Tag: Inflation

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Several Hon. Members rose – [Interruption]

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

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

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

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

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

    Mr. Neil Hamilton (Tatton) rose –

    Mr. Cranley Onslow (Woking) rose –

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

    Mr. Speaker Order. The House knows the rules.

    Several Hon. Members rose –

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

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

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

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

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

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

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

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

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

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

    Mr. Speaker Order.

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

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

    Mr. Maxwell-Hyslop rose –

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

    Mr. Maxwell-Hyslop rose –

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

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

    Sir William Clark (Croydon, South) rose –

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Several Hon. Members rose –

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Mr. Tony Banks rose –

    Mr. Stuart Bell (Middlesbrough) rose –

    Mr. Major rose –

    HON. MEMBERS Give way.

    Mr. Speaker Order.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    HON. MEMBERS Oh.

    Mr. Speaker Order.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Mr. David Shaw (Dover) Listen, Kinnock!

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

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

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

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

  • Mr Major’s Speech in Northampton on Economic Policy – 27 October 1989

    Below is the text of the press release, 231/89, issued by Conservative Central Office on Friday 27 October 1989. The text is of the speech made by Mr Major in Northampton, his first speech as Chancellor of the Exchequer.


    CHANCELLOR OF THE EXCHEQUER:

    I understand the difficulties that many face with high interest and mortgage rates. But they – and the resulting slowing of the economy that we must see – are the means by which we will cure the problem. They are not the problem.

    The problem is inflation. I have no doubt that the central task before us is the reduction and the elimination of rising prices.

    Not only does this objective remain the same, but so do the policies needed to achieve it. I was fully involved as a Treasury Minister in setting economic policy barely three months ago. I have not changed my views over those three months.

    Many think a little inflation does no harm. I do not share that view.

    For some people, inflation may seem a cosy companion. But for others it can be disastrous. Those on fixed incomes see savings eaten away, and security destroyed. For those without savings and on low incomes there is the nagging insecurity of falling behind and losing the dignity of self-sufficiency. These fears were real for millions when inflation took over in the 1970s. We must not let this happen again.

    And for businesses inflation is the same unpleasant brew. It destroys competitiveness, damages industrial relations, undermines investment, and savages profits.

    So inflation must go. Ending it cannot be painless. The harsh truth is that if the policy isn’t hurting, it isn’t working.

    I set out these truths to make one central point. All aspects of policy will be directed to bringing inflation down. Reducing it is never easy, but it is absolutely necessary.

    I know that there is a difficult period ahead. But the important thing is that we cannot and must not fudge the determination to stop inflation in its tracks. I won’t fudge it.

    The economy is not regulated by interest rates alone. Government income is many billions of pounds greater than expenditure. We are repaying our debts. And this is underpinned by firm control of public expenditure. So the Government’s financial position is very sound.
    High interest rates are working exactly as intended. Spending is slowing down – we can see it in housing and in the shops. As a result the shortages which were driving up costs in industry are easing.

    Interest rates also affect the exchange rate. A declining exchange rate pushes up prices, so I favour a firm exchange rate. The budgetary position and the present level of interest rates are such as to keep the exchange rate firm. And our tactics in the foreign exchange markets are designed to check fluctuations which are of no economic significance.

    We have had some fluctuations over the last twenty four hours. That is hardly surprising as people round the world react to an event which they were not expecting. The resignation of a Chancellor of the Exchequer is not an everyday event. But the policies I have described were the right ones before this event. And they are the right ones now.

  • Mr Major’s Parliamentary Answer on Interest Rates – 6 July 1989

    Below is the text of Mr Major’s response on Interest Rates on 6th July 1989 in the House of Commons.


    Ms. Quin To ask the Chancellor of the Exchequer what representations he has received from small businesses on the current level of interest rates.

    Mr. Major My right hon. Friend has received a number of representations on this subject.

    Ms. Quin Have the Government studied the recent survey by the Forum of Private Business, which shows that small firms are rapidly becoming the victims of high interest rate policies? Are the Government aware of the CBI’s industrial survey showing the weakness of small firms’ export orders? What advice are the Government now giving to small firms?

    Mr. Major I have seen those reports. There is no doubt that interest rates are uncomfortable. But inflation would be more uncomfortable, would last longer and would be far more damaging. Monetary policy is specifically geared to bear down on inflation and so bring it down. That is in the interests of all business, particularly small business.

    Mr. Gow Is it not the case that excessive monetary growth caused, and diminished monetary growth will cure, the monetary evil of inflation? Will my right hon. Friend confirm that he will maintain interest rates at such a level as to persevere in the abatement of inflation until we achieve his declared target of stable prices?

    Mr. Major I can certainly assure my hon. Friend that we have no intention of relaxing on monetary policy until it begins to bear fruit.

    Mr. Haynes When the Prime Minister comes in to the Chamber in a moment or two, will Treasury Ministers have a word with her and tell her to get rid of the Chancellor and farm him off back to the beautiful green fields of Blaby, because he has been a complete failure? He promised that the Government would help small businesses because that was where the jobs would come from and said that that would sort out the problems of the economy.

    Mr. Major I disagree with what I could hear of what the hon. Gentleman said. We cherish the Chancellor and hope to keep him for a long time.

    Mr. Bellingham Is the Chief Secretary aware that in west Norfolk unemployment has come down from a peak of 18 per cent. to less than 6 per cent.? The main reason for that is the success of the small firms sector, which has prospered under the Chancellor’s policies. However, is my right hon. Friend aware that that sector is worried about the increase in inflation and supports policies that will bring inflation down?

    Mr. Major I entirely agree. Unemployment has fallen in each and every region of the United Kingdom – without exception – and that has been happening for a considerable period of time. That is a direct result of the policies that my right hon. Friend has been following.

    Mr. Chris Smith Is the Chief Secretary aware that bankruptcies among self-employed sole traders in London and the south-east have risen by 28 per cent. in the past year, as a direct result of the Government’s high interest rate policy? Does he show no concern for the small businesses throughout the country that are being forced to abandon re-equipping and investment decisions and, in many cases, being forced to lay off staff? Has he heard the verdict of the small business man in Gosport, who said that high interest rates were squeezing his business to choking point? Why does he not change his policy before it is too late?

    Mr. Major The hon. Gentleman can rattle his chains all he likes, but the creation of new businesses is now running at an unprecedented rate of 1,300 new businesses every week. The hon. Gentleman can never tell us when that happened under any Labour Government.

    Mr. Oppenheim Does my right hon. Friend agree that the effect of high interest rates on business is substantially mitigated because long-term rates are several points below the level of short-term rates? In addition, does he agree that the long-term interests of all business, the economy and the people of Britain are best served by having high interest rates now, rather than allowing problems to build up for the future, as other Governments would have allowed?

