Tag: Inflation

  • PMQT Written Answers – 15 January 1991

    Below is the text of the written answers relating to Prime Minister’s Question Time from 15th January 1991.


    PRIME MINISTER:

    Government Achievements

    Mr. Sayeed : To ask the Prime Minister if he will make a statement on the achievements of Her Majesty’s Government since 1987.

    The Prime Minister : Since 1987 the Government have continued to build upon the changes begun in 1979, to strengthen the economy, foster a spirit of enterprise and improve living standards. Sterling has been brought into the exchange rate mechanism of the European monetary system, reinforcing the Government’s strict anti-inflationary policy. Output is 8 per cent. higher. Investment has grown faster than at any time since the second world war. Taxes have been reformed. Privatisation of 29 more major businesses has taken place and 24 per cent. of the adult population now own shares. The Government have exercised strict control of public expenditure–general Government expenditure has been brought below 40 per cent. of GDP for the first time since 1966-67. Almost £30 billion of public debt will have been repaid by the end of the current financial year. Over 2 million more people are in work than in 1987.

    In the public services we have improved efficiency, safeguarded quality and enhanced safety. Key themes, reflected in the reform of the health service, in housing policy and in education have been to increase choice and to encourage people to take personal responsibility for their well-being and that of their families. The Government have striven to improve the quality of life of all the British people. A number of special initiatives have focused on those living in inner cities. The Government have played a leading role in developing environmental protection, nationally and internationally.

    The Government have maintained a firm commitment to national defence and the NATO alliance. We have supported and contributed to NATO’s efforts to establish closer relations with the Soviet Union and with the countries of eastern Europe. The United Kingdom has played an important role in securing firm reaction of the United Nations in dealing with Iraq’s invasion of Kuwait. We have played a positive role in the building of the single market in the European Community.

    Common Agricultural Policy

    Mr. Allen : To ask the Prime Minister, pursuant to his reply to the hon. Member for Holland with Boston (Sir R. Body) Official Report, 18 December, column 165, what further investigation of the common agricultural policy he expects the EC to make ; and if he will make a statement.

    The Prime Minister : The common agricultural policy is likely to be subject to a period of further reform as a result of renewed production and expenditure pressure and the outcome of the current GATT negotiations. The Commission’s 1991-92 price proposals are likely to incorporate a first instalment of these reforms.

    GATT

    Mr. Allen : To ask the Prime Minister, further to his statement on 18 December, Official Report, column 157, whether the remit for the EC negotiations in the GATT talks has been altered by the recent Heads of Government meeting.

    The Prime Minister : The meeting of European Heads of Government asked the Commission, which negotiates on behalf of the Community, to intensify its contacts with other participants in order to resolve outstanding problems.

    Minimum Wage

    Mr. Chris Smith : To ask the Prime Minister, pursuant to his oral answer of 13 December, Official Report, column 1108, on what basis he calculates the figure of a loss of three quarters of a million jobs through the establishment of a national minimum wage.

    The Prime Minister : Officials in the Department of Employment have estimated that a national minimum wage set at half male median earnings will result in the loss of about three quarters of a million jobs. This estimate uses earnings information from the new earnings survey and information on the relationship between real wages and employment set out in the published Treasury paper “The Relationship Between Employment and Wages : Empirical Evidence for the United Kingdom” (HM Treasury, January 1985).
    A detailed explanation of the method was placed in the House of Commons Library on 2 February 1990–“Estimating the Effect of a National Minimum Wage”.

    Publicity and Advertising

    Mr. Michael : To ask the Prime Minister, further to his reply on 17 December, Official Report, c. 15, if he will list the Government conventions regarding the use of paid publicity and advertising within which expenditure on advertising in the press, television and other forms of publicity is a matter for departmental Ministers.

    The Prime Minister : The conventions on Government publicity and advertising have already been published. I refer the hon. Member to the reply given by my right hon. Friend the Secretary of State for Energy on 28 June 1990 to my hon. Friend the Member for Wanstead and Woodford (Mr. Arbuthnot) at column 311.

  • Mr Major’s Commons Autumn Statement Speech – 8 November 1990

    The text of Mr Major’s 1990 Autumn Statement Speech to the House of Commons on 8th November 1990.


    CHANCELLOR OF THE EXCHEQUER:

    The Chancellor of the Exchequer (Mr. John Major) With permission, Mr. Speaker, I should like to make a statement.

    The Cabinet agreed the Government’s expenditure plans this morning. I am, therefore, now able to inform the House of the public expenditure outturn for this year; the plans for the next three years; our proposals for national insurance contributions in 1991–92; and the forecast of economic prospects for 1991 required by the Industry Act 1975.

    As usual, the main public expenditure figures, together with the full text of the economic forecast, will be available from the Vote Office as soon as I sit down. The printed “Autumn Statement” will be published next Tuesday.

    In this survey we have had to take some tough decisions in the interests of the economy and the new plans represent a very tight settlement. But it is a settlement which is fully consistent with the Government’s commitments and channels extra resources to the areas where the need is greatest. For this, and other reasons, I should like to pay tribute to my right hon. Friend the Chief Secretary for the skill and persistence with which he has brought the survey to a successful conclusion.

    Since 1984–85, while the economy has grown by nearly 20 per cent., total public spending has risen scarcely at all in real terms. As a result, the ratio of public expenditure to national income has fallen by more than seven percentage points, the largest sustained fall for 40 years. Moreover, in the past three years large budget surpluses have enabled us to repay debt totalling £26 billion.

    Mr. Dennis Skinner (Bolsover) Not any more.

    Mr. Major We shall add to that this year.

    The main objective of economic policy at present must be to bring inflation down, but, as we do so, the short-term prospect is bound to be one of weak activity. [Interruption.] In the past, during similar periods the ratio of public spending to national income has risen strongly. On this occasion it will not.

    Planned public expenditure in the current fiscal year is now expected to be £180.6 billion, rather less than 1 per cent. above the planning total set a year ago. A large part of this extra spending is due to an increase in the financing requirements of the nationalised industries, to a surge of common agricultural policy spending on agricultural market support and to expenditure on the Gulf crisis.

    Notwithstanding this cash overrun, public expenditure remains under tight control. Inflation has been higher than forecast, but it has not been allowed to feed through fully into expenditure. As a result, the ratio of spending to national income in the current year is likely to be slightly lower than projected at the time of the Budget – virtually unchanged from the 1989–90 level.

    The decisions on public expenditure for the next three years have been taken against a more difficult world and domestic economic background than for some time. Activity at home and abroad has begun to weaken and some countries such as Canada and the United States are expected to grow very slowly indeed over the coming year. The outlook has also been complicated by events in the Gulf, with the rise in oil prices and the uncertainty that they have produced. Against that background, our new plans are designed to protect the most vulnerable groups in society against the effects of higher inflation [Interruption.] I repeat, to protect the most vulnerable groups in society and to maintain longer-term policies to improve the working of the economy.

    Mr. Robert N. Wareing (Liverpool, West Derby) rose–

    Mr. Major I shall of course give way to the hon. Gentleman when we come to questions a little later.

    But, beyond that, this is not the year for making substantial additions to plans in other areas. The priority must be to honour existing commitments, within a total for public spending that is affordable and fiscally prudent. For 1991–92, the new planning total has been set at £200 billion, a little under £8 billion more than the previously published figure. The planning totals in the following two years are £215 billion and £226 billion respectively.

    In recognition of the economic uncertainties and the risks arising from the Gulf crisis, these totals include higher reserves than last year’s plans: £3½ billion in the first year; £7 billion in the second year; and £10½ billion in the third. I believe that these increases are prudent. Our plans also incorporate an estimate of privatisation proceeds at £5½ billion a year that is in line with the average outturn in recent years.

    After taking account of inflation, the level of spending next year will be rather less than implied by last year’s plans: that is, the cash additions to the planning total do not fully compensate for the higher level of prices now expected for 1991–92. This restraint is necessary, but it means that many of my colleagues have had to drop or postpone proposals that they would otherwise have regarded as desirable.

    Nevertheless, within this total there are substantial extra resources in three main areas: health, social security and central Government support for local authority services. These additions to plans total some £7½ billion in 1991–92. It has also been possible to make improvements to other key areas including education, public transport, and the environment.

    We have also been able to make savings elsewhere, including defence. I can assure the House categorically that financial constraints will not hinder in any way the United Kingdom’s military contribution to resolving the Gulf crisis. However, the “Options for Change” announced by my right hon. Friend the Secretary of State for Defence on 25 July will produce increasing savings in the defence budget. Over the next three years the new plans provide for a real reduction in defence spending of about 6 per cent., and further reductions should be achieved in later years as my right hon. Friend’s proposals are fully implemented. For the first time in the period since World War 2, we are now able safely to plan on a defence budget that is significantly less than one tenth of all Government expenditure and falling.

    In certain other areas, we have been able to accommodate increases in expenditure by finding offsetting savings. For example, on the trade and industry and employment programmes we have made selective increases while keeping broadly to existing plans overall, and within the Home Office programme, lower prison population forecasts have enabled us to reduce the prison building programme, while considerable resources have been made available for the refurbishment of existing prisons, including Strangeways.

    In July, the Government announced extra support for local authority current spending which will add around £2½ billion to previous plans. Current spending by local authorities has substantially outstripped central Government spending over recent years. This year local authorities in England budgeted for increases of over 5 per cent. in real terms before capping. This has led to community charges which in many authorities are far higher than expected or justified.

    The additional support that we are providing for next year should enable local authorities to finance local services without sharp increases in their charges. My right hon. Friend the Secretary of State for the Environment has already announced that, if required, the Government will make vigorous use of their powers to cap high-spending authorities. I re-emphasise that.

    Nearly £3 billion has been added to the social security plans for next year. This mainly reflects the upratings already announced by my right hon. Friend the Secretary of State for Social Security which maintain in full the real value of benefits paid to 10 million pensioners and 11 million people on income-related benefits. The additions also reflect the substantial extra cost of community charge benefit which will help about one in four charge payers. My right hon. Friend was also able to announce selective increases for poorer pensioners, people in residential and nursing homes and families. These improvements will be financed within the social security programme by savings from restructuring the statutory sick pay scheme, as announced by my right hon. Friend on 24 October.

    As in previous years, the Government have also made very substantial extra provision for health. Between this year and next, spending on the national health service in the United Kingdom will rise by £3 billion, so that the real resources over and above inflation that are available for spending on health will increase by a further 5 per cent. The total real increase in health service spending since 1979 will now be nearly 50 per cent. This has enabled the NHS to employ some 8,000 more hospital doctors and dentists, and over 50,000 more nurses and, of course, to provide for more sophisticated health care than ever before. As a result, more than 1½ million more in-patient and day cases are now treated every year. In the largest sustained programme of hospital building ever seen, nearly 500 major capital schemes have been completed since 1979. The plans that I am announcing ensure that the next three years will see further improvements in services.

    Extra finance is also being provided for public transport. London Transport and British Rail have large long-term investment programmes which will enable them to extend and to upgrade the London underground and to prepare for the opening of the channel tunnel. Between them, they will spend some £¾ billion on safety alone in the next three years. The new plans also consolidate the substantial extra provision for roads that was announced last year and include measures to relieve congestion in London. Investment in public transport in the next three years will be double the level of the past three years.

    Central Government spending on education will be increased by more than £500 million next year, largely to finance the record number of students in higher education. One in five of the 18 to 19 age group will be in higher education, compared with one in eight only a decade ago. The number of higher education qualifications gained, as a proportion of the relevant age group, is higher in the United Kingdom than in Germany, France, Italy and almost every other European country.

    Following the publication of the White Paper on the environment, the new plans provide significant extra resources for environmental research and in support of environmental bodies such as the National Rivers Authority and the Countryside Commission. There is extra provision also for the Government’s programme of action on rooflessness.

    Throughout the past decade, we have sustained a high level of capital spending in the public sector. In total, it will approach £30 billion in the current year. Leaving aside defence, our new plans include an extra £1½ billion a year for investment by central Government and nationalised industries. There is also extra support for local authorities’ capital spending on schools, housing and local transport.

    Taking capital and current together, real growth in total public spending over the three survey years will be less than 2 per cent. a year – well within the trend growth of the economy. As I have said, this is a tight settlement and it means that the ratio of public spending to national income should remain stable at its present level for the next two years. Thereafter, as activity strengthens and inflation remains in check, the downward trend will be resumed.

    I now turn to national insurance contributions. As usual, the review this autumn has taken account of advice from the Government Actuary on the income and expenditure of the national insurance fund, and of the statement on benefits that was made by my right hon. Friend the Secretary of State for Social Security on 24 October.

    The lower earnings limit at which contributions begin will go up next April to £52 a week, in line with the single person’s basic pension, while the upper earnings limit will rise to £390 a week. The upper limits for the reduced employers’ rates will also be increased.

    In addition to those changes, there will be reductions in the contribution rates paid by employers. As my right hon. Friend explained in the House on 24 October, the restructuring of statutory sick pay will add modestly to employers’ costs from next April. It is right that the Exchequer should share these costs. Therefore, the main employers’ contribution rate will fall next April from 10.45 per cent. to 10.4 per cent. and each of the lower rates will be cut by 0.4 per cent. This relief through contributions will limit the impact of the statutory sick pay adjustments on employers of lower-paid workers in particular. The necessary legislation will be laid before the House. The contribution rates paid by employees and the class 4 rates paid by the self-employed will remain unchanged.

    I am publishing today the economic forecast required by the Industry Act 1975, the first since we became members of the exchange rate mechanism. I must emphasise at the outset that the Gulf crisis and its effect on world oil markets make the future unusually difficult to predict. The United Kingdom, along with other countries, has already seen some of the adverse impact on consumer price inflation. The oil price rise is likely also to contribute to the general slowdown in the world economy that was already under way before the Gulf crisis.

    For the Industry Act forecast I am following the practice of international institutions such as the International Monetary Fund and assuming some fall in oil prices from recent levels to around $25 a barrel by the end of 1991. But I must reiterate that the situation in the oil market remains very volatile.

    Despite these uncertainties, however, it is now clear that the tight United Kingdom policy stance of the past two years is bringing about an easing of domestic inflationary pressures. This will make possible both a sharp fall in retail prices index inflation next year and a strengthening of output.

    So far this year, the public sector debt repayment has been running below both last year’s outturn and our expectations at Budget time. Local authority borrowing was particularly high earlier this year as some authorities experienced delays in collecting non-domestic rates and the community charge. Public corporations’ finances have been adversely affected by the slowdown in economic activity and central Government spending has also been higher. Nevertheless, despite this, I still expect a significant debt repayment in the year as a whole of £3 billion. This amounts to ½ per cent. of GDP and represents a strong fiscal stance at this stage of the economic cycle.

    Mr. Skinner What was the right hon. Gentleman’s forecast?

    Mr. Major For the benefit of the hon. Member for Bolsover (Mr. Skinner), we have a stronger fiscal position than Germany, France, the United States and every other member of the Group of Seven, with the solitary exception of Japan.

    Thus our public finances remain strong. Given our membership of the exchange rate mechanism and the counter-inflationary strategy that we are pursuing, it is essential that they remain strong. As I made clear to the House last month, the Government remain committed to the medium-term objective of a balanced budget. That is why we have continued our firm restraint of public expenditure in the current year.

    Turning to demand and output, it is clear that growth has now slowed down sharply. GDP is forecast to grow by 1 per cent. this year. This figure is the same as the forecast I made at the time of the Budget, but the path has been slightly different, and I expect output in the second half of the year to be down on the higher than expected and projected level in the first half.

    This period of weak activity should last until early next year, after which I expect growth to resume; GDP is expected to grow by over 2 per cent. in 1991, though year-on-year growth is forecast to be only ½ per cent.

    Unemployment has been rising since the spring and may continue to rise in the months immediately ahead, but job prospects will improve with a resumption of growth, the more so if employers keep tight control of costs, including pay rises.

    Within domestic demand, growth of consumer spending has now slowed markedly from over 7 per cent. two years ago to under 3 per cent. in the first half of this year. The signs are that it will fall further over the year ahead as consumers continue to adjust to lower growth of real incomes, following the high borrowing of recent years.

    Business investment rose by an unprecedented 45 per cent. in the three years to 1989, taking investment to an historically high level as a share of GDP. It may have fallen slightly in 1990 and is expected to fall a little further next year. A modest downturn from such a high level is unsurprising; indeed, it would be extraordinary if it did not occur at this stage in the cycle. It will still leave investment over 50 per cent. higher in real terms than in 1979.

    The current account has now begun to improve markedly. With low growth of domestic demand, import volumes have shown virtually no growth over the past year and import prices have been falling in recent months as a result of the firm exchange rate. Export growth, on the other hand, has remained strong over the past year so that the United Kingdom’s share of world trade in manufactures has risen for the second year running. The deficit on visible trade has followed a welcome trend and has virtually halved since the middle of 1989. This progress has been partly offset by poor figures for invisibles in recent quarters, although in the past these have, more often than not, been revised up later – at times, substantially.

    I now expect that the current account deficit in 1990 will remain close to the forecast I made at the time of the Budget – at just over £15 billion. With domestic demand and import growth likely to stay low, I expect a considerably improved performance next year, with the deficit falling to £11 billion despite some slowdown in export growth as world trade decelerates. As a proportion of gross domestic product the deficit is expected to fall from 3¾ per cent. last year to 1¾ per cent. in 1991 – a sharp improvement.

    I am now certain that inflationary pressures have been brought firmly under control. The monetary indicators show this clearly. The growth of MO has fallen every month since April and is now considerably within its target range, while growth of the wider measure, M4, and lending have fallen sharply to 14½ per cent. and 15½ per cent. respectively. With demand and output slowing markedly over the past two years, it is clear that inflation will come down next year. The fall in the headline figure will be very sharp as the effects of the past mortgage rate rises, of the high initial level of the community charge and of recent petrol price increases cease to influence the inflation rate by the end of next year. From a peak at the current level of about 11 per cent., I expect RPI inflation to fall to around 5½ per cent. in the fourth quarter of next year.

    In summary, the plans that I have announced today honour our existing commitments and provide additional resources for key areas – notably for the health service, for pensioners and for investment. They are within an overall total we can afford and they avoid the sharp upturn in the share of expenditure in national output which has occurred at similar stages in previous economic cycles. They are, therefore, consistent with the tight fiscal and monetary policies that will lead to a falling trade deficit and to a sharp reduction in inflation. They are, in my judgment, the right policies for building on the economic achievements of the past decade and I commend them to the House.

    Mr. John Smith (Monklands, East) Can the Chancellor of the Exchequer explain why, in his analysis of our economic situation, he was unable to utter the word “recession”? Is not it clear from the surveys compiled by the Confederation of British Industry and by the chambers of commerce, let alone from the experience of commerce and industry from one end of the country to another, that we are the midst of a recession and that the outlook for an economy with falling output, with declining investment and with rising unemployment is far from encouraging?

    From table 11 in the “Economic Prospects for 1991” section of the autumn statement, is not it clear that output is predicted to fall significantly in the second half of 1990 and in the first half of 1991 – that is, for a whole year or for four quarters? By any definition, is not that a recession? Why is that information hidden in a table at the back of the published document? Why does not the Chancellor come to the Dispatch Box and admit that, as his figures prove, we are in a recession and that the recession has been caused by the Government’s economic policies? Is not it the case that the only way in which he can justify the phrase in his statement about “strengthening of output” is by a leap of faith that output will suddenly increase in the second half of 1991?

