The Economy

Part of the debate – in the House of Commons at 12:00 am on 19th November 1973.

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Photo of Mr Patrick Gordon Walker Mr Patrick Gordon Walker , Leyton 12:00 am, 19th November 1973

The right hon. Member for Stafford and Stone (Mr. Hugh Fraser) made some very interesting comments, particularly about the setting up of a Ministry of Fuel, Power and Energy. I agree with his implicit point that Government Departments are rather too big nowadays. This is a new trend, towards which both Governments have moved. It seems to me that such Departments are impossible to manage properly. I wholly agree also that the coalfield which the right hon. Gentleman mentioned ought to be able to be developed much more quickly if one Minister and one Department were in charge of the whole thing.

One cannot for very long avoid the great challenge facing us, that of infla- tion. But one of the difficulties here is that the Prime Minister has a particularly bad conscience about prices, because of the injudicious speech that he made on the subject in the General Election. It is this that leads him—this is one of the Government's troubles—to maintain that the Government and he are never in any way responsible for the rise in prices. There is always an alibi. Always someone else is responsible. It is not the Government or the Prime Minister. It used to be the trade unions and wage increases. It was also—the Prime Minister spoke of this today a little—recalcitrant industrialists who do not behave properly and do not invest enough. Above all however, the alibi nowadays is world prices.

It is said that world prices are outside our control; there is, and has been, a shift of the terms of trade against us. That has been one factor in the rise in prices, a factor which no Government of any kind could wholly offset. But it must be said also that the Government have a considerable share of responsibility for the rise in world prices too and not only in domestic prices. The Government's main responsibility here is for the balance-of-payments crisis which they have helped to bring about by a reckless financial policy. Instead of working somewhat more slowly and gradually, as he should have done, for an export-led boom, the Chancellor lost his nerve and patience and chose the soft option of a consumer-led boom. He did so by greatly increasing Government expenditure while reducing taxes. It is a fatally easy thing to create a consumer-led boom. Many of our troubles have arisen from this error.

The consequence of that was a great jump in Government borrowing, which was tantamount to fuelling inflation by the printing of money. The Government tried to guard against the obvious effect of a balance-of-payments crisis resulting from a consumer-led boom by floating the pound. But the predictable result was that there was a dramatic fall in the value of the pound. The Chancellor has brought about a rampaging devaluation of the pound. This has led inevitably to a great rise in the sterling cost of all imports—what are called world prices.

Owing to the continuing drop in the value of the pound there has been no real chance for the secondary effects of devaluation, an increase in the value of our exports, to come into play. The steady sinking in the value of the pound has meant that that the primary consequence of devaluation, namely an in crease in import prices, has kept ahead of the increase in the value of exports.

The great error of a floating pound is that, if one wants the advantages of devaluation to accrue, one must have a fixed amount of devaluation. It is because of this that we have the appalling trade figures which have panicked the Government into desperate measures which will not solve the problem. It is no solution to a balance-of-payments crisis to attract hot money by high interest rates. Such money always goes out again.

What precludes the Prime Minister from doing anything constructive to remedy the dire results of his own policy is his obstinate and blind optimism. He is always convinced that things will come right soon and that the terms of trade will move our way. In the prevailing circumstances that is just hoping that the problem will go away. That attitude formed a good part of the right hon. Gentleman's speech. The problem will not go away. The producing countries are increasingly eating their own products, prices are naturally going up and the supply is declining. The insatiable demand of developed countries for commodities, including oil, has put up prices for a considerable time, possibly for ever. It is their optimism that has induced the Government to resort to temporary and makeshift policies.

An essential point is that the Government, instead of contributing to the rise in world prices, as they have done and are doing, should take positive measures to counter it. One measure they may now be beginning to think about, although it is late in the day, is to reduce Government borrowing by balancing expenditure with revenue, so that there is not a great, continuing borrowing need.

The prime need, however, is that we should once again increase controls on the flow of credit, especially bank lending. Credit for consumer spending should now be checked, and credit should be directed towards investment in industrial expansion, with special emphasis on exports. This would not reduce the rise of world prices, or therefore our own prices, at a stroke, nor would it remove the rise, but it would remove the contribution which the Government are still making towards inflation.

It would at least mean that the Government were doing their best to reduce and counter the rise in world prices instead of, as at present, reinforcing and stimulating the rise. It would mean one more U-turn in Government policy, but another U-turn would hardly be noticed. This U-turn would be more valuable and decisive than all the others taken by the Government. It would help to tackle the intolerable scale of inflation, which is the major challenge of the day and which will continue to be so as long as the present Government are in office.