    Mr. Major That is right. It is also pertinent that the profitability of small businesses is at the highest level for 20 years. That means that firms are much less reliant on borrowing and therefore much less sensitive to short-term interest rate changes.

  • Mr Major’s Comments on Labour’s Economic Policies – 27 May 1989

    Below is the text of the press release, 695/89, issued by Conservative Central Office on 27 May 1989. It contains the text of a message sent by Mr Major to the Huntingdon Conservative Association.


    CHIEF SECRETARY TO THE TREASURY:

    Ask Mr Kinnock a serious question about his economic policies and you do not get an answer, you get an explosion.

    After two years of careful coaching, he still cannot tell us how he would control inflation. He does not believe that interest rates are the answer. He prefers credit controls. But he cannot explain how he would make them work. And his own Shadow Chancellor has as good as admitted that they would not.

    So how would he control inflation?

    He claims to be a born-again European. But his policies would bring him into direct conflict with the Community. He knows that people would dodge his credit controls by borrowing from foreign banks. So he would need exchange controls to back them up. But exchange controls are illegal throughout the European Community from next year.

    So how does he reconcile his commitment to Europe with his interventionist economic policy?

    He seems to want to take direct action against imports, perhaps through deposits, perhaps by controls. But unfortunately he went off the air before he could finalise his answer. No doubt he will tell us.

    After two years of reviewing his economic policies, you might expect him to have produced a properly costed programme. But not a bit of it.

    He does not say how much his extravagant spending pledges would cost.

    And he is no more willing to tell us how many families would pay more under Labour’s plans for higher rates of income tax. Tax payers are entitled to an account of what their tax rates would be under a Labour Government. When will they be told?

    One question repeated four times by Mr Naughtie produced a memorable explosion. What will four questions produce, I wonder?

  • Mr Major’s Speech to the American Chamber of Commerce – 27 April 1989

    The text of Mr Major’s speech to the American Chamber of Commerce on 27th April 1989.


    CHIEF SECRETARY TO THE TREASURY:

    I am grateful for this opportunity to address the American Chamber of Commerce. I believe it is true to say that the bilateral links between our two countries have never been stronger, either at a political or a commercial level. At present the US is the largest recipient of UK direct overseas investment and US is the largest direct investor in the UK. These investment flows are very welcome, and are the most tangible sign possible of mutual confidence in our respective economies. We see a similar pattern in visible trade. UK exports to the US, and US exports to the UK, were both around 18 billion dollars in 1988.

    Our two countries also share similar convictions about the importance of enterprise, choice, initiative and the need to minimise government controls over industry and commerce and, for that matter, the individual, too. We also agree that the Government has an important role to play in providing a stable background in which industry can operate effectively. The main job is to reduce the current level of inflation and seek to eliminate it in the future. Inflation is the first and most serious problem we face. It undermines business and personal planning. It destabilises industrial relations and it can destroy within a few years the savings of a lifetime. That is why the elimination of inflation must remain the central economic objective. This is why monetary policy has to remain tight to maintain downward pressure on it. And it will remain tight, so inflation should turn down later this year. I know that people dislike the short term discomfort of high interest rates. I understand that. But they are absolutely necessary if we are to avoid the long term pain of an inflationary spiral that would damage our economic competitiveness, our industrial and commercial growth and our individual prospects. We have made it absolutely clear that we are not prepared to take risks with inflation.

    Much has changed these last ten years. During the 1980s the UK has grown faster than all other major EC countries, and – if it is not ungracious to say so before this audience – even more rapidly than the US. In the previous two decades the UK was at the bottom of the growth league. Now it is at the top. The same story holds for investment. In the 1980s the growth of total investment here was higher than in any major European country, after being pathetically low in the 60s and 70s. Last year alone the growth of business investment was over 14 per cent and we expect a further 8 per cent this year. Over the past 7 years total investment has grown over twice as fast as total consumption. By contrast, during the 70s, consumption grew over 5 times faster than investment.

    This investment is critical and has enabled our industry to improve its productivity considerably. Indeed, the growth of productivity in the UK during the last decade is second only to Japan of all the major industrial countries and manufacturing productivity has grown more rapidly even than in Japan. Recently debate has focused on the trade deficit. For last year the published figures show a current account deficit of 14.5 billion pounds or 3.2 per cent of GDP, although it must be said that these figures certainly overstate its size. The balancing item – which consists of an unknown mixture of unidentified capital inflows and unrecorded net exports – was even larger, at 15 billion pounds, than the total recorded deficit. Nevertheless it is clear that the current account deteriorated significantly between 1987 and 1988. I want to consider three aspects of this: what caused the deficit, whether it poses a threat and how it will be corrected.

    Firstly, what caused the deficit?

    The main reason for the balance of payments deficit is the dramatic surge in investment I referred to a moment ago. That has not been accompanied by a comparable increase in savings, so UK has had to import capital from abroad. The net capital inflow is the necessary counterpart of the current account deficit. With the world economy becoming increasingly integrated, it is inevitable that there will be differences in patterns of saving and investment in different countries, and hence balance of payments surpluses and deficits.

    It is clear that consumer spending in the UK has also been growing rapidly, although, as I have said, at only half the rate of investment. The successful supply side policies of recent years, together with this extra investment, have enabled our economy to increase output substantially. But last year domestic demand from both companies and persons grew even faster than industry’s capacity to meet it. The excess was diverted partly into imports and partly into inflation. This unwelcome resurgence in inflation is a worldwide phenomenon. In response, there has been prompt action to tighten monetary policy around the world, reflecting a common determination to get inflation under control, and keep it under control.

    Does the deficit pose a thread?

    The forecast we made at the time of the Budget indicated a balance of payments deficit of 14.5 billion pounds, around 3 per cent of GDP.

    Given the underlying strength of the economy this is readily financeable. There are three key points which keep the UK deficit in its proper perspective.

    First, the UK’s net overseas asset position is extremely strong. Indeed the ratio of our net overseas assets to GNP is by far the largest of any major economy.

    Second, the nature of the present deficit is quite different from those the UK faced in the 1970s. In those days, the UK government was borrowing overseas to fund an excessive spending programme. By contrast we are now running a substantial budget surplus of around 3 per cent of GNP. In the three years to March 1990 we will have repaid around one sixth of the outstanding government debt. As a result the public sector is adding to total savings, and not contributing to the deficit in any way.

    Thirdly, the most important point to bear in mind when putting the balance of payments deficit in context is its composition. Only about one quarter of the growth in the value of manufactured imports between 1987 and 1988 was accounted for by consumer goods (including cars).

    The remainder, fully three quarters, was up of goods for production and investment. The significance of this is that it represents British firms investing both to modernise and increase output. The fact is that we are in the midst of an investment boom that any previous government would have given their eye-teeth for. The short term impact on the balance of payments should be the precursor of long term improvement in productive capacity and efficiency. There is more to the trade gap than video recorders.