    Is not it clear from the Chancellor’s document that, having predicted in his Budget – not all that long ago – that manufacturing output would increase by ¾ per cent. in the first half of next year, he now predicts that it will fall by ½ per cent. for the whole of that year? In the Budget, investment was forecast to decline by ¾ per cent. in the first half of next year; now it is forecast to be falling by 1 per cent. for the whole of 1991. In the Budget, exports were predicted to increase by 5½ per cent.; now they are forecast to rise by just 2½ per cent.

    As we are clearly experiencing a recession, why do the Government continue to cause reductions in the investment expenditure of the Department of Trade and Industry? Why is it cut by £250 million in cash terms, and by even more in real terms? As we prepare for 1992, should not we be increasing investment in the regions, in training, in export promotion and in research and development?

    Can the Chancellor tell us whether he has reversed the cuts in the training budget that he announced last year? The Department of Employment appears to have sustained a cut of £370 million; I understand that some of that is accounted for by £254 million going to Scottish Enterprise, which will take over responsibility for some of these functions in Scotland. I must tell the Chancellor that, with considerable difficulty, I was able just a few minutes ago to extract from the Department of Employment its press release explaining its figures. It said: Employment training, which is already running substantially below capacity this year, will be reduced in scale and reshaped to give TECs more discretion in matching the needs of their local labour markets … Payments to TECs will be more closely focused on their success in securing jobs and qualifications for participants. We have learnt from the past that – as far as the Government are concerned – closer focusing equals reduction. While we are in the midst of our present economic difficulties, why on earth are we cutting spending on training? Will the Chancellor tell us what the cut is and will he tell us why?

    The Government will also seek to take credit for the instances in which there are planned increases in the totals for public expenditure. Will the Chancellor reflect on the experience of last year? The figures provided today show that a planned expenditure total of £179 billion turned out to be £180 billion. However, the GDP deflator – which was estimated last year at 5 per cent. – turned out to be 8 per cent. because of inflation.

    Is not it clear that the promised increase in public spending announced this time last year did not materialise? The public know that. That is why they know that the services on which they depend have not improved – that teacher shortages are increasing, and hospital waiting lists are at record levels. Do not the Government’s own figures about the effects of inflation on the projected increases for the year to come show that those figures corroborate the experience of all our constituents in relation to public services? Does the Chancellor think that it was a bit much to talk in his autumn statement about protecting the “vulnerable groups in society”, given the Government’s position on child benefit, which was announced only a few weeks ago?

    Will the Chancellor explain the cuts in the Department of the Environment budget? There appear to be cuts in the total, although the text that he read out mentions increases. Will he say whether less will be spent next year than is currently being spent on water, environment and the countryside? Will the Chancellor tell us who invented the word “rooflessness”? Is it meant to be a synonym for being homeless? Was the word introduced because Ministers and the Chancellor cannot bring themselves to talk about the state of homelessness that they have caused for so many people in this country?

    The Chancellor made some predictions. Has he reflected on the record of the Treasury at making successful economic predictions? I assume that he has read the Treasury bulletin issued recently which confirms that in 1988 the Treasury was wrong by 288 per cent. about the balance of payments; in 1989, it was 30 per cent. wrong about the balance of payments; and in 1990, 20 per cent. wrong – [HON. MEMBERS: “Getting better.”] Getting better, certainly, but there is still a long way to go. Conservative Members clutch at any crumb of comfort, but if they find these figures comfortable they need to think again.

    On inflation, the prediction in 1988 turned out to be 62 per cent. wrong; in 1989, it turned out to be 38 per cent. wrong; and in 1990, it turned out to be 40 per cent. wrong. All the same, inflation kept peaking and blipping along while these errors were being made.

    Does the Chancellor recall coming to the House last year with his autumn statement and saying that inflation now would be 5.25 per cent? And what is it? It is 11 per cent. The Government keep making predictions that lack credibility. Does the right hon. Gentleman understand that this is the fifth occasion on which the Government have predicted a fall in inflation? Why should we believe this one any more than the others? And since the right hon. Gentleman is predicting a fall in the headline rate, will he tell us what will happen to the underlying rate? What will be the underlying rate in the fourth quarter of next year?

    We have received uncertain predictions from the Government and they have usually turned out to be incorrect. We have received poor policies and poor purposes. The most disturbing aspect of the autumn statement was the Chancellor’s statement that there will be no change in economic policies. It was those economic policies which got us where we are now and they will make matters worse until they are changed.

    Mr. Major I hope that the right hon. and learned Gentleman will forgive me for saying at the outset that that was an odd response from the shadow Chancellor, who keeps telling the markets that he would spend money only on child benefit and pensions. He produced a litany of areas on which the Labour party clearly thinks that it would be wise to spend a lot more money. [Interruption.] The right hon. and learned Gentleman is clearly sensitive about the deep split between himself and the shadow Chief Secretary on these matters.

    Let me deal first with the questions that the right hon. and learned Gentleman asked. He made a point about recession. He used the word in the way most calculated to alarm – [HON. MEMBERS: “Answer the questions.”] I will come to the specific points in a moment. The right hon. and learned Gentleman’s use of the word recession conjured up an image quite different from the reality of what is happening or is expected to happen in future.

    It is perfectly true that output will decline for a brief period during the second half of this year –

    Mr. John Smith And the first half of next year.

    Mr. Major – and during the first quarter of next year, but if the right hon. and learned Gentleman will listen for a moment he will hear, first, that it declines from a very high level. We shall be back into growth next year at an accelerating rate. Inflation will fall, savings will increase, the trade gap will close and investment will be 50 per cent. higher than in 1979. We shall still have more people in employment than any other European nation. It is clear from what is happening and from what I have been able to forecast today that the British economy is coming back on track – that is what the right hon. and learned Gentleman does not like – [Interruption.] The Leader of the Opposition is occasionally wont to express the view from the Dispatch Box that he is glad that television is here. I hope that it is here at the moment to witness the way in which right hon. Members on the Opposition Front Bench are behaving.

    In terms of investment, the past three years have seen both a record rise in total investment and in business investment and I quoted the figures a few moments ago on the difference in 1979. The fall next year will be modest and from a very high level.

    There is certainly a redirection within the employment programme which is broadly unchanged in cash terms. The Government will be spending more than £2½ billion on training enterprise and vocational education. The savings on employment training have been made following a reappraisal of what employment training is delivering and there will be improved job clubs and other facilities as an alternative, and a considerable degree of extra resources and extra choice for training and enterprise councils in future.

    The right hon. and learned Gentleman referred to child benefit and the vulnerable. He knows as well as anyone in the House that on each occasion that child benefit was not increased, extra resources were put into child scale rates and income support to more than make up the difference. There is an increase in the environment budget of about £180 million in 1991–92 for the White Paper policies despite the fact that this is a very tight year for the survey. It is perfectly clear that although at the moment we find ourselves in the most difficult part of the economic cycle, we can now see our way through it and out of it during the course of next year.

    Several Hon. Members rose–

    Mr. Speaker Order. The House knows that this matter may be discussed in our debate on the Loyal Address specifically tomorrow and again next week. Hon. Members should ask single questions, please.

    Sir William Clark (Croydon, South) Does my right hon. Friend agree that this is a very tight public expenditure settlement and that both he and my right hon. Friend the Chief Secretary to the Treasury are to be congratulated? Although the pundits in the media and the press have been saying that there will be an overshoot of £12 billion on public expenditure, if we ignore the reserves there is an overshoot of only £4.5 billion. Despite our difficulties, more and more money is being spent on capital projects, unlike what happened under the last Labour Government who reduced public expenditure on the national health service and roads. Is not it about time that the Opposition stopped talking down Britain and our economy?

    Mr. Major In his latter remarks, my right hon. Friend asked for more than is likely to be delivered. It is perfectly true that to many commentators this will be a surprisingly tight package. It keeps public spending at £200 billion when many expected larger increases. The share of expenditure in national income remains unchanged when I think that many expected at this stage of the cycle that it might increase. As I said earlier, we still expect a substantial debt repayment in the present fiscal year. It is a tight settlement and it was necessary to be a tight settlement. We will continue to keep tight control of public expenditure.

    Mr. A. J. Beith (Berwick-upon-Tweed) Is not it clear that when we strip away the skilful and ingenious presentation, this statement amounts to cuts in many areas and inadequate investment in the key areas of transport, training and education because the Government must fund the massive inflation that they have caused and also because the Chancellor still has to leave room for the kind of income tax cuts that the Prime Minister keeps talking about without abandoning all semblance of fiscal respectability? Will the Chancellor confirm that the underlying rate of inflation will remain high throughout next year? Will he confirm that inflation minus mortgage interest rates will be high throughout next year? Is not that a serious problem and what is the Chancellor going to do about it?

    Mr. Major I expect underlying inflation also to fall next year – [HON. MEMBERS: “How far?”] To broadly the level of the headline rate.

    With regard to the programmes to which the hon. Gentleman referred, I have already said that something in excess of £½ billion is being added to the education budget largely to finance the very dramatic increase in the number of students in higher education. The plans imply at least as much capital spending in schools and colleges next year as in the current year.

    As there have been huge increases on transport in each of the last two surveys, the priority on transport this year is the extra almost £600 million mainly for the Jubilee line extension, the east-west crossrail and services for the channel tunnel. It is a very good settlement for public transport, for we are determined to produce an efficient and effective public transport service.

    Mr. Terence L. Higgins (Worthing) Although it is very important for the long-term trend of public expenditure to decline as a percentage of national income, does my right hon. Friend agree that the primary role of the rate of interest must now be to keep sterling within the limits of the exchange rate mechanism and that, as a result, fiscal policy has become more important than ever? Against the present economic background, are not the increases in planned public expenditure which my right hon. Friend has announced entirely appropriate if we are to avoid the dangers of recession? In that context, is not the increase in transport expenditure which my right hon. Friend has just announced particularly appropriate?

    Mr. Major I see my right hon. Friend’s point. He is, of course, entirely right about the necessity of remaining within the bands in the exchange rate mechanism to which we are committed, and equally entirely right that we will need to keep a very firm control of the trend rate of public expenditure in future years.

    Mr. Robert Sheldon (Ashton-under-Lyne) May I press the Chancellor further on the underlying rate of inflation? When the underlying rate was less than the RPI, the Government made a great deal of it. Now that it is likely to be more than the RPI, may we have his forecast of the underlying rate of inflation, excluding mortgage interest, at the end of next year, the fourth quarter?

    Mr. Major As the right hon. Gentleman knows – he is a very distinguished former Treasury Minister – the underlying rate of inflation has never been published, for perfectly understandable reasons.

    Mr. Charles Wardle (Bexhill and Battle) What happened to my right hon. Friend’s forecast last year for the surplus on invisibles and to his belief that negative growth in GDP would be avoided this year? If his forecasts this year go even slightly astray, just how disinflationary will £200 billion of spending be? Are not there lessons to be learnt from 1973–74?

    Mr. Major We do have a surplus on invisibles this year, and I would expect there to be a surplus on invisibles next year. The underlying premise of my hon. Friend’s question is perhaps inaccurate.

    Mr. Giles Radice (Durham, North) Does the Chancellor of the Exchequer agree that, as the planned spending total to a large extent reflects the Government’s failure to control inflation and the mess over the poll tax, there will be little room for improvements in vital public services? Will not the increase in the public spending total actually disturb the markets? In other words, are not we in danger of getting the worst of all worlds – disturbing the markets without satisfying the public?

    Mr. Major Of course, if the markets listen to the hon. Gentleman that would undoubtedly be the case. I suspect that the markets will notice that we have kept very tight control of expenditure in the circumstances that prevail, and I think that the markets will welcome the fact that we have been able to do so. It is clearly important that we do.

    Mr. Ian Stewart (Hertfordshire, North) Now that my right hon. Friend has announced the first part of his budgetary package on public expenditure and has shown very welcome restraint on the public expenditure totals, when the time comes will he be equally austere in presenting his Budget in the spring, because a tight fiscal policy is the best foundation for restoring economic growth?

    Mr. Major I am grateful to my right hon. Friend for his early budgetary representation which I will consider with great care.

    Mr. William Ross (Londonderry, East) As the 1992 planning forecast has now increased by 4 per cent. and it is intended to increase that total by 7.5 per cent. the following year and by 5 per cent. the year after, does the Chancellor expect those increased sums to be met from the Revenue or will he dip once more into the public borrowing requirement?

    Mr. Major No, I am not at this stage anticipating a public borrowing requirement. As I indicated in my statement, our medium-term policy is to remain at nothing worse than balance in terms of public borrowing. I hope that we will keep to that fiscal balance. We have a surplus this year, against the expectations of many commentators.

    Mr. Tim Smith (Beaconsfield) Is my right hon. Friend aware that his statement today on public expenditure is most welcome because he has succeeded in containing the increase in spending below that necessary to accommodate inflation while at the same time providing substantial additional resources for priority programmes? Does not the substantial increase in cash spending next year show that urgent need to continue to press down on inflation? Will my right hon. Friend continue to take a tough stance on monetary and fiscal policy?

    Mr. Major I entirely agree with everything that my hon. Friend has said and see no reason to add to it. I could not have expressed it as well myself.

    Mr. Ted Leadbitter (Hartlepool) The Chancellor’s statement suggested that he is still aware of the volatility of oil prices. However, is he aware that today there has been a reported 70 per cent. increase to £1.1 billion in the profits of the Shell oil company? It is therefore reasonable to deduce that there will be comparable increases for other oil companies. Does the right hon. Gentleman accept that the volatility of oil prices is beneficial for the oil companies, but that higher prices for oil buyers, such as motorists and industry, are disadvantageous? Does he agree that a lower profit margin and a more reasonable price would remove one element that has a serious impact on inflation, which so concerns the House at the moment?

    Mr. Major As the hon. Gentleman knows, that point has been examined by the Monopolies and Mergers Commission. The hon. Gentleman is right that the volatility of oil prices represents a damaging uncertainty for the projections that we and other countries must make. It is for that reason that I have taken the assumption, similar to that taken in many other forecasts, of an oil price that will be down to $25 by the end of 1991.

    Mr. Anthony Nelson (Chichester) Is my right hon. Friend aware that Conservative Members fully support the content as well as the style and tone of his statement? Will he also accept our congratulations to the Chief Secretary to the Treasury on showing clear political judgment in giving a priority to increased health spending? However, does he agree that if we are to increase expenditure on such areas – as we must – at a time when our constituents are having to tighten their belts, it would be quite improper to face them with an increased burden of taxation next year?

    Mr. Major I am grateful to my hon. Friend for his kind remarks to both myself and my right hon. Friend the Chief Secretary. As he knows, I believe that my right hon. Friend has produced a remarkably successful outturn to the public expenditure round. I believe that it is important to sustain expenditure on health and, on this occasion, we have managed to increase it in real terms by 5 per cent. again. I note my hon. Friend’s point about taxation, but, as he knows, I must consider that only in the period between now and the Budget.

    Mr. John Fraser (Norwood) With “rooflessness”, as the right hon. Gentleman calls it, going through the roof, how many extra homes for rent will be provided by the public sector as a result of this statement?

    Mr. Major My right hon. Friend the Secretary of State for the Environment will be making that clear in his own statement.

    Mr. Nicholas Budgen (Wolverhampton, South-West) Since my right hon. Friend is promising very substantial increases in public expenditure, will he confirm that there will be room for either substantial cuts in interest rates when it is safe to do that, or for cuts in taxation, but not for both?

    Mr. Major My hon. Friend is well aware that I cannot comment on the prospects of taxation, and I have no intention of doing so. I will not cut interest rates until I am absolutely satisfied that it is safe and secure to do so.

    Mr. Alex Salmond (Banff and Buchan) Am I correct in thinking that the Chancellor has assumed £2,700 million in oil revenues for the current year, bringing to a round £90,000 million the total by which Scottish oil revenues have bankrolled the Government in the past 10 years? What has happened to the additional North sea revenues as a result of the higher oil prices which, according to the brokers’ forecasts, are running at £20 million per day? How much of that has gone to the oil companies and how much to the Chancellor? I am sure that the right hon. Gentleman will appreciate the anxiety of people in Scotland to find out the answer to that question today, given the announcement of further steel closures and the further abandonment of North sea steel markets to the Japanese and the Germans.

    Mr. Major The hon. Gentleman did not, of course, put the reverse point to me some time ago when oil revenues fell dramatically after accidents in the North sea. He should look at both sides of the equation. Oil revenues are important to the Exchequer, but they represent a relatively small element of income.

    Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak) Does my right hon. Friend accept that many of us have been disturbed at what we have read in the papers, which we always believe, that the Government are dismantling the health service? How is it, then, that we are told that we will spend £3.2 billion more this year? If that is dismantling the health service, what would we have to spend if we were trying to improve it?

    Mr. Major I am grateful to my hon. Friend for his most helpful observation. It is certainly the case that, on any measure, expenditure on the health service has risen dramatically over recent years to accommodate not only an improving service, freely available operations which previously were not available, and more doctors, nurses and dentists but a general improvement, as well as the largest capital building programme for hospitals that we have ever known.

    Ms. Diane Abbott (Hackney, North and Stoke Newington) Does the Chancellor accept that the figures that he announced on the extra money that he is lavishing on the health service do not mean much except in the context of the outturn figure of inflation and the relative price effect? As the Chancellor will know, the health service as a whole has a higher rate of inflation than the rest of the economy. That point was made by the Treasury and Civil Service Select Committee in its report on last year’s autumn statement.

    Mr. Major The relative price effect in health may conceivably – statisticians disagree – add about I per cent. over the normal GDP deflator. On that basis there is still a large real increase in health spending yet again next year.

    Mrs. Elizabeth Peacock (Batley and Spen) I heard my right hon. Friend say that investment is slowing down, but is he aware of investment that has recently taken place, is now taking place and is planned to take place in the near future in manufacturing industry in Yorkshire? Is not that a sign of great confidence in the future of manufacturing and our country?

    Mr. Major I entirely agree with my hon. Friend. There has been a considerable degree of investment in manufacturing in the past few years. Equally as important as the quantum of investment has been the quality and nature of the investment that we have seen during the past few years.

    Mr. D. N. Campbell-Savours (Workington) Is not it true that any old Chancellor can reduce inflation if he is prepared to kick people out of work and reduce consumption by in effect strangling the whole economy? Is not the real art to reduce inflation by keeping people in work and maintaining demand? Why does not the Chancellor pursue such a strategy? Is that not in the national interest?

    Mr. Major How curious it is, in view of the hon. Gentleman’s remarks, that we have more of our population in work than any other nation in Europe.

    Mr. John Townend (Bridlington) May I congratulate my right hon. Friend on resisting the demands of the Opposition and, indeed, some of his colleagues, for higher expenditure? Is he aware that by continuing to run a budget surplus and repay the national debt he is doing a great service to our children and grandchildren? He mentioned wage increases. Does he agree that the public sector must set an example this year if we are to bring down inflation as quickly as we hope?

    Mr. Major I am grateful to my hon. Friend. He is right about the repayment of the historic national debt which, by the end of this year, will have amounted to about £29 billion over the past four years. Consequently, there has been a considerable year-on-year saving in interest which will no longer have to be paid on that debt. My hon. Friend is right about the need to restrain wage increases generally.

