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Autumn Statement

Part of the debate – in the House of Commons at 8:03 pm on 13th February 1991.

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Photo of Mr Peter Shore Mr Peter Shore , Bethnal Green and Stepney 8:03 pm, 13th February 1991

I had not planned to speak, but, as I listened to the various clichés and half-remedies advocated by hon. Members on both sides of the House, I found myself irresistibly tempted to do so.

I have come to the conclusion that we are talking about two different subjects. One is the continuing—although, in my view, declining—problem of inflation. Some of today's speeches have suggested that inflation is the outstanding problem of the time; the right hon. Member for Guildford (Mr. Howell) and the hon. Member for Berwick-upon-Tweed (Mr. Beith) were both so concerned about it that they suggested that we invent a new way of ordering our affairs, enabling an independently reconstructed Bank of England to make all the necessary decisions on our behalf.

Even if I accepted that inflation was the outstanding problem of today, I should find that suggestion rather naive. When all is said and done, the Bank of England is not a computer; it consists of men and women who advise the Governor on monetary policy and interest rates. There is no reason to believe that Bank of England governors and their staff will handle things any better than the Chancellor of the Exchequer and his Treasury officials. I accept that they have a natural bias towards sound money and deflation, but beyond that I would not trust them at all. I see no reason to pay such a compliment to the governors of central banks, either here or abroad.

In this debate, concentrating on inflation really means concentrating on last year's or yesterday's problem. As was made plain by many speeches from hon. Members on both sides of the House—very eloquent speeches from Opposition Members—the main problem now is that of recession turning into slump. No one who has seen the various indicators relating to monetary growth, unemployment trends, short-time working and bankruptcy can doubt that we are in for a severe recession—possibly the nastiest since the 1930s. That should be the focus of today's debate, along with this question: what must we do to halt or reverse the slide, and what instruments should we use, now that we have joined the exchange rate mechanism and are no longer free to use interest-rate or exchange-rate policy to combat the slump, unemployment and the major problem of falling output in manufacturing industry?

It has been interesting to observe the way in which various hon. Members have tried to deal with that question without facing it directly. What must we do in the new, vastly changed economic environment in which we so foolishly placed ourselves last October? The Chancellor's speech came shortly after the announcement of a half per cent. cut in interest rates. I am sure that he knows as well as any hon. Member that that is a pathetic amount in view of the internal needs of the British economy—the needs of British industry and the British public, especially mortgage holders. Why, then, does he not do more? The answer is obvious: if he does more, he can reasonably expect us to drop through the floor of the limit—6 per cent. from DM2·95 to the pound—to which he is entitled under the rules of the exchange rate mechanism.

The same problem produced some remarkable innovations in the thinking of some of the Chancellor's right hon. Friends. The right hon. Member for Worthing (Mr. Higgins) is always well worth listening to, and, as we all know, is a very serious man. He suggested that the only option, now that we have lost control of interest rates, was an increase in public expenditure and something resembling an incomes policy—certainly in the public sector, if not in the private sector as well. That surely reflects the change that has taken place in our economic environment since we renounced the right to use the great weapons of economic management, interest rates and exchange rate.

My right hon. and hon. Friends have problems here too, because they advocate a greater reduction in interest rates than 0·5 per cent. They face the problem of what to do if a 1 per cent. or 1·5 per cent. cut takes us through the floor of the ERM, below the 6 per cent. margin against DM2·95. My hon. Friend the Member for Durham, North (Mr. Radice) tried to deal with the problem. He obviously felt unhappy about it. His remedy was that the Germans should revalue and put the deutschmark up. He believed that, if the Germans put the deutschmark up against the rest of the currencies in the ERM, the problem would be solved and we could achieve the changed relationship between our currencies with minimum damage to ourselves.