    In the first quarter of this year the current account deficit was around a fifth lower than the peak registered in the fourth quarter of 1988. The latest figures provide further evidence of the trends I mentioned a moment ago. Goods for production and investment continue to represent the major part of our imports. Indeed imports of consumer goods fell by 1 per cent between the fourth quarter of 1988 and the first quarter of 1989.

    I am also glad to see exports performing well as capacity constraints are eased by the rise in investment and the slowdown in domestic demand. Manufactured exports reached their highest ever level in the first quarter of this year, whether measured in value or volume terms. They have increased 13.5 per cent in volume terms since the first quarter of last year. Our exports of consumer goods are doing particularly well.

    How will it correct itself?

    This illustrates what we have always made clear: that the balance of payments deficit is the result of private sector decisions, and that therefore it is through changes in private sector behaviour that the gap will be closed.

    It is now clear that the current level of interest rates is beginning to have the effect we intended. Higher interest rates make saving more attractive and borrowing less so. They will also reduce the growth of consumption to a more manageable level, and in so doing reduce the growth of imports of consumer goods. And the evidence of improvement is gradually accumulating: the housing market has slowed down considerably both in terms of prices and turnover. The decline in turnover is important because many consumer spending decisions (eg buying carpets, curtains, refrigerators) are associated with moving house. Recent statistics on retails sales and M0 can confirm that consumer spending growth is slowing down in response to the tightening of monetary policy against the background of a budget surplus. That is welcome but we must recognise that the process of reducing the deficit will take time. It will not happen overnight.

    Of course, the current investment boom, which is adding to the deficit in the short term will, over time, play its part in reducing the deficit. These investments will lead to increased capacity, greater competitiveness and a better export performance, as well as displacing some imports. Either way the new output will help to reduce the balance of payments deficit.

    I have no doubt that improved competitiveness is the key to a more prosperous and stable economy. To achieve that, companies must not only invest, not only improve the quality of their goods but also increase their competitiveness by constraining their unit wage costs. Achieving this is an important function of good management and prudent investment. And I must tell managers bluntly that the Government will not permit the depreciation of sterling as a way of artificially improving competitiveness. Such a policy is not sensible. It is not prudent. And it rarely works. it would simply raise import prices and add to inflationary pressures.

    It is instructive to look back at experience in the 1970s. In 1974 the UK had a balance of payments deficit of 3.8 per cent of GDP, somewhat higher than last year’s outturn. Over the period 1973-1978 the effective exchange declined by a quarter yet the UK’s competitiveness – measured in terms of relative unit labour costs – did not improve but actually further deteriorated by 5 per cent. I can also assure you that the Government will not attempt to reduce the deficit by protectionist measures such as import controls. We are a very open economy and can only be hurt by a slide into protectionism.

    The Government’s role in improving competitiveness is to strengthen economic performance through supply side measures, namely deregulation, privatisation and tax reform. Over the last decade nearly 40 per cent of the state owned commercial sector has been transferred to the private sector since 1979 and a further 20 per cent is in train. The abolition of exchange controls and various other deregulatory measures have all helped to make markets more efficient. The latest White Paper shows the government’s continued commitment to creating an environment in which enterprise can flourish. It lists no less than 120 deregulatory measures achieved in the previous 18 months and specified 80 measures scheduled for the future. And we now have a tax structure which rewards enterprise and initiative, with one of the lowest corporate tax rates in the world.

    Business is responding to this invigorating climate. New businesses are being created at an unprecedented rate. New firms are registering for VAT at an average rate of 1,300 a week. These new enterprises will compete for business in home and export markets and will play a part in lowering the deficit.

    The Government is playing its part in helping the market to operate more efficiently by improving the flow of information from retailers to manufacturers. From the beginning of June more inflation will be available from Customs and Excise marketing agents about the sort of goods being imported by different companies. This will enable British firms to contact the importing companies to see whether they could compete with those imports. I am sure they can and I hope they will.

    Conclusion

    To summarise: the trade deficit resulted from excessive growth in domestic demand last year. To combat this, monetary policy has been tightened considerably in the last year (both in the UK and the US). UK fiscal policy is extremely prudent. Higher interest rates will encourage additional savings, discourage borrowing and slow down spending. The private sector will respond to these policies although it would be foolish to expect the deficit to narrow immediately. By their nature these adjustments take time. But they will take place.
    What is clear is that the current economic position bears no relation to the balance of payments crises in the 1960s and 1970s. The prophets of doom and gloom should lift their eyes from the history books and look instead at the remarkable transformation that has taken place in the Government’s own finances and on the ground in Britain’s industries.

    The productivity and profits of UK companies are at record levels. The number of people in work is at its highest ever level. And we are seeing the longest sustained fall in unemployment since the War. Our current prosperity is based on extremely strong foundations, business is investing to make sure it continues and I have no doubt that it will do so.

  • Mr Major’s Commons Statement on the Finance Bill – 25 April 1989

    The text of Mr Major’s Commons Statement on the Finance Bill made on 25th April 1989.


    The Chief Secretary to the Treasury (Mr. John Major) I beg to move, That the Bill be now read a Second time.

    This Bill embodies the legislation that flows from my right hon. Friend’s Budget. Over the past 10 years we have seen a transformation in economic policy and performance. Policies of demand management and state intervention that failed have been replaced by policies of free enterprise within a sound medium-term framework that have succeeded. The underlying performance of the economy has improved dramatically as a result.

    The evidence for this is overwhelming: output has expanded by over 20 per cent. since 1979, business investment has risen to its highest ever level as a proportion of GDP, the public finances are now in large surplus and not in large deficit and there has been a marked rise in productivity and employment and a drastic reduction in inflation. As a result, real living standards are now much higher than they were 10 years ago and have every prospect of improving further.

    There are two measures that illustrate the improvements we have seen. First, the performance of our economy has been transformed compared with its own performance in earlier years; but, secondly, and equally importantly, it has also been transformed when compared with the current performance of our competitors. That is why in the 1980s output and investment have grown faster here than in any other major European Community country, a marked contrast to earlier decades, particularly the 1960s and 1970s; and manufacturing productivity has grown faster here than in any other major industrial country, including Japan. In all these measures the United Kingdom was bottom of the league of performance in the 1960s and 1970s. Our position has now dramatically improved.

    Also, in the 1980s, small businesses are being created at an unprecedented rate. In the year to March 1989 the net increase in the number of firms registering for VAT was nearly 70,000, an increase of over 40 per cent. on the previous year, which was itself a record. This means that on average over 1,300 new firms are being established every week. I cannot imagine that this has ever happened before in this country. It is noticeably higher than the 1,000 new firms a week we previously claimed.

