Tag: Interest Rates

Below is the text of Mr Major’s speech made to the Cambridge Chief Executives Forum on Friday 13th November 1992. Several phrases in the speech were inaudible.

PRIME MINISTER:

I’d just like to talk about some things that I think are relevant to our situation at the moment, what has happened, what is happening, and what is going to happen in the future. It’s a private occasion, so I will [indistinct] one or two matters in public, and I know that you will respect that. Let me just talk about some of the background. I think it is important to see what the background is to where we are. Two things that happened over the past two or three years. Undoubtedly good news everybody said. In one respect they were. But they had a very material effect in an economic area entirely unsuspected. The first of those two great events was the collapse of the Soviet Empire. We wanted it for a long time. The second of those two great events was the collapse of the Berlin Wall, something all of us found offensive, and were pleased to see the back of.

There was a great surge of optimism, and understandably so, for who could possibly have defended either the Soviet Empire or the maintenance of the Berlin Wall. But what has been the practical effect of those two? Take the collapse of the old Soviet Union first. The obvious illustration is simply this. Would Yugoslavia be in flames today if there still had been the Soviet Union? And the answer is no. And so one sees that with every great and worthwhile event – and I’m not seeking to reconstruct the Soviet Empire – but I do point out that for every action there is a reaction, and one of the reactions of course is what has happened to Yugoslavia. It is a bitter, nasty, savage war. It is in danger potentially of spreading down to Kosovo, bringing in the Albanians, the Greeks and others. And it is immensely dangerous. And it is for that reason that we’ve sent some British troops there to help with the delivery of humanitarian aid, and we’ve spent a great deal of money – far more than I think most people realise – it must be well over a hundred million in the present financial year – in terms of easing the particular problems that exist in Yugoslavia. And yet despite that, this winter, despite the enormous amount of UN aid, the UN High Commissioner for Refugees, the British troops that are out there, the money we’ve spent, the aid we’ve sent, the risks the RAF pilots have taken to get into Sarajevo Airport, and they got in, I’m bound to tell you, when nobody else could or would – repeatedly day after day. Despite all that, at least a hundred thousand, and possibly a quarter of a million noncombatants in Yugoslavia this winter, men, women and children, will die. Through hunger, through lack of medicine, through cold, as a result of that particular problem. And it has destabilised an important part of the world on the very outskirts of the European Community of which we are a member.

And then there is the collapse of the Berlin Wall. We all cheered, we all watched the television pictures, we all knew it was a historical inevitability which had to happen. But the impact of it happening has been very profound, for Europe and for business. Of course, there were two colossal political and economic discussions that I believe were made by the German Government after the collapse of the Berlin Wall. The first was the one to one swap Deutschmark for Ostmark in terms of introducing a new financial system into the new East German Lander. And the second was the belief in Germany that that great all-powerful West German private sector economy will rush into East Germany, invest, build it up, and the problems there would be solved. But East Germany is an environmental sink. And West Germany withdrew from it, and it said we don’t know what the costs are. We don’t know what the reward is. We do know that we can do far better in investing in Czechoslovakia a little way down the road than we actually can in the East German Lander. And so the investment wasn’t there. And because the investment wasn’t there the East Germans began to show signs of wanting to move to West Germany very rapidly where they would have been not welcome, and where there would have been new social problems had they done so. And so the West German Government poured massive sums of West German public sector investment subsidy into East Germany. And the practical effect of that has been German interest rates a good deal higher than they otherwise would be, Germany monetary supply getting out of control, Germany heading into inflation, and German growth in the coming year down to 1%, and still on the downward trend. And there you have one of the three great motives of the world economy.

The United States in near recession for three years. The Japanese economy in a very sickly state by its own powerful motives in the past. Huge fiscal stimulus in Japan – they’re still not going to meet their targets. Their economy is still going down. Their industrial production in Japan has fallen five times as fast as it has in the United Kingdom or Western countries over the last few years. And there are riots occasionally in Japan because of the state of their economy. So the three great engines of the world economy, the United States, Japan and Germany, all sickly, or declining, and in the case of Germany the ramifications of German interest rate policy as the benchmark of the ERM led to that extraordinary fallacious decision of the French to hold a referendum on Europe brought about that combination of events that gave us Black Wednesday and the rest of Europe a great deal of difficulty. So, springing out of two entirely unconnected events, we see a more uncertain, difficult world, political, security and economic situation than anybody might reasonably have imagined.

