Public Expenditure

Part of the debate – in the House of Commons at 8:41 pm on 18th February 1987.

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Photo of John Maples John Maples , Lewisham West 8:41 pm, 18th February 1987

I have some sympathy with some of the problems that the hon. Member for Knowsley, North (Mr. Howarth) has described. I, too, represent an inner city area in which there are housing difficulties. I think that there are other solutions to the problem apart from building more council houses, but it is an area of policy that perhaps needs more thought.

I wish to concentrate on the main theme of the debate. One of the characteristics of all economic debates is the constant attempt of Opposition Members to pretend that the economy is in terminal decline, that no one has any employment and that all companies are losing money and markets. We have a serious unemployment problem, but large sectors of the economy are extremely successful. My right hon. Friend the Chancellor of the Exchequer is to be congratulated on his record of sustained growth. We are now entering the seventh year of economic growth with sustained relatively low inflation despite that growth.

My right hon. Friend the Chancellor of the Exchequer was able in his autumn statement to offer substantial increases in public expenditure and the economic debate that is taking place outside the House is directed to how whatever fiscal surpluses there are should be used. Should they be used to reduce the public sector borrowing requirement or to produce tax cuts, for example? That is not a picture of an economy in terminal decline. Instead, it is one that reflects substantial successes. It is to the constant chagrin of the Opposition that that is the ground on which the economic debate is taking place. As I have said, discussion is centred on the purpose for which fiscal surpluses should be used. Should they be used to increase public spending, to reduce the PSBR or to enable tax cuts to be introduced? I expect that the result will be a mixture of two or three of the options. None of us knows now the size of the surplus that my right hon. Friend will have at his disposal.

If my right hon. Friend finds that the fiscal surplus allows him to introduce income tax reductions, I hope that he will concentrate on reducing the standard rate and not on raising thresholds. The argument whether we should reduce rates or raise thresholds in those terms has been conclusively won, in my opinion, by those who share my view that the cutting of the standard rate is the most important objective. The raising of thresholds does not take people out of income tax. That may happen temporarily, but within a short time they will receive a pay rise that puts them into income tax again. The raising of thresholds has become irrelevant to the poverty and unemployment traps. It is irrelevant to the poverty trap because the proposed social security changes will be based on net take-home pay. It is irrelevant to the unemployment trap because that relates to average tax rates and not marginal ones. For all these reasons, it makes much more sense, if we are to have income tax reductions, to have them directed to the basic rate.

The argument against that approach is that it does not help the low paid as much as the raising of tax thresholds. That is true, but we should concentrate on helping the low paid and not give more general help to the entire wage-earning population. If tax thresholds are raised, everyone benefits as the effect extends across the board. A simple approach — it is one that my right hon. Friend the Chancellor of the Exchequer has pursued in various Budgets—is to reduce or remove bands of employees' national insurance contributions. That concentrates help on the low paid and does not go to everyone else, and it can be done relatively cheaply. The 5 per cent. and 7 per cent. employees' national insurance contributions could be abolished at a net cost of about £500 million. That would mean that those on less than £5,000 a year would pay no national insurance contributions.

It is worth thinking of what that means. Someone on £5,000 a year would have an extra £350 a year in his pocket. If we were to achieve that result by the thresholds approach, we would have to raise them by about £1,200, or about 35 per cent. That would be prohibitively expensive because it would apply across the board.

The two main themes of our economic policy should be the reduction of interest rates and the reduction of unemployment. The unemployment scene seems to be radically different from that of two years ago, when I started to take a serious interest in the subject with my hon. Friend the Member for Carshalton and Wallington (Mr. Forman). The House will recall that we published a short pamphlet. On looking back, I feel that much of what appeared in the pamphlet still makes a great deal of sense.

As I have said, the unemployment scene has changed radically. A substantial part of Britain is in a boom but there are pockets within that part — some are more substantial than others — where there is serious depression. It is not the simple matter of a north and south divide. The south-east generally is a prosperous part of the country, but there are parts of central London that are extremely deprived, which have massive unemployment and many serious problems. On the other side of the coin, there are parts of the north where there are just as many Mercedes and BMWs per 100 yd as there are in the southeast. The problem is much more complex than a north-south divide. There are specific areas in which there are serious problems.