    This is by any yardstick an outstanding record of success and this year’s Budget seeks to build on it. But there are difficulties as well which we acknowledge. The Budget was framed against a background of an unwelcome increase in inflation at home and abroad. Inflation in all the major nations is currently at its highest level for three and a half years. In the United Kingdom, current inflationary pressures, although much exaggerated by the perverse effect of mortgage interest payments on the RPI, had their roots in the events of October 1987. At the time of the stock market crash commentators feared that is would precipitate a world wide slide into recession, as it had done in 1929. That fear was shared by many right hon. and hon. Members.

    It was precisely to avoid that risk that we, along with the other major industrialised countries, deliberately made sure that monetary conditions at that time were not too tight. We were successful in that aim, in that the effects of the crash were not remotely as bad as we, or anyone else, including Opposition Members, feared. It is clear that the current strength of the world economy owes much to the prompt and co-ordinated action taken by the major nations in the wake of the crash. But it is also clear that in response to the inflationary pressures there has been similar prompt action to tighten monetary policy around the world. I hope, believe and expect that that reflects a worldwide determination to get inflation under control, and to keep it under control.

    The Budget was also framed against the background of the current account deficit. This largely reflects an excess of private sector investment over private sector saving, and not the reckless public spending which was the hallmark of previous deficits. It is thus fundamentally different from those of the 1960s and 1970s. The investment boom we are now experiencing underlines the confidence which domestic and foreign investors have in the United Kingdom economy and will stand us in good stead for the future.

    Against an international background of rising inflation, this had to be and was a prudent and cautious Budget. That was undoubtedly the right judgment, and it is generally shared. Our long-term aim is a balanced budget, but in the current circumstances my right hon. Friend judged it appropriate to budget for a further year of substantial debt repayment. That means that, in three years, we will have paid back roughly one sixth of the public debt accumulated over two centuries, thus saving about £3 billion a year in interest payments. That saving will continue in each and every future year. The burden of debt interest as a share of GDP will be the lowest since 1915. That both lightens the burden on the shoulders of future taxpayers and, at the same time, leaves room for further tax reductions, further debt repayment or for higher spending on areas we judge to be priorities, and those decisions can be taken in each successive year.

    Much of the economy’s success is a direct response to the favourable tax structure created by my right hon. Friend and his predecessor in the past 10 years. Successive Budgets have broadened the tax base, lowered tax rates and made the tax system more coherent, more intelligible and a great deal simpler. The tax climate is undoubtedly a significant factor in attracting the stream of welcome inward investment recently and magnificently continued by Fujitsu, Bosch and Toyota. That inward investment, as a result of tax and other changes, should be welcomed by hon. Members in every part of the House – [Interruption] – or nearly every part of the House.

    The 1989 Budget made further progress. It contained a major reform of national insurance contributions and the abolition of the pensioners’ earnings rule. Those two measures were considered during the Report stage of the Social Security Bill yesterday. Both have received widespread support. Both will remove significant distortions and disincentives. The reform of national insurance contributions will also increase take-home pay for the majority of those in work by about £3 a week; and the abolition of the earnings rule, long necessary and now effected, will give significant help to pensioners, who will also benefit further from other measures in the Bill.

    In his 1987 Budget, my right hon. Friend recognised the special needs of older pensioners by introducing a new and more generous age allowance for those aged 80 and over. Clause 29 extends this higher allowance to people aged between 75 and 79. This will take an additional 15,000 elderly single people and married couples out of tax altogether. In real terms, the age allowance for those aged 75 and over will be 19 per cent. higher than in 1978–79. Three quarters of all those aged 75 and over will not be liable to income tax at all.

    The clause also reduces the rate at which the age allowance is withdrawn for those with incomes above the income limit. It is clearly right to concentrate the benefits of the age allowance on elderly people with relatively modest incomes, but we received a number of representations from hon. Members calling for a reduction in the marginal tax rate faced by those with incomes in the withdrawal band. I am pleased that the Budget met these concerns, which were expressed forcibly by hon. Members – among others – in Committee on last year’s Finance Bill.

    These changes ensure that pensioners keep more of their own money. They also build on what is already an impressive increase in pensioners’ incomes. Between 1979 and 1986, the average net incomes of pensioners increased by 23 per cent. in real terms. By contrast, despite the concern I know exists among Opposition Members, pensioners had an increase of only 3 per cent. in the years of the Labour Government between 1974 and 1979.

    The Budget has been hailed as a Budget for the elderly – [Interruption] – a view endorsed by the director general of Help the Aged in a recent letter, which I will quote for the benefit of Opposition Members. He wrote: I thought you would appreciate hearing how much we applaud the actions you have taken in your Budget to help pensioners. We are especially pleased at the abolition of the age related earnings rule and are grateful too for the changes you have made in VAT regulations in connection with charities. This will be of considerable assistance to us in our efforts to help elderly people, both in this country and overseas. That letter was from Mr. John Mayo – [Interruption] – and I read the whole of the letter.

    This Bill contains one other measure to help the elderly. Clauses 51 to 54 will give tax relief for private medical insurance premiums for the over-60s. Unlike Opposition Members, I do not want to endow this measure with a false importance. It accounts for just 1 per cent. of the tax reductions announced in the Budget. It addresses a very real problem, and I make no apology for the measure, for I fully support it.

    In recent years, employers’ health insurance schemes have expanded rapidly, and I welcome that. It is attractive to see independence and choice increasing, and I regret that Opposition Members are hostile to that. It is largely due to such schemes that some 50 per cent. more people are covered by medical insurance schemes today than in 1980. But membership of these schemes usually ends on retirement. People are then faced with a double increase in costs: not only do their employers cease to pay their premiums, but the premiums tend to rise at precisely the moment when people’s incomes fall.

    We have had a large number of representations over the years from people caught in this trap who did not think it was fair that they should suffer this double penalty. I agree with them, and the relief is designed to deal with that specific problem. It also encourages the overall provision of health care and investment in it, and thus eases the demands in that fashion on the NHS.

    Indeed, in a curious way, the greater the take-up of this relief, the more that effect will be apparent. In particular, pressure on waiting lists will be eased, which will benefit all of us who continue to depend overwhelmingly on the NHS for medical treatment. Even non-taxpayers will benefit because they, too, will pay their premiums net of tax relief.

    The medical insurance industry has begun to introduce policies which are aimed at those who cannot afford, or do not want to take out, more expensive cover. Some of the policies are intended specifically for people in retirement, and I welcome that extension of choice for them.

