Her Majesty's Government (Economic and Industrial Policies)

Part of the debate – in the House of Commons at 8:59 pm on 28th February 1980.

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Photo of Mr Denis Healey Mr Denis Healey , Leeds East 8:59 pm, 28th February 1980

Some may find it a little surprising that the House of Commons is celebrating what is almost the start of a new decade with a motion of no confidence in the policies of a Government elected only nine months ago. It is a motion for which a large number of Conservative Members, Front Bench as well as Back, would vote if they had the courage of the convictions that they have expressed, mainly anonymously, to the Lobby correspondents. I should at least like to congratulate the hon. Member for Aldershot (Mr. Critchley) for having the courage to express his views directly.

What I find a little surprising about the Prime Minister is that she is terribly keen on secret ballots in the trade union movement. I wonder whether she would dare to face a secret ballot of her own party tonight?

A year ago, everyone would have agreed that for Britain the 1980s would be a decade of exceptional economic and industrial advance. For the first time this century, we are self-sufficient in energy, when none of our world competitors have that advantage. North Sea oil is at last starting to bring immense benefits to our economy—to our national wealth, our balance of payments and to the Government's revenue. We in Britain have security of supply when no other country in the world can rely on it, and when there is great risk of a sudden interruption in world output.

The recent doubling of oil prices has more than doubled Britain's relative advantage in all these areas. Yet the astounding thing is that the United Kingdom's prospects in this new phase of the oil crisis are not better but worse than those of all our competitors. For example, Germany is totally dependent on imported oil, but this year she is expecting growth in her economy of 2 per cent. The United Kingdom is totally independent in oil—indeed, is selling large quantities of oil to Germany—yet the Government expect our output to fall by 2 per cent. this year. The reasons are not controversial, but are universally agreed. First, the Government have decided to adopt a fiscal and monetary policy that is far stricter than any other industrial country in the world and, secondly, they have abdicated their essential responsibility for helping industry to improve its performance at a time when all our competitors are accepting increased responsibility for helping their industries.

The House may still not be fully aware of the revolution in our situation that has been produced by North Sea oil. In 1974, just after the first oil price increase, the incoming Labour Government found that the first OPEC increase was cutting our gross domestic product by 5 per cent., was increasing by£1½ billion a current account deficit which already amounted to £1 billion and was rising fast, and was having a big impact on domestic prices. The incoming Labour Government in 1974 had to cope with that situation at a time when the money supply had been growing at nearly 30 per cent. for the two previous years and earnings were set to rise by 13 per cent. in their first six months, solely because of the ill-starred threshold agreements established by the right hon. Member for Sidcup (Mr. Heath).

It was a very different situation when the right hon. Lady took office in May. In 1979, the incoming Conservative Government faced another increase in oil prices of roughly the same economic magnitude as the first increase, although it was a doubling of oil prices rather than the quadrupling which took place in 1973–74. But because we were almost self-sufficient in oil in 1979, the second increase in oil prices means that North Sea oil will this year add 5 per cent. to our gross domestic product.

A benefit of £7 billion will be derived from our current account in the balance of payments from North Sea oil this year, instead of a disbenefit of £1½ billion in 1974. In addition, this year the Government will derive additional revenue of £4,000 million from North Sea oil. However, I understand that not all of it will go into the Treasury coffers when the money is due. That is a windfall of staggering magnitude.

Despite that, our prospects today are far worse than they were in 1974. They are also worse than the prospects of any of our competitors. However, none of them enjoy our advantages. That is not only my view, it is also the view of the Government. The other day the Chief Secretary told us that we face three years of unparalleled austerity. A couple of days ago the Cancellor of the Exchequer extended that three years to 10 years, in a speech that he made in the City of London. His pessimism is not surprising. There has been a frightening deterioration in every aspect of our economic performance since the Government came into power and found themselves floating on a sea of oil that was steadily increasing in value.