    Mr. Keith Vaz (Leicester, East) The Chancellor will recall that a couple of weeks ago he was a most unwelcome guest in my constituency [HON. MEMBERS: “Shame.”] While he was dining at the Grand Hotel with the chairman of the Conservative association, did the chairman tell him that the current waiting list for hip operations in Leicestershire was 29 weeks? As a result of the Chancellor’s grand proposals, how much less will people have to wait for operations in Leicestershire?

    Mr. Major The hon. Gentleman is too gracious in his welcome. The chairman of the Conservative association did mention that in the period up to 1979 there were virtually no hip operations anywhere in the national health service.

    Mr. Yeo Would it be fair to characterise my right hon. Friend’s statement as one that puts teachers and textbooks before tax and patients before prisons? Has the achievement of containing public spending in real terms at the same time as directing resources to those highly desirable areas been made possible by the success of the Government’s policies over the past decade in defence and law and order?

    Mr. Major My hon. Friend is entirely right. He certainly analyses the autumn statement correctly. Had it not been for the staunch and successful way in which the Government decided to station cruise missiles two or three years ago and the effects that followed from that, I doubt whether we could safely have reduced defence expenditure today.

    Mr. Skinner Why does the Chancellor of the Exchequer come to the House of Commons with nothing less than a cock and bull story? During the past 11 years, the Government have accumulated more than £120 billion in extra revenue through privatisation and North sea oil revenues. As a result of those 11 years, we now have a public sector debt repayment which, according to him, will be only £3 billion next year and will disappear from view the following year, a trade balance of £15 billion and invisibles that are almost invisible, whereas they used to amount to £700 million a month. No wonder he says that the economy must be put back on track. He is running an economy that is off the rails.

    Mr. Major I am bound to say that a PSDR of only £3 billion was not a beast that I recall during the period of the Labour Government. The hon. Gentleman referred to a cock and bull story. We know which of those he talks.

    Mr. Richard Alexander (Newark) My right hon. Friend told the House the total amount of saving in the national debt which will be achieved as a result of this statement. How much saving to income tax payers will be represented by the fact that they no longer have to pay the interest payments on that capital sum?

    Mr. Major It will be a considerable sum. I cannot give my hon. Friend a precise answer, but we are talking about approximately £2.5 billion a year which is perhaps equivalent to 1p or 1.5p on the standard rate of income tax.

    Mr. Paul Flynn (Newport, West) Will the Chancellor of the Exchequer comment on the claimed increase in what he might describe as “bedlessness” in that, by next April, 3,500 hospital beds will close to comply with the Government’s “finance first and patients last” policy? What effect will today’s statement and the closure of those hospital beds have on waiting lists next year? Will they stay the same, increase or decrease?

    Mr. Major The hon. Gentleman should perhaps look at the whole question in the round. The cash increase for the hospital and community health services budget was more than 10 per cent. in 1990–91. Even on the basis of health service inflation, which the hon. Member for Hackney, North and Stoke Newington (Ms. Abbott) mentioned, that is a substantial increase over and above inflation. The same health authorities to which the hon. Gentleman referred are also planning to spend more than £220 million on service developments. If there are volume increases on that scale, I see no reason for the shortfall to which he refers.

    Mr. Michael Morris (Northampton, South) I congratulate my right hon. Friend on giving the House such a clear financial strategy, which contrasts with the questioning from Opposition Benches. May I congratulate him on a realistic planning total for reserves? To return to the welcome 5 per cent. real increase in health expenditure, will he say whether the planning total on which this is based is at least no lower than the planning total for the current year?

    Mr. Major Yes, I can certainly confirm that it is a 5 per cent. real increase. It is there specifically to reflect the priority that we give to health. I am grateful to my hon. Friend for his early remarks, particularly those about the increase in reserves. With the present uncertainties, it is wise to increase them to £3½ billion, £7 billion and £10½ billion respectively. Events may yet show that.

    Mr. Wareing Is not the Chancellor of the Exchequer misleading the House when he tells us that, despite tight control of public expenditure, vulnerable people are to be protected? How does he justify a cut in Government grant for the first time in history to the Royal National Institute for the Blind to assist it with the production of braille material? How long will it be before people, such as blind people, are not expected to bail the Government out of the economic mess for which they are responsible? Who is responsible for that decision and what is the justification for it?

    Mr. Major The answer to whether I am misleading is categorically no. The hon. Gentleman asked about the blind. He would do well to reflect upon the changes that I made in the Budget specifically to help people with that most distressing ailment.

    Sir Ian Lloyd (Havant) The Chancellor will doubtless agree that if the claims of every organisation in the country which said that it was underfunded were met, the Chief Secretary would be coming before the House with a claim for about 60 per cent. of the national income rather than the figure that he has announced. The Chancellor told us that the increase in output in real terms is likely to be 2 per cent. and probably not much more in the foreseeable future. Against that, those very expensive organizations – the national health service and local government – have received increases of just over £5.5 billion or 5 per cent. in real terms. If those claims are met in real terms which sectors of the economy will pay for them in real terms?

    Mr. Major My hon. Friend is right about the inevitable claims that could be placed upon the public purse, often for quite legitimate schemes which, if the resources were available, one would be pleased to meet. The substantial increase for health and local government is at the expense of other areas in which we have been able to make savings and, of course, at the expense of a smaller debt repayment than might otherwise have been the case.

    Mr. John Evans (St. Helens, North) Will the Chancellor confirm that, despite his words about protecting the most vulnerable groups in society, his statement contains no additional community charge resources for northern metropolitan boroughs such as St. Helens? Does he agree that any system that gives the borough of Westminster twice as much money per child to care for children at risk from abuse and poverty than it gives to children in St. Helens is corrupt and indefensible?

    Mr. Major The hon. Gentleman has uncharacteristically overlooked the enormous increase of £2.5 billion made available to cushion community charge payers, often from unjustified levels of expenditure. He has equally uncharacteristically forgotten the £3 billion increase in social security that is specifically to help vulnerable people.

    Mr. Quentin Davies (Stamford and Spalding) I congratulate my right hon. Friends the Chancellor and the Chief Secretary on striking an extremely skilful balance in achieving a £200 billion public expenditure outturn. Does my right hon. Friend agree that in the fight against inflation there is a trade-off between the public sector surplus or net debt repayment and private sector savings? In that context, one of the most encouraging features of the past few months has been the rise in the household sector savings ratio. Does he agree that that will continue to play a key role in the fight against inflation?

    Mr. Major I strongly agree with my hon. Friend. The savings ratio has increased significantly over the past year as a result of increased savings and reduced borrowing. I hope that that trend will continue because it is greatly in all our interests for it to do so.

    Mr. Stuart Bell (Middlesbrough) The Chancellor said that there was central Government provision for the poll tax of about £3,000 million. He also said that the poll tax had helped to double the retail prices index from last year’s forecast of 5.75 per cent. to 11 per cent. He also accepted that local government borrowing had been higher because of the slow collection rate of the poll tax. Is it any wonder that the poll tax is as unpopular today as it was when it was introduced?

    Mr. Major The community charge added 1 per cent. to the retail prices index. The hon. Gentleman is entirely correct about that. However, it was not so much the community charge itself but the increasing level of expenditure reflected in a high community charge that added to the retail prices index. It is difficult to avoid the fact that in the first year of the community charge there was a quite unprecedented increase in local authority expenditure. That was because many local authorities took the opportunity on the introduction of the charge to increase their expenditure in the hope of blaming the Government for it.

    Mr. Jonathan Sayeed (Bristol, East) Will my right hon. Friend remind the House what happened to the ratio of public expenditure to national income in previous periods of slower growth and what were the consequences for inflation?

    Mr. Major My hon. Friend touches on an important point. Both in this country and elsewhere, at times in the cycle similar to that in which we now find ourselves, the ratio of public expenditure tended to rise dramatically with an impact on taxation and frequently on inflation, too.

    Mr. Peter Hardy (Wentworth) The Chancellor seems to strike a rather complacent note on the creation of jobs. Will he confirm that a very much larger proportion of the jobs created in Britain in the past few years has been casual, low paid and part time – far more casual, low paid and part time than the jobs created in our main competitor countries?

    Mr. Major The hon. Gentleman is correct in that some, but not all, of the jobs are indeed part time, but that reflects many people’s demand to work part time. They are now able to satisfy themselves on that count as they were previously unable to do. Whichever way one examines the labour market, we have a significantly higher percentage of our population in work than any other European nation, including Germany.

    Mrs. Edwina Currie (Derbyshire, South) Am I right in thinking that we are spending a lot more on education – that in fact education has done rather well out of this statement? But do we have systems in place that will ensure that the money is spent – especially in counties such as Derbyshire – on improving the quality of education and the physical fabric of our schools and not, as it is at the moment, with excessive administration expense, on free newspapers, educational advisers who have nothing to do with education, and subsidised baked beans for school meals?

    Mr. Major My hon. Friend is quite correct. The figure of £520 million which I quoted earlier was the central Government increase. There is also a significant increase in local government spending in education, a large part of which is financed by the aggregate external finance settlement.

    Mr. Robert Hughes (Aberdeen, North) Does not the very elegant Treasury prose which the Chancellor read so beautifully – especially the part that said that the higher than expected inflation had not been allowed to feed through into Government public spending – disguise the fact that, never mind any improvements for the very vulnerable in our society, the health service and others will have to make cuts simply to keep pace with current demands?

    Mr. Major No, it does not. I illustrated to the House where the savings had been made to provide increased resources for the vulnerable; for education, social security and health. I set out where those savings had come from. So the hon. Gentleman’s premise is, I fear, inaccurate.

