. The hon. Member for Cornwall, North (Mr. Pardoe) made a wide-ranging speech. Obviously the particular matter which is of importance to the House is his reaction to the proposed increase in petrol tax. I sympathise with his concern about rural transport. However, he will agree that a general reduction in petrol tax is an inefficient way of trying to help. That is because 80 per cent. of petrol must be consumed in towns by town dwellers.
Those in rural areas—in the constituency of the right hon. Member for Orkney and Shetland (Mr. Grimond) for instance—will be helped little by such a reduction. A number of hon. Members and I visited Orkney and Shetland during the Easter Recess. There was no doubt that transport costs were the biggest single issue there. It is the wish of the hon. Member for Cornwall, North to do something to alleviate that situation. I urge him to turn his mind to ways in which more effective support could be given to all country dwellers generally by using the large funds that are represented by the proposed increase in petrol tax.
Understandably the Chief Secretary had nothing new to offer in his analysis in the absence of the Chancellor of the Exchequer who is in Washington. The situation continues to develop regardless. In his Budget the Chancellor offered a 2 per cent. reduction in standard rate of income tax. Unions have been doubtful in their reaction to that. They are doubtful whether any stage 3 is negotiable at all. I wonder whether the Chancellor will make that 2 per cent. reduction in the standard rate, regardless. Perhaps he will suggest a larger figure.
Inflation dangers remain acute. Interest rates have been further reduced. The minimum lending rate has fallen more than equivalent rates in other countries. There is pressure on building societies to reduce their borrowers' rate. The exchange rate is being stabilised. Generally the situation is developing in a way which is not out of line with what the Chancellor of the Exchequer expected at the time of the Budget, but it gives cause to the House to wonder whether the reductions that he planned then are appropriate to the situation now.
The effect of high interest rates last year, the IMF loan, the safety net, supplementary special deposits and restrictions on financing Third World trade have stimulated a massive inflow of funds, the unwinding of leads and lags, a massive sale of gilts and a reduction in M3. Interest rates have fallen. The margin of interest rates over foreign interest rates has become much lower than the gap in inflation rates between this country and others. The rate of inflation, interest rates and exchange rates are so unstable that people wonder what will happen and what the Government will do. The economy is in the doldrums and pressures on the pound may go all over the place.
The Government want to hold the exchange rate to arrest inflation. They want to keep interest rates low to encourage investment. They fear that, if they pursue that course with inflation still high, negative interest rate may create a crisis of confidence. The possible outflow of funds, a fall in the sale of gilts, rises in DCE and money supply, a sharp rise in interest rates and a sharp fall in sterling, are all too familiar as elements in a July crisis. All that can happen before any of the machinery of the safety net comes into operation, because that is contingent only on the movement of official holdings of sterling. Inflationary wage settlements later could greatly exacerbate the dangers.
What advice are the Government receiving in this uncertain situation? The IMF wants its money back. Most banks do. It is not really interested in inflation. It wants its money back in SDRs. It is not concerned how many pounds one has to pay for SDRs.
The Financial Times reported from Washington yesterday:
IMF staff have made it clear that they are concerned that Britain may not have let the pound fall far enough yet to reflect the continuing effect of inflation on its competitive position.
That reflects the theoretical, not to say doctrinaire position of the IMF staff and Mr. Polak in particular, not only in the artificial invention of domestic credit expansion, but also in his address at the
conference in Washington last month on United States-European relations. Here he stressed the reluctance of economies and Governments to "adjust" as opposed to "co-ordinate"—that is to say, to accept the devaluation implications of inflation. He says that one can pursue what domestic policies one likes provided one is realistic with the exchange rate policies that go with it. One should adjust exchange rates to match. That is successfully achieved in some South American countries.
According to the Financial Times report, the IMF is saying that the pound should be allowed to slide gently down and that it should not be over-defended. It is saying that we should defend it by DCE and public expenditure rather than by interest-rate policy. So much for the IMF. It is eccentric, but it has an influence on our affairs.
There are also the portfolio monetarists. Their broad doctrine is that holders of currencies have a view about how much of each currency they want to hold. If too much currency is supplied the price will fall. That means that short-term behaviour is dominated by capital flows. Current flows only affect rates as they alter the portfolio balance. These monetarists have many representatives. One such group exists at the London Business School—Terry Burns and Alan Budd in particular. They are arguing in their most recent forecast, reported in the Press today, that if Government combine tight money policy and seek a low exchange rate or an undervalued exchange rate they will get the worst of all worlds in combining a recession, as a result of the tight money policy, and inflation, as a result of the ever-increasing price of imports. Their advocacy is of a deliberate attempt to raise and maintain the exchange rate to let it float but with the expectation that it will float upwards.
Peter Jay, again writing in The Times today, wants a clean float, but a clean float aimed at a current non-oil balance of payments, thus building up vast surpluses to build up investment and capacity in an economy which he fears is going through the process of de-industrialisation. That is a powerful argument and, I think, one with which many of us would sympathise—that we cannot use the oil revenues as a bonanza and must use them to seek structural change in the economy. His implication for currency drawn from this—although I am not sure that the hon. Member for Guildford (Mr. Howell) would agree—is the expectation that the clean float would take the pound downwards. Quite how he expects holders of sterling to discriminate between an oil balance and a non-oil balance is not entirely clear, but, nevertheless, his prescription is that the Government should push the exchange rate down.
Sam Brittan—they have all had a go today—writing in the Financial Times, wants a clean float, and he also expects it to go downwards, but not yet; perhaps later on this year. He produces convincing graphs in the Financial Times today to show that at present the exchange rate is not over-valued. However, this is clearly a moving target, and as rates of inflation in this country continue at a higher level than rates of inflation overseas, sooner or later the question is bound to come: how will the pressures on the exchange rate move and what should be the Government's policy in relation to it?
All these differences of point of view—and they would all describe themselves as, I suppose, monetarists of one kind or another—are, as Terry Bums points out, crucially dependent upon the very obscure long-run properties of the individual equations, models actual or mental that these chaps have of how the economy works. Terry Burns goes to the trouble of formulating these numerically and quantitatively, and testing them. That is a degree of menial labour that neither Peter Jay nor Sam Brittan finds necessary. They are, perhaps, more fundamentalist in their pursuit of this background.
Coming more closely to the Chancellor, what about the Treasury? The Treasury listens to everyone, and it tries to test alternative theories on the evidence; and a great many theories it has had to test. Specifically, it seeks to link a flow of funds model to its national economy model, and it seeks to find relations linking the real and monetary variables in the ways described by the monetarists, be they primitive, insular or international monetarists, as Sam Brittan describes them. The Treasury is not very successful in testing the theories that are put forward, for two reasons. First, the data really are not very helpful; it is not at all clear from experience which of the theories are right; but also, I am afraid that the Treasury has difficulties because it has gone about its model building in a rather ham-fisted way. It convinces no one, least of all the Chancellor.
Skirting around the Chancellor for a moment, there is, of course, the Opposition, whom I describe as Billy Bunter monetarists. They complain that we give too much money to everyone else. They say "Just let me and my friends have the money in the till, cut our taxes, and we shall make gorgeous pigs of ourselves and you will see how the tuck-shop prospers". That is more or less how it comes across in all those dreary weeks in Committee on the Finance Bill, to which we on this side of the House look forward with such mixed feelings.