While the policies of individual Governments on interest rates must be determined largely in the light of their domestic circumstances, it is important that countries should have regard to the international consequences of their actions.
Does the Chancellor admit that his forecast in his Budget speech of reduced interest rates resulting from increased taxation and vicious cuts in public expenditure has now been shown to be worthless? Does he agree that the budget that President Reagan is now proposing, with its crazy 18 per cent. increase in defence expenditure, threatens a deficit that will produce an increase in interest rates throughout the world? Does this not demonstrate the crass folly of the economic policies pursued by President Reagan and this Government?
—throughout the summer, interest rates that were several points lower than they would otherwise have been, and several points lower than they were in other countries. The main reason for the increase in United Kingdom interest rates in September was the impact of higher interest rates in the United States. That increase was the consequence of higher prospective United States public sector borrowing. For that reason, while the Government support the general objectives of United States policy, we urge on the United States the need to contain its budget deficit, just as we do upon ourselves.
While not accepting all the points just made by the hon. Member for Harlow (Mr. Newens), I suggest to my right hon. and learned Friend that the scope for reducing United Kingdom interest rates, even if the monetary aggregates are moving in a satisfactory way, is extremely limited while United States interest rates remain high. In view of the remarks made by Mr. Paul Volker today, will my right hon. and learned Friend consider carefully whether he should have further consultations both with the United States Administration and, in the light of what he has just said, the leaders of Congress?
I accept my right hon. Friend's point. While we do not claim that United States interest rates are the sole influence on our own, they have a powerful effect and we can do only a little to offset that. Even so, we must continue to achieve the right balance between fiscal and monetary policies as far as we can.
It is equally important for the United Kingdom and its partners in Europe to make plain to the United States our concern about the level of its budget deficit and the implications of that for interest rates throughout the world. The European nations have already taken steps to do that, but I shall consider my right hon. Friend's suggestion.
The use of the word "enjoyment" is singularly inappropriate to any aspect of the Chancellor's economic policies during the past year. As my hon. Friend the Member for Harlow (Mr. Newens) rightly reminded the House, interest rates were cut to 12 per cent. last March as the justification for the massive fiscal deflation that accompanied the Budget. Does the right hon. and learned Gentleman at least accept that one major reason why interest rates have risen during the year has been the abolition of exchange control, which has resulted in a flood of British money—for the September quarter the Bank of England put it at more than 25 per cent. of total savings—from pension and insurance funds for investment abroad? Has not the Chancellor contributed to the high interest rates of which he is now complaining?
The right hon. Gentleman misunderstands the matter. The subject has been fully analysed in the latest issue of the Economic Progress Report, which was discussed at the NEDC meeting last week. It was plain from that discussion and those documents that the impact of the abolition of exchange control on interest rates was small. On the other hand, the impact of exchange control on the level of exchange rate undoubtedly served to keep it at a lower level than it would otherwise have been—exactly what the right hon. Gentleman has always wanted.