    Mr. Nicholas Winterton (Macclesfield) Although I warmly welcome the additional resources allocated to health, education and infrastructure in the announcement made by my right hon. Friend this afternoon, does he agree that manufacturing industry is the only genuine source of non-inflationary economic growth and that he would be able to allocate even more resources to those deserving and necessary areas if interest rates came down and if manufacturing industry could play a more positive and productive role in the economy?

    Mr. Major As my hon. Friend knows, the thrust of the Government’s present fiscal and monetary stance is to move to a position where we can see inflation falling significantly which will open the possibility, when it is safe and secure to do so, to reduce interest rates. I shall certainly do that, but not, alas, until I am convinced that it is safe and secure to do so. To do so prematurely would not be in the interests of manufacturing industry or of any other part of the economy.

    Mr. Peter L. Pike (Burnley) The Chancellor forecast that he would receive £5.5 billion from the proceeds of privatisation. He is going to repay national debt to the tune of £3 billion. If he was producing a balance sheet, would not he have to show that he is using £2.5 billion to subsidise the programme for the year ahead and that he will end up with £5.5 billion less in assets? What will he do when there is no more family silver to sell?

    Mr. Major The £5.5 billion is next year and the £3 billion is this year. If we were borrowing at the rate at which the last Labour Government borrowed, there would be a £50 billion borrowing requirement.

    Several Hon. Members rose–

    Mr. Speaker Order. A very important foreign affairs debate will follow the autumn statement. I wonder whether, exceptionally, I could have an arrangement with those hon. Members who are standing. If I call them on the autumn statement, may I ask them not to rise on the business statement?

    Mr. Richard Tracey (Surbiton) My right hon. Friend’s allocation of resources to health, transport and education will be particularly welcomed in my constituency and in London generally. As we are not allowed by the rules of the House to question the Opposition on the various intemperate promises that they have dangled before the public, will my right hon. Friend speculate on how a Labour Government could possibly pay for the kind of promises that the Opposition have made? What extra taxation and borrowing would be needed?

    Mr. Major They would not, of course, pay. My hon. Friend and other taxpayers would pay. I am not sure that Mr. Speaker’s ruling is quite so welcome to me as it is to my right hon. Friend the Leader of the House.

    Mr. Speaker I am sorry.

    Mr. Jacques Arnold (Gravesham) My right hon. Friend will be aware of the concern about global environmental issues, overseas aid and the work of the BBC’s overseas service. Will he confirm that his statement means that these important British programmes will be both safeguarded and extended?

    Mr. Major I can confirm that there is to be an increase in resources for the BBC world service. On the environment, I referred earlier to the increase of £180 million.

    Sir Hal Miller (Bromsgrove) Will my right hon. Friend reflect on the contribution made by the motor industry to the achievement of his targets in the autumn statement? It has expanded employment and radically improved the balance of trade. When he makes his Budget judgment will he bear the industry’s contribution in mind?

    Mr. Major I am grateful to my hon. Friend for his early representations. It is true that the turnround in the motor industry’s performance in recent years has been remarkable.

    Mr. Peter Thurnham (Bolton, North-East) I congratulate my right hon. Friend on a tight and financially prudent package, but will he confirm that he has also been able fully to protect those groups that are particularly vulnerable to inflation?

    Mr. Major As I said in my statement, the £3 billion increase in social security is intended specifically to ensure that that occurs. I believe, therefore, that I can give to my hon. Friend the assurance that he seeks.

    Mr. James Paice (Cambridgeshire, South-East) While, Mr. Chairman – [HON. MEMBERS: “Mr. Chairman?”] One has waited so long, Mr. Speaker, one forgets.

    Mr. Speaker It is lucky that I do not forget, is it not?

    Mr. Paice My right hon. Friend’s statement, which included extra expenditure on a range of important services, is welcome, but does he agree that he would have been able to give far more within the same planning total had it not been for the profligacy of local government? Does he also agree that those who call for extra expenditure should direct their criticism at authorities that waste money in the belief that by providing jobs they are in some way helping? Instead they should provide cost-effective services.

    Mr. Major My hon. Friend is entirely right. When he has an opportunity to examine in detail the figures that I shall publish next week, he will see that we have had to squeeze central Government expenditure to accommodate the local government expenditure overrun.

    Mr. Michael Jack (Fylde) Can my right hon. Friend confirm that had he been making his announcement today with the same proportion of gross domestic product available to him in tax revenue as the last Labour Government enjoyed, his total expenditure would have been short by some £18 billion? Can he also confirm that this remarkable achievement has come about during the lifetime of this Government, even though there have been falling tax rates?

    Mr. Major I can certainly confirm that, but I cannot confirm the precise figure. I have no reason, however, to suspect that my hon. Friend’s figure is inaccurate. There have been falling tax rates. The only reason why the tax burden has not fallen, relatively, is that the last Labour Government had a borrowing requirement and did not tax honestly for their expenditure.

  • Mr Major’s Parliamentary Answer on Inflation – 25 October 1990

    Below is the text of Mr Major’s response on Inflation made on 25th October 1990 in the House of Commons.


    Mr. Andrew MacKay To ask the Chancellor of the Exchequer if he will make a statement on the current level of inflation.

    Mr. Major I expect there to be a substantial reduction over the coming year.

    Mr. MacKay As there is a clear need for pay restraint, does my right hon. Friend agree that those chairmen and chief executives of major companies who received highly publicised and spectacular pay rises last year – which, by and large, were supported because they were linked to increased profits – must equally accept reductions in their salaries this year, which should be equally spectacular if their profits are suitably reduced?

    Mr. Major As I said earlier, if there is a need for wage restraint throughout industry to ensure greater competitiveness, it must apply at the top as well as at the bottom. I am happy to reiterate that.

    Mr. Robert Sheldon Does the Chancellor realise that we are now two years into the counter-inflationary strategy of relying on high interest rates? Does he realise that, by increasing the retail prices index – which is what high interest rates have done, through mortgage interest rates, quite apart from the other factors – the Government are now relying on exhortation, and that exhortation will not be enough as the RPI rises?

    Mr. Major The right hon. Gentleman makes a better case against the way in which we measure prices than against the policy that will bring inflation down.

    Mr. Ian Taylor Does my right hon. Friend agree that the most sensitive guides to the direction that inflation is taking is not the latest RPI figure but the movement of monetary aggregates? Will he confirm that there has been a steady decline in monetary aggregates over the past six months – particularly in M0 but also in M4? Does he agree that that is a good sign that he has got inflation under control and that the Government’s policies are working at last?

    Mr. Major I strongly agree with my hon. Friend’s view. The reduction in M0 has occurred over the past six months or so and the reduction in broad money has continued throughout this year in each and every month since January.

    Mr. Flannery Like his predecessor, the Chancellor is constantly explaining to us that he is trying to bring down the rate of inflation. Why does he talk as though it was an act of God that caused inflation? Why does not he admit that the Government did it? Why is it that, with the bonus of North sea oil, which no other country in Europe has enjoyed, our inflation rate is higher than those of our European counterparts – in some cases twice as high?

    Mr. Major At no stage have I placed the blame where the hon. Gentleman suggests I have. The problem that created inflation was excessive demand, as I have repeatedly stated. That is accepted by commentators and it is broadly accepted by hon. Members on both sides of the House. As a result of monetary policy, demand is falling away, and inflation will come down as well.

  • 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 Speech to the Lord Mayor’s Banquet at the Mansion House – 18 October 1990

    The text of Mr Major’s speech to the Lord Mayor’s Banquet, held at the Mansion House in London on 18 October 1990.


    CHANCELLOR OF THE EXCHEQUER:

    It is now very nearly a year since I returned to the Treasury after a brief parole in the Foreign Office. I believe I am probably the only politician to have prepared the Treasury’s public spending posture for a bilateral with the Foreign Secretary; conducted that bilateral as Foreign Secretary; and announced the outcome as Chancellor. As the public expenditure round continues I must comment that such a sequence of events does have its advantages. And to be strictly fair I should add that I am glad none of my Cabinet colleagues has that advantage this year.

    From the outset it seemed likely that 1990 would be an uncomfortable year and so it has proved. Economic policy has been dominated by the struggle to get control of the inflationary pressures that were evident in the large current account deficit and, of course, in the inflation figures themselves.

    The cause of the problem was excess demand. And the remedy that we put in place was a firm monetary policy that is now clearly working.

    All the monetary aggregates now tell the same story. Annual growth of narrow money, M0,has been reduced in every month since April and is now within its target range; M4 growth has fallen steadily throughout this year to reach its lowest point since June 1987. We have seen a welcome recovery in the savings ratio from 4.9% in the third quarter of 1988 to 7.7% in the second quarter of 1990. And in the last few months, there has been a marked change also in the real indicators in the economy. Over the next few months we are likely to see a further reduction of that excess demand pressure that has been the root of higher inflation.

    Earlier this month sterling entered the Exchange Rate Mechanism. This event marks a significant development in the conduct of monetary policy. The news was greeted with rapture in some quarters, and with deepest gloom in others. Neither of these extreme reactions seems to me to be right. What entry to the ERM amounts to is an extra dimension to our monetary discipline. I have no doubt it will bring benefits for the UK. But I do not agree with those who argue that the ERM will bring those benefits in the short-term and then have long-term costs. Precisely the reverse is true. Entry will require tough action in the short-term to ensure low inflation thereafter. The disciplines of the system will force both the Government and the private sector to make difficult choices.

    For the private sector, I am thinking in particular of the control of costs including labour costs. The days have gone in which businesses could simply negotiate around the RPI and assume that a falling exchange rate would keep them competitive with their European rivals. Keeping our costs in line with, or lower than, those elsewhere in the Community is now essential.

