few moments, the purchasing power parity rate, which is what matters, is more favourable than many other people have yet considered. If the hon. Gentleman will wait and see, events will give him his answer.

    Mr. Quentin Davies (Stamford and Spalding) I congratulate the Chancellor on his momentous decision. Does he agree that this is the first time since the Labour devaluation in 1967 that British industry faces the disciplines of a regime of credibly stable exchange rates? It is also absolutely clear from this afternoon’s proceedings that the Labour party remains at heart a party of devaluationists. The vital thing is for both sides of British industry to take on board the full enormous importance of the changed circumstances that they now face.

    Mr. Major It could not be put more clearly, and I entirely agree with my hon. Friend.

    Mr. Jim Sillars (Glasgow, Govan) Does the Chancellor recall quoting the experiences of other countries entering the ERM? Does he agree that it is a fair parallel to cite the French experience – another weak currency like our own – on entering the ERM? Is it not the case that the French had not only to maintain very high interest rates and introduce credit controls, but to tighten their fiscal policy? Why does the Chancellor think that he can get away with a very loose fiscal policy, when the French had to tighten theirs?

    Mr. Major I think that the hon. Gentleman is overlooking several facts. First, we have a very tight fiscal policy and fiscal surplus, which the French did not; secondly, we have put in place a whole series of supply side improvements, but the French have not; thirdly, they have a socialist Government pursuing socialist policies and we have not.

    Mr. Hugh Dykes (Harrow, East) Is my right hon. Friend aware that his decision 10 days ago has been almost universally welcomed in this country? It is a significant step forward, as is his reminder yet again today that the eventual single currency will be reached by agreement, not imposition, which is, after all, the Community habit and was at the specific request of Heads of Government when they asked Mr. Delors to draw up the plans.

    Mr. Major I am grateful to my hon. Friend for his support on those matters, which I greatly welcome.

    Ms. Clare Short (Birmingham, Ladywood) Is not the truth about the timing and level of our entry to the ERM the short-term interests of the Conservative party? The Chancellor thinks that, via an overvalued exchange rate, he will buy, for a short time, a cut in inflation and the stability to cut interest rates. After the election has been called, we shall see a terrible recession because the exchange rate is overvalued. Surely the danger for the Chancellor is that the markets have read all this, and that therefore the pound will drop in value. He will not get his desired outcome – the cut in interest rates – as the whole strategy will blow up in his face. That will be the price he pays for acting in the interests of the Tory party rather than the British economy.

    Mr. Major The hon. Lady and her party should not judge us by their standards. Entry into the ERM is not about short-term advantages and long-term costs – in reality it is almost precisely the reverse. There will be short-term restrictions on policy in return for the long-term advantage of lower inflation. That is the right way to proceed.

    Mr. George Walden (Buckingham) May I congratulate my right hon. Friend on making it clear in his speeches, notably at the party conference, that the success or otherwise of the ERM ultimately depends on self-discipline within the economy? I note his hope, his appeal and his wish for lower wage rates. Will he also make it clear to the country that there must be no resurgence of the bloated house prices that played such a large part in our inflation in the first place if this policy is to succeed?

    Mr. Major I absolutely share the views that my hon. Friend has expressed. The way in which house prices took off a couple of years ago added significantly to our difficulties – they took off after the election, so they did not help us win – and they represented a considerable complication in policy.

    My hon. Friend is entirely right as well in what he says about wage rates, which should apply to management as well as the work force.

    Mr. Doug Hoyle (Warrington, North) Will not the Chancellor admit that, despite his brave words, British manufacturing industry is not competitive, at almost DM3 to the pound? If it is not competitive, what will the result be? In the early 1980s, the Government destroyed almost 30 per cent. of British manufacturing industry, now the rest of British industry will also go down the plughole because of the Chancellor’s folly, dictated not by reliance on economic strategy but by political expediency.

    Mr. Major The hon. Gentleman may feel that, but if he does, he is wrong. In addition, I do not agree with his remarks about competitiveness. I reiterate my point that the size of the trade gap – which I have publicly stated I regret – is essentially the result of excess demand over our capacity to supply at home, no lack of competitiveness. That is why our export performance has been so good.

    Mr. Ivan Lawrence (Burton) Will my right hon Friend acknowledge that, necessary and commendable as entry into the ERM may be, there is nevertheless widespread concern in the country that it will inevitably lead not only to economic and monetary union but to a form of single currency and centralised banking control, and of control over our economy and taxation policies that will take away this nation’s national sovereignty and replace it with the elements of a European super-federal state? Will he make it absolutely clear that under no circumstances will the Government’s policies end at that destination?

    Mr. Major I am happy to tell my hon. and learned Friend that I see no prospect of us moving towards a federal state.

    Mr. Graham Allen (Nottingham, North) Does ERM mean exchange rate mechanism of election rigging manoeuvre? Will the Chancellor explain clearly and simply to the House what mechanism exists to devalue the pound within the ERM?

    Mr. Major I will tell the hon. Gentleman precisely what ERM means – it means an assistance towards low inflation. I am not contemplating devaluation, which is the traditional policy of Opposition parties, not a Conservative Government.

    Mr. Andrew Rowe (Mid-Kent) My right hon. Friend is of course aware that the belated conversion of the Labour party’s Front Bench spokesmen to welcoming membership of the European Community reflects their hope that by doing so they will belong to a socialist Europe. Does he accept that, although many of us welcome the fact that we are being moved closer to Europe, we wish to see a Conservative Europe and welcome his latest manoeuvre because it gives us a voice in the central policies of the European Community?

    Mr. Major I am grateful to my hon. Friend. What has become crystal clear during this questioning, to a greater extent than I imagined, is that the Opposition are split on the issue of the exchange rate mechanism. Their Front Bench spokesmen want to go in, but their Back Benchers are already asking how to come out – that is how split they are.

    Several Hon. Members rose –

    Mr. Speaker Order. I have to have regard for the subsequent business, an important debate on financial services and the European market, in which some hon. Members now standing wish to participate. I shall take three more questions from each side and then we must move on.

    Ms. Joyce Quin (Gateshead, East) Is the Chancellor aware that a document that the House will be considering shortly – the Government’s official response to the report of the Select Committee on Trade and Industry on the EC and financial services – clearly states that ERM entry will be considered only when the level of United Kingdom inflation is significantly lower. In view of that statement, will the Chancellor admit that, for political reasons, the Government have made a complete about-turn?

    Mr. Major That is a very charming attempt, but I will not. The relevant factor is not the historic inflation rate when we were not in the exchange rate mechanism but what the inflation rate will be when we are in the exchange rate mechanism.

    Mr. Edward Leigh (Gainsborough and Horncastle) Does my right hon. Friend agree that membership of the ERM makes sense to a Government committed to national economic sovereignty only if it is seen not so much as a cosy support system but as a measure of fiscal rectitude equivalent to the old gold standard? In that sense, what hope would there be for any Government who retained membership of the ERM but pursued policies of high spending, borrowing and taxation, and low interest rates, as a Labour Government would? Would not that send the pound not so much floating as crashing through the floorboards?

    Mr. Major That, of course, crisply put by my hon. Friend, is why Opposition Back Benchers hate the idea of the exchange rate mechanism and would never, in practice, have let a Labour Government enter and, in the unlikely event of a Labour Government coming to power, they would seek to bring them out. I hope that the markets and our colleagues in Europe understand that.

    Mr. Robert Litherland (Manchester, Central) The Chancellor puts great emphasis on self-discipline. If voluntary wage restraint did not come up to his expectations, however, would he ever consider a wage freeze?

    Mr. Major I do not think that the experience of wage freezes in the past 20 years – under Governments of both major parties – has been at all satisfactory, and I do not envisage our taking such action. The reason why I set out so clearly the importance of the wage round is that the sooner that it is clearly understood by both sides of industry that it is necessary for wage increases to be only those that are affordable, the less will be the impact in the form of job losses.

    Mr. Graham Riddick (Colne Valley) Does my right hon. Friend agree that one of the more distasteful aspects of the whole ERM debate has been the way in which Mr. Jacques Delors has been saying that the inevitable next step is a single currency whether Britain likes it or not? Will my right hon. Friend confirm once again that the inevitable next step is no such thing, and that the present Government will not be dictated to by this Brussels bureaucrat?

    Mr. Major I am happy to reiterate to my hon. Friend that we are not at all in favour of stage 3 of the Delors plan, and that we intend to pursue very fiercely our own plans for a market-led approach.

    Mr. Win Griffiths (Bridgend) Everyone knows that the Government have been thinking about joining the exchange rate mechanism for 11 years, and that they have been looking into it particularly deeply during the past five. Given this amazing conjunction of events, and the Chancellor’s emphasis on the reduction in inflation, can he tell us the expected rate of inflation on a quarterly basis until October next year, and also what estimate has been made of the rate of unemployment in the same period?

    Mr. Major I shall do that in the Autumn Statement – as is traditional – at some stage in November; the precise date is as yet unclear.

    Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak) Does my right hon. Friend accept that many of us were disappointed by the rather churlish response of the right hon. and learned Member for Monklands, East (Mr. Smith) – for whom many of us have considerable regard – when my right hon. Friend has done precisely what was asked of him only a week ago, by reducing interest rates and joining the ERM? Is this because the Opposition have recognised – it has been brought home to them – that what we must have are the same kind of wage increases, in relation to productivity, as other European countries; and that, if Rover and Ford car workers ask for 13 per cent. when Benz and Volkswagen workers are asking for 3 per cent., there is no way in which that can prove successful, whoever are in office?

    Mr. Major My hon. Friend is smack on the button: I entirely agree. I confess, however, to feeling some sympathy for the right hon. and learned Member for Monklands, East. It is not easy to try to ride two horses in that circus.

  • Mr Major’s Speech to Conservative Party Conference – 11 October 1990

    The text of Mr Major’s speech to the 107th Conservative Party Conference, held at the Bournemouth International Centre on Thursday 11 October 1990. The speech was issued as a Conservative Party news release, reference 637/90.


    CHANCELLOR OF THE EXCHEQUER:

    Let me turn immediately to the concern that I know is in most people’s minds. Two years ago inflation seemed beaten. Continuing growth, falling taxes, rising prosperity. That was what people had come to expect.

    Then we hit difficulties. In essence the case was simple. We grew too fast. We spent too much. We saved too little. And too much of what we spent was borrowed. The result was inflation at home and a trade gap abroad.

    Our objective must be to get back on course: most importantly to reduce inflation; and then eliminate it. And we must close that trade gap. At the moment we import far too much that both could and should be made here in Britain.

    Too often our industry – especially manufacturing industry – is portrayed as though it was the weak link in our economy – constantly in need of a crutch.

    That image is insulting to industry; more importantly, it simply is not true. Manufacturing industry is fitter and more competitive than for years. Increasingly it is attracting the best and brightest of our young people. An independent report recently argued that Britain has the potential to become the manufacturing dynamo of Europe in the 1990s. We have provided the right tax regime – the best in Europe. We have provided the right industrial relations framework – the best in Europe. Now we need to match that with the right low inflation economy and make that the best in Europe.

    On Monday of this week we took an historic step towards that when sterling joined the ERM. No one should think this will be an easy option. Or a soft one. It is not a quick fix. And it was not intended as such. It will not remove the need for tight domestic policies. But it will help us to get our inflation rate down and to keep it down.

    Membership of the ERM will not make it easier overnight for our industry to compete in Europe. But it will help to keep the exchange rate stable and to provide the certainty which industry needs to plan for the future. And we have gone in at a rate at which industry can compete. It is now up to them to stay competitive by keeping costs down.

    But let me correct one misconception that seems to have appeared. Joining the ERM does not mean that we are now on a road leading inexorably to a single currency. It does demonstrate yet again that we take our commitment to Europe seriously and that we mean what we say. But we also mean it when we say that we cannot accept the Delors plan and we will continue to press our own alternative that we believe will better promote European integration and keep the Community together.

    Joining was not a light or casual decision. But it was the right one. And it does target inflation as the poison in the economy that must be destroyed. Only as we do so can we take further steps to reduce interest rates and mortgage rates. I want to see that as much as anyone. I do understand – very well – the difficulties many people and many small businesses are facing. But I know too, that the countries that achieve the lowest inflation rates are the countries that will enjoy the lowest interest rates.

    The trouble with inflation is that the welcome bits come first – more money, cheap goods, expanding output. The unwelcome bits follow – soaring prices, collapsing businesses, lost jobs.

    But the cure works in reverse: high interest rates, bankruptcies, and tightening belts come first. Then we get stable prices, competitive businesses and a growing economy. In recent months we have been right at the nasty end of the cycle – feeling the pain but not yet seeing any of the benefits.

    Although oil prices have not fed through fully into the Retail Price Index I am now in no doubt that inflation will fall sharply over the next year. That will be next year’s reward for this year’s policy.

    And there is a further point. The first time I addressed this Conference was as a Social Security Minister. I noticed then that many pensioners were on social security benefits. Not because they were feckless. They weren’t. Not because they had not saved. They had – and often from modest incomes throughout a lifetime of work. No, they were on benefits because rampant inflation in the 1970s wrecked the value of their savings. I believe that was unforgiveable; we must never let it happen again.

    In recent weeks we have heard little enough of these realities from Labour. One of the main causes of our present difficulties is that, after the Stock Exchange crash in 1987, we reduced interest rates too fast. In retrospect it was a mistake. But we did so because we feared recession. So, at the time, did everyone else: economists, businessmen, pundits, even – heaven help us – the Labour Party.

    So I was astonished to hear Mr Kinnock claim that, at that time, in 1987, he was saying “Steady, steady!”. Now in retrospect that would have been right. But Mr Kinnock? “Steady, steady”, somehow I don’t recall that. So I looked it up. And, try as I might, I couldn’t find him saying that. Almost everything else, it is true, but not “Steady, steady”! Now it may be that I’m being unfair to Mr Kinnock. So let us try a larger sample.

    – Hands up those of you would heard him say “Steady, steady”?

    – Hands up those of you who think he could have said anything as sensible as “Steady, steady”?

    – Hands up those of you who believe he would say anything as short as “Steady, steady”?

    I will let you into a secret. I will tell you why Mr Kinnock always speaks at such length. It’s because he has nothing worthwhile to say. And because he has nothing worthwhile to say, the poor chap never knows when he’s finished. We know when he’s finished. The day after the next General Election.

    By the way, I did find out what he said in 1987 – and I quote;

    “This is a time of judgement and that judgement should be a big cut in interest rates”.

    So much for “Steady, steady”. So much for Mr Kinnock’s memory. And so much for our prospects had we taken his advice.

    For what he really proposed was a policy that would have given us far higher inflation today. And what he plans now would give us even higher inflation tomorrow.

    For every pressure group he has a spending promise. Many are appealing. Some are appalling, others are frankly loopy. But together they are unaffordable. Even the large tax and national insurance increases they admit to could not pay for Labour’s real programme. But, of course, if they kept their promises, tax increases would be bigger. And if tax increases were not bigger then they could not keep their promises. That’s why Labour will not price their programme. But in due course, we will. Just to help them out – and also, of course, to help keep them out.

    There is now only one solitary part of John Smith’s economic programme that still survives: credit controls. The problem for him is that they don’t work, they’re out of date and the rest of the world is ditching them. What a commentary on the modern Labour Party. As the Third World tosses out failed economic policies, John Smith picks them up. Well, after this week he’ll have to pick up a few more if he wishes to look distinctive.

    But put aside for a moment the rights and wrongs of any particular policy. Consider their priorities: the State and tax and spend. And the individual can pay and be controlled. Doesn’t that just sum up the essential differences between our two parties? They are the party that builds up choices by the State. We are the Party that provides choices for the individual.

    They are, of course, closer than us to the trade union leaders. But we know what that means. It means that when it comes to the crunch the trade unions will put their arm around Mr Kinnock’s shoulders and say “Neil”. And he will.

    By contrast, our Party is about people and for choice. People know what we stand for. Our policy is to promote economic well-being. Over the years we have succeeded.

    We have done so because we have been prepared to take the long view, to make fundamental changes, often controversial at the time. To deregulate, to denationalise, to allow enterprise to flourish, and to encourage people to take responsibility for their own lives. This approach is often less cost than promising that the Government will do everything for everybody. But, in 11 years, it has improved the prospects for the future out of all recognition.

    We owe a great deal of that to the policies pursued by Geoffrey Howe and by Nigel Lawson.

    Our approach has been based on the fundamental premise that people want opportunity:

    – Opportunity to do more for their children;

    – Opportunity to improve the standard of their life;

    – Opportunity to obtain the dignity of independence and self-sufficiency in retirement.

    And not only for the better off.

    – Do council house sales help only the privileged?

    – Or employee share ownership?

    – Or lower basic rate taxes?

    We know the answer to that. They do not.

    The changes we have introduced give choice and opportunity to millions of people who never had them before. That is what we have achieved in the last 11 years. It is a truly remarkable achievement. And it could not and would not have happened without the leadership of Margaret Thatcher.

    And that is what we must continue to build on in the future. As we do so, the Labour Party will accuse us of being materialists. I plead guilty. In that one charge they admit the dramatic improvements in living standards we have brought about.

    Of course the charge is meant to make us look selfish. But does it?

    What materialism means for many people is that they are better fed, better clothed, better housed than ever before. They own homes, cars, washing machines and televisions, on a scale earlier generations never dreamed of. They live in a society where literature, art and music are available in abundance. In which political and personal freedom are taken for granted. In which the class barriers that once strangled social mobility are gone.

    And what our opponents cannot stomach is that they live in a society that knows it is the free market and capitalism that have delivered this improvement. For here as elsewhere the market economy has won the political, the social and the economic argument and Socialism has lost.

    Since 1979 we have rebuilt a market economy; we have untangled bureaucracy, we have denationalised industries and reformed trade unions. And it has worked. We enter the 1990s in incomparably better shape than we entered the 1980s.

    – Investment is far greater.

    – More people are in work.

    – Real take home pay is higher.

    – Strikes are down dramatically.

    – And half the State sector is back in private ownership.

    And the prizes before us now are enormous. The 1990s will be a period of immense opportunity. Increasing trade will flow from the completion of the Single Market and the opening up of Eastern European economies.

