Autumn Statement

Part of the debate – in the House of Commons at 4:52 pm on 24 November 1983.

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Photo of Mr Terence Higgins Mr Terence Higgins , Worthing 4:52, 24 November 1983

It is not usual for the House to debate the autumn statement, but I welcome the opportunity to do so because the statement is likely to play an ever more important role in our future debates on economic policy.

As the report of the Select Committee on Procedure (Finance) points out, we have made considerable progress, which includes the twice-yearly Industry Act economic forecasts, the Medium-Term Financial Strategy bringing together projections of expenditure, tax and borrowing for four years ahead … the inclusion in the FSBR of a table showing income and expenditure side by side, and the publication of ready reckoners showing the revenue effects of major tax changes. Therefore, we are moving towards the concept of a "green" budget.

It is important that, in addition to the usual party political battle, the House should seek to debate such highly complex matters at an appropriate level. That being so, I share the regret expressed by my right hon. Friend the Member for Taunton (Mr. du Cann) earlier this afternoon that we do not have the benefit of the reports of the appropriate Select Committees on the Chancellor's autumn statement because they have not yet been set up. I hope that there will be a future opportunity for them to analyse these matters in greater depth.

The statement has received an undeservedly poor press. Substantial improvements in the underlying trend in economic growth and inflation are not news in the same way as more specific but comparatively small changes in tax and public expenditure. However, there is currently a substantial and interesting discussion in the press on the more technical questions.

The right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) said that the economic forecast could not be regarded as objective. The House has always understood those forecasts to be official forecasts, not forecasts produced by Ministers. Too much stress has been places on the question whether there may need to be a fiscal adjustment of £500 million in a few months' time. That is well within the margin of error of the forecast. We must appraise that when we reach the final form of the Chancellor's Budget next year.

However, my right hon. Friend was right to stress that forecasts have been fallible. Government Departments have tended to underspend, whereas last year—and probably this year—they will not underspend to anything like the same extent. Indeed, they may even overspend. We must live with that fact and take it into account when appraising the actual forecasts.

Cash limits are an effective means of controlling public expenditure when inflation is rising, but they are not an effective means of doing that when inflation has been falling rapidly. Indeed, it may be possible to have greater real resources in the public sector even though the cash limits have been reduced. My right hon. Friend the Chancellor has been right to concentrate on that point.

I want to concentrate especially on the balance between monetary and fiscal policy. My right hon. Friend said that they go hand in hand. I am far from convinced that that is necessarily so. I drew attention earlier to what I described as the Bermuda triangle between the public sector borrowing requirement, the money supply and the rate of interest. That triangle is located in the middle of the Atlantic, and we must not underestimate the great importance of the dollar-sterling exchange rate. it is slightly dangerous to say that we must reduce the public sector borrowing requirement so that we can fund it easily and bring down interest rates. We may find that we cannot bring down the rate of interest, because of the strain that might be placed upon the exchange rate, and create inflationary consequences since the effect on imports is likely to be rapid compared with any improvement in exports.

We must therefore consider to what extent and at what speed, in present international circumstances, we can usefully reduce the size of the public sector borrowing requirement. I view with rather less horror than usual the fact that the public sector borrowing requirement has overshot.

We face a difficult position because of the American Government deficit. In effect President Reagan has been presented with an American university multiple choice question: put up taxes; cut public expenditure; hope that the recovery in the American economy will produce sufficient funds to finance the deficit anyway; or none of the foregoing. We are all clear that, this side of the American presidential election, the answer is "none of the foregoing."

The implication must be that United States interest rates are likely to rise, which will create a serious problem for my right hon. Friend. He expressed the wish that the American deficit should be brought under control. Some of the suggestions about the extent to which American interest rates might rise—perhaps by two, three or four percentage points during the next year—are very worrying.