    And it is, of course, the Directors and Managers of British companies who must ensure that they stay competitive. The Government cannot do it for them. It will be of no use businessmen bewailing the dominance of the so-called “going rate” in general while meekly accepting it as an unavoidable cost in their own firms. Within the ERM that approach will lead to only one result: lost markets, redundancies, plant closures, and ultimately company failures.

    I put the point starkly because I want to ensure that message is fully understood. It is as relevant to pay in the boardroom as it is to pay on the shop-floor.

    For the Government too, membership of the ERM will be a discipline. We have an obligation to hold sterling in its band, and it is an obligation which we will meet through the normal instruments of monetary policy. That does not mean we ignore other monetary indicators. Making a success of the ERM depends upon making a success of monetary policy. And that will require continuing attention to monetary conditions in this country. This is precisely the way other members of the ERM operate their policy.

    One of the enormous complications for the conduct of policy in the 1980s has been the inconsistency in behaviour of various monetary aggregates, very probably because of the speed of financial liberalisation. The problem is that different indicators can at the same time give completely contradictory messages. Thus it is possible to argue that in 1980 not enough attention was given to narrow money; and in 1986 that broad money should have been the focus of greater attention. One comforting development has been that for some time now, the messages coming from both broad and narrow money have been the same; possibly because the biggest effects of financial liberalisation have begun to work themselves through.

    Before we could join the ERM we needed to be sure that inflationary pressures were on the way down. As usual, there has been a lag between the peak in economic growth and the peak in inflation – indeed, on this occasion that lag has been particularly long. But – although oil prices have yet to f through fully into the headline figures – it is now clear that inflation itself is near its peak and will fall markedly over the next year. 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 the same time. In doing so I was influenced by the risk that a reduction in interest rates before entry into the ERM would have been misunderstood as a signal that I was seeking to weaken the exchange rate in readiness for joining – which I was not; or alternatively, that entry was a long way off – which it was not. Both interpretations might have weakened the exchange rate and damaged the prospect of entering at a central rate that would make our counter-inflationary intentions clear from the start. I took the view, therefore, that the markets should be aware of both those factors at the same time- hence the joint announcement. To be frank, I thought that was the most straightforward and sensible way to proceed, and I still do.

    We decided to enter with 6% margins to give sterling an opportunity to settle down in view of the uncertainties which necessarily attend an important market development of this kind. As circumstances permit, we will move to the narrow 2 ¼% bands.

    Returning to inflation, the indications are that this will fall throughout next year, and especially quickly from April onwards as both the underlying rate improves and some of unusual adverse factors drop out. However, notwithstanding this improved prospect, interest rates will be reduced further only when it is clearly safe to do so.

    The ERM also has implications for fiscal policy. Throughout the 1980s fiscal policy has been used to support monetary policy and it is crucial we maintain this approach in the future.

    Some commentators have suggested that interest rates are, in some sense, allocated to maintaining the exchange rates and are therefore not available to help achieve other objectives. They argue therefore that in consequence membership will require a more active fiscal policy. I have no doubt that it would be a huge mistake to return to frequent mini-budgets and fiscal fine-tuning. It is not necessary, its effects are not wholly predictable and, in my limited experience, one Autumn Statement and one Budget a year are quite sufficient! However, the overall fiscal balance will be important in the future just as, in practice, it has been in the past.

    As the economy has slowed it has become inevitable that large cyclical Budget surpluses would diminish. The boom in corporation tax collection has come to an end for the time being and, as I indicated to the Treasury Committee of the House of Commons some years ago, an economic slowdown inevitably brings renewed pressures on public expenditure, which may no longer fall as a proportion of GDP. But I do not believe we should change our medium-term objective of a balanced Budget. That would not make sense.

    To summarise, there is no doubt about the problems of 1990. I do not promise that 1991 will be easy either: we will continue to need tight monetary and fiscal policies and our commitment to the ERM will reinforce that discipline on industry and on Government. But we will, I am sure, begin to see the benefits in a substantial fall in inflation. That will be important progress. And with inflation back under control, British business will be well placed to take advantage of the enormous opportunities which our policies have created.

    I should like to turn to Europe. In recent years we have played an important and constructive role in shaping the Community. I have no doubt that we will continue to do so in the future. This is vital to the future of the City and of industry. Of course, whenever we voice doubts about a proposal emanating from Brussels, there will be those ready to call us halfhearted Europeans or accuse us of trying to disrupt the Community. Equally, whenever we will put forward positive proposals to make Europe work better, there will be those who accuse is of pre-emptive surrender. Both are wrong.

    Our record as good European is excellent. It was Britain that was instrumental in seeking a Budget deal that kept the Community viable; Britain which has helped remove the worst excesses of the CAP; and Britain which has implemented more single market measures than all but one of our Community partners. Many so-called good ‘Europeans’ are in practice very bad Europeans when it comes to opening up their markets to competition.

    Often, when we voice doubts about European initiatives, we succeed in persuading our partners that our approach is practical, realistic and “communautaire”. A case in point is the Commission’s advocacy of a withholding tax. This would have been harmful to the Community and would have damaged the City’s ability to compete worldwide. The UK has played a substantial part in devising, and bringing near to agreement, a more acceptable alternative scheme.

    I believe that an important test of Britain’s commitment to Europe is our desire to see the Community evolve together. We do not want to see it split into two tiers with an inner core speeding ahead. This would not strengthen the EC. And it could damage it gravely. It is against that background that I hope our partners will judge our proposals for the development of EMU beyond Stage 1.

    In recent months I have been encouraged by the direction that debate has taken. Increasingly the focus of attention is on the practical steps after Stage 1 as our partners in Europe recognise that the pre-requisite to further integration is convergence of economic performance. Moreover, there is an inherent absurdity in arguing about the length or date of Stage 2 before determining what should be in it.

    Our proposals for a European Monetary Fund and a hard ecu are well known. They provide an evolutionary approach based on the market and choice. They recognise that economic convergence is far from satisfactory. For the present differences between the relative performances of the twelve are striking. Annual rates of inflation in the Community range from 2.5% to 22%; short-term interest rates range from 8% to 18%; and public sector budget balances range from a surplus of 3% of GDP to a deficit of over 17%. And the degree of flexibility in the economies of member states varies considerably.

    Our proposals were heavily influenced by advice and guidance from within the City. They were also, of course, worked up in co-operation with the Bank of England. Indeed, if I may digress for a moment, I should say that one of the most agreeable aspects of the last year has been working so closely with the Governor and his team. But returning to our proposals, they were intended to advance the debate on EMU and offer a way to keep the Community moving forward together.

    As we draw nearer to the inter-governmental conference in December, we shall continue to take a practical and constructive approach. But no one should misinterpret our position. Joining the ERM did not commit us to adopting, and cannot oblige us to accept, the imposition of a single currency in Europe.

    But I have made it perfectly plain that under the UK’s proposals, the hard ecu could ultimately evolve towards a single currency if it were the wish of governments and peoples that it should be used in preference to their own national currencies. But I have also indicated that it is neither necessary nor desirable to take a decision of that kind now.

    While the debate continues we are looking for practical ways in which the existing basket ecu can be developed. In 1988, we launched the ecu Treasury Bill programme and since then LIFFE have introduced an ecu interest rate contract. Tonight I can announce some further modest moves in that direction. The Bank of England is already consulting Gilt Edged Market makers about the basis on which they can extend their dealings to cover ecu bonds as well as the sterling instruments they already trade. I welcome that. I am now giving consideration to an ecu bond issue, at the appropriate time, which would demonstrate further our attachment to the ecu and would strengthen London’s important position in this rapidly growing market. Another practical step which we shall support is the proposal that member states’ contributions to the European Development Fund should in future be denominated in ecu.

    Our commitment to Europe is also demonstrated by our support for the nations of Eastern Europe and our conviction that they too must have the opportunity to become members of the Community. The European Bank for Reconstruction and Development in London will be an important means of assisting market economies to emerge in those countries. And the choice – which I warmly welcome – of London as the site is a tribute to the City’s unique experience in finance and privatisation.

    In summary, My Lord Mayor, I look forward to the 1990s as the decade in which we will make further improvements in our economic performance; in which we will continue to play a leading role in creating an open and liberal Community; and in which we can look forward to London consolidating its position as the financial centre of Europe. We should aim for nothing less. And accept nothing else.

  • 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 Written Parliamentary Answer on Retail Prices Index – 24 July 1990

    Below is the text of Mr Major’s written Parliamentary Answer on Retail Prices Index on 24th July 1990.


    Mr. Hanley To ask the Chancellor of the Exchequer whether he will make a statement about the recent report of the Retail Prices Index Advisory Committee.

    Mr. Major As I told my hon. Friend the Member for Carshalton and Wallington (Mr. Forman) on 4 July, at column 577, the report examines how the price of holidays might be incorporated into the retail prices index and recommends that the Central Statistical Office should begin to collect relevant data and examine a new methodology which the committee has developed. However, there is no recommendation to include holiday prices in the retail prices index for the moment. I am asking the Central Statistical Office to put in hand the data collection and further work necessary to determine whether it will be possible to overcome the methodological problems associated with incorporating a holiday price index into the retail prices index in due course.

    The report also examines the way financial services are taken into account in the retail prices index. On this it recommends that the annual fees which are being introduced for the holders of certain credit cards should not be covered by the retail prices index, and that any supplements which retailers might charge to customers using credit cards should also be ignored in constructing the index, at least for the present. It is also recommended that charges for personal banking services and transaction charges incurred by households buying and selling investments should be excluded from the index, but that the coverage of insurance should be extended to include personal accident and “protection-only” life insurance. I have decided to accept these recommendations.

    The full report is being published today as Cm. 1156 and copies are available in the Vote Office.

  • 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 Speech to Welsh Conservative Party Conference – 6 July 1990

    Below is the text of Mr Major’s speech to the Welsh Conservative Party Conference, made on Friday 6 July 1990 in Llandudno.