    I have no time for the misery mongers with no faith in our future. It’s about time people stopped talking this country down and started talking it up. Throughout much of the 1980s the British economy outperformed the rest of Europe.

    Overseas investors have shown their confidence in our country and our workers – and that is why we attract more inward investment than any other European country. We should have more faith in ourselves. And that must be one of our aims for the 1990s.

    And when inflation comes down, as it will; when interest rates can prudently be lowered, as in due course they can; when 11 years’ improvement to the economy brings more prosperity, as it must; the electorate will know which way to turn.

    Once again, it will put its trust in a Government that delivers. That keeps its word and keeps it nerve. That knows what we should aim for and plans to achieve it. A Government, above all, with the will, the authority, and ‘The Strength to Succeed’.

  • Mr Major’s Comments During the Economic Debate – 24 July 1990

    The text of Mr Major’s comments during the Economic debate, made on 24th July 1990 in the House of Commons.


    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 improvement in economic performance over the last 10 years, with the United Kingdom’s growth of output, manufacturing productivity, employment and investment since 1980 exceeding that of almost any other major European Community country; and endorses the priority the Government attaches to reducing inflation, in order to safeguard and build on these achievements. For all its customary charm, the speech by the right hon. and learned Member for Monklands, East (Mr. Smith) had a familiar ring. Perhaps a touch scaled, it is an old favourite that the House has heard on a number of occasions. It is no wonder that the right hon. and learned Gentleman delivers it so well, for he has delivered it so often. None the less, as ever, we enjoyed it. Despite that, it was an empty speech because it was empty of the alternatives that he and his colleagues would bring into operation were they in government.

    If the right hon. and learned Gentleman wishes to be taken seriously as a potential Chancellor, he will need to produce in some detail policies that, when examined, can be seen to be capable of being carried out and to add up in economic and political terms. The right hon. and learned Gentleman will achieve nothing if he continues to condemn the disease and also condemn the cure, which he should know must involve monetary policy of the sort that we are using at the moment.

    The right hon. and learned Gentleman has no policies to curb the central problem that exists at present – the problem of inflation. Neither does he have any policies to prevent it from recurring in future. All that he has to offer are the same old traditional recipes that have been handed down from generation to generation in his party – looser monetary policy and looser fiscal policy, that is lower interest rates and higher spending. Where does the right hon. and learned Gentleman think that that would leave him and his party? That is the classic recipe for the debt and devaluation that have been the legacy of every Labour Government.

    I was intrigued a few weeks ago to listen to the leader of the Labour party when he appeared on “Panorama”. He said then that, when monetary policy was loosened at the end of 1987 in the wake of the stock market crash, “We” – that is, the right hon. Gentleman and the Labour party – “were saying steady, steady.” In retrospect, it would certainly have been right to say, “Steady, steady.” However, I was not sure whether that was how I remembered the Labour party’s posture at the time, so I had a brief look to see what the right hon. Gentleman was advising at the time, and I certainly did not find “steady, steady” among the right hon. Gentleman’s pronouncements. Indeed, I offer a prize to anyone who can find the term “steady, steady” used in any context by the right hon. Gentleman at that time. I found what I had expected to find. Then, as now, the right hon. Gentleman was arguing for lower interest rates and described the modest cuts we had made as “inconsequential”. He told us: This is a time for judgment, and that judgment should be a big cut in interest rates.” – [Official Report, 29 October 1987; Vol. 121, c. 446.] No “steady, steady” there.

    Perhaps, I thought, the right hon. Gentleman leads a collegiate team and is remembering the words of his colleagues, so I checked those too. I found that his hon. Friend the Member for Dagenham (Mr. Gould) spoke in the House on 5 November, but he did not say “steady, steady” either. He said:

    If the Americans were to follow the Chancellor’s monetarist advice, and if the interest rates and taxes were to be raised or social security benefits were to be cut, it could only bring the threat of worldwide recession so much closer.” – [Official Report, 5 November 1987; Vol. 121, c. 1154.] It is clear what the hon. Member for Dagenham had in mind. He was not saying “steady, steady”; he wanted a reduction in interest rates too. I then wondered whether the Leader of the Opposition had remembered the words of his right hon. and learned Friend the Member for Monklands, East – that pillar of fiscal rectitude. I checked and I found it as I remembered. The right hon. and learned Gentleman did not say anything in the House that I could find, but he went to Paris to talk to the OECD on 13 November 1987. Did he tell the OECD that things should be taken “steady, steady”? Did he heck. He called for A stimulation of the economy by cuts in interest rates”. Just to make sure that there was no doubt that the right hon. and learned Gentleman wanted to loosen policy he said it again the next day at Airdrie:

    Now is the time for cuts in interest rates to stimulate the economy”. So much for “steady, steady”. “Steady, steady” is fiction, fiction. In retrospect we all acknowledge that it was the relaxation of monetary policy that helped cause the difficulties.

    Mr. John Smith As we are trailing over the years since 1987, let us look to the Budget of 1988. Will the Chancellor tell us – given that the situation was so obvious in 1987 – what on earth was the justification for the huge tax cuts in 1988, which were attacked by me and my right hon. Friend the Leader of the Opposition, but which the right hon. Gentleman defended?

    Mr. Major I believe that the right hon. and learned Gentleman has just taken economic advice from the leader of the Labour party, and if that is so, he has just made a material mistake. The underlying problem that generated many of the difficulties that we faced was, in retrospect, a relaxation of monetary policy because of fear of a recession. One could see that, with credit growth of £40 billion in the subsequent year, the problems were not caused by the cuts in income tax that amounted to only £4 billion, as a supply-side measure. The figures do not remotely add up and I suggest that the right hon. and learned Gentleman should get a new and better economic adviser than his right hon. Friend.

    Mr. John Smith With the benefit of hindsight, can the right hon. Gentleman tell us whether the Government were right to let a credit boom rip to the extent that he has just described? If so, what on earth was the justification for making tax cuts in such a situation?

    Mr. Major Does the right hon. and learned Gentleman not realise that one of the things that generate a credit boom is lower interest rates, which he was precisely calling for? The reduction of taxation was on the back of a huge fiscal surplus in 1988 – a point which the right hon. and learned Gentleman and his right hon. Friend have momentarily overlooked.

    Given that the Leader of the Opposition has criticised us for causing inflation, the uncomfortable truth is that, judged by his words and those of his colleagues, he would have made bigger mistakes on monetary policy than anyone else. The problem of the credit boom would have been materially worse. I suspect that the right hon. Gentleman has remembered that only latterly, but it is about time that he admitted that he was wrong in 1987. The uncomfortable truth –

    Mr. Neil Kinnock (Islwyn) As a matter of history, it is important to refresh the Chancellor’s memory, as I believe that he is trying to offer the view that the difficulties, to which, presumably, he will own up, only began with the relaxation of policy in response to the slip in the stock markets in the back end of 1987. The right hon. Gentleman should understand that, before the 1987 election, in order to make a contribution to try to win that election, policy was greatly slackened with the intention of tightening it up after the election. The Government, however, were taken by surprise and made an utterly incompetent response to the events on the stock markets. Until now I thought that the Chancellor was a candid man; if we are to have a story, let it be the whole story.

    Mr. Major I shall not only provide the whole story, but remind the right hon. Gentleman of the other element he has overlooked.

    Just before the November stock exchange crash, in August, my predecessor, my right hon. Friend the Member for Blaby (Mr. Lawson), unexpectedly increased the interest rate by 1 per cent. because of concern about the growth of credit. That was a considerable shock and surprise to people, but he acted so because he wanted to restrain what he thought might be an incipient growth of credit. If the Leader of the Opposition would also care to come to the Dispatch Box again to give me chapter and reference of when he said “steady, steady” in 1987 I shall happily give way. [HON. MEMBERS: “Come on.”] I should be happy for the right hon. Gentleman to advise the House on that.

    Mr. Kinnock I shall do so on the understanding that my reply will be given in exchange for the right hon. Gentleman’s readiness to get on with addressing the present problems. He is the Chancellor and we want to know what he will do about dealing with the problems, because that is what will most interest the British people, business and anyone else concerned about the future of our economy.

    The right hon. Gentleman will recall that, in 1987, and definitely as we came up to the Budget of 1988, which he has defended, we proffered urgent counsel that everything possible should be done – it should also be done now – to assist the supply side of British industry. We included in that the reduction in interest rates and the avoidance of the type of tax cuts the Government were then making. That was the policy for stability, steadiness and production, but instead the Government pursued their policies that have resulted in a disastrous balance of payments deficit and an inflation rate of 10 per cent. “Steady, steady”, John.

    Mr. Major That was an amazingly skilful reinterpretation of events, as one would have expected from the right hon. Gentleman. If he will forgive me for saying so, it was more slippery, slippery than “steady, steady”. Let me be sufficiently unkind to quote again what the right hon. Gentleman said: This is a time for judgment, and that judgment should be” – as Leader of the Opposition, his judgment is important – a big cut in interest rates.” – [Official Report, 29 October 1987; Vol. 121, c. 446.] That is what the right hon. Gentleman said in October 1987.

