In view of the Chancellor's claim today to the Tory ladies that Britain is on its way to a low-inflation economy, what level of inflation does the Chief Secretary to the Treasury think will be safe before we can reduce interest rates to a level that will restore the confidence of manufacturing industry, the CBI and others?
I am answering the question. The level of interest rates is reduced as is consistent with bearing down on inflation and retaining our position in the ERM. Once again, that question exposes the Labour party's desire to be all things to all men—on the one hand, ever so European and ever so committed to the ERM, but, on the other, every Opposition Back Bencher and some Opposition Front Benchers making claims that are entirely inconsistent with that commitment.
Have my right hon. and learned Friend and the Governor of the Bank of England done any calculations to see what would happen if the Government spent £35 billion extra in public expenditure and could not finance it out of taxation? What would be the effect on interest rates and funding if such a programme were followed?
My right hon. Friend is absolutely right. If extra expenditure on that scale was incurred—we await the Labour party's statement about which of its pledges it wishes to disown—and was put not on to taxation, but on to borrowing, not only would that inevