I for one do not share the readiness of the hon. Member for Chester-le-Street (Mr. Radice) to accept international tutelage. If we lack determination, if we lack insight, if we lack wisdom and courage, then those qualities will certainly not be supplied by the interested benevolence of other nations. We have to find them for ourselves if we are to use them at all.
There has been much talk, in the recent conference weeks particularly, of national unity—these deploring that we do not have it, those believing that we are about to get it, and those calling for it to be created. I do not know about national unity; but on the subject which we are discussing this evening there certainly has recently been a remarkable move towards a consensus, at any rate as to the cause and nature of the inflationary evil from which we persistently and increasingly suffer in its symptoms and its consequences.
The two Front Benches, so far as one can judge, and most other quarters of the House seem now to be agreed upon the identification as at any rate the major cause of inflation of the consequences of an excessive public service borrowing requirement having to be met by methods which increase the money supply. Whatever distaste their past disclaimers may have inspired in Ministers and those who sit on the Opposition Front Bench, it is all too clear, from words in the one case and in the other from the practical policies which the Government pursue, that radically they accept this broad analysis of the causation of inflation and of our present predicament. It would be impossible otherwise to understand the necessity for the Prime Minister himself to make such speeches as he makes to his own party, notably at the Blackpool conference. So we have the advantage in this debate, which we have not always had, of a broad consensus as to diagnosis.
The Chancellor of the Exchequer was, I thought, remarkably frank in describing the immediate causes of the steps which have recently been taken—the massive new borrowing and the increase of the minimum lending rate. He described how quite suddenly it had been found impossible to meet the emerging requirement of the Government for loans from the public here or abroad, and that therefore steps had to be taken to meet that alarming deficiency. What was lacking in the speech of the right hon. Gentleman, and what I believe has to be supplied, is the relationship between that sudden predicament of the last few weeks and the fundamental and increasingly accepted analysis.
It is tedious and rarely justified to venture upon a self-quote; but sometimes such a thing can be a kind of datum or bench-mark, and I will venture upon two sentences from the debate of March this year:
I say that it is an unacceptable danger—not to a class but to the nation—for us not to aim at eliminating the net borrowing deficit over the next two years, and without being able to quantify that precisely—of course I cannot—I say that it means a reduction of about £4 billion on what is proposed in the coining financial year. I said that six or nine months ago, at a point of time when it would have been much easier to achieve that result."—[Official Report, 10th March 1976; Vol. 907, c. 498.]
Already another seven months have passed since I said the words which I have just quoted.
We do not do these things unobserved, we do not conduct our affairs in secret. The consequences of the exorbitant public service borrowing requirement, and the chance that at any moment—as indeed happened in these last few weeks—we might fail to meet it by the selling of Government securities to the public had not escaped the attention of others. In so far as we were failing to fund this requirement, then, as the money supply figures mentioned this afternoon show, the process of overcoming inflation had actually been reversed: the pressure of money supply was again rising, and, of course, the prospects also were that this would only be the beginning. Those therefore who for their own purposes and in the course of their own business try to estimate what will be the course of our affairs concluded that, sooner or later, renewed inflation, generated by the inability to fund this excess borrowing requirement, was bound to be our experience in the coming months. Whether the fall in the rate of sterling somewhat anticipated the actual rate of inflation or not, it was a direct consequence of the manner in which our financial budget is constructed. Similarly, the necessity for trying to tempt out funds became stronger when potential lenders saw themselves threatened with the consequences —which have already been referred to earlier this afternoon, I thought in rather gloating terms—of buying gilt-edged securities at the wrong time.
Two measures, therefore, were taken which did not go to the heart of the matter but which were palliative of the symptoms. The first measure was directed at the symptom of the falling sterling exchange rate. Now, the balance of payments always balances, provided that the exchange rate is allowed to be the equilibrator; but the Government are not willing to accept that—I think mistakenly—and therefore have found themselves making immense borrowings in order simply to prop up the exchange rate of the pound sterling. For that purpose they both used the reserves and ploughed back the borrowings. It is exactly like attempting to cure a fever by smashing the clinical thermometer or putting it into a refrigerator. It is merely attempting to hide the symptoms without paying regard to the causes. This is not merely futile: it is positively damaging.
There is a lot of mythology about the exchange rate and the consequences of a fall in the sterling exchange rate; and I am afraid that the Press, and the manner in which it handles this, contributes to public misunderstanding. The notions of bankruptcy, catastrophe and so on, the whole vocabulary of national ruin, are exhausted every time there is a movement of a few cents in the exchange rate.
Yet a movement of the exchange rate which reflects, belatedly or in advance, internal inflation, has, and can have, no effect whatsoever upon our standard of living or our ability to procure what we want from other countries in exchange for our products. That can be affected only by an alteration in the real terms of trade; in other words, in the comparison between the prices of what we import and the prices of what we export. In fact, the terms of trade in recent years, though they took a dent in 1973, have, broadly speaking, been by no means catastrophic for this country.
It is also true that a fall in the exchange rate, temporarily at any rate, renders some items relatively more expensive on the domestic market, and others therefore necessarily less expensive—it alters slightly the pattern of internal prices. But this does not and cannot contribute, upon the analysis which, fundamentally, the Government themselves have accepted, to cause or to exacerbate inflation.
A fall in the exchange rate is, therefore, a pure symptom, harmless in itself and, indeed, very useful, because, unless we allow the exchange rate to act as the equilibrator, if we attach ourselves mystically to some exchange figure for the pound sterling in terms of dollars or otherwise, there will be no end to the extent to which we shall load upon ourselves useless debt for the mere purpose of concealing this indicator of reality, this external index of the internal depreciation in the value of our money. It is for that reason that I say, and have long said, that it is perverse for Governments to attempt to rig the exchange rate. The exchange rate is an indicator which tells useful truths if it is allowed to do so. Any attempt to rig or to fudge it does no one any good.