    Let us leave it to stand on the record between us whether that judgment was “steady, steady” or slippery, slippery. [HON. MEMBERS: “What about inflation?”] I am about to deal with that, because the uncomfortable truth for Governments of whatever complexion is that inflation does not respond to soft options. It certainly does not respond to speeches. It takes tough measures, which are inevitably unpleasant, to defeat inflation. There is no choice in my mind about the necessity to defeat inflation.

    It was difficult and often painful and unpopular measures that brought inflation down at the beginning of the 1980s. I understand that monetary policy is often unwelcome to people, but that is how every other major industrial country deals with inflationary pressures. That is why we are using interest rates and that is why the Leader of the Opposition should know that we shall continue to use them. We shall use them for one simple overriding reason: they work. No one should doubt that, and that is the only recipe for getting inflation down.

    Mr. John Smith The Government will ruin industry.

    Mr. Major So the right hon. and learned Gentleman would not use monetary policy, but let inflation rise. That is excellent.

    The evidence that interest rates will work is indisputable. It is now there to be seen in the housing market, which has cooled down. It is evident in the high street and in sales of new cars. In recent weeks, it has been evident in slower money growth, in the easing of capacity constraints in industry and in a better export performance.

    Mr. John Smith What about imports?

    Mr. Major Imports are down. They are higher than I would wish them to be, but they are down, and in the past 10 months, exports have grown five times as fast as imports. When did that happen under a Labour Government?

    Perhaps the real concern in the Opposition’s mind is that the policy is working. In this, unusually, they are right. No doubt that is why the right hon. and learned Member for Monklands, East is so concerned and agitated. But it is perfectly true that although the policy is working, its job is not yet done. I readily concede that the inflation rate is still too high and, because of the time that it takes for policy to have its full effect, it may move a little higher yet before it begins to turn down. But turn down it undoubtedly will, towards the end of this year and on through next year – although perhaps a bit more slowly than we had hoped.

    We are determined to keep a tight policy in place to secure this fall in inflation. There should be no doubt about that. I have made it clear before – and I willingly do so again in view of what the right hon. and learned Gentleman said – that this policy is not a short-term attack on inflation. It is not a question of bringing inflation down by a few per cent. and then letting up. There will be no pre-election boomlet of the sort sketched out by the right hon. and learned Gentleman. The policy is a long-term attack on inflation. First, we must get our inflation down to our competitors’ average level. Then we must get it down further still, then down to the level of the best and onward down beyond that. That is clearly the policy.

    Perhaps I may attract the attention of the right hon. and learned Member for Monklands, East. [Interruption]. I shall endeavour to do so, and I shall certainly give way to the Leader of the Opposition if he wishes me to do so.

    My remarks about inflation do not mean that I am unaware of, or insensitive to, the difficulties that high interest rates cause. I am fully aware of the feeling that they arouse and I do not ignore them or weigh them lightly. But there is another consideration which any Government are bound to take into account and which, in my view, is decisive: the damage that inflation does if it is permitted to entrench itself. If it entrenches itself and goes unchecked, it can cause long-term damage to the economy, as we saw only too clearly in the 1970s when the Labour party did, indeed, leave it unchecked. The legacy of that was acutely painful.

    Mr. D. N. Campbell-Savours (Workington) Has Mr. Leigh-Pemberton made any representations to the Government about a pre-election boom?

    Mr. Major I think that the conduct of monetary policy, and economic policy generally, is a matter for the Chancellor of the Exchequer and not for the Governor of the Bank of England, however distinguished. Moreover, Mr. Leigh-Pemberton’s discussions with me, whatever they may contain, are a matter for Mr. Leigh-Pemberton and me and not for the hon. Gentleman. [HON. MEMBERS: “Steady, steady.”] I am entirely steady and, as I have been reminded of the matter, I still look forward to the Leader of the Opposition telling me the time and the place at which he voiced that extremely interesting proposition.

    I know that some people who are struggling with high interest rates may think that nothing could be worse, but the banana republic rates of inflation in the 1970s were definitely worse. To return to that at a time when – once inflationary problems are stripped away – the prospects in every other respect are extremely promising would be quite unforgivable. Under the right hon. and learned Gentleman’s prescriptions, of course, a return to high inflation would be inevitable, for reasons to which I shall come in a moment. If the right hon. and learned Gentleman will forgive me for saying so, the leopard has certainly not changed its spots, even if it has developed a Scottish accent.

    I find it truly astonishing that the right hon. and learned Gentleman argues for a let-up on inflation – that is implicit in what he says – on the grounds that that is what business wants and needs. That is the way in which the Labour Government acted and we saw what that did to the condition of British industry. The success that British business men and women have made of their enterprises in the past decade has represented the clearest possible rejection of the misguided economic policies and industrial strategies that the Labour party left to us in 1979. Individual business men and women have shown beyond a doubt the results that can be achieved if Governments spend less time interfering, less time regulating and less time feather-bedding them.

    It was precisely because the Labour Government neglected their real duties that business and commerce entered the 1980s in such a fragile and pathetic state. Contrast that with the resilience of the economy today: even with interest rates in double figures for two years, business starts still exceed stops by a massive margin, week after week. That is the clearest illustration of the revitalisation of British industry. We have more people in work than ever before. We have managed to halt decades of decline in our share of world trade, actually increasing it in the past year. None of those points managed to find a place in the right hon. and learned Gentleman’s familiar speech, but I offer them to him for the future.

    The strong growth in exports over the past year, itself a result of strong investment in recent years, is, in my judgment, the best possible omen for the long-term future of the British economy. I note that the right hon. and learned Gentleman made no acknowledgement of that performance, although I am sure that he would welcome it. Our performance did not fit in with the picture of doom and gloom that the right hon. and learned Gentleman sought to paint. As I said a moment ago, in response to a sedentary comment, in the past few months, British exports have been growing five times as fast as imports. In fact, exports have been growing faster than imports for the past 10 consecutive months.

    For the future, the prospects opening up in the single market in the next few years will massively increase the opportunities for British firms to trade abroad. There is still more to come as we free up the areas that remain for the completion of the single market. There is still a considerable amount to be done to achieve that. It is in no sense a remit that we can put on the back burner. Britain is determined to make sure that the laggards in the Community – and we are not among the laggards when it comes to implementing Community directives – keep up with implementing the single market measures and do so with all possible speed.

    We face even more far-reaching questions as we consider proposals by our Community partners to enhance economic and monetary integration beyond what has become known as stage 1. There is not a shred of doubt in my mind that at present that is the most important issue facing the whole Community. But so far, the debate in Europe has not fully covered the many important issues at stake, and in the months to come, we are determined to ensure that it does.

    There are undoubtedly significant points of disagreement within the Community about how we progress beyond stage 1. But I believe that there are some important areas of general agreement. First, we agree that it is desirable to move forward together – if we can.

    Secondly, I believe that it is generally accepted that to make a premature attempt to introduce monetary union while levels of inflation in the Community are as disparate as at present and before we have much more flexible markets would be to risk great strains and tensions.

    Thirdly, I think that we all share the ultimate aims of greater price and currency stability and more fully integrated economies.

    We think that it is essential to bring out the key criteria that we should be aiming to meet as we examine options. We believe that it is desirable to achieve a greater economic convergence on the performance of the best in the Community. We must also respect the principle of subsidiarity which – to avoid doubt in anyone’s mind – specifically means that nothing should be done at Community level that could better be done at national level. Above all, there is an overriding need to ensure that any future arrangements have a strong anti-inflationary character.

    The proposals that we have developed, which are now being studied across the Community, will, I believe, meet those criteria, and we shall be advancing them very forcefully throughout the coming months. The United Kingdom’s proposed approach centres on the creation of a new anti-inflationary currency, which we have called the hard ecu, and which would be managed by a new Community institution, a European monetary fund.

    We believe that the hard ecu would provide an attractive common currency for the whole Community. It would be for people, businesses, and Governments to choose whether and how much they wished to use it. Our approach is new and different in one important respect from the parallel currency proposals that were examined and rejected by the Delors committee: it has been designed in a way that would strengthen, not weaken, the anti-inflationary forces in the Community. It could not lead to extra money creation. We believe that that is essential, since the concern that a parallel currency would lead to undue growth in the money supply is a legitimate one, which we share.

    First, the new currency would be part of the exchange rate mechanism, but, by definition, it would never be devalued at exchange rate mechanism realignments against any European Community currency. It would therefore set a stiff standard of competition for national monetary policies and would reinforce monetary discipline.

    Secondly, the hard ecu could be purchased only by surrendering national currencies. Thirdly, the requirement on national central banks to buy back national currency from the European monetary fund would oblige them to run a tight ship. This is a novel requirement which was not considered when previous parallel currency ideas were floated.

    Mr. John Smith And rejected.

    Mr. Major And rejected for good reasons – that absent from the proposals were many of the features that are included in the proposals that we have now put forward. It was right to reject those ideas.

    Our proposal avoids falling into the trap of blurring responsibilities for monetary policy. Responsibility for the hard ecu would clearly lie with the European monetary fund, while national monetary authorities would still retain overall responsibility for their own currencies. In particular – this is a point that I shall be making very clear to my colleagues in other European nations – our proposals respect the roles of national Parliaments and, as such, are entirely in tune with the overwhelming consensus in this Parliament, as expressed in our debate on these matters last November.

