I follow the right hon. Gentleman entirely in that I do not think that it is easy to quantify or predict the result of changing a given factor in the balance of payments analysis. Some of the factors which, in themselves, are inherently negative may turn out, in their repercussions and indirect effects, to be positive overall. To that extent, I agree with the right hon. Gentleman.
I now come to the point that I wish to put to the Chancellor of the Exchequer. He said that British industry has the
opportunity both to increase its exports and to reduce import penetration in the home market."—[Official Report, 18 March 1986; Vol. 94, c. 169.]
I want to ask him what he thinks the consequences will be if that exhortation, hope or prayer on his part is followed by British industry.
In so far as exports are increased and import penetration in the home market is reduced, no doubt the current account surplus on our overall balance of payments will, other things being equal, be that much greater — we shall have an intensification of the phenomenon which we have experienced in the past six years. Is that what the Chancellor aims at? Is that what he hopes for? What is his analysis of the economic consequences—the consequences in terms, first, of the impact on the balance of payments, and, secondly, the impact upon the economy of that impact on the balance of payments?
I come in haste to the matter with which the right hon. and learned Member for Richmond, Yorks was dealing—control of the exchange rate. The balance of payments will operate inexorably, whether or not one messes around with the exchange rate. With an exchange rate entirely free to move, with which the Bank of England is not playing any games, still the inexorable logic of the balance of payments will apply. But if one decides upon a fixed exchange rate policy —or an aligned exchange rate, which is effectively another version of the same thing —then, in addition to everything else, one is deciding to add a further factor, namely, the level of the exchange rate, and bring that into the play of forces which determine the composition of the balance of payments.
If one decides to fix the exchange rate, one does so at one's own expense, in two ways: to keep the rate down one manufactures one's own currency and sells it; to push the rate up one borrows other people's currencies and sells that. It is a simple and rather hair-raising game, is rigging the exchange rate. In the end the cost always recoils on the country which does it—either by the consequences of providing currency of its own in order to depress the rate, or by the consequences of the international debt incurred in operations to force the exchange rate up.
The Prime Minister made a sage observation—indeed, it might have been a deep observation—when, responding to a supplementary of mine, she said, referring to the suggestion that we should tie our exchange rate to a norm not within our own control, that had the Government listened to the suggestions earlier
we would have found ourselves in some difficulty in view of the fluctuation in exchange rates which inevitably comes through having a currency rather different from those in the rest of Europe."—[Official Report, 6 March 1986; Vol. 93, c. 444.]
The right hon. and learned Member for Richmond, Yorks evidently believes that we have walked out of history. He believes that we have left behind us the period when factors which none of us foresaw, not years before, but only a few weeks before, could alter the balance of supply and demand for sterling. For myself, I cannot believe that the change in economic variables throughout the world which comes home to roost in terms of a movement of the sterling exchange rate lies behind us once and for all and that therefore it would now be painless to
attach ourselves to an external norm. I believe that we would still find ourselves paying dearly to maintain that norm, and ultimately at our own cost.
The right hon. and learned Gentleman is under an illusion when he imagines that the stop-go that would result would be an effective measure against inflation. It is true that it has been used in terrorem by Chancellors of the Exchequer. They threatened the economy, which they were themselves inflating, chat if it did not behave itself, there would be a balance of payments crisis; but still inflation continued and still the balance of payments crisis had to be met by sudden and sharp adjustments of the rate of exchange.
I agree rather with the right hon. and learned Gentleman's fundamental proposition that the Chancellor of the Exchequer and this Administration in general have, by control of public sector borrowing, been utilising the only instrument by which money supply can be increased or controlled or by which inflation can be—to use the rather absurd metaphor—conquered. We would not get any nearer to that by applying the self-punishing mechanism of an externally fixed exchange rate, which would have to be fed in along with all the other factors in the balance of payments.
So I hope that the Government will reflect long and hard upon the philosophy of the Prime Minister's reply, and that we shall continue to enjoy what have proved to be the lasting advantages of an exchange rate which tells us the truth about the worldwide supply and demand for our currency. At least we can do without that additional factor in the already difficult and puzzling make-up of the balance of payments about which both from the Chancellor of the Exchequer and eventually, no doubt after an appropriate period of reflection, from Her Majesty's Opposition I look forward to further enlightenment.