    Although this measure is important, it needs to be seen in perspective. Our public expenditure plans mean that, overall, the NHS will have an extra £2,500 million in 1989–90, and a further £2,500 million in 1990–91 – a total of £5 billion – before resources for it are reconsidered in subsequent public expenditure rounds. The cost of tax relief is nothing in 1989–90 and £40 million in 1990–91 – less than 2 per cent. of the increase in planned spending on the NHS. I must say to the Opposition in all charity that if they have chosen to target their attack on the Budget on this measure, it serves simply to underline how little they find to criticise both in the Budget and the Bill.

    Mr. John Battle (Leeds, West) Can the Chief Secretary tell the House why the Secretary of State for Health and the Minister of State for Health welcomed the measure in lukewarm fashion, saying that, at best, it was an interesting detail in the Bill, and, at worst, would damage attempts to sell the White Paper on health about which the Government are struggling to convince the country?

    Mr. Major It is within my knowledge that both my right hon. and learned Friend and my hon. and learned Friend strongly support this measure. There is no doubt about that.

    A dominant feature of the Bill is the improvement of the taxation of savings. It contains a series of measures to increase and deepen the ownership of shares, especially by employees and smaller investors. In the post-war period up to 1979, there was one clear trend in the composition of personal savings and that was the dramatic decline in direct share ownership. In 1957, shares and unit trusts accounted for around 20 per cent. of personal sector wealth. By 1979, their proportion had fallen to 8 per cent. That decline had nothing to do with the pre-tax return on equities because, historically, they have tended to out-perform other savings instruments. But it had a great deal to do with the post-tax return that investors received on their investments.

    In contrast to saving through large tax relieved institutions, such as occupational pension schemes, direct equity investment subjected the saver to a range of punitive taxes. A top rate of tax of 83 per cent., combined with an investment income surcharge of 15 per cent., meant that direct investors in equities could receive as little as 2p in the pound of dividend income. On top of that, they were taxed not only on real capital gains, which I am afraid were few and far between from 1974 to 1979, but also on inflationary gains, which were in considerably more plentiful supply. If the investor wanted to hand on his shares to his children, he was subject to yet another confiscatory tax in the form of capital transfer tax, where rates could be as high as 75 per cent. It is hardly surprising that direct share ownership went out of fashion in the 1970s; the only surprising thing is that it survived at all. Since 1979, my right hon. Friend and his predecessor have given share ownership a dramatic boost.

    The trend has changed – I hope irreversibly. Shares and unit trusts now account for a growing share of personal wealth. Moreover, share ownership has widened dramatically. There are now 9 million shareholders. That represents 20 per cent. of the adult population, compared to only 7 per cent. in 1979. That has come about partly through a programme of privatisation which has proved immensely successful and which will continue in this Parliament and the next. But even more important for the longer term has been the creation of a more sensible tax system. Now that no tax rate is higher than 40 per cent., investing in shares is again a worthwhile proposition.

    We believe that it is right to go further to promote private saving through equity investment. Direct share ownership must be allowed to compete with institutional saving. That is why my right hon. Friend introduced personal equity plans in 1986 and further improved them in the Budget. The increase in the overall investment limit from £3,000 to £4,800 and in the unit trust and investment trust limit from at best £750 to £2,400 will give PEPs an additional impetus. Unit and investment trusts allow investors to spread risk and are a good introduction to equity investment for the small saver. Along with the important PEP deregulation measures announced by my right hon. Friend, the changes have been widely welcomed. More plan managers are setting up plans and a number of new products are being marketed. As the chairman of the Unit Trust Association has said: PEPs should now be the major success that for investors they deserve to be. We all look forward to that.

    Employee share schemes are specifically designed to encourage direct share ownership by workers in their own companies. As such, I know that such schemes have supporters in each and every part of the House. They have the particular advantage of giving employees a direct stake in the company that they work for, and have been an important factor in breaking down the “them and us” mentality which pervaded British industrial relations, resulting in great damage, in the 1960s and 1970s. That mentality is going, and good riddance to it. The sooner it is gone, the better. The House will know of the success of all-employee share schemes, 1,600 of which have been approved to date against only 30 in 1979. Clauses 59 to 62 are designed to give them added impetus by increasing the limits for relief and relaxing the material interest rules.

    Employee share ownership plans, known generically as ESOPs, provide an alternative means of encouraging employee ownership. Clauses 64 to 71 and schedule 5 provide a statutory basis for tax relief for company contributions to those plans. For some companies they offer more flexibility than normal all-employee share schemes. The point is that ESOP trusts can borrow to acquire shares rather than relying entirely on funds provided by the company. That enables a substantial number of shares to be held in trust for longer-term distribution to employees. Those clauses ensure that payments by a company to an ESOP trust, set up to acquire and distribute shares to its employees, will qualify for corporation tax relief, provided that certain qualifying conditions are met.

    The most important of those conditions is that the shares must be distributed to employees within a maximum of seven years of their acquisition by the trust, and on an all-employee, similar terms, basis. ESOPs have a number of enthusiastic supporters on both sides of the House, and I am sure that those clauses will be welcomed. As the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) said on Second Reading of the Finance Bill three years ago: I wish to make it clear that I support genuine extensions of share ownership schemes which enable and encourage employees to acquire stakes in their companies. The schemes that I want would carry voting rights proper to share ownership, and would be available to all company employees”. – [Official Report, 29 April 1986; Vol. 96, c. 819.] I hope that the right hon. Gentleman will use his voting rights to support this measure because I agree with what he said three years ago and it is contained in this Bill.

    The changes to the taxation of pension schemes set out in clauses 72 to 74 complement the wider share ownership measures. They will increase pensions choice and encourage greater personal responsibility for pension provision. They will also deregulate an area of savings which has become excessively and undesirably circumscribed by Inland Revenue rules.

    The Government’s record on improving private pension provision has been substantial over recent years. We have introduced personal pensions and free-standing additional voluntary contributions. We have made it easier for employees to contract out of the state scheme if they wish to do so, and we have improved the rights of scheme members, in particular those of early leavers.

    Those clauses build on that record. The rules for additional voluntary contributions, or AVCs, will be greatly simplified, reducing the administrative burden on employers’ schemes; and the anomaly whereby successful investment performance of the AVC led to a reduction in the employee’s occupational pension will be ended. In future, excess AVC funds will be returned to the employee subject only to a special tax charge.

    Ending the link between Inland Revenue limits and the maximum pension payable by employers also makes the pensions regime more flexible. Employees and employers will now be free to negotiate whatever pension package they jointly think is appropriate. Inland Revenue rules will no longer constrain the size of the pension, only the extent of the tax relief.

    The cap on tax privileged pension benefits completes the changes begun by my right hon. Friend the Chancellor in 1987. Based on earnings of £60,000, the cap has been pitched at a generous level. It will still be possible to receive a privileged pension of £40,000 a year, or, where benefits are commuted, a maximum tax-free lump sum of £90,000. Moreover, the limit will be indexed annually to prices. The transitional arrangements are equally generous. Only new schemes and new members of the existing schemes will be subject to the cap on benefits. Most ordinary scheme members will simply not be affected.