    CHANCELLOR OF THE EXCHEQUER:

    “This Conference recognises the need for stringent measures to curb inflation and to ensure growth and welcomes the specific measures to increase the commercial success of Wales.”

    This motion addresses the need to control inflation and the measures that are required. It recognises – rightly – the connection between curbing inflation and promoting economic growth and prosperity.

    The economic history of our first ten years demonstrates this connection with utter clarity. The reduction of inflation from the quite unacceptable levels reached in the 1970s was the essential prelude to the recovery of Britain’s industrial health and our national prosperity, and two achievements the cynics thought impossible. They are achievements we must both preserve and build on. I have no doubt that we can. But the absolute condition of our doing so is that we get inflation under control. No-one should regard this aim as an optional extra.

    For there is no hiding the damage inflation does to competitiveness. To investment. To industrial relations. Where it is the mother and father of industrial strife.

    On its own this would be reason enough. But there is another – equally vital – reason why we must get inflation down. And that is the social damage inflation does, to the people who are least able to protect themselves, the people who have contributed least to the problem. Inflation breeds fear and resentment. It punishes savers and penalises everyone who relies on a fixed income. That penalty is cruel, and it is permanent.

    But Mr Chairman, there is a legitimate question we must answer, one that genuinely puzzles many people, not least amongst the supporters of the Party. The question is: why has inflation come back? Why has it proved such a stubborn problem? And why indeed has it risen recently, despite our anti-inflation credentials and our real determination to reduce it?

    I think it is clear that the answer lies, in large part, in the tremendous surge of confidence we saw in this country in the aftermath of our third election victory in 1987. There was confidence on the part of industry, which resulted in a 40 per cent increase in business investment in the three years to 1989. That investment was of course welcome. We shall see the benefits of it in years to come – indeed, we are already beginning to see them – but the colossal scale of it nonetheless added to demand.

    And just as industry and business felt confident, so too did millions of individuals. And they too expanded their spending and borrowing, so that they and their families could be better housed, and as an investment for the future. The combination of this behaviour on the part of both business and consumers at the same time was unprecedented in the last fifty years, and it is at the root of our present inflationary problems.

    We were not slow to tighten policy as it became apparent this was necessary. But we can see now that our initial response underestimated the problem. However, that is only clear with hindsight. At the time, almost all outside commentators – like us – underestimated the inflationary pressures we faced. Now we need to reduce these pressures and that is why we have to maintain high interest rates, and a tight fiscal stance too.

    I know high interest rates are difficult, painful. But they are unavoidable. That magic potion, the painless cure for inflation, simply does not exist. I wish that it did, but it doesn’t. The truth is, as in every other country, the use of interest rates is essential to reduce inflation.

    There is no doubt, Mr Chairman, that they will work. Their effects are abundantly clear in the housing market, and in the high street too. Demand has slowed by a very considerable amount, but it is proving to be a longer haul than anyone expected. Disappointingly, we have still to see the RPI turn down, and I fear it will be a while before it does so decisively.

    We have to see inflation come down – and keep on coming down. Back down to the average level of our competitors; then beyond that to the level of the best, and then lower still. Nothing less will do. For this is the absolute precondition of all our hopes for the coming years. Low inflation will deliver them for us. High inflation will destroy them.

    I hope it will be clear from what I have said, Mr Chairman, that the policy is a long term attack on inflation. I have no intention of relaxing monetary policy prematurely, before the job has been done.

    Inevitably this means that it will be a difficult year. I in no way underestimate these difficulties. But neither should anyone underestimate the underlying long-term strength of the economy. This will endure, and continue to work to our advantage long after our present problems have been overcome. We should not forget what has already been done and what has been achieved. In the 1980s we have seen enormous changes. Many problems that appeared to be insurmountable ten years ago have been swept away.

    In 1979 no-one thought we could seriously return nationalised industries to the private sector. No-one thought that we could reform corporation and personal taxes in the way that we have done. No-one thought that we could deregulate and improve the supply side of our economy as we have. No-one thought in 1979 that a Government could successfully reform trade unions.

    In the 1980s we have done all these things. Deregulated. Privatised. Cut tax rates and abolished taxes. We have moved from being a Government that constantly had to borrow to finance spending to one that has repaid a large proportion of the debts accumulated by Governments over the last 200 years. Who in 1979 would have thought that a modern Government would have repaid £25 billion of the national debt, as we have done in the last three years?

    The 1980s have been one of the most successful decades in the history of the British economy. We have had strong growth in investment, in productivity, in new businesses and in jobs. Over the last six years this country has produced more new jobs than any other country in Europe. And after decades of decline, we have seen our share of world trade first stabilise and in the past year actually rise.

    The effects of our policies on ordinary people up and down the country are also clear. Since 1979 real take-home pay for a married man with a family has increased by more than a third. More people now own their own homes, more people now own shares and more people than ever before have their own pensions. Ownership – with all the security and opportunities it gives you – is now an everyday aspiration for the many, not just the few.

    But in Wales you do not need to look at the statistics. Here you have the evidence before your eyes. Wales is – manifestly – a success story. You have attracted businesses and investment from all over the world at a remarkable rate. Indeed, in 1988 over a fifth of all the inward investment to the UK went to Wales. Companies like Toyota, Bosch and Ford are investing billions of pounds in the principality. They chose the UK in Europe, and in the UK they chose Wales.

    Mr Chairman, we all know that Governments cannot create jobs and Ministers cannot legislate for prosperity. But I believe that much of the success of Wales in the last ten years flows from the commitment, flair and energy of Nick Edwards and Peter Walker. They have applied the Government’s policies with enormous vigour and imagination and it has produced very real rewards for the people of the Principality. There is no-one better than David Hunt to build on that.

    Ten years ago Wales was still heavily dependent on a narrow range of heavy industries. In the main, these were nationalised corporations, unproductive, inefficient and loss making. But today the prosperity and jobs of the Welsh people are based on a more balanced and a wider range of economic activities. Who would now turn the clock back? And if so, for what reason?

    That may sound like a rhetorical question. But it is not. For – amazing as it may seem – there are people who want to turn the clock back, for Wales, and for Britain. This regressive organisation goes under the name of the Labour Party.

    A couple of weeks ago the nation had the opportunity to see an interview with the leader of this small and increasingly desperate band. A rare opportunity indeed – for as a species they tend to shun occasions where they will be forced to answer straight questions. And what did we hear? Words, yes – lots of them. But answers? No, none.

    All the old Labour reflexes were there: tax to the hilt and spend as if there was no tomorrow. But what about taxation? If you look carefully you’ll see that Neil Kinnock committed himself to compensate only working people with his tax plans. Why only “working people”, I asked myself?

    I have found the answer. It lies buried in their last policy document: “Meet the Challenge, Make the Change”. In that, you’ll find that Labour plan a new tax on savings, to be levied at 9 per cent.

    Savers have always suffered under Labour. In the 1970s pensioners saw Labour rob them of their savings, by letting inflation rip. And they plan the same again. On my calculations that tax plan alone would make a million people worse off, and half of those are pensioners.

    And then there’s Mr Kinnock’s confident assertion that fourteen out of fifteen basic rate taxpayers would be no worse off. If he knows that, he knows who they are, but he doesn’t dare tell them. If he knows that, he knows what his growth projections are, but he doesn’t dare announce them. If he knows that, he knows what their public expenditure plans really cost, but he won’t tell us.

    Or, if he doesn’t know, then this “fourteen out of fifteen” line is just make believe, an empty phrase that sounds good but means nothing.

    But a tax on savings is just the tip of Labour’s tax iceberg. Let me give you a flavour of some of their other pledges:

    – They intend to freeze the married couple’s allowance. That would make all married couples in this country, 24 million people, worse off.

    – They have a plan to abolish the upper earnings limit on National Insurance contributions, making over 3 million people worse off.

    – And on top of this Labour plan to increase the top income tax rate to 50 per cent.

    – They plan to restore capital transfer tax and to meddle with mortgage interest relief.

    – And they plan to introduce a new local government tax. But they won’t tell us what it is. When Mr Dimbleby asked Mr Kinnock all he said was: “I’m sorry, I can’t enlighten you”.

    Well, I can enlighten Mr Kinnock about one thing. Taxpayers aren’t fooled. They know Labour would cost them dear. And as for spending, all we ever hear is pledge after pledge from Labour spokesmen, but never a number in sight.

    Mr Kinnock hasn’t been doing his sums. Perhaps he won’t add up the numbers. Perhaps he can’t add up. Perhaps it’s not the numbers that don’t add up. Perhaps it’s Mr Kinnock.

    The fact is, the Labour Party has nothing to offer this country other than a determination to put the clock back. I have no doubt that the Party that has these policies to secure Britain’s future is the Conservative Party. We are the Party with the policies that will bring inflation down and keep it down. We are the Party that will promote saving. We are the Party that will enable Britain’s businessmen to translate our opportunities into success.

    Mr Chairman, I believe that in the next decade these opportunities will be immense. The next ten years will be years of great change and rapid progress. The single market in Western Europe will be completed. The dramatic transformation of the countries of central and eastern Europe will open up wholly new trading opportunities.

    In the 1990s there will be more countries that are genuinely free; and there will be a wider and more prosperous world market. There will therefore be tremendous opportunities for this Principality and for the other parts of the United Kingdom. This will be a world in which British businesses will be able to generate the wealth and the jobs that will provide prosperity, security and opportunities for all our citizens.

    The economic changes of the 1980s mean that this country starts with a formidable base to take advantage of the 1980s. We have a sound base; and we have the flair and enterprise to build on it. We have immense opportunities. I believe that the long term outlook for the people of this country is brighter today than at any time for a generation.