Now where are we in the United Kingdom? Let me just set out an objective that we have. An objective that I have always had. The objective I set on the first day I became Chancellor, way back in the dark ages. You may think it’s only three years! If you’d had my job [laughter] What was it, though, that objective? A fairly straightforward objective, I would have thought, sustainable, non-inflationary growth. There are two ways to get it, and how you get there depends where you start. And once you appreciate that point, you begin to see the necessity for some of the changes of policy that our less educated friends in the press would call U-turns. I’ll explain to them why they’re not U-turns, but they are a straight path to the objective one demands. Sustainable, non-inflationary growth.

Where did I start on the day I became Chancellor of the Exchequer? With 15% interest rates, 11% inflation and rising. That was where I started at that stage. It was the constant concern of business and commerce that we were heading for hyper-inflation, and that interest rates seemed to be stuck. It was never going to be easy to get them down, and despite the fact we’d been toppled out of the Exchange Rate Mechanism without it, we would not have got them down in the way we have. But we now have a different set of circumstances. We now have inflation at 3.5%. The headline rate of inflation stayed the same, and the figures announced today were 3.6%. A more important underlying rate of inflation fell yet again to 3.8, reducing prices [indistinct] input of inflation is around about 2.5%, on some measures even less. And interest rates down 1.5%, and we now have by courtesy of events rather than management, the most competitive exchange rate. [Indistinct]. But we find ourselves in a different set of circumstances. But given that we now approach the centre of the maze, non-inflationary growth from a different position, we are in a position to operate different policies. Because we are heading on a different route. And it was for that reason, and for one other which I will come to, that I announced about a month ago in some television interviews which seemed to surprise some people that we were looking for a structure and policy for recovery and for growth. Why it should have surprised people – who on earth would have thought I would be looking for a policy [laughter] I have never myself quite understood. But there we are. Such are the ways of the world, that it seemed to be a surprise. For two reasons.

Firstly, because I now think there is a lot of disinflation out there in the system. It is possible to move more rapidly to a more relaxed monetary policy and to recreate the conditions for investment. But secondly, for this reason. When I looked beyond the United Kingdom economy and the Germany, French, Italian economies, I looked at the economies in the United States and Japan. When I looked at what was happening in the Soviet Union, and its impact on Eastern Europe, 1,500% inflation in Russia, 2,500% inflation in Ukraine, one begins to see a set of economic circumstances coming together that potentially, in the absence of two things I will come to, could have toppled Western Europe through that narrow dividing line between recession and slump, and for that reason I think it was right, though the balance of this lay in that direction, to begin to look for recovery for growth and for stimulating the economy in a different way for the problems we face.

There are two things the world needs – not just this country. The first, if I may take the lesser matter first, is the completion of the Single Market in the European Community at the Edinburgh Summit. We will have that. We have made great progress in the British Presidency, and we will complete the Single Market, I am sure, at the Edinburgh Summit in a few weeks time. The second is an altogether bigger problem, and more dangerous. And that is the necessity to reach a rapid conclusion to the Uruguay Round and to get a GATT settlement throughout the world. It is not tolerable for the world not have a GATT settlement, whatever the difficulties may be for any individual country or any individual Government. It is not tolerable. And. I would say to you without a single blush on my cheek that I have spent more time in the last month in seeking to get a GATT agreement than I have dealing with the occasional problems we [indistinct] [laughter] now I trust behind us. And the difficulties of the domestic economy.

Without that GATT Agreement there is a risk of a retaliatory trade war between the United States and Western Europe. And there is only one way in which that can go. That will mean a move from recession to slump in Europe and in America, and it is folly that almost defies belief that that could be brought about for the sake of a handful of oil seeds and a barrel of grain, and it must not be allowed to happen. For that reason I enjoyed the [indistinct] with President Delors [indistinct] [laughter]. I am very pleased indeed that the European Community have now decided that they will re-engage in the negotiations with the Americans, and Mr. McSharry has been disinterred [indistinct] and brought back into the negotiating frame, and he will be off to the United States with Andriesson on Monday. And I hope that he, Mr. Andriesson and Mr. Madigan and Mrs. Carla Hills, [indistinct] that they will come back and settle.