    I believe that a cap is necessary. Although we are committed to widening private pension provision, that should not he at an ever-increasing cost to the majority of taxpayers who do not receive such large pensions themselves. There is a limit beyond which tax-privileged saving is unfair and crowds out other ordinary saving. Other tax reliefs are subject to monetary limits, and it is time the tax relief for pensions was put on a similar basis.

    These changes have also provided an opportunity to redress the balance between occupational and personal pension schemes. Many members of personal pension schemes start contributing late in life, for reasons well understood in the House. They have no access to the accelerated accrual available in the best final salary schemes, and often have lower pensions in retirement as a result. Although tax-relieved contributions to personal pension schemes will be subject to an annual cash limit, we also propose that the limit on contributions be raised as a percentage of earnings for those aged 36 and over.

    To take the example of someone aged 56, under the old rules he received relief on contributions up to 22.5 per cent. of his earnings; under the new rules he will receive relief up to 35 per cent. of his earnings. This change will give a further boost to personal pensions and will be of special value to those who, in their earlier working life, need to plough back every penny available into building up their business. On Budget day, my right hon. Friend the Chancellor reported that more than 1 million people had taken out personal pensions by the end of 1988. I am pleased to tell the House that that number has risen to 1.5 million.

    The Bill also contains important measures for business. In his first Budget my right hon. Friend introduced a major reform and simplification of corporation tax which enabled the main corporation tax rate to be reduced to 35 per cent., one of the lowest in the industrial world. That low rate, together with the removal of the old bias against employment inherent in the old system, has made a significant contribution to rapid economic growth, employment growth and the high investment that we have seen in recent years.

    Of no less importance was the reduction in the small company corporation tax rate from 42 per cent. in 1978–79 to 25 per cent. today. It is now right to extend the benefits of that rate to more companies. Clause 33 therefore raises the profit limit by 50 per cent., far more than was required to keep pace with inflation. That measure will enable firms to make profits of up to £750,000 a year before paying the average rate of 35 per cent.

    Mr. Dennis Skinner (Bolsover) In this and in other Budgets in recent years, many in the Government would argue that they have given large sums of money through taxation relief to the top salaried people. The last set of figures shows that the salaries of company directors have increased by 26 per cent. Does the right hon. Gentleman take the view that those company directors who have been fed pretty well by the Government in the past few years are perhaps biting the hand that feeds them? What has the right hon. Gentleman to say about the 26 per cent. increase when low-paid workers are being packed off with increases of 4, 5 or 6 per cent.?

    Mr. Major We have made significant changes in taxation affecting people at all levels of income and not just those on high incomes. The basic rate of taxation, which affects all the 20-odd million people at work, has been reduced from 33 per cent. to 25 per cent. The hon. Gentleman will know – perhaps in view of what he has just said he will support it – that it remains our objective to reduce that as soon as we prudently can from 25 per cent. to 20 per cent. I am pleased that he thinks that that is a desirable objective. I hope that he carries the support of his colleagues.

    Mr. Gordon Brown (Dunfermline, East) Will the Chief Secretary confirm that the very people who have been calling for wage restraint from the workers have seen their standard of living rise, after tax, by 26 per cent. in the last year? Is he aware that, according to the British Institute of Management, the standard of living of senior directors has risen by 47 per cent. in a year and that, according to another study, the standard of living of those on unearned income has risen by 87 per cent. in one year alone? Will he condemn those rises?

    Mr. Major The hon. Gentleman should bear in mind that payments to directors of companies are not a matter specifically for the Government. Taxation rates are legitimately a matter for the Government to determine. Incomes are not directly under the control of the Government. I have no intention of responding in detail and directly at the Dispatch Box on each of those points.

    Mr. Neil Hamilton (Tatton) Does my right hon. Friend agree that that little exchange shows with the greatest possible clarity the difference between the Opposition and we on this side of the House on taxation? Opposition Members see taxation as a fine on success regardless of whether it brings more money to the Treasury. The decrease in taxation rates on higher levels of income has increased the amount of money brought into the Treasury, which is then available for redistribution to those on lower incomes.

    Mr. Major My hon. Friend is entirely correct in what he says about the tax yield. It is equally true to say that under the management and guidance of the people criticised by the hon. Member for Bolsover (Mr. Skinner) there has been a dramatic increase in investment, employment, the profitability of companies and the general well-being of people in this country. We see tax changes, at both the upper and the lower level, as supply-side measures, and they have proved to be so over recent years.

    Mr. James Lamond (Oldham, Central and Royton) What my constituents in Oldham cannot understand is that, in the midst of this success story which the Minister has just told us about, last year, when they went on holiday to Spain, they got 202 pesetas for their pound, while this year they are getting only 192.5 pesetas. Does that reflect a strengthening of our economy?

    Mr. Major What the hon. Gentleman misses out of that interesting illustration is how many more of his constituents have been able over the past 10 years to afford to go abroad as a result of the policies of this Government.

    Returning to the necessary, if perhaps esoteric, area of small companies corporation tax from which I was unruly ripped, I was about –

    Mr. Nigel Griffiths (Edinburgh, South) Untimely.

    Mr. Major I am grateful for that Shakespearian memory. “Untimely ripped” is the correct quotation from “Macbeth”, appropriately coming to me from a Scottish Member.

    The measure in clause 33 will enable firms to make profits, as I reminded the House a few moments ago, of up to £750,000 before paying an average rate of 35 per cent. What is relevant about this is that it strengthens once again Britain’s claim to have the most favourable tax regime in Europe for small companies and it has been very widely welcomed by business men and managers, who, as the director general of the British Institute of Management wisely said – and the Opposition should listen to this – prefer stability and good sense to histrionics. How wise the director general was.

    A substantial chunk of the Bill will complete the reform of the administrative framework for the main taxes, which began with the setting up of the Keith committee in 1980. Clauses 138 to 165 simplify and update the system of interest and penalties for tax offences and revise the information powers of the Revenue. They will help to ensure that the operation of the tax system is effective and efficient, while at the same time remaining fair and just. They are the product of an almost unprecedented degree of consultation on tax matters and have been widely welcomed in responses as achieving a proper balance between the rights and obligations of the taxpayer and between the powers of the Revenue and safeguards for the citizen.

    Clauses 17 to 21 implement last June’s judgment of the European Court on VAT zero rating. As my right hon. Friend said in his Budget statement, we have made every effort to minimise the unwelcome burden of tax that we have been obliged to impose on businesses and, more especially, charities. Again, we have consulted widely with those who will be affected; indeed, consultation began on a contingency basis even before the judgment was given. I am glad to say that my right hon. Friend was able to meet their main proposals for minimising the judgment’s impact. We have delayed implementation for as long as is possible and the transitional arrangements are said to be and are generous.