That brings me to the other measure which has been taken—that of the increase in the minimum lending rate. There is both an internal and an external aspect to this measure. The external aspect is yet another form of fudging the exchange rate, because an increase in the minimum lending rate is a kind of surrogate for a fall in the exchange rate. If the aim is not to let the exchange rate fall, it is possible to prevent the realisation of that movement by artificially increasing the internal rate of interest. However, I have already dealt with the disutility of fudging the exchange rate.
At the same time, driving up the internal interest rate temporarily brings out funds which are not in themselves inflationary to meet the Government's borrowing requirements, it being the case that people are ready to invest—very temporarily—in Government securities if they believe that the next move in the interest rate will be downwards, and it is easier to believe that when the interest rate has been pushed up very high than when it has not.
I will not describe this process as a trick, since everyone understands it, and those who are intended to be tricked watch very carefully to ensure that they escape from the trap before it closes on them. But morally innocent though the procedure may be, it is foolish and counter-productive, because the interest rate has an even more vital function in the regulation of the economy than the exchange rate.
The business of an interest rate is to spell out, in all the possible varieties of circumstances and under all the possible varieties of conditions, the choices which people are making between present and future and between less risk and more risk. If we are interested in getting investment and in getting the right investment, as I think we all are—in getting a more satisfactory productive pattern in the British economy—we must not fudge the interest rate, we must not grotesquely falsify it, for it is indeed a grotesque falsification to pretend that 15 per cent. represents the current balance of supply and demand for investable savings if it were not for Government intervention. When we intervene for short-term purposes, we destroy the markers by which those who are taking all manner of investment and commercial decisions should be guided. Other hon. Members se:; this—and I make no criticism—in terms of the direct harm which an artificial rise in the interest rate does to employment and to investment.
So in order, once again, to conceal the consequences of what really ails us and to patch over what the Government themselves know is the risk which they have deliberately courted and to which they have fallen victims, we have inflicted additional injury upon ourselves. That is what we have done with the 15 per cent. interest rate.
I come back, therefore, to the undisputed fundamental that we cannot carry on with a British economy staggering under this huge public service borrowing requirement, which at any moment can force a Chancellor of the Exchequer into the position in which the right hon. Gentleman found himself, no matter whether other economies can do so, where confidence and the attitude of the public to Government are different. We have, therefore, to bring total intake and total output of money by the Government much more nearly into balance, and we have to do it with greater urgency than ever. That is the message which should be conveyed by the events of the past few weeks.
Since I made the remarks six months ago which I ventured to quote to the House, I fancied that I had caught an echo of them from the right hon. Member for Leeds, North-East (Sir K. Joseph), and I noted with great disappointment that he was not to be leading for Her Majesty's Opposition in today's debate. But when the insistent question, "How do you do this?", which I have not been afraid to face, was put to the right hon. and learned Member for Surrey, East (Sir G. Howe), he took refuge almost in trivialities. Of course, he referred to the reduction and elimination of subsidies. I have always done the same and give it my support, but remember that it is an ambition which the Conservative Party and incoming Conservative Governments have cherished during the past 20 years but rarely realised. However when that phase of his speech was finished, when the reference to food, housing and transport was over—I wonder when these transport subsidies were mostly accumulated, but let that pass—the right hon. and learned Gentleman had nothing to talk about but nationalisation.
Nationalisation may be very wicked; but it does not make any difference to the expenditure estimates for 1977–78, and it is those estimates that we are discussing. The fact is—and the Chancellor of the Exchequer and the Prime Minister well know it—that in order tolerably to reduce the risk which they took, and which did not come off, with serious results, in the past three months, they need to reduce the estimates for the coming financial year by £4 billion or thereabouts. I use the figure again, because I believe that we should all indicate the magnitudes in which we are thinking. I have no doubt that the major contribution to that reduction can be found only in the capital programmes of the nationalised industries and of the great Government services.
In saying that, I come to the last point which I wish to make, and I make it more to Government supporters than to right hon. and hon. Members on the Benches round me. There is a misconception abroad about the relationship between public expenditure and unemployment. The unemployment from which we are suffering is the predicted unemployment which was bound to accompany a fall in the rate of inflation. It is a rise in unemployment which we knew we would have to go through if, as we knew we had to do, we reduced the rate of inflation from nearly 30 per cent. towards single figures. That is the prime nature of the unemployment with which we are now afflicted.
But it is not true to suppose that a lump of public expenditure which does not appear in the public accounts therefore vanishes into thin air. It is a mistake to suppose that this demand and the resources which it represents become non-existent if it is not part of the net borrowing requirement in the Government accounts. Every penny of Government expenditure is a transference from somewhere else in the economy achieved by one of three methods—taxation, genuine debt or inflation; for inflation is just as much a transfer of command over resources to the Government from the rest of the economy as is taxation or borrowing.
When one says that by alterations to the pattern of Government receipts and expenditures we have to achieve a massive reduction in the net borrowing requirement, one is not extinguishing a great mass of effort for the coming months and years. One is altering the pattern of application of that effort away from one which has constantly plunged us and still plunges us into embarrassments such as those we are considering today towards a pattern with which we shall not be at constant risk of refuelling—to use the Chancellor's own word—inflation and therefore having to go once again through the purgatory through which the people of this country are now living.
Perhaps I am being ingenuous or starry-eyed; but, unlike the hon. Member for Cornwall, North (Mr. Pardoe), I do not believe that the people of this country are incapable of understanding the things we are talking about and I do not believe that they lack sound instincts and understanding in these matters if they are not misled as to the relationship between cause and effect.