Those approaches are unsatisfactory, because they do not deal with the dilemma of being in the ERM. I can come clean with the House and say that I am not in favour of membership of the ERM. Therefore, I am not constrained by the fear of dropping through the floor of the ERM by cutting interest rates, nor am I the least bit concerned about the change in relationship between the pound sterling and the deutschmark that would follow. On the contrary, I would welcome that. I am far from being in a minority in the country in terms of serious opinion about what our needs are.

Everyone has referred to the letter in The Times today. It is right about going into the ERM in October at that exchange rate. I have plucked out an editorial from The Times of 14 December. It says: The highly political decision to enter the European exchange rate mechanism last October and at an exchange rate of DM2·95 to the pound looked like a mistake at the time. Today this can no longer be doubted after the juxtaposition of yesterday's unemployment figures with the previous day's blustering about interest rates by Norman Lamont in his first Commons performance as Chancellor". I have great sympathy with the Chancellor. What can a Chancellor do except bluster when we have entered an exchange rate mechanism at the wrong rate? We cannot expect him to come here and confess because that would be folly. The first casualty of entering an exchange rate system is that one can no longer tell the truth. We all know that. That was the great problem that dogged us through the 1960s until we floated in the early 1970s.

William Rees Mogg—no softie on inflation, he—said in The Independent on 11 February: The recession will be deeper and investment will be lower because of the destabilising effects of entering the ERM at the wrong rate, and at the wrong phase of the British—and, indeed, of the German—trade cycle. That is pretty clear and I do not think that the opinions that I have quoted are anything other than representative of the majority of economists of all points of view, whether left or right—if one can say that about economists—and of a large number of British business men, not to mention those in the construction industry, and others.

I am concerned about the problems of recession and the possible slump that we are now in. I am desperately anxious to avoid the damage to our economy and people that a further bout of deflation and unemployment will bring. I do not think that our problems will be solved by simply lowering interest rates or by waiting for the effects of those admirable medium-term measures of training and education that my right hon. and hon. Friends so frequently urge upon us. Something has to be done in the short term. Interest rates alone, even if they are cut, will not be sufficiently effective to deal with the problem of reviving our manufacturing industry and making a major contribution to closing the vast and unmanageable deficit on our current account trading and our balance of payments. We cannot go on running a current account deficit of over £11 billion or £12 billion a year. If it goes on for another two or three years, we will soon find ourselves a net debtor overall in terms of our national assets.

We are not getting a switch of resources. A deflation sometimes, provided that we are competitive at home, will drive resources into exports and import substitutions to the benefit of our current account balance. That is not happening on the scale that is needed. The output of our manufacturing and other industries, which is no longer being bought by domestic consumers, cannot be switched effectively into export markets because the price is wrong. We know that the only way of dealing with the problem of over-valuation is to change the basic exchange rate of the pound against the deutschmark. That is the one way open to us, just as it is the one way open to the United States to change the dollar in its relationship to the yen and the mark in order to close its vast current account deficit.

We are not competitive now, and we must become so. The problem has arisen for us in the exchange rate mechanism. As I have said, one cannot be a member of the ERM and still have a policy of running one's own exchange rate or interest rates. However, one can temporarily agree to freeze those policies if one is in a mechanism within which one can change from time to time. In other words, it is possible to correct an overvalued exchange rate in the ERM because there is still a mechanism—it is not easy to operate—that allows currencies to realign against each other.

Anyone who is contemplating further steps towards economic and monetary union where there is to be a permanently locked exchange rate and a single currency had better look carefully at what is happening in Britain today. They had better look carefully at what happened in 1980, 1981 and 1982, and they had better have a jolly good look at what happened when Winston Churchill put us on the gold standard. They should look at the agony that overtook the Government of that day—I believe that it was a Labour Government—as they attempted to escape from the appalling problems.

I strongly urge the Chancellor to think hard about the decision taken by his predecessor, now the Prime Minister, and I hope that he will be courageous in his conversations with him and bring about the change in the basic rate of the pound against the deutschmark that lies at the centre of our affairs.