    One of our main concerns has been the effect of the judgment on charities. We have managed to ensure that for their basic non-business activities charities will continue to benefit from zero-rated construction services and fuel and power. Homes for children, the elderly and the disabled will continue to be zero rated. In addition, charities will be relieved from VAT on fund-raising events, classified advertising and sterilising equipment for medical use. These measures have met with the approval of many charities. As a Royal National Lifeboat Institution spokesman put it: We stage all sorts of fund-raising events where the admission charge carries VAT. It will mean a good few thousand saved for our coffers. I certainly hope so.

    Mr. Robert Sheldon (Ashton-under-Lyne) The right hon. Gentleman has been speaking for more than half an hour in dealing with the details of the Finance Bill much more fully than is normal on Second Reading. When will he turn to the critical report of the Treasury and Civil Service Committee?

    Mr. Major The right hon. Gentleman is entirely correct in saying that I have been speaking for half an hour, but a considerable part of that time has been taken up by interventions. He says that I am dealing in detail with the Finance Bill. That is what we are discussing, and it is a courtesy to the House to deal with what we are discussing.

    There are a number of other provisions in the Bill which will benefit charities. Clause 25 exempts from car tax vehicles leased to the disabled. This will reduce the cost of each car by £400 and it has been widely welcomed. I quote from the deputy chairman of Motability: Without doubt this measure will help to enhance mobility for disabled people, especially those with very limited resources. As a former Minister of State for the disabled, this gives me particular pleasure.

    The best way to help charities is to encourage people to contribute to them. In recent years in budgetary measures we have improved relief for charitable covenants, introduced relief for companies making one-off donations and, most recently, introduced relief for payroll giving.

    The response has been encouraging. Between 1978–79 and 1987–88 covenanted giving to charities grew by 140 per cent. in real terms. Payroll giving has also grown steadily since its introduction in 1987. There are now over 3,600 schemes in operation covering 100,000 participants. Clause 55 gives a further encouragement to this form of charitable giving by doubling the limit for relief. I am delighted that this measure has met with considerable approval among charities. It also shows that tax reductions and growing net incomes have increased charitable giving and that we are by no means the selfish and materialistic society that the Opposition sometimes claim.

    Finally, and perversely, I would like to draw Members’ attention to clause 1. This contains the measures designed to promote unleaded petrol, which have met with universal approval.

    Despite the growing availability of unleaded petrol, its lower price and clear environmental benefits, at the time of the Budget it still accounted for only around 5 per cent. of petrol sales. That was, frankly, extremely disappointing and it prompted my right hon. Friend to try a new approach. He made it clear that he expected the full tax reduction of 3.6p a gallon on unleaded to be passed on to consumers. This has happened. The price differential at the pumps between four-star and unleaded is now generally between 9p and 10p per gallon compared with 6p before the Budget. Furthermore, the increase in duty on two and three-star has raised prices to at least the level of four-star, leading to a reduction in the market for these two grades and creating more capacity for unleaded.

    All the signs are that those changes are having the desired effect. The proportion of garages now selling unleaded petrol is close to 40 per cent. and is expected to top 50 per cent. by mid year. I hope and expect that that will increase still further. The onus is now firmly on individual motorists – be they two, three or four-star users – to ensure that, where they can, they switch soon to the cleaner fuel. I hope that they will do that.

    The Bill contains a series of measures to improve the taxation of savings, to widen share ownership, and to help small businesses. It will simplify and modernise the administration of the tax system. It underpins the continued strength of our public finances, takes forward our programme of tax reform, and improves the supply performance of the economy. It is a Bill well worthy of support, and I commend it to the House.

  • Press Release on Mr Major’s Central Council Speech – 17 March 1989

    Below is the text of the press release, 557/89, issued by Conservative Central Office on Friday 17 March 1989 and summarising Mr Major’s speech to Central Council, made in Scarborough. The full text of the speech is also available.


    John Major said that although the Chancellor had produced a prudent and cautious Budget, it continued the familiar themes of reform and wider share ownership.

    National Insurance and Tax Reform

    “The centrepiece of the Budget was the reform of National Insurance Contributions. These reforms will mean that most employees are better off by about £3 per week, and that is of proportionately greater value to those on lower incomes. Referring to the abolition of the Earnings Rule and the changes made to Age Allowances, John Major pointed out that the Budget “introduced a number of measures which will be of great help to those who are retired”.

    Repaying Debt

    On public finance, he said that “outside times of national emergency, I do not believe that Governments should continually spend more than they are prepared to raise honestly in taxation. It is unwise economically… and wrong socially”. He went on to say that because “Britain has the strongest fiscal position of any major nation in the world” it was able to repay a significant part of the national debt. “We are repaying debt in large sums. It means a saving of debt interest of around £3 billion a year. And those £3 billion we don’t pay in interest on debt will be available for roads or schools or hospitals or to cut taxes or to further reduce debt”.

    Curbing Inflation

    Reaffirming the Government’s commitment to curb inflation, John Major said, “The British people do not like inflation and they will support measures to bring it down. There is no pain-free way to do it. But there is a way that will work. And that is to raise interest rates to bear down on inflation. They have worked before, and they will work again”. He said that the Labour opposition “deplore inflation, but attack the tight monetary policy that will cure it”.

  • Mr Major’s Parliamentary Answer on Inflation – 23 February 1989

    Below is the text of Mr Major’s response on Inflation, made on 23rd February 1989 in the House of Commons.


    Mr. Douglas To ask the Chancellor of the Exchequer what is the latest forecast for inflation for 1989–90.

    Ms. Walley To ask the Chancellor of the Exchequer what is the latest forecast for inflation for 1989–90.

    Mr. Major My right hon. Friend the Chancellor will be giving a forecast in his Budget statement next month.

    Mr. Douglas Does the Chief Secretary admit that one of the difficulties in anticipating the rise in inflation arises because the Chancellor has left himself only one weapon of economic management – interest rates – which is rather like asking Mr. Bruno to fight Mr. Tyson with one hand tied behind his back? As the Prime Minister was so appalled when the rate of inflation was 3 per cent., halving the value of money in a period of about 25 years, will the right hon. Gentleman give us some idea of what No. 10 is saying about that? When will the value of money be halved at the present rate?

    Mr. Major The hon. Gentleman may be under some misapprehensions, the first of which is about monetary policy, which has worked in the past and will work in the future. Neither is that the only aspect of my right hon. Friend’s policy; it is buttressed at the moment by a firm fiscal policy and a huge debt repayment, which was not the position when the hon. Gentleman’s party was in Government.