    Mr. David Howell (Guildford) Is not my right hon. Friend right to emphasise that the scheme he is outlining is for the whole Community? Would not the alternative idea of a single Eurofed currency certainly exclude some countries whose convergence with the Community’s monetary policy had not been fully achieved, which would lead to the divisive two-tier Europe that most good Europeans do not want?

    Mr. Major I agree entirely with my right hon. Friend. It would either exclude some Community countries or, if they were included, create considerable economic turbulence within the Community. On that basis, therefore, they would clearly in reality be excluded, as my right hon. Friend said.

    Mr. Brian Sedgemore (Hackney, South and Shoreditch) Does the Chancellor agree that if there were to be genuine competition between the pound and the hard ecu, the hard ecu would need to have the same legal status, the same access and the same ability to be transferred, which would lead to the hard ecu having to be made legal tender? Will the Chancellor confirm that in answer to me he said that the hard ecu would not be made legal tender?

    Mr. Major The hard ecu does not have to be made legal tender in any member state of the Community. If, however, it were to be adopted, many states might choose to make it legal tender. Provided that it were accepted by the parties who consented to a transaction, the hard ecu could perfectly legally be utilised without formally being made legal tender. I suspect that the hon. Gentleman and I may be able to debate this matter at length at the meeting tomorrow of the Treasury and Civil Service Select Committee. I much look forward to that bi-annual encounter.

    On the point of our debate last November, there seems to be some common ground between us and a number of Opposition Members. I find it not surprising, although perhaps a little sad, that there is little common ground between us anywhere else. There is certainly no common ground between the parties on public expenditure. Despite the appearance of rectitude and virtue that the right hon. and learned Member for Monklands, East seeks to establish, shadow Ministers vie with one another almost daily to pile up more and more spending pledges.

    The hon. Member for Derby, South (Mrs. Beckett) made a valiant effort, but her claim that Labour has only two spending commitments – increased child benefit and higher retirement pensions – is, frankly, ludicrous. She says that other spending proposals would be fulfilled only when the money was there. She knows, as everybody else knows, that she has no chance whatsoever of convincing the country of that while the leader of her party, the shadow Chancellor and assorted colleagues implicitly and explicitly commit themselves to extra spending in nearly every speech that they make. The right hon. and learned Gentleman referred to the restoration of cuts, but he must surely realise that to restore something means that expenditure must be increased from its present level. Even today he referred to the restoration of expenditure.

    The hon. Lady’s trenchant message clearly has not got through to her spending colleagues in the shadow Cabinet. With the solitary exception of the armed forces – and how well we understand that – all Labour spokesmen shadowing a spending Department have promised massive increases in expenditure for their client groups. They have not told us, of course, where the money is to come from. In essence, however, it can come from only two places. It can be funded by increased borrowing, with inevitably higher interest rates, or by increased taxation. We know some of the bad news already. The Opposition are pledged to phase out the married couple’s income tax allowance. That would make every married couple in the country worse off. Labour would abolish the upper earnings limit on national insurance, thereby making nearly 3.5 million people worse off.

    Mr. John Smith Where does the Chancellor get that from?

    Mr. Major I get it from the right hon. and learned Gentleman’s own commitments.

    That would add 9 per cent. to the marginal tax rates of nearly 3.5 million people. Labour would extend national insurance to what it has the temerity to refer to – rather inelegantly, I think – as unearned income: what the man in the Monklands high street might conceivably call savings. So much for the encouragement of thrift.

    Mr. Smith Apart from the fact that there is no Monklands high street – the Chancellor ought to understand that it is a district, not a town – on the question of the upper earnings limit for employees national insurance contributions, what is the justification for asking everybody earning up to £18,200 to pay national insurance on the whole of their salary while those who earn more than £18,200 pay national insurance only on part of their salary, with employers having to pay it in every respect?

    Mr. Major The progressive nature of taxation is in the income tax system, not in the national insurance system, and has been there from the moment that the scheme was first conceived. I apologise to the right hon. and learned Gentleman for having assumed that there was a Monklands high street. I now know that there is not, although the right hon. and learned Gentleman no doubt wishes that there were.

    What is perfectly clear from the right hon. and learned Gentleman’s policies is that his message to the individual is to spend now and pay later – just like Labour’s policies would be as a Government. We know precisely where their policies landed us last time.

    The fact is that, if Labour spends as it promises to do, it cannot tax as it implies. I hope that the right hon. and learned Gentleman will absorb that point. If Labour sticks to its tax pledge, its spending pledges are meaningless, for the two are wholly irreconcilable. If they are not irreconcilable, let the Opposition show us their arithmetic. If they cannot do so, we shall assume that the Opposition would do what they have always done: have their hands in taxpayers’ pockets more often than taxpayers have their hands in their own pockets. That is precisely the way in which Labour Governments have always behaved.

    The Labour party called this debate out of a mixture of timidity and desperation – timidity because it was too timid and nervous to call a censure motion, desperation because its fleeting hopes of last spring are disappearing before its eyes.

    Mr. Sedgemore Go on; let us have more of this.

    Mr. Major Yes, there is more of it. The hon. Gentleman, who clearly had an extremely good lunch, must know that in their heart of hearts the Opposition realise that they will not win and that they cannot win. The Opposition have seen their best days in this Parliament and they have now passed.

    When inflation comes down, as it will; when, in due course, interest rates can prudently be brought down, as they will be; when 11 years’ improvement to the economy brings more prosperity, as it undoubtedly will, the electorate will know where to turn. They will put their trust, once again, in a Government who believe in the market rather than in paying lip service to it; a Government who deliver freedom rather than just talk about it, and a Government who can deliver prosperity rather than seeking merely to redistribute it. That is why, after the next election, Opposition Members will be precisely where they are now – opposite – and Conservative Members will be on the Government Benches.

    Mr. John Battle (Leeds, West) Despite the television coverage of our proceedings in the House and the need to cultivate our media personalities, a curious paradox seems to be emerging in our politics which could be encapsulated in the words, “Whatever you say, say nothing.” That is precisely what the Chancellor has done today and it is precisely what the former Secretary of State for Trade and Industry, the right hon. Member for Cirencester and Tewkesbury (Mr. Ridley), discovered to his cost from the article in The Spectator.

    I was interested to note on the midday television news yesterday that, when asked to comment on the deteriorating trade figures, the Chancellor had nothing to say. The Chancellor does not seem to have a word to say either to those who have lost their jobs in the basic manufacturing, textile and engineering industries. I suspect that it is the silences, the gaps, the absences in Government statements, press releases and the words of Ministers, that show the real underside of the Government’s economic policies.

    Has the Chancellor nothing to say about the increasing unemployment that is becoming a daily experience with closures and redundancies in many constituencies? We now have the new Cityspeak, with redundancies being described by the euphemism “down sizing”. For real people it means losing their source of income.

    On 14 June the Department of Employment issued a press notice which said: The rise in unemployment is not unexpected”. It went on to say that unemployment in Yorkshire and Humberside is falling. But according to the figures in the Library, at the same time the rate in my constituency was increasing. It had risen to 6.9 per cent. If we take into account the 30 changes in calculating unemployment figures, the real rate in my constituency is 10.4 per cent. – 4,478 people without full-time work. That is double the Government’s figures of 2,965, twice the rate that the Government calculate and, I assume, on which they base their policies.

    Has the Chancellor nothing to say? Perhaps he has said nothing about unemployment because unemployment has never been a priority, an election issue, with the Conservative party in the past. The unemployed can simply be written off because they cannot determine the outcome of an election. Their stake in an election is too low. The unemployed do not matter. They can be made, statistically, to disappear.

    I am interested that the Chancellor had nothing to say today about the increase in poverty. He gave not a word of apology for the fact that the Government have repeatedly used figures in the House against our arguments which they have now revealed to be completely wrong and misleading. Only yesterday, a document entitled “Households Below Average Income 1981-87” was published which showed that the number of people living on less than half average income rose by 50 per cent. to 7.7 million in the two years 1985-87.

    When they are discussing a policy for the family, I hope that the Chancellor will remind the Prime Minister that in 1981 the number of children living in households on below average income was 1.8 million. In 1987, it was 2.4 million – 20 per cent. of children. If we were to look at the facts of poverty, we might start to have policies for the family which address that issue rather than the rhetoric that we have heard in recent weeks.

    The facts in the document “Households Below Average Income” show that, in 1979, 9.4 per cent. of the population had incomes below half the average. In 1987, 19.4 per cent. of the population had incomes below half the average. The poorest 10 per cent. saw their real incomes reduced by almost 6 per cent., and that in the face of the overall average going up some 23 per cent.

    Mr. Anthony Nelson (Chichester) To put the figures in context, will the hon. Gentleman say what the average incomes were in the two years to which he refers, and what the real increase in average incomes was during that period?

    Mr. Battle The hon. Gentleman will be aware that the average income was £239 a week, well above the incomes of many of my constituents. They would be glad to be on the average income. The Government base their calculations on averages, but some Conservative Members do not seem to realise that, if incomes at the top go up, they will pull that average up at precisely the same time as the incomes at the bottom are going down. They have a Heineken theory of economics. It is as though the adverts have taken on real life.