A question that I have asked on previous occasions is: what is the engine of recovery? An interesting point about my right hon. Friend's speech today, as opposed to his speech at the Mansion House a short time ago, was the dogs that did not bark in the night. We did not have a clear analysis of M3, M2 or M0" —popularly known as "Little Mo". That can be debated more easily in other parts of the House during the course of our analysis.

The crucial point, which my right hon. Friend has always made, is that the real money supply is what really matters, and that is the result of the relationship between the rate of inflation and the change in the nominal money supply. I am worried because we have seen some increase in the real money supply as the rate of inflation has fallen in relation to changes in the nominal money supply. This has given some boost to demand. However, if that process were reversed by any resurgence of inflation, we would find ourselves again bumping along the bottom of the recession. We must give further thought to how we ensure that that does not happen. Undoubtedly, further restraints on wage settlements and the achievement of non-inflationary wage settlements must be a substantial key to that.

I am a little concerned about the position set out on page 18 of the autumn statement, which is an elegantly produced document. In it we are told that investment is expected to rise by 4 per cent. and exports also by 4 per cent. between 1983 and 84. However, as my right hon. Friend pointed out in his statement the other day, the increase in domestic demand is expected to fall. We need to consider whether those estimates of investment and exports are justified. After all, such exports depend on a substantial upsurge in world trade. Clearly investment will depend on the real rate of return as against the real rate of interest. It is true, as my right hon. Friend said, that interest rates are lower than they have been for five and a half years—I think that was the time—but that is not true of the real rate of interest, bearing in mind the fall that has taken place in inflation. This may still create real problems for investment. Therefore, we should monitor carefully how the situation develops between now and the Budget next spring.

I shall not go into the question that my right hon. Friend raised of how one defines investment in the defence sector. It was an interesting new concept. If I understand it correctly, it is that all defence expenditure on armaments and so on is regarded as current expenditure. That may be somewhat pessimistic and perhaps confuses the actual relationship.

We must place greater stress on the importance of increasing investment, as against current expenditure, in the public sector. What is less readily accepted by the Opposition, but what we often assert, is that we shall increase public sector investment only if we pay less on public sector wages. The Opposition are reluctant to face that fact, but I profoundly believe, in many respects, that is the crucial factor if we are to increase investment.

Perhaps I should also mention an accounting point. It relates to whether we should have a breakdown of the extent to which public expenditure is investment, in the sense that it increases productive potential, and the extent to which public expenditure is current expenditure. I should not want to go back to the old system of above and below the line accounting. I recall my right hon. Friend the Prime Minister and I, then in opposition, trying to work out on that basis the true deficit of the then Labour Government. However, it would be useful to have some breakdown, perhaps by way of a supplementary statement, dividing public investment from current public expenditure.

We must do all we can to restore competitiveness. The extent to which our competitiveness has deteriorated since 1979, as a result of the massive wage explosion which took place following the Clegg pay settlements, has been a severe handicap. Productivity has been improving. As a result, we shall begin to restore competitiveness. However, the extent to which that will take place is clearly limited in the short term. The extent to which a fall in the exchange rate can affect competitiveness cannot possibly be on the scale that we have seen during the past couple of years. Again, therefore, we have to face the major problem of public sector pay.

Competitiveness can also be achieved by some fiscal measures. I do not share the pessimism that was perhaps implicit in the official forecast about next year's prospects, so I hope that my right hon. Friend, in preparing his Budget, will take into account the need to reduce the national insurance surcharge and to ensure that the tax burdens on British industry are reduced as far as possible.

Overall, I believe that we are right to stick to the policy and reinforce the trends that we now have. It is easy, in the face of criticism in the press and elsewhere, to say that we should perhaps make a little adjustment here and do a little trimming there. The right approach is a consistent one, and I have no doubt that the real answer lies in keeping down inflation. One cannot cure unemployment, which we all agree is appallingly bad, if we go back to the old reflationary policies of the past. We now have the foundation for future progress, but we must analyse carefully some of the highly technical problems, which in my opinion cut across party lines, rather than debate the matter at a superficial level.