Whatever help or treatment we provide should be focused on the unemployment problem in specific areas with great problems. We should not try to do something nationwide that would diminish the effect of whatever policy we pursued in the areas with the greatest problems.

It would seem that there are two specific ways in which we can try to alleviate unemployment, and they should be targeted on the areas that are especially deprived. One approach is the further reduction of employers' national insurance contributions to reduce the cost to employers of employment. The other approach is the extension of job subsidy schemes, of which there are two or three examples in the Government's package of employment policies. An average male manual worker is paid about £8,500 a year and the cost to the Exchequer if he becomes unemployed is about £7,500 a year. It would seem that it is worth focusing on areas within regions where there are high levels of unemployment to try to ease the cost to employers of creating jobs in the private sector.

The really run down inner city areas need something rather more specific than what I have suggested so far. The urban programme as a whole — we have urban development corporations, urban land grants and urban regeneration grants — is a serious and well targeted attempt to help them, and I welcome the increased budgets this year. If we add together the budgets of the urban programme, the derelict land grant and the urban development corporations the total is about £580 million, an increase of about one-eighth since last year. I welcome that increase, but if there is room for fiscal manoeuvre in the Budget and it is of the order of some of the figures that are being speculated upon, I hope that some of it will be used to increase specific programmes that are directed to improving decaying and run down inner city areas. That will create jobs in the short term while the work is taking place, and in the longer term it will lead to the economic regeneration of the areas. The other main theme of economic policy should be to achieve a reduction in interest rates. By any standard, we have high interest rates. The bank rate is about 11 per cent. The rate on dollars is 6·5 per cent., on deutschmarks and the yen it is just over 4 per cent., and even on the French franc it is only 8·5 per cent. By international standards, and in real terms, our interest rates are high.

We must ask why we are out of line with the rest of the important developed economies. I have a theory, which I have propounded often in speeches in the House, which gains some agreement from a great many people, but seems to fall on deaf ears in. the Treasury. I do not know whether my right hon. Friend will have time to deal with it when he winds up the debate. Interest rates are high not because other countries' interest rates are high or because of attempts to prop up the pound, but because credit is growing fast. The banks and financial institutions have become the engines of credit growth. By the liberalisation of financial markets, they have actively and aggressively gone out and sold loans to people. They have sold credit—that is their product—and they have done so in a way that has caused it to grow at an artificially high rate. They have had to fund that by bidding up the interest rates on deposits. That is borne out by the fact that so much of the expansion of lending has gone to property development companies and to individuals and consumers rather than to industry. The figures for one of the major banks over the past five years show that its lending to manufacturing industry has risen by 33 per cent., to property companies by 170 per cent. and to individual consumers by over 200 per cent. Those figures bear out my argument.

High interest rates have a serious and a deleterious effect on manufacturing industry's ability to invest and on its costs. They are one of the fundamental reasons, if riot the main reason, why sterling is under pressure on foreign exchange markets. The markets are concerned about the huge overhang of liquidity and are worried that it might result in inflation. Financial factors feed off themselves—the pound is weak because credit is growing too fast, so we have to raise interest rates and keep interest rates high to protect the pound. It: is a vicious circle that must be broken. To break it, there must be some restriction on credit and credit growth. The danger is that it might damage the consumer boom. If my right hon. Friend the Chancellor has room to cut income tax perhaps he could get the best of both worlds by restraining credit growth to help interest rates but sustain the consumer boom through cuts in income tax.

One of the other ways that my right hon. Friend the Chancellor might help with interest rates is by using some of his fiscal adjustment to reduce the public sector borrowing requirement. Of itself, that will not reduce interest rates, but it will go some way towards compensating what is seen in financial markets as a laxity in fiscal and monetary policy, and a not entirely 100 per cent. belief that the Government will hit their public expenditure targets. If one could inject a little confidence there, and it were combined with some restriction on credit growth, we might see a fairly substantial and meaningful reduction in interest rates to the levels in our competitor countries. Those are sensible ways in which my right hon. Friend the Chancellor might use the money available to him.

My right hon. Friend the Chief Secretary to the Treasury has brought to the House a remarkable success story on the economy. It is to his credit that the debate is being conducted in terms of what we will do with the extra money that is available. It gives him a range of options. If he were to apply some of the extra money in the ways that I have suggested, we could sustain the growth in consumer spending, but at the same time bring down interest rates and help alleviate unemployment. I hope that he will choose to do some of those things.