This afternoon, the Prime Minister quoted some selected figures about the Labour Party's performance during its five year's of office. Some of them were very daunting. They included the first two years of painful readjustment to the increase in oil prices and to the legacy inherited from the previous Tory Government. However, once the adjustments had been made—it took us only two years —it was a very different picture. The record of our last three years in office has been described in detail by the Chancellor in a letter that he recently sent to the right hon. Member for Taunton (Mr. du Cann), as chairman of the Select Committee. He pointed out that during those last three years the average increase in output was well above 2½ per cent. He further pointed out that there had been a steady movement into surplus on current account, a steady fall in unem ployment for two years and a growth in money supply over the whole five years that averaged just over 10 per cent.

The Government have recently published figures showing that during the last two years of Labour Government, private manufacturing investment rose by 26 per cent. in volume. Industrial productivity rose by 11 per cent. and inflation was under 10 per cent. for our last 15 months of office. That progress was stopped in its tracks by the election of the Conservative Party to government. Growth has fallen steadily since it took office. According to the Government, output will fall by 2 per cent. this year. Indeed, fresh leaks suggest that they forecast a 3½ per cent. fall for this year. The Government have spent the last 48 hours furiously massaging the figures in order to produce a better outturn.

All of that is taking place at a time when North Sea oil is adding 5 per cent. to our gross domestic product. It is forecast that the balance of payments deficit for this year will be £2 billion. However, oil will benefit our balance of payments by £7 billion. Investment is set to fall by 7 per cent. this year. Productivity has just begun to fall and that is shown in the figures published yesterday, where the third quarter for last year is compared with the second quarter. The only thing that will rise this year is inflation and unemployment.

Unemployment has risen by 9½ per cent. in the past six months. That is shown in the figures that were published on Tuesday by the Government. The rate of inflation has doubled during the past 12 months. The right hon. Lady will be able to celebrate her first anniversary in power by announcing that inflation is above 20 per cent. It will have doubled since the election.

The only bright spot in the whole picture so far as the Government are concerned, if we are to believe that this morning's leaks from the Chancellor are more accurate than those of yesterday, is the prospect for the public sector borrowing requirement. We were told yesterday, unanimously in six or seven newspapers, I suppose as a result of a briefing by the Chancellor or one of his officials, that without drastic action in the Budget we should have a PSBR of about £11 billion. We are told today that without any action by the Government we shall have a PSBR of only £8 billion.

I can well understand that that should be true. This year the Government will get an extra £2 billion in oil revenue and £2 billion more from the increases in VAT decided last June.

I am interested to know why the PSBR estimate has changed by £3 billion in 24 hours. Is it because the right hon. and learned Gentleman used the £11 billion figure yesterday to frighten his colleagues into public expenditure cuts, and has chosen £8 billion today to reassure the City, because cuts in public expenditure will not be large enough?

I tell the Chancellor that if he is aiming at a PSBR of £8 billion next year, it is far too low for the state of the economy. The savings ratio jumped 3 per cent. between the second and third quarters of last year to 17 per cent., a level of almost Japanese magnitude. The economy is set to work far below its natural capacity.

I say to the hon. Member for Croydon, South (Sir W. Clark) that Britain is not living beyond her means. We are not spending more than we earn, if people are saving 17 per cent. of their income, and the Government decide to borrow 5 per cent. of total income out of those savings in order to finance public services that need help to get going and to raise the rate of growth in the economy. There is no Government in the world that does not hold that view except the present British Government.

The excuse that the right hon. and learned Gentleman gives for getting the PSBR down to that level—and we heard it echoed by some of his Back Bench colleagues this afternoon—is that interest rates cannot be lowered unless the PSBR is brought down. That is bunk, and the right hon. and learned Gentleman knows it. Interest rates were much lower under the Labour Government, when the PSBR was almost twice as high as a percentage of our GDP.

