Orders of the Day — The Economy

Part of the debate – in the House of Commons at 8:12 pm on 29 November 1988.

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Photo of Mr Matthew Carrington Mr Matthew Carrington , Fulham 8:12, 29 November 1988

One of the themes that has run through the debate is inflation, and many of us remember the times of high inflation and the tremendous hardships that that brought. The argument has been less about the disease—I think that we all realise the evils of inflation—and more about the nature of the possible cures that are available to us. To take the analogy of my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath), how many different types of golf club does my right hon. Friend the Chancellor of the Exchequer have to tackle the problem?

The two remedies that have been most cogently argued by Opposition Members as alternatives to the path chosen by my right hon. Friend the Chancellor of the Exchequer are the old remedies of higher taxes and a credit squeeze. We remember the remedy of the credit squeeze from the 1960s and 1970s. Higher taxes have a serious effect on the economy. We remember the experimentation in high taxes which started after the 1964 general election, when direct taxes were raised to an extremely high level to fund a massive increase in public expenditure. Those taxes cut growth in the economy. They caused a wage-price spiral and increased the expectations of many people who did not regard what they were earning as a gross figure, as economists told them that they should, but took the more rational view that the sum that they received after paying tax was more important.

Higher taxes have two effects on the economy, both of which are bad. The problem is made the greater because of the way the Government spend the taxes that they raise. Consumer spending is increased because of the redistribution that may occur through indirect taxation and Government expenditure.

Credit controls are a much more interesting experiment, and the Opposition have been suggesting that they are a potential alternative to raising interest rates. We have tried introducing credit controls on many occasions in the past. Indeed, they had a certain ability to work in the economy as it once was. I am talking of the time when the economy was much more closed than it is now. My hon. Friend the Member for Horsham (Sir P. Hordern) said that when we had a closed economy we could restrict the ability of domestic banks to lend. We could put political pressure on them. We could even put laws into place to stop domestic banks being able to provide the credit that was demanded by domestic consumers especially. If we were not careful, credit controls cut credit to industry. That meant that we ended up with many exceptions to the controls. We found that the exceptions started to outnumber the opportunities for restricting the availability of credit to such an extent that the controls ceased to be effective.

We now have an open market. No longer do we have the ability to stop those who are denied credit from one source obtaining it from another. The credit can be found from overseas from foreign banks, which may be active in our domestic market, or through the various financial intermediary mechanisms that are now so sophisticated that even the domestic mortgage market is increasingly financed by money that originates from outside the United Kingdom. We have an open market and credit controls would be an impossibility. Indeed, they would have no chance of working without the imposition, or reimposition, of exchange controls.

Exchange controls had ceased to work to any real extent when they were abolished in 1979. They were a problem for tourists who wished to leave the country to travel and spend money overseas, but they had ceased to be a problem for any company that wished to raise money overseas. Similarly, they had ceased to be a problem for any foreign company that wished to raise sterling in this country. Any method of exchange control that was introduced had to have many loopholes if it was to circumvent the real demands of the international market.

We have had some comments about the problems that may be created in the City and the benefits that the City may derive from high interest rates. It is worth remembering that the City, or the financial sector, employs over 1 million and generates over £5 billion in net earnings. The development and growth of the City is something that we should and need to protect. That is one reason why exchange controls should not return.

Exchange controls lead on, perhaps, to the other solution that is sometimes suggested, which is the manipulation of the exchange rate. That manipulation is now an impossibility, if only because the volumes that are traded in the international market are so large. It has been suggested that we should push down our exchange rate or fix it against other currencies. That is fine at an instant in time, but it is difficult, as we have seen with the rise in United States base rates, to predict what will happen to other currencies. It is rather like looking at the bird in "Alice's Adventures in Wonderland" that turns its head and stares at us. We may think that we have one solution, but the other countries against whose currencies we have fixed sterling may manipulate their currencies away from sterling.

The real problem is house mortgage lending and the leakage from it. The leakage in 1987 was about £14·6 billion, which was half the total sum raised in the house mortgage markets and about three times the rise in consumer credit. It is that leakage which has led to consumer spending, which to a large extent has led to the balance of payments problem that we now face. How best do we control the leakage? My feeling is that the leakage itself is not that much of a problem. If we examine the asset base that underlines the leakage and the borrowing that the house mortgage market represents, the gearing for the borrowing is only about 17 per cent. That is still a relatively low level, although I quite accept and understand that on an income basis the strain on the income ratio is actually higher and more serious. However, that is a short-term problem rather than a structural problem. If there were a higher ratio on the asset base, there would be a more serious problem.

The real difficulty arises from the low savings ratio. Our savings ratio is a highly questionable figure. Many areas of dispute have arisen over the accuracy of our savings ratio figure, if only because the figure is calculated by subtracting one very large number from another and is therefore subject to the inherent volatility and uncertainty of those two numbers. I suspect that we would all agree that the personal savings ratio is too low.

One of the major challenges facing the Government is to raise the personal savings ratio. High interest rates are a start and I believe that they will push up the savings ratio—[Interruption.] I beg the House's pardon for the frog in my throat. It must have been caused by the comments made yesterday by the hon. Member for Copeland (Dr. Cunningham) about the frogs that left the marshes as they were drained. I should like to see measures taken to increase the savings ratio and to encourage personal savings.