    Mr. Batiste Does my right hon. Friend agree that art increase in personal savings at the expense of personal expenditure would produce a downward pressure on inflation and the balance of payments deficit? If so, how best can such a welcome increase in personal savings be accomplished?

    Mr. Major I agree with my hon. Friend’s opening, remarks. My right hon. Friend’s high interest policy offers people a great incentive to save.

    Mr. James Lamond Is the Minister aware that the monetary policy is not working as satisfactorily as he thinks, according to the Manchester chamber of commerce and industry, which, in its latest bulletin, complains that high interest rates and a high pound are preventing firms from expanding at the rate that they would wish? Is he further aware that it feels that that policy may be all right for the overheated economy in the south-east of England, but is not acceptable in the north-west?

    Mr. Major The hon. Gentleman may have heard what my right hon. Friend said a few moments ago about the remarks of Mr. John Banham. In case he does not recollect them, I remind him that Mr. Banham said: We think the Chancellor should carry on with high interest rates to combat inflation. The hon. Gentleman neglected to say that the Manchester report was highly optimistic.

    Mr. Latham Since the Government’s interest rate policy is already having a dramatic effect in reducing overheating, and indeed output, in the private housing industry, is not the practical reality likely that market forces will soon force down building society borrowing rates?

    Mr. Major I am certainly not in the business of making that forecast, but my hon. Friend is entirely right that there are already clear signs of a slowdown in consumer spending, and one trusts that inflation will follow it down in due course.

    Dr. Marek Will the Chief Secretary accept that the Opposition are alarmed at the Paymaster General’s complacency about the dominance of hot money over direct and portfolio investment on the capital account and its clear threat of inflation? What measures is the Chief Secretary going to take with regard to this matter, or is he just going to keep to an interest rate war with the United States of America? If he does not take further measures, the country, as judge and jury, will find the Government and their economic policy guilty as charged.

    Mr. Major The hon. Gentleman’s remarks bear little or no relationship to the question. I find it very strange to hear lectures about inflation from the Labour party when every policy it recommends to us is inflationary in one aspect or another.

  • Mr Major’s Written Parliamentary Answer on Inflation – 8 December 1988

    Below is the text of Mr Major’s written Parliamentary Answer on Inflation on 8th December 1988.


    Mr. Alton To ask the Chancellor of the Exchequer what action he intends to take to make up the shortfall on spending experienced by Departments committed to projects whose costs have risen through increased inflation.

    Mr. Major New plans were announced by my right hon. Friend the Chancellor of the Exchequer in his Autumn Statement on 1 November. Although the expected level of inflation was a factor that was considered when setting these plans, public expenditure is planned in cash terms and in general there is no automatic adjustment for higher prices. The planning total for 1989-90 remains £167.1 billion, the same level published in the last public expenditure White Paper. Within that unchanged total there is provision for substantial increases in spending on priority programmes.

  • Mr Major’s Speech on the Economy – 10 September 1988

    Below is the text of Mr Major’s speech on the economy, made in Huntingdon on Saturday 10 September 1988.


    JOHN MAJOR:

    To read some recent commentators one could believe we are facing economic catastrophe. Far from it. The foundations of our economy are sound and strong and British firms are doing extremely well.

    Take manufacturing for example. Exports are up 8.5% over the last year, taking them to record levels. Total order books are strong and the CBI’s surveys indicate that firms are confident that they can do better still. As a result, there is an investment boom underway as British industry equips itself with the best and most up-to-date equipment.

    The astonishing transformation of the economy which has taken place since 1979 has spread new prosperity. Living standards are up at all levels of earnings. And unemployment has been falling steadily for over 2 years, month in, month out. And it is now coming down in every single region of the country – without exception.

    This healthy state of affairs is no accident. It has come about because we have set the right policy framework and stuck to it consistently for the best part of a decade. Nigel Lawson has pursued policies for the long-term, designed to liberate an economy that had fallen further and further behind our competitors during much of the 1970s. That is why he has pursued policies of deregulation and tax reduction. And above all he has pursued policies which have tamed inflation. This clear framework has given industry the stability it needs to plan for the future with confidence. We have earned that confidence by holding to our principles, not pursuing the short-term solutions that others urge upon us.

    So, what is the fuss about? The recent current account deficit figures are certainly unwelcome. No-one doubts that. But the increase in the deficit is not so much a problem in itself as a symptom of a different concern. Although much of the deficit is accounted for by the investment boom, there is no doubt that demand overall in the economy has been growing unsustainably fast. Faster than even our revitalised industry’s ability to expand output. As a result imports are drawn in, and the mismatch between imports and exports has led to a current account deficit.

    There is a fundamental difference between this state of affairs and the crises we were facing time after time again in the 1960s and 1970s. Then, the trade deficit reflected profligate government spending financed by massive borrowing. The contrast with today could not be greater. The public finances are in better shape than for a generation. We have turned the Government from being the largest borrower in the economy to the largest repayer of debt. The Budget is in surplus. And for the last two years we have not only cut borrowing, but we have simultaneously cut tax rates and increased public spending.

    The trade deficit we are now seeing is the result of private sector activity. This is because of strong growth in individual spending, and even stronger growth in industry’s reinvestment programme.

    I can understand that people may be puzzled when the Government asserts, with perfect truth, that the economy is doing excellently and yet interest rates rise and the balance of payment deficit widens. They ask, naturally, why is this happening? Why is demand growing so strongly? Why are companies and individuals spending more? Precisely because they are so confident about our future prospects. Industry is investing in order to produce higher output. Individuals are buying the goods which are the mark of a better quality of life and the tangible sign of a more prosperous Britain. Because they are confident they are tending to save less. They borrow, in the expectation of being able to put money aside in the future to pay back their debts. Or they spend out of savings. That confidence is welcome and justified. But the resulting borrowing must be sensible and responsible. And it must not lead to spending at a rate which the economy cannot sustain. That is a recipe for inflation.

    That is why the Government has responded. The Chancellor has taken timely and appropriate action by raising interest rates. Interest rates change the balance of attractiveness between saving and borrowing. And they are well directed at the housing market which has been a particular source of concern.

    This is the right response. It is consistent with our underlying philosophy. We are not going to introduce credit controls, as some are urging us to do. Credit controls would be unwise and unworkable. In today’s more open and international economic scene they could be avoided all too easily. We believe that people are able to make their own realistic judgements about the level of repayments they can afford.

    So there will be no panic response. No credit controls. And no Autumn Budget either. The March Budget was a crucial and far-reaching supply-side reform. In years to come it will be seen as an historic opportunity, which the Chancellor had the courage to seize. The country will reap the economic benefits of the Budget reforms well into the future.

    My message is simple. There was a need to nip inflationary pressures in the bud. That is why the Chancellor raised interest rates. It will inevitably take time to work through. But the economy remains in excellent shape and the policies which have brought this about will remain in place.