Economic Policy

Part of Opposition Day – in the House of Commons at 5:36 pm on 31 October 1989.

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Photo of Mr Peter Shore Mr Peter Shore , Bethnal Green and Stepney 5:36, 31 October 1989

The House listened with close attention to what the right hon. Member for Blaby (Mr. Lawson) had to say. He was frank. There were no obfuscations, no skating over the reality of his disagreements and the reality of his disappointment that he felt obliged to resign his high post. As he said, he did not lightly give up being Chancellor of the Exchequer, nor was it an outcome that he sought.

Furthermore, the right hon. Gentleman focused upon what I believe was the major and continuing source of disagreement between himself and the Prime Minister in economic policy—that is, the relative weight that they have given and continue to give to the use of exchange rate policy in the general mix of Government policy and counter-inflation strategy.

The right hon. Gentleman has not in the past sought, or conducted himself in a way that encouraged, the affection of the House. But, if I may say to him, those of us who have disagreed with him most strongly have always respected his intellectual ability and his great intellectual candour. We have not always enjoyed it, but we have respected it. He has done himself no harm at all on either side of the House in what he has had to say in his very frank speech today.

The right hon. Gentleman's resignation last Thursday raised for all of us three serious issues of economic policy. First is the question of the authority over economic policy of the Chancellor of the Exchequer in relation to the Prime Minister and to her advisers. Second is the question of the Government's policy towards joining the exchange rate mechanism of the EMS. Third is the question—the most important of all—of the continued and massive deterioration in our economic prospects and what the Government intend to do about it.

The first issue has inevitably received much attention in the debate, and no doubt will continue to do so after the right hon. Gentleman's speech. I say "inevitably" because it was the right hon. Gentleman who, in his resignation letter, put clearly, as he saw them, his reasons for going. Having listened to the right hon. Gentleman, surely no hon. Member can doubt that for the best part of the past 18 months he has had major disagreements with the Prime Minister on both interest rate and exchange rate policy.

Not only were there major disagreements, but they were made highly visible by comments both from the Prime Minister and her former economic adviser, Sir Alan Walters. When the Prime Minister told Mr. Brian Walden in a television interview on Sunday: I fully backed and supported the Chancellor … somehow Nigel had made up his mind that he was going", she was being exceptionally economical with the truth. Today's debate would never have been staged if the Prime Minister had really wanted to keep the right hon. Member for Blaby as her Chancellor. Without further ado, she would have sacked her part-time adviser. She did not do so, and she continued to refuse to do so even when she knew for certain that to retain Sir Alan would mean the departure of the Chancellor of the Exchequer. Faced with the choice of backing or sacking the right hon. Gentleman, the Prime Minister simply waited for his resignation. Sir Alan Walters's resignation settled nothing. It simply removed the surface manifestation of disagreements between the Prime Minister, her former Chancellor and her present Deputy Prime Minister.

The result is confusion and uncertainty, or, to use the words of the right hon. Member for Chingford (Mr. Tebbit) only yesterday, "an appalling muddle" about the real thrust of Government policy and in particular their attitude to joining the exchange rate mechanism of the European monetary system. It is no good the new Chancellor making statements, partly propagandistic and partly designed to reassure people, that there is no real change in Government policy, because the nation knows that two different policies were pursued in parallel, the consequences of which we are all aware of today.

The problem that the Government must face is the result of their long-term mismanagement of the British economy. They have presided over years of under-investment, high and costly unemployment, squandering of North sea oil reserves and, in the past three years, the growth of excessive purchasing power swollen by a falling savings ratio, a massive increase in personal borrowing and large cuts in taxation. That excess purchasing power has been reflected in both rising inflation and a horrific current account deficit.

That is the economic background against which proposals for joining the ERM must be judged. The argument about joining the ERM in the next two or three years is now largely academic. Whether or not the Prime Minister's condition that other European countries free the movement of capital is met, and whether or not United Kingdom inflation comes down from its present rate of 7·6 per cent. to the Community average, we are in no position to join so long as our vast current account deficit pertains.

Our £20 billion deficit on current account this year is almost 5 per cent. of our gross domestic product and the largest deficit that any major country has experienced since the end of the second world war. At its peak, the American deficit was less than 3·5 per cent. of GDP and its gradual diminution required several massive devaluations of the dollar before noticeable progress could be made. Today, no one has the faintest idea what the level of sterling should be in relation to the deutschmark and other European currencies.

I am aware that many other conditions would need to be satisfied before Britain could contemplate membership of the ERM. My right hon. Friend the Leader of the Opposition and my right hon. and learned Friend the shadow Chancellor of the Exchequer frequently refer to the need for adequate swap arrangements between the central banks, for a co-ordinated growth strategy throughout the European Community and for enhanced regional support. All those points are important, as is the ending of exchange controls in European Community countries, but it is inconceivable that we should enter the ERM and fix our exchange rate while our huge deficit remains and we have literally no idea what the rate should be.