Within the constraints that my right hon. Friend the Chancellor of the Exchequer has accepted, there is much to be welcomed in his Budget. The major disappointment is, of course, the failure to do very much on the public expenditure front. I echo the remarks of my hon. Friend the Member for Brent, South (Mr. Pavitt) on the National Health Service. This is one consequence of the central Budget judgment—the decision to reflate by only £2½ billion.
In any economy where men, money and resources are lying idle in any substantial quantities it is the matter of the merest and most straightforward common sense that the first priority should be to try to get the economy moving again. The Chancellor said as much in his Budget Statement. However, I believe that he would be the first to concede that he has not done enough to bring the rate of unemployment down and to get the economy moving at the rate of full employment.
Obviously, the Chancellor has left himself constrained by two familiar inhibitions—the balance of payments and the money supply. The first constraint arises in the familiar fear that if we wore to expand demand, British industry would not be productive or competitive enough to meet that demand. This would lead to an increase in manufactured imports and then to balance of payments problems.
It is now fashionable to talk in terms of our propensity to import. It is as though that is in some way an explanation of our difficulties which absolves us from the need to seek a solution rather than to look to an alternative formulation of the problem.
I was at least glad to hear some acknowledgment in the Chancellor's speech of price competitiveness. That is a useful antidote for a lot of the nonsense that has been talked on the subject in the recent past.
It might be useful to the House if I were to draw the attention of hon. Members to the way in which this sort of issue is seen by objective observers outside this country. I was recently sent a copy of an economic commentary prepared by the American securities firm Merrill Lynch, dated February this year, in which that firm said quite flatly and matter of factly:
If $2·40 was the equilibrium exchange rate in 1970 then the average equilibrium exchange rate in the fourth quarter of 1977 was $1·47. By the fourth quarter of this year the average equilibrium exchange rate should be $1·45. During the 1970s the British authorities seem to have kept sterling over-valued by between 7½ and 21 per cent. For political reasons they forecast that sterling will be maintained at an over-valued rate, representing a 25 per cent. over-valuation by the end of the year.
It is against that background that we can see that the rise in sterling which began in October last year was a ghastly mistake. Despite all the comforting and optimistic words of the international monetarists, that rise in sterling has caused enormous damage, as I, perhaps not too immodestly, can claim to have forecast at the time. What that rise in sterling has done is to make very difficult indeed for the Government the option of an October election. As I argued in October last year, the effects of a rise in sterling would be felt by the time we were
thinking of going to the country in October this year.
It is not solely a matter of electoral considerations. The refusal to face facts on exchange rates is not peculiar to the present Government. It is imbedded deep in the national psychology; it has been endemic in our economic policy over many years. Until we face facts, we shall not solve our problems.
The second major constraint is that of money supply. A few years ago we did not realise that we had such a constraint. The one thing we are rather good at is inventing reasons for not expanding the economy. I seem to detect a greater air of cheerfulness about the place now that we know that we have yet another reason for not doing what common sense dictates.
It is true that in some senses we are all monetarists now. We all accept that no Government can expect to print money or to allow unlimited credit expansion without stoking up inflation. To move from that position to a dogmatic and overriding adherence to a particular figure is a large step, but it is a step which apparently my right hon. Friend is prepared to take.
Given all the difficulties and uncertainties of measuring the money supply and deciding what it is we are trying to measure, and given the doubtful value of trying to control simply the quantity of money where it is the demand for money which is so important, surely in all these ways we can see how far common sense has fallen victim to shibboleth.
There is, in my view, a further reason for being suspicious of monetarist doctrines, and it is the fact that the trademark of monetarist theory is that one takes a relatively simple phenomenon for which there is an obvious explanation and then invents a circuitous chain of causation to try to explain it. Let me give an example. When the pound began to fall a month or so ago, monetarists said "That has happened because the supply of money has increased too fast." Why we should need to have recourse to an explanation which rests on an uncertain prediction, which depends on a doubtful theory, which in turn depends on an unreliable measure, when we have plenty of evidence from the real economy to explain this phenomenon, I do not know. Surely the pound fell because the experience of people trying to sell our goods in overseas markets and at home was that they were overpriced. That was reflected in our balance of trade figures, in statements by British industry, including the chairman of ICI, and in all the statistical indicators of competitiveness.
Exactly the same thing happens when we look at the so-called money supply constraint. Again, by far and away the most obvious direct and convincing explanation is offered by the real economy, not by monetarist theory. The money supply constraint is presumably explained by monetarist theory in the following terms. If money supply rises, inflation will increase. That will produce a fall in the exchange rate and, borrowing from the words of the international monetarists, that in turn will produce an equivalent increase in the domestic inflation rate. In the end it is said that our goods become uncompetitive, we cannot sell them and we run into a balance of payments crisis. In other words, the monetarists, true to form, arrive at the self-same conclusion as is offered in the old-fashioned demand inflation, but they do so by an unnecessarily complicated route.
None of this would matter if it were simply a question of rival analysis, but the danger with such analysis is that it leads us to ignore the fact that our real problems are those of stagnation and lack of competitiveness and that what we should be doing is embracing policies for growth and for making exporting more competitive and more profitable. Instead of recognising these problems, the monetarists say that what is required is further restriction and that one of the objects of that restriction should be to tie us to an exchange rate which makes it impossible for British industry to expand.
Unfortunately, although this is nonsense, more and more people believe that this is what matters. They therefore act according to minor measurements and minor movements in the exchange rate. Therefore, simply because they believe that it is true, it achieves a certain importance and credibility. That is one of the charges to be laid against the Treasury now, that it has done so little to disabuse people of this nonsense.
I believe that in the end my right hon. Friend the Chancellor has to choose between expansion and monetarism. His present monetarist policies mean that the underlying restriction implied by a tight money supply is reinforced by the high interest rates and the uncompetitive exchange rates which are the necessary concomitants of that tight money supply.
The consequences of that are all too familiar, because we have them now. We shall have no growth. We shall have balance of payments crises which are, in turn, a further constraint. We shall have unemployment. Even inflation, which is partly benefited by the economic paralysis which this policy produces, is hindered by the fact that unit labour costs and unit costs generally are forced upwards.
The alternative is a policy for expansion. That in itself would make it possible for the economy to grow and thereby reduce, as was said earlier by my hon. Friend the Member for Bristol, North-West (Mr. Thomas), the PSBR. We could have low interest rates. We could have—I that we would—a falling exchange rate, which would make industry more competitive and allow us to escape the balance of payments constraint. If that falling exchange rate meant an outflow of foreign capital, according to monetarist doctrines that would solve our money supply problem. If an inflow of foreign capital means an increased money supply, an outflow of foreign capital must mean a reduction of the money supply. Therefore, in all these ways I believe that the policy for expansion offers great advantages for the people of this country over the policies currently being pursued.
To sum up, my right hon. Friend has made the error of concentrating far too much on the cost of living and has paid too little attention to the standard of living. I conclude by pointing out that I have not found it necessary to refer to the Conservative Party on this sort of issue. The reason for that is that its prescriptions are not only not relevant to our problems but would make them immeasurably worse.