Tag: Interest Rates

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mr. John Smith The Government will ruin industry.

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

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

Mr. John Smith What about imports?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mr. John Smith And rejected.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mr. Battle From where?

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

Mr. Battle Where is the money coming from?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In Germany, trade unions have played a more constructive role than has traditionally been expected or encouraged in Britain. I took part in a discussion in Germany in which a Labour Member asked, “Surely what you say will happen in East Germany will not happen because the trade unions will insist that they do not suffer all those job losses as the firms are made more efficient.”

The German officials to whom we were putting those questions were amazed, because the idea that a trade union would not understand the need to increase efficiency had not even crossed their minds. In Germany, the trade unions traditionally have operated a more progressive approach to industrial change, and that has been a major factor in Germany’s success. Germany has also recognised the need for essential public investment in the transport system, for example.

We are not learning the lessons of German success. Instead, we are complaining about that success. Decentralised government, a fair electoral system, an autonomous central bank with responsibility to deal with inflation, training, investment and constructive trade unions do not form a package that the Government or the Labour party can accept in its entirety. They should be part of a package of change for Britain. They have long been part of the policies of my party. That is why our approach to Britain’s economic policies has proven marks of success.