The problems for the Government's monetary policy are not created by the PSBR. The right hon. and learned Gentleman has more than financed that in the past 12 months, although at far too high a price. The problems arise entirely because of excessive lending by the clearing banks to private firms. The Chancellor of the Exchequer has admitted that, because he told us many times in recent months that he will not reduce the minimum lending rate until private bank lending is reduced. That is the problem. It is not the PSBR.

The right hon. and learned Gentleman has got himself into an extraordinary situation. It is the banks that are responsible for breaking his monetary target, but instead of punishing them he is rewarding them by raising interest rates, which will double their profits. That is the economics of the madhouse. How can he justify it?

If the right hon. and learned Gentleman is not able to announce in the Budget a large fall in the minimum lending rate, we shall press, I hope with support from many Conservative Members, for a windfall tax on these excessive bank profits, which have been generated wholly by his monetary incompetence. That is only one example of the appalling intellectual and practical muddle that the Government have got themselves into by attaching themselves to punk monetarism, as preached by Professor Milton Friedman, the TV pundit, who seems to bear no relation to Professor Milton Friedman. the Nobel prizewinner.

The right hon. Member for Down, South (Mr. Powell) treated us once again to his version of the higher lunacy, in a speech that I found somewhat overlong, and a little over-familiar. Unfortunately, the right hon. Gentleman was not invited to No. 10 Downing Street yesterday to hold a seminar for the inner Cabinet. Professor Friedman was invited and, so far as I am able to tell, he was asked to conduct a seminar for the benefit of the Lord Privy Seal. I confess that I am not entirely clear—perhaps the Chancellor could enlighten me—as to whether tie was present to learn along with the Lord Privy Seal or to prevent the Lord Privy Seal from getting away.

I strongly recommend that all right hon. and hon. Members, especially Conservative Members, watch Professor Friedman's television series, which started a week or so ago. They will find it at least as entertaining as a comic strip by Saatchi and Saatchi. They should watch it because it provides the intellectual foundation of the Government's economic, industrial and social policies. That foundation is laid out so that all its logical fallacies and moral repulsiveness are clearly exposed. They will find it a series of stupefying shallowness and disgraceful dishonesty. But at least they will have the benefit of seeing the shallowness and dishonesty exposed in the discussions that follow. It is a tragedy that the right hon. Lady and the "Gang of Six", of which she is the centre, take this charlatanism seriously and that they are using it to crucify the British people.

Monetary control must be one element in economic policy. I used it myself. I kept the money supply at 10 per cent. for five long years, without any of the consequences that followed the right hon. Lady's monetary policy. However, it is one thing to give a dose of quinine to a patient who is suffering from a fever, but it is quite another to sit the British people down in front of a tank of quinine and tell them that they must drink a pint for breakfast, a pint for lunch, a pint for dinner and that they should eat or drink nothing else in three years—or 10 years, as the Chancellor of the Exchequer now tells us. That is the Government's policy at present. I warn Conservative Members who have shown some restiveness, that, as the first pint gurgles down their gullets, the consequences that they are now seeing are only just the beginning.

The right hon. Member for Brighton, Pavilion (Mr. Amery) warned the right hon. Lady that he could take it for one year, but that if it went on beyond 12 months, she would be hearing from him again. The Chief Secretary to the Treasury has told us—and the Government forecasts in a fortnight will show it in detail—that 1981 will be as bad a year as 1980. It could be worse. He said that 1982 will be as bad as 1981. One reason is that the Government have made their self-imposed ordeal more painful by the massive increase in prices which in that wonderful dawn, the Chancellor recklessly inflicted on the long-suffering British people.

I listened carefully to the Prime Minister's speech this afternoon. She did not attempt to deny that 5 per cent. of the increase since the last election was the direct result of Government policy. Therefore, the bulk of the increase since the last election flows entirely from the policy of the Government. By the middle of this year, further price increases that are al- ready decided by the Government will add 8 per cent. at least to the RPI which the Government inherited. Indeed, one reason for that is that most of the so-called public expenditure cuts are not cuts in Government spending. They are new ways of financing existing spending by raising prices rather than raising income tax.

