Orders of the Day — Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 7:01 pm on 26 March 1990.

Alert me about debates like this

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham 7:01, 26 March 1990

Every Opposition Member who has spoken has suggested increasing the rates of income tax. I know that that is the result of their experience in government as that was their custom, but there is one considerable difference between the position today and that under successive Labour Governments: we do not have a financial deficit; in fact, we have had a substantial financial surplus for the past two years, and that is unique in the experience of the past 20 years or longer.

The case for increasing income tax has not been made because our position is fundamentally different. Moreover, my right hon. Friend the Chancellor was not averse to putting up taxation, because, as hon. Members have recognised, he raised the excise duties by more than the rate of inflation. That does not show any lack of authority, still less any lack of courage, on the part of my right hon. Friend.

I know that many in the City felt that the Budget should have done more to take demand out of the economy, and many of them sought increases in direct taxation. I recollect that 365 economists wrote a letter to The Times in 1981, after the Budget of my right hon. Friend the Leader of the House, saying that it would result in rapid inflation, but they were all proved wrong. The proposition put forward by those in the City and by economists that we should have taken more out of the economy by increasing direct taxation was also wrong. I do not believe that we have a choice between increasing direct taxation and reducing interest rates. Our interest rates are extremely competitive, and it is by no means certain that had we increased taxation we should thereby have been able to reduce interest rates later. I very much doubt whether that would have been the case. One has only to look at what is happening now in Japan, and to a similar extent in West Germany, to realise the truth of that observation.

I do not know what the House thinks will happen as we all have different views, but I suggest that the demand for money in eastern Europe will be extremely large in the foreseeable future. The effect of that demand will be similar to the large transfer of resources that occurred during the last hike in oil prices when so much money went to the middle east. It is no longer the case that we can envisage a gradually growing world economy in which interest rates accommodate a flow of money from surplus countries to debtor countries. There is bound to be a huge demand for money and for funds which will be attractive to investors all over the world. That brings me to the exchange rate mechanism.

The conditions we have set for joining the exchange rate mechanism are that the French and Italians should discard capital controls and that we should more nearly approximate to the rate of inflation and the interest rate in West Germany. Naturally, many people consider that that will happen over a period in which our inflation rate falls and our interest rate falls with it, but I suggest that, because of the extra demand for funds in eastern Europe, interest rates in West Germany are likely to be rather higher than one would normally expect as perhaps will be the rate of inflation, for however temporary a period. West German interest rates at 9·5 per cent. for long-term funds are extremely high, historically speaking, and it is by no means certain that the limit has yet been reached. So, by a curious twist which was in no sense expected, the convergence between our inflation rate and interest rate and those in West Germany will now occur because the West German rates are likely to increase and we expect ours to fall somewhat.

We must also consider the effectiveness of our monetary controls. I must tell my right hon. Friend the Chancellor that I have enthusiasm for almost every part of the Budget save only that part dealing with monetary policy. It may well be that I am shamefully out of date in these matters, but MO does not register with me as an indication of anything except for banks and notes in circulation and as a snapshot of the economy at any particular moment.