The world economy has been passing through an extremely dangerous phase, and continues to do so. Unlike the hon. Member for Motherwell, North (Dr. Reid), I feel that we owe my right hon. Friend the Chancellor a vote of confidence for the skill with which he has so far steered us through these dangerous and challenging rapids. His troubles are certainly not over yet, as I shall explain in a moment. Now that Paul Volcker has departed from the scene, my right hon. Friend's judgment will become increasingly central in world financial circles. He will be turned to increasingly and that will be a heavy responsibility, which I believe he will carry with skill and experience.
I said that my right hon. Friend's troubles were not yet over, because the worst is yet to come. In the 1930s, following the financial crash, many said, "That is just financial. We can all relax. The economy is fundamentally sound." Our position today is not dissimilar and the same pattern could unfold if we are not careful. The reason has less to do with our own affairs than with the fact that the United States economy is in an extremely fragile, indeed rotten, state. Despite the superficial signs of prosperity—job performance and the increasing exports to which my right hon. Friend referred—that economy is riddled through with debt of every kind.
Tomorrow's trade figures may be a little better. They will merely confirm what is obvious to some of us, although not to some Opposition Members: one cannot devalue one's way to salvation in trade any more than one can do so in any other activity. The trade figures will probably not be appalling, but they will not be very good.
Tomorrow's trade figures will tell us nothing. The United States economy is burdened not only with the debts of the developing countries about which my hon. Friend the Member for Hertford and Stortford (Mr. Wells) spoke so eloquently but, more seriously, with a mass of farm debts, energy bad debts, over-borrowing by consumers on a scale far greater even than in this country and, above all, a mass of bad debt arising from the huge speculative borrowing that went on throughout spring and summer last year to finance junk bond arrangements and leverage-managed buy-outs. The present situation is the legacy of that period, which some hon. Members seem to think was a good period for United States economic policy. The true legacy consists of borrowing and debt on a most fearsome scale, which are bound to mean that the American economy remains deeply sick.
All this will mean that the recession, which will come anyway, will be prolonged. I differ from my right hon. Friend the Chancellor only in that respect. Of course, he is right to suggest that this economy is in a strong position in a dangerous world. However, he is too sanguine about the prospects of recession arising from what is coming quite soon in the America economy. As happened in the 1930s—the present situation is not dissimilar—we have a mass of bad debt that will never be repaid and that will lead banks increasingly to seek loans of higher quality and to try to squeeze out those stuck with unrepayable loans.
Neither the clichéd traditional policies of Keynesianism recommended by the right hon. Member for Bethnal Green and Stepney (Mr. Shore) nor monetary policy have much power to exert a counteractive influence. There often comes a stage—this was very much so in the early 1930s—when a monetary policy that has been relevant during several stages of the cycle ceases to be an effective instrument. Keynes described it as like pushing on a piece of string, trying to counteract the recessionary forces of a debt-ridden world — particularly a debt-ridden United States economy — by monetary expansion and an injection of additional money and liquidity.
That is the reality, and those who think that we are over the financial crisis and that there will be a calm phase when everything will gradually pull together are living in cloud cuckoo land. The dangers are as great as ever, if not more so. Our task in our part of the global economy is to do everything responsibly and to manage our small ship in the colossal storms that are all around us and are still coming over the horizon.
The first thing that we must do—we have already done some things that were necessary—is recognise the limitations of our position and avoid following the Americans into debt-ridden disaster. We must avoid accumulating more debts. Luckily, we are in a stronger position than the Americans were in the 1930s, just as the Americans are in a much weaker position. In the 1930s, the United States was a creditor country, but now it is one of the world's biggest debtor countries. We had some credits in the I930s, but they were dying away. Today we are a strong, major creditor nation.
We must do everything possible to preserve that, internally and externally, and to maintain a creditor position. That means avoiding debt in terms of the Autumn Statement and the issues immediately ahead for the Budget, and it means that we must pursue a policy of a tight Budget. By a tight Budget I mean a balanced one, I understand from the excellent report of my right hon. Friend the Member for Worthing (Mr. Higgins) and his colleagues that when the Chancellor speaks of a balanced Budget he means a borrowing requirement of about 1 per cent. of GDP. That is probably sensible — a little borrowing covering some but not all of Government capital spending and revenues covering certainly all current spending.
If the Chancellor follows that policy with a tight and balanced Budget consistent with the picture that I have painted of an extremely dangerous world, it could make room for £3 billion or £4 billion-worth of tax cuts or increased expenditure. We have heard different views on which it should be, but I believe that tax cuts produce increased revenue. Cutting taxes has produced a vast increase in revenue from VAT, corporate taxation and income tax. Out of that can and should come the additional resources that should be spread to the vulnerable parts of the economy and to the major public and social services that we need.
If Opposition Members think that there is a policy choice — that we can have either tax cuts or public expenditure increases—they are living in a world of muddle. Tax cuts will generate the wealth that will enable us decently to finance vital public services and raise family living standards through individual effort.