The consequence of that for earnings is liable to be horrific. The other way in which the right hon. Lady is financing existing spending is by selling oil which we have not yet produced—forward oil—and selling off priceless national assets such as the BNOC. However, I am glad to see that the most junior member of the "Gang of Six", the Secretary of State for Energy, is putting up a sort of pallid battle against that decision.

The irony is that among those who will suffer most severely from the Government's policies are precisely those people who voted for the Conservative Party at the last election because they believed that its policies would protect them. I shall take two examples at opposite ends of the spectrum. If we take an average family with two children living in a council house in a safe Conservative area such as Kent or Cheshire, it will face an increase in outgoings of about £6 a week this year. That increase will be caused by rents, rates, school meals charges and school bus fares alone. A similar family in Kent would face an increase of about £9 a week. Those increases come at a time when their cost of living has already been pushed up by about £15 a week. So far, that family has received only a few pounds help from the income tax cuts of the last Budget.

How can the right hon. Lady be surprised if ordinary working people demand compensation for the imposts that are inflicted upon them by the present Government and which owe nothing to their wage increases in the past? At the other end of society, we should consider the effects of the Government's policies on British industry—especially on the small firms for which so many crocodile tears have been shed by Conservative Members in this debate. The increase in MLR is forcing them to run down their stocks and drop investment plans that are already under way in many cases and have been going on for one or two years. The increase in MLR is still not enough to keep the Government's money supply growth on target. It is still growing at about twice the target rate, if the acceptances which the Governor set himself last October of 7½ per cent. to this October are included.

The effect of MLR has not been to reduce bank borrowing. That has been remarkably resistant, as the Government should have known, because the Bank of England explained in detail why bank borrowing is so resistant to changes in interest rates. The only effect, besides the swelling of bank profits, of which I have already spoken, has been to push up the exchange rate so that the firms which are already crippled by MLR cannot compete at home or abroad in markets which are shrinking steadily. Indeed, they are shrinking at home because of the over-tight Government fiscal policy.

The right hon. Lady made a great deal of sterling being a petrocurrency. I ask the right hon. Lady to consider this. Last week when the interest rate differential dropped by a few percentage points between Britain and the United States, the pound sterling dropped three cents in a day.

The fact is that excessive interest rates are bound to attract some of the 100 billion petrodollars that are now moving round the world unwilling to go into any long-term vehicle and therefore attracted by any short-term differential. I hope that the right hon. and learned Gentleman will assure us—and he showed some sensitivity when he broke all his principles last week by lending £500 million to the clearing banks to slop short rates rising again—that he will not allow the irresponsible increases in interest rates that obtain in some other capitals, particularly Bonn and Brussels, to push him into raising MLR yet again.

Nothing would be more healthy for our industry than for this differential to disappear so that the pound could settle to a more realistic level in relation to the growth of Britain's industrial costs. Squeezed as it is between excessive earnings increases generated by the Government's inflation policy, excessive MLR generated by their monetary policy and an excessive sterling exchange rate generated by the excessive MLR, industrial confidence is now at its lowest level since the war. Consumer confidence according to the Financial Times consumer confidence survey is the lowest since records began. I warn Conservative Members to take this seriously even if their Government do not.

We shall see a financial freeze particularly on small firms later this year that will litter the country with bankruptcies. I do not need to describe, because others have already done so, the human misery and humiliation involved in unemployment and the steady fall in living standards which the Government are inflicting on the British people. I ask the House to consider this. Supposing that the monetary policy succeeded in the aim that the Government have set for it in bringing down the rate of inflation in three years or 10 years as the Chancellor has suggested. Where will the growth come from?

By that time vast areas of Britain will be an industrial desert. Whole sectors of manufacturing industry will have disappeared altogether and what is left of it will have carried out no investment during the previous three to 10 years.