Orders of the Day — The Economy

Part of the debate – in the House of Commons at 3:43 pm on 28 November 1989.

Alert me about debates like this

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield 3:43, 28 November 1989

I will not give way to the Member for Stamford and Spalding (Mr. Davies). I have made it crystal clear, and I make it clear again, that I do not intend to give way to the hon. Gentleman at present. Perhaps if he will remain in his seat I could make some progress in this debate. Many hon. Members want to speak and I should not take too much time.

The same degree of confusion appears to extend to the other first duty of Government—the control of inflation. One wonders why the new Chancellor has been so coy about accepting that inflation should be his judge and jury. On at least two occasions he has reminded us that those were not his words—perhaps a case of "Read his lips, don't read mine." The Government's problem is their loss of credibility over the whole range of their economic policy. They once professed to have a medium-term strategy. Hon. Members remember the heady days when we were told that the MTFS would provide a stable financial climate for business and that stability was to be brought to the disordered world of our finances so that virtuous businesses could plan ahead with confidence.

Earlier this year, the new Chancellor, the then Chief Secretary, sought to explain the policy to small business men. He said: Government policy now operates in a medium-term framework, which gives individuals the confidence to plan ahead. He was speaking on 24 May, the very day when interest rates rose to 14 per cent. He omitted to warn them of that increase or the subsequent increase to 15 per cent. in October. So much for the confidence-inspiring medium-term financial strategy. It is no more than an addiction to rising interest rates.

The Government still peddle the myth of an economic miracle and will resort to any device to attempt to wish away economic reality. When the balance of payments monthly deficit first began to exceed £1 billion, at Prime Minister's Question Time the Prime Minister herself dismissed the figures as a "freak". But as, in month after month ever since, the average monthly deficit was significantly above £ 1 billion, a new explanation for the freaks had to be found. The device which the Government hit upon would have pleased Lewis Carroll—stand the problem on its head and declare it to be a success. The deficit was not a problem at all. Indeed, it was but a sign of success.

Into the fray went the present Chancellor, again as Chief Secretary. On 27 April 1989, in a speech to the American Chamber of Commerce, rather than attribute the deficit to the consumer boom, an error into which many other commentators appear to have fallen, he declared: the main reason for the balance of payments deficit is the dramatic surge in investment. We have often heard such arguments since. For example, British industry is merely pausing to re-equip itself for the next great leap forward.

That argument cuts no ice with the Opposition. To refute it in detail, I quote the analysis prepared by the City firm, Greenwell Montagu Research, entitled "The UK and Its Love of Imports: How the Deficit Arose", which was published in May of this year. In a detailed study of the composition of the balance of trade, meticulously analysing imports in each category of goods under the standard international trade classification, it concluded: The deterioration in the trade deficit is across virtually all categories of goods. It is certainly not true that the deterioration is due, as the Chancellor"— that is, the former Chancellor— would have us believe, to an investment boom. Greenwell Montagu Research showed that true investment goods, which it defines as categories 71 to 74 in the standard trade industrial classification, which means power generating machinery, specialised industrial machinery, metal working machinery and general industrial machinery, have accounted for a little over £3 billion of the £25 billion deterioration in the trade account since 1981. Just as the claim that the deficit has been caused by an investment boom is bogus, so is the claim that the rise in business investment has transformed the capacity of the British economy, and especially of its manufacturing sector. The truth about the Government's claim is that they constantly seek to obscure the facts about manufacturing investment with hype about business investment—we hear it every day of the week. The real increase in investment is overwhelmingly concentrated in the service sector. There has been greater investment in retail distribution, in banking, insurance, finance and related services. In contrast, manufacturing investment is only marginally higher than the level inherited by the Government 10 years ago, in 1979. Imagine that—manufacturing investment is hardly higher today than it was 10 years ago.

The fundamental point that the House of Lords Select Committee on Overseas Trade begged the Government to appreciate but which they have constantly failed to appreciate, is that manufacturing is not only the basic wealth creator in this country, but also the crucially internationally tradeable sector of the economy. I remind the House that, at page 82 of its report, the House of Lords Select Committee stated: service industry cannot substitute for manufacturing because many services are dependent on manufacturing and only 20 per cent. of services are tradable overseas". The same point was made in an important article on the United Kingdom's investment record, which was published in the Financial Times on the 8th of this month by Mr. Andrew Glyn, an economist at Corpus Christi college, Oxford. He stated: it would be fantasy to believe that finance and business services can take over from manufacturing and generate the foreign exchange necessary to pay the import bill". In this House, however, we are more accustomed to hearing of fantasies rather than facts when Government economic policy is being justified. What else but a sense of fantasy could have led the former Chancellor to claim in the Budget debate of 1988 that Britain was experiencing an economic miracle similar to that enjoyed by Japan and previously experienced by West Germany?

The first thing that needs to be done is to abandon such illusions. We need a fresh start. Rather than seeking, to maintain the pretence of a busted medium-term financial strategy, we need to build a medium-term industrial strategy that will modernise and expand Britain's manufacturing capacity, so that by wealth creation we can secure the prosperity of the nation and provide the public services that are so vital to the community's quality of life.

Such a strategy must encompass the whole nation. Britain cannot afford the north-south divide or, to put it another way, cannot operate properly by cramming so much of our economic activity in the overcrowded and congested south-east, to the prejudice and harm of the rest of the nation, as well as of the south-east itself. Therefore, a vigorous and determined regional policy is required, not only in the interests of fairness, but to deploy the under-used resources and the unemployed people who have potentially so much to contribute to the process of wealth creation—[Interruption.]