Once Europe and the United States have settled, the scene then moves on to Geneva. We have other problems there. Relatively small problems, bananas from the ACP countries, is it? A tricky little problem. It’s actually a tricky problem for those countries and for us, and a very serious one. But they are problems that will not hold up the GATT Round. And there’s not one single thing in the world that will do more to stimulate world trade and growth and confidence and prosperity and earnings and profits than a GATT Round. And for those countries who seek to hold it up, for one domestic reason or another, whilst with their other hand they pour out aid to the Third World, I am bound to say to them, the whole of official aid from the whole of Western Europe to the Third World is but a drop in the ocean compared with the importance to the Third World of opening up the industrial markets of the West to their products. And it is a moral matter, as well as a political and economic matter, that we get that GATT Agreement and the opening of those markets.

So those are some of the things that are important. Let me turn to the measures the Chancellor announced yesterday. What actually lay behind them. I think there is a certain amount any Government can do to stimulate the right economic [indistinct] I don’t kid myself for a second that the Government can do it all, for we can’t. The people who produce this country’s growth and prosperity and jobs are the people like you who run businesses, predominantly medium-sized businesses, from one end of this country to the other. Our job as Government is limited to trying to produce the right economic [indistinct] and trying to produce the right psychological atmosphere or confidence which has been so sadly lacking over the last few months.

We have passed through, are passing through the first ever south-east based white collar recession that we have ever known. It is a recession that encompasses the homes of the opinion formers. Very easy for the great denizens of Fleet Street not to worry about the recession closing a steel works up in Scunthorpe. But it’s actually putting out of work the man with the Mercedes who lives next door. It comes a lot closer to home. And it engenders a different atmosphere among the opinion formers. And – I don’t know if any of you remember Itma – it’s being as gloomy as keeps you going – an expression, if given the choice, I would pin from one end of Fleet Street to the other. For surely it is the way in which they have conducted their writing on economic matters over the last few months, and getting [indistinct] out in a quite damaging way, it does make it more difficult to [indistinct] interest rates, it does make it more difficult to encourage growth, and that psychological belief that we are actually in a position to be confident, to be successful, to grow, is vitally important.

I have very few prejudices, though those few I have are increasing in number. But one prejudice I assuredly do have. I am sick and tired of the British habit of writing down our country, its prospects, what it is, what it stands for, what it can do. You don’t see that in other countries. They instinctively beat their chest in favour of their country, whereas the dear old British laconically lay back and say well, yes, we don’t do that very well. You can’t expect us to deliver on time. It’s not the way we treat it. And all this nonsense. But the reality is it is nonsense. And it’s damaging nonsense. And it is actually time that we started standing up and saying this is a brutal and competitive world, and we have got to stand up for ourselves. By we I mean the politicians, business, opinion formers, the media, actually stand up for Britain and say we can do things better than other countries, and you just watch what we’re going to do. Because that is the way in this increasingly competitive world that we’re really going to make our mark. The measures that Norman Lamont introduced yesterday were very sharp, three-quarters of a billion [indistinct] empty properties to lift that overhang by the housing market, help to re-stimulate the housing market, improve the balance sheets of many people in doing so.

The change in the first few allowances in manufacturing industry. I must admit to you a heresy that I hold and have long held, held in the Treasury when I was overruled – more difficult to overrule me today [laughter]. I do not myself believe manufacturing industry is an add-on extra, and our policy is going to reflect that in a way it hasn’t in the past, and if that is a culture shock to a theologian or two in Great George Street, it is a culture shock he or she will have to live with [laughter]. And then I think beyond that the reduction in car tax to help the engineering industry was self-evident and a straight forward point. The addition of an extra £700 million of export credits to markets, if we’re going to take advantage of the export opportunities that actually exist. That is there. There is a risk with an export credit guarantee, a taxpayer [indistinct] risk, but I think in present circumstances it is acceptable. And the idea of releasing the future accumulated receipts of local authorities is two-fold. Firstly, to encourage them to sell the land and buildings and homes they no longer need, and secondly, giving them the opportunity to utilise that money to construct new properties, construction industry, and to deal with renovations and repairs in their existing properties, for that is peculiarly intensive in labour terms.