    The document “Households Below Average Income” shows beyond a shadow of doubt that there has been no trickle-down effect in our society, by which with wealth generated in our economy is supposed to reach the poorest. The Government used to claim – the hon. Gentleman might care to reflect on this – that the incomes of the poorest 10 per cent. grew faster than those of the rest of the population. Then, in a footnote to a written parliamentary question, it was revealed that the statistical basis of that calculation was wrong and that the incomes of the poorest 10 per cent. did not grow as fast as those of the rest of the population.

    It may be of interest to hon. Members to know that annexe 1, table d, of “Households Below Average Income” shows that the real income of the poorest 10 per cent. between 1979 and 1987 was – wait for it – minus 5.7 per cent.; in other words, a reduction in income, not an increase, as my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) made plain. How can we hide that behind the euphemism that their incomes are increasing less rapidly? They are decreasing, yet the Government’s press release which accompanied the publication of that document yesterday claimed: More people had below half the average 1987 income, reflecting a wider income distribution. What a euphemism for the fact that the rich are getting richer and the poor poorer. At last the Government acknowledge the fact, but the next Labour Government will be looking for policies which address that fact.

    We effectively have two Budgets. We have the real Budget and we have a statement on benefits some time in advance of that each winter which has always reduced the incomes of the poorest. Yet the Chancellor has the nerve to tell us today that £4 billion of public money was given back in tax cuts and that is now seen to have been a mistake by the former Chancellor of the Exchequer.

    Yesterday, the first edition of the new Treasury bulletin was published, for which we are grateful. In the foreword to that document the Chancellor says: It is important for public debate that we have accurate statistics and accurate information. I urge the Chancellor to insist that such accuracy should apply to press releases, answers to written questions and answers at the Dispatch Box. It is all right for Mr. Jim Hibberd, who works for the Treasury, to point out in that bulletin that there were misleading indicators which clearly underestimated the buoyancy of the economy. That underestimate may have misled the former Chancellor of the Exchequer. It also resulted in millions in Britain paying the price for this Government’s economic policies and in the rash, tax-cutting, classic Tory, old-fashioned methods which unleashed the consumer boom for which this Chancellor is now having to pick up the pieces.

    I noticed that the Treasury bulletin also said that there would now need to be “judgmental revision”. I hope that that does not mean that we shall be told that the Government will make judgments about unemployed people. I also hope that that does not mean that the decision will be, as was suggested by one of the institutes, that the unemployed should no longer receive unemployment benefit and that people should take out private insurance against times when they might lose their jobs. There would, in other words, be no unemployment benefit as a basic national social security cover. The Treasury is forcing people to pay the price for the decisions of the previous Chancellor.

    Over the past 10 years, we have experienced the sustained and systematic statistical abolition of poverty, unemployment, low pay and housing need. Blindness has been deliberately fostered in Government policy to the very existence of the unemployed and of the poor as real people. There has been an insistent silence when appeals have been made to tackle the increasing structural poverty in our society. There have been denials that the divisions have been increasing.

    The Treasury bulletin says: There are clearly very different stories”. I hope that Conservative Members will listen carefully to some of the stories that they may hear in the recess from their constituents who struggle to pay their mortgages, struggle to pay the poll tax and struggle to find homes that are appropriate to their needs. The poor should not be derided as freeloaders, as one Minister referred to them recently in a television interview on the poll tax. It may not occur to Ministers when they say that people on rebates are freeloaders that they receive a rebate precisely because their income is too low to enable them to pay their own way. The Government should raise their incomes and we might then tackle the problem of rebates. I remind Conservative Members before they go on television and castigate the poor as freeloaders that the poor are all means-tested before they have access to those rebates.

    It is fair to point out that the Chancellor did not refer to the unemployed or to the poor. However, he also says nothing about the report in the Financial Times yesterday that, according to the latest surveys, Britain’s managers are all on course for a 13 per cent. rise in total pay. The Chancellor says nothing about the fact that former state-owned organisations reacted to their newly found private status by awarding large increases in earnings to their best-paid directors. In four of them – Enterprise Oil, British Airways, the British Airports Authority and Jaguar – the directors all received an initial year’s increase in salary of 100 per cent. The Chancellor says nothing about the recent report on City fringe benefits, which include that special perk of a cheap 5 per cent, mortgage. This year alone, for 200,000 people it is estimated to be worth £380 million. The Chancellor says little about how the £91 billion benefits of North sea oil revenues of the past decade, which the Government had at their disposal, have been squandered.

    The Chancellor has nothing to say about the recent regional inequality. The regional trends survey published this month showed a widening of the north-south division in terms of regional differences in income, share ownership and the growth in second jobs. The number of people with second jobs increased massively in the south-east – between 1981 and 1988 it increased from 162,000 to more than 300,000. The increase in second jobs is far smaller in Yorkshire and Humberside. The increase in income disparity between 1985 and 1988 was 30 per cent. per head in the south-east, 32 per cent. per head in the south-west and 24 per cent. in Yorkshire and Humberside. If we use an index under which national average income is taken as 100 in 1988, the south comes out at 117, and Yorkshire and Humberside at 89.9, lowest of all and only just above the figures for Northern Ireland. The region that I represent is a low-wage, part-time job area and the Government’s policies are intent on keeping it that way.

    The Chancellor may be quietly trying to lay the ghost of Professor Sir Alan Walters. The new Treasury bulletin says that the Central Statistical Office will be shifted from the Cabinet Office to the Treasury. The Prime Minister may be quietly undermining that strategy by ensuring that one of the Chancellor’s new junior Ministers is a member of the “No Turning Back” group. What characterises that group is that it has a classic formula for turning its back on whole sections of the British population.

    When a Government adopt a policy of “whatever you say, say nothing”, I am reminded of a comment that was shouted out by Conservative Members about the phrase in the United States election, “Watch my lips”. That is the say nothing politics and the ultimate in economic and political body language of 1988. What happened? Last month, President Bush carried out that long-awaited U-turn. He acknowledged that he needed to increase some taxes to bring his runaway budget deficit under control. There will now be new taxes and it is interesting to note that they will be indirect taxes, which are precisely the taxes about which this Government forget to tell the people. They have increased indirect taxes to almost double the level that they were when they came into office.

    The people of Britain should be reminded that the overall tax burden of personal tax under this Government has risen from 34 per cent., which it was under Labour, to 37 per cent. of personal income. Yet the Chancellor has nothing to say about the fact that people are paying more tax now. The Government still deny that the Tories tax people; that is not even to be whispered.

    The time of the monetarists and of the Chicago school has come and gone. I hope that, when we have a new Chancellor in a Labour Government, the policies of this Government will be rejected and that those who have been marginalised and left out of the Budget will be included.

    Mr. Tim Smith (Beaconsfield) I congratulate my hon. Friend the Economic Secretary on his appointment to the Treasury Bench. I met one of his constituents last night who was bathing in the reflected glory. His constituents have every right to be proud, as he will make a most valuable addition to the Treasury team.

    I also congratulate my right hon. Friend the Chancellor of the Exchequer on his speech. I congratulate him especially for one reason. He succeeded in ensuring that the Leader of the Opposition finally conceded that, in late 1987 and early 1988, the Opposition called for substantial cuts in interest rates. I recall that a motion on the Order Paper at that time set out that demand. Everything that the right hon. and learned Member for Monklands, East (Mr. Smith) says now should be seen in that light. There is no credibility in his position now because of his position then. If we had followed his policies then, we should have been back to the 27 per cent. or 28 per cent. inflation that we had in 1975-76. We should have had a complete re-run of the record of the previous Labour Government. We should address ourselves to that record and to the right hon. and learned Gentleman’s words at that time, and not to the hot air earlier in this debate, with little specific information about what he would do to address the country’s current problems.

    Although the right hon. and learned Gentleman rather pooh-poohed this, there is an important point about the construction of the retail prices index. When the index looks at housing costs, it concentrates on mortgage interest and not on house prices. If house prices were included in the index, we should have had an earlier sign of the inflationary problems to come. Rising house prices are in themselves a useful early sign of coming inflationary problems. If we gave more weight to house prices in the RPI, that would give a better impression of inflationary trends in the economy.

    Another important reason why we should address that problem is that the figures that the right hon. and learned Gentleman quoted, as the Chancellor said, are not comparable. Rates throughout the rest of the EC show that the inflation indices of other countries are compiled on a different basis, a subject which the Public Accounts Committee examined recently and to which, in due course, the Retail Prices Index Advisory Committee will have to return.

    We must consider the construction of the index in relation to the community charge. The reference on the community charge was made to the advisory committee before transitional relief was announced in the autumn of last year. As a result, the decision to take no account of transitional relief was made not by that committee but by the Central Statistical Office.

    It is wrong not to take account of transitional relief, because it is not an income-related relief. It is available automatically to people, regardless of their income, depending on the rateable value of their homes under the previous arrangements. I hope that Treasury Ministers will examine that point, because the committee will soon be publishing a report recommending that the matter be referred to the RPI advisory committee.

    I am glad that the hon. Member for Leeds, West (Mr. Battle) has taken part in the debate, because he was unwell recently and was unable to attend some of the Standing Committee meetings on the Finance Bill. I am pleased to see that he is better. He said that Conservatives did not care about unemployment. To suggest that a Government who have presided over a larger increase in the number of jobs in the economy do not care about people without jobs is absurd.

    We also share the concern that the hon. Gentleman expressed about people on low incomes. What better solution is there to unemployment or low incomes than to create more jobs? More people now have jobs, providing them with a standard of living that they have not previously enjoyed.

    Mr. Battle I thank the hon. Gentleman for his kind remarks.

    Although the Government claim that the total number of jobs has increased, that may be because part-time jobs are included in the statistics. Is it not a fact that the total number of unemployed people has been consistently high under Conservative rule, higher than was ever the case under Labour? In other words, there are more people unemployed now, even though more people may be working in part-time jobs.

    Mr. Smith I would not dismiss part-time jobs as of no value. They are not normally the sole source of a household’s income. Indeed, a second earner normally has the part-time job, and such jobs provide a considerable improvement in the standard of living of the average family. In the last 10 years, average earnings of the average man with two children have risen by about 30 per cent. That has been an outstanding achievement, especially compared with the situation under the last Labour Government, when the increase was only 1 or 2 per cent. over six years.

    I am sorry that the hon. Member for Leeds, West derided the performance of some privatised companies. Privatisation has made a tremendous contribution to the supply side of the economy in recent years. A major improvement during those years has occurred in productivity. The Library recently published a background paper which examined British manufacturing productivity. A table on page 1 showed that, from 1980 to the third quarter of 1989, manufacturing productivity in the United Kingdom rose by 28.5 per cent. whereas the figure for West Germany, about which the hon. Gentleman made such a song and dance, was 13 per cent.

    I appreciate that we are still some way behind, but we have narrowed the gap considerably. One example – admittedly an outstanding one, but it is worth considering the best – is the record of the British Steel Corporation, and that document looked into its performance. There are three reasons for the huge increase in manufacturing productivity. The first is the restructuring of British industry, so that it is more efficient. The second is the much higher rate of capital investment – and the main source of funds for that investment has been retained profits, with profits now back at levels not seen since the early 1960s. The third is the degree of improved capacity usage.

    That record has been aided and abetted by the many supply side changes that the Government have made in the last 11 years. For example, we have not interfered with business. We have got off the backs of business and have allowed management to manage. I believe that to be the main reason for privatising companies – getting rid of unnecessary bureaucratic regulations.

    Also important has been our low corporation tax regime since 1984. That has been attractive for investors at home and abroad. Another factor was drawn to my attention at lunchtime by a business man who said, when I told him that I would speak in the debate, “Don’t forget to mention the massive improvement in industrial relations in Britain in the last 11 years, and the fact that we have had a record low number of days lost through strikes.”

    All those factors have enabled British industry to operate so much more efficiently that we have such a good record on productivity. We have much increased profitability and, as the Chancellor said, we have a good export story to tell. Figures for the last year show that, although we still have a large trade deficit, the trend is now in the right direction. While the volume of exports is rising at about 12 per cent. per annum, the volume of imports is rising at about only 3 to 4 per cent.

    What should we do to maintain the momentum in the 1990s? We must maintain our attractive tax regime and not fiddle with it, because it has encouraged much inward investment. We must continue to examine Government regulation, deregulate where possible and make further supply side changes to make the economy more efficient.

    I agree with the right hon. and learned Member for Monklands, East that we need to invest more in education and training, although he should not pretend to the House that it is somehow a short-term solution. I fully support the introduction of the national curriculum, but that is only just getting under way and the first school kids to have gone right through the curriculum will not emerge from our schools for another 10 years. So it is wrong to pretend that the investment will pay off in the next year or two. It is important that the curriculum is adequately resourced, and I hope that that will receive attention in the context of the current public expenditure round.

    Most important – this is why the Chancellor paid such attention to it – is the need to get inflation down. That is why I support the tough monetary policy that he has adopted in the last year. In my view, it must be supported by an equally firm fiscal policy.

    There are signs, to which my right hon. Friend referred, of a slowdown in the economy. This is a difficult time for public spending, but it is vital that it is kept under firm control. The only Departments that should be allowed a real increase are the Department of Health and the Department of Education and Science, for the reasons I have given. There is room for cuts to be made in the expenditure of other Departments’ budgets, such as the Ministry of Defence, the Department of Trade and Industry and the Department of Energy.

    The Labour party is always trying to pretend that, in some way, the period 1964 to 1970 was a fine time for public spending, and that since then we have done nothing but cut public expenditure. A significant table in the Autumn Statement sets out trends in public spending over the last quarter of a century. In 1973-74, in real terms, spending was £150 billion, at 1988 prices. In the following year – the first year of a Labour Government – it shot up to £169 billion, an increase of over 10 per cent. in one year.

    In every successive year from then on, public spending was cut, and by the end of Labour’s period in office it was back down to £165 billion, £4 billion less than it had been five years previously. That was the starting point for this Administration – £165 billion – and this year public spending is £192 billion. That gives the lie to anybody who suggests that in overall terms this Government have cut public spending. They have not. However, what they have succeeded in doing – this is the trick – is to decrease public spending as a proportion of our national income. At the low point under Labour, it was about 48 per cent. of GDP; today, it is 38 per cent.

    We should be quite clear about Labour’s policy. The right hon. and learned Member for Monklands, East has said that his only spending commitments are to increase child benefit and to increase pensions. However, when asked on “Panorama” where he would find the money for the extra spending commitments, the Leader of the Opposition said that any other spending commitments must depend on the economic situation and on securing economic growth. He was then asked, “That is all very well, but how are you going to secure economic growth?” The answer was, “Ah, well, we must invest more money in education, training and the infrastructure.” If that is not public spending, I do not know what is.

    The Labour party must make up its mind about what comes first: are we to have more spending followed by economic growth, which is fuelled by that spending, or are we to have the growth first – and if so, where will it come from? The right hon. and learned Gentleman has not answered that question. As long as he fails to do so, his policies have no credibility.

    Mr. Jacques Arnold (Gravesham) Has my hon. Friend noticed that the hon. Member for Kingston upon Hull, East (Mr. Prescott) has said that £3 billion will be spent in the early days of the next Labour Government, which he foresees, on the high-speed rail link, which would be financed totally by borrowing, which he seems to believe will have no effect on the capital position, let alone on the revenue costs?

    Mr. Smith My hon. Friend is right to draw my attention to today’s spending commitment from the Labour party – another £3 billion on the high-speed link –

    Mr. Battle From where?

    Mr. Smith I do not know – presumably from the channel to London. I think that that is what is suggested, but it is £3 billion –

    Mr. Battle Where is the money coming from?

    Mr. Smith That is the question that the Labour party should answer. There are only two possibilities: either the money is borrowed, in which case interest rates rise, or taxes are increased. There are no other sources of revenue for a Labour Government or for any other Government. It is about time that Opposition Members had the honesty to recognise that and to tell the country how they will finance all their projects.

    Mr. A. J. Beith (Berwick-upon-Tweed) Although the debate began with good-humoured contributions, it seems to be degenerating into an exchange of insults about who will spend what. The hon. Member for Beaconsfield (Mr. Smith) did not really refer to the purposes – and perhaps the achievements – of the Government’s economic policy on a broader canvas. If one were looking for some examples of what one thought the Government had been trying to achieve – it is not an easy task – one could pick out certain things.

    The hon. Gentleman did refer to the improvement in industrial relations that was brought about when the Government took on some of the measures that we have been pressing on them for years – such as holding postal ballots before strikes and putting unions more effectively under the control of their members through that postal ballot system. However, he could also have turned his attention to the reassertion of the role of private enterprise as the primary engine of economic success in the public mind.

    That is one of the most useful things that has happened in the lifetime of this Government. However, there has been a signal failure to tackle the monopoly prevalence in our system. Indeed, the Government have converted public monopolies into private monopolies by the way in which they have carried out their privatisation policy, and have failed to address the consumer protection issues or the social issues, to which the hon. Member for Leeds, West (Mr. Battle) referred, without which the success of private enterprise seems hollow to the people who do not have the means to purchase the goods that are produced.

    There seems to be no sense of the Government having any continuing overall purpose to their economic policy, which is a strange thing to have happened after so long. However, perhaps it is not all that surprising, when one considers the way in which the Government are bogged down in their economic failures and the consequences of their mistakes. No one can look at the trade figures, the inflation figures, or the balance of payments figures without seeing a history of failure, which owes its existence to a series of mistakes made by the Government in their economic management, which is the focus of this debate.

    The Conservative party now likes to place much emphasis on the failures of the former Chancellor of the Exchequer. There is always somebody previous who is responsible for inflation. It used to be the previous Labour Government or the preceding Conservative Government – the Heath Government – but now the former Chancellor of the Exchequer is recognised as having made mistakes. Some of the most significant mistakes were made in the 1988 Budget, some of which the right hon. Member for Blaby (Mr. Lawson) has now admitted. He has admitted, for example, that it was a mistake to stage the ending of multiple mortgage tax relief until the August of that year because, along with the expansion of the credit, the right hon. Gentleman added another engine of increase.

    There is a whole series of mistakes, of which the major one must be the tax cuts themselves –

    Mr. Major I do not recall the hon. Gentleman mentioning those matters as mistakes at the time. I do not recall him criticising the reductions in interest rates in late 1987, and I expressly do not recall him criticising the four or five-month period in which people could keep multiple mortgage interest relief – for the very good social reason, which the hon. Gentleman should understand, that it enabled young people who were purchasing to complete the transactions into which they had entered.

    Mr. Beith The right hon. Gentleman must look at the record. He will then find that I did indeed criticise his predecessor on that count. Interestingly, when his predecessor appeared before the Select Committee on the Treasury and Civil Service to explain why that had been done, he did not give the good social reason that the right hon. Gentleman has just advanced. The right hon. Member for Blaby said that he had been advised by the Revenue that the computer system could not cope with the change as rapidly as he had intended to make it. He did not have a social reason: he had a technical and administrative reason. I pointed out the effects of that measure and of the other measures in the Budget at that time.

    However, the present Chancellor himself has made mistakes. In a debate only last week, the hon. Member for Eastbourne (Mr. Gow) pointed out that the Chancellor should have raised taxation in his last Budget, and said that, by not doing so, he had made the current inflationary problems worse. The Chancellor has been slow – his predecessor was also slow – to take any of the voluntary steps to dampen credit that should have been taken, but he has now advised the banks that they should stop their high-pressure circulars that encourage people to take out loans that they cannot afford. That could have been done long ago.

    Alongside those management mistakes, it has also been a mistake on the Government’s part constantly to encourage high expectations of the Government’s success. Even now, the Chancellor seems to have private meetings with Conservative Members, at which he tells them that things are not really going all that well, that it will be a tough winter and that the public expenditure round will be extremely difficult; but he does not often say such things in public.

    The Government’s practice – this applies even more to the right hon. Gentleman’s predecessor than to himself – has been to lead people to believe that everything is fine and that they can reasonably take out large borrowings, because everything will get better and interest rates will come down in due course, although they will have to be kept high for a little longer. All those expectations, which are generated by rosy economic statements, do not help to bring about the self-discipline for which the Chancellor is asking and which he knows the economy requires.

    Perhaps the most remarkable errors of all are those that the Government are making over Europe. The Government seem incapable of any clear, settled or united policy towards Europe. The plans for the hard ecu, which the Chancellor has devised with the assistance of Mr. Butler and others, has the singular merit that it enables one set of people in the Conservative party to believe that it will never lead to a single currency, a European central bank and full monetary union, and another set of people in the Conservative party to believe that it is a constructive and significant step along that road, which I suspect is the Chancellor’s own view.

    The right hon. Gentleman is assisting the Labour party in the same respect, because a number of Labour Members take the same view of the conditions that the Labour party has set down for joining the exchange rate mechanism. I believe that it was the hon. Member for Great Grimsby (Mr. Mitchell) who said that he was quite satisfied with the Labour party’s attitude to the exchange rate mechanism, because the conditions were such that they could never be satisfied. He is probably right, because the condition that the whole exchange rate mechanism should become a reflationary process, which is effectively one of the four conditions, will not be satisfied. Those conditions also have the merit that they can mean different things to different people.

    Mr. Major I am grateful to the hon. Gentleman for making that point, which in essence is entirely right. People must understand that the specific circumstances under which the Labour party has said that it will join the exchange rate mechanism would mean nothing other than the destruction of the exchange rate mechanism itself. It is a piece of flimsy oratory to cover the fact that the Labour party has no policy. The hon. Gentleman may be right in his implicit criticism that I should have made that point earlier.

    Mr. Beith I hope that the right hon. Gentleman recognises the beam in his own eye, or that of the Government. Setting up structures which mean different things to different people makes a wide political impression.

    I was fascinated by the response from the Leader of the Opposition during Prime Minister’s Questions the day after the Chancellor’s plan was unveiled. He said to the Prime Minister: I have read the speech. I wonder whether the Chancellor explained to the right hon. Lady that if the idea that he put forward were accepted, with the European Monetary Fund and the hard ecu, it would be the final surrender of monetary sovereignty by Britain”. – [Official Report, 21 June 1990; Vol. 174, c. 1107.] I was most intrigued by that, as it was not clear whether the right hon. Gentleman was saying to the Prime Minister, “How outrageous it is that you, the Prime Minister, should even contemplate the surrender of monetary sovereignty which I, as the Leader of the Labour party, would never contemplate”; or whether he was simply pointing to an obvious inconsistency in the Prime Minister’s attitude. I suspect that, when he said that, he thought that the Labour party would never contemplate such a move in any circumstances, so the ambivalence surrounding the Labour party’s attitude to Europe is similar to that of the Government.

    It is carried through in their attitude to a European central banking mechanism, which is part of the all the plans put forward so far, except that proposed by the Chancellor. The right hon. and learned Member for Monklands, East (Mr. Smith) made Labour’s position quite clear in his response to my earlier intervention. He said that the Labour party would have none of that and did not want an independent autonomous central bank. He is at one with the Government in that. There are stages in serious prospect in the minds of our major partners in Europe which neither the Conservative party nor the Labour party is prepared to contemplate. They are key elements in European monetary union.

    The refusal to accept what is happening in Europe seems to sow the seeds of downfall for any policy pursued by the Conservative party or the Labour party as long as they retain those prejudices. I do not understand what role the Government or the Labour party envisage for Britain in future. I do not believe that the rest of Europe will accept the Chancellor’s plan. It has been accepted by many of our European partners as evidence that he is in earnest about trying to find a basis on which Britain can play a part in the future economic development in Europe, and he has dragged the Prime Minister into that testimony of earnestness. However, I shall be most surprised if his plan is preferred to the proposals in the minds of the Germans, the French and our other European partners.

    What will the Chancellor do if our European partners decide to go ahead and we are left out? The obvious conclusion is that we will remain in the second division, eventually to be joined by Hungary and Czechoslovakia in years to come, when they become supplicants to join the European Community, and that we shall remain outside the major developments in Europe. That would be disastrous for Britain. It would be disastrous for Britain’s industrial position and for the hopes of the City, which could reasonably expect to be the financial capital of Europe when financial and monetary union is achieved. It would leave Britain in a very much weaker position.

    Within that argument about our future there has suddenly broken out the row about what we think about the Germans – a most extraordinary episode. The remarks subsequently disowned by the right hon. Member for Cirencester and Tewkesbury (Mr. Ridley), which seemed to be fuelled by a mixture of malevolence and jealousy against a nation that has succeeded where Britain has failed, were given substance by that extraordinary Chequers seminar and the assortment of prejudices drawn up there.

    Why was there no serious analysis about what has made Germany a successful economy in the post-war years? The writings of the commentators on what has happened in Germany show common agreement on a number of key elements. Some of those elements are political, such as having a decentralised system of government with centres of power away from the capital and the consensus produced by a fair electoral system which ensures that Governments have to carry wider support than that of their own party. Some of them are about economic decision-making, in particular having a central bank which has an autonomous responsibility for price stability and therefore effective control of monetary policy.

    That is not a superficial claim about the German economy. No serious economist would not regard that as having played a major part in Germany’s success in fighting inflation. Yet today the Chancellor made it clear that the Chancellor of the Exchequer and not the Bank of England will have responsibility for monetary policy in future. Can he or the official Opposition pretend that Britain can demonstrate that it has been more successful by leaving the control of inflation solely in the hands of the Government than has a country which has given its central bank a major role in the control of inflation? Of course they cannot.

    Among the other features which have been important in Germany’s success is the record of training through the education system and in employment. The hon. Member for Beaconsfield referred to the budgets of Government Departments. He should remember that the Department of Employment’s budget was one of the casualties of the last public expenditure round. Just when we should have been increasing expenditure on training, it was cut.

    In Germany, trade unions have played a more constructive role than has traditionally been expected or encouraged in Britain. I took part in a discussion in Germany in which a Labour Member asked, “Surely what you say will happen in East Germany will not happen because the trade unions will insist that they do not suffer all those job losses as the firms are made more efficient.”

    The German officials to whom we were putting those questions were amazed, because the idea that a trade union would not understand the need to increase efficiency had not even crossed their minds. In Germany, the trade unions traditionally have operated a more progressive approach to industrial change, and that has been a major factor in Germany’s success. Germany has also recognised the need for essential public investment in the transport system, for example.

    We are not learning the lessons of German success. Instead, we are complaining about that success. Decentralised government, a fair electoral system, an autonomous central bank with responsibility to deal with inflation, training, investment and constructive trade unions do not form a package that the Government or the Labour party can accept in its entirety. They should be part of a package of change for Britain. They have long been part of the policies of my party. That is why our approach to Britain’s economic policies has proven marks of success.

  • Mr Major’s Written Parliamentary Answer on the Exchange Rate Mechanism – 5 July 1990

    Below is the text of Mr Major’s written Parliamentary Answer on the Exchange Rate Mechanism on 5th July 1990.


    Mr. Barry Porter To ask the Chancellor of the Exchequer what his latest plans are for taking the United Kingdom into the European exchange rate mechanism; and if he will make a statement.

    Mr. Major I refer my hon. Friend to the answer that I gave to my hon. Friend the Member for Chichester (Mr. Nelson) on 7 June at column 774.