So those are some of the measures that Chancellor mentioned. There are two others to which I would turn very briefly, for I think the impact of them has not yet. When I first went to the Treasury I was confronted by something called the Brierley rules. The Brierley rules were a set of rules developed by a great and good mandarin, Sir William Brierley, to set as many road blocks as it possibly could to any relationship between the public sector and the private sector on infrastructure subjects. And it was a very important piece of Treasury theology that there was that dividing line, and if you go across it these rules made jolly sure that [indistinct]. And I had the privilege of meeting Sir William Brierley just after he retired. And I asked him about these rules, and I said, “what d’you think of them?”, “absolute rubbish, he said”! What we have now done is go a long way further. It is actually to set out a series of circumstances in which the public sector and the private sector can combine to produce the right sort of infrastructure.

I do mean things like the Channel Link, the Birmingham road, new developments like the [indistinct] Dartmouth crossing, like underground railway, large-scale infrastructure projects in partnership with Government and the private sector. A concept we haven’t seen before. Areas of the public sector leasing rather than buying to enable the right sort of capital development to proceed without being artificially delayed by public expenditure considerations in the short term. It is pragmatic, it is difficult, but I think it is highly practical. And not only do I think it is highly practical, I think it is very much in our own commercial and industrial interests to develop the sort of infrastructure that will make sure our British economy is as efficient as any economy anywhere.

So there is a great change. It will take a while to come about, the East-West, the whole series of other projects that otherwise might not take place probably will take place now over the next few years as a result of this important change. And there’s one other that will have a mixed blessing. Some will dislike this next point very much, but I see great advantage. And that is that we are producing a Green Paper to look at the capacity for tolling roads, taking decisions like that, in order to improve the physical infrastructure. Why not let the private sector build roads, and toll them, and take that expenditure wholly out of the public sector and improve our infrastructure at the same time. It happens in France, Italy, it happens right the way across Europe. It doesn’t happen here. Take that money over 15 years out of the public sector figures, and you have extra resources to help elsewhere, to research and development and science, with education, the health service, and people will actually have a better physical infrastructure as well. So we are producing a Green Paper, another huge change of political theology. It has not yet been fastened upon by the opinion formers and others, and the Green Paper will come out in the course of the next few months.

These are not short term measures. These are not measures to get us over Christmas, or over the next week or over the latest scandal that undoubtedly will erupt somewhere around the world. These are matters addressed to the medium and the far distance. With one single shining objective in the middle of them. To make sure that we have the right structure for British business, British industry, and British commerce, to maximise its opportunities, its profits, its prosperity, its growth, and its employment creating new jobs. Many years ago the old CBI had a slogan. I thought it was the best slogan the CBI ever had, and I myself am sorry that they didn’t stick with it from the 1970s when they thought of it till today, Britain Needs Business was their slogan. Gloriously ambiguous. But it is true. Britain is a [indistinct]. We are a trading nation. We always have been. We never had our eyes fixed down at our bootstraps. Our eyes, our prosperity, have been fixed on markets overseas, on innovations, on developments, on research and development, on new ideas. More Nobel Prize winners for science and industrial matters in this country per head of population than any nation in the world including the Japanese who always get the credit. Because Britain does need business. Our prosperity does, our future does. Unless we are able to recreate that entrepreneurial spirit we had in the ’80s, and it slipped away from us, at the end of the ’80s in the excessive boom that was created and inevitably followed by the recession as people who had over-borrowed got trapped into high interest rates as the Government tried to force down the inflationary [indistinct].

So it is a great change. People will accuse us of a U-turn in policy. I don’t [indistinct]. It is a policy going the direction I have always wanted. It is upon that British, industrial, commercial, and, yes, manufacturing base that our future depends. And you may expect the direction in which Norman Lamont went yesterday to be the direction in which the Government will move in the future. And I for one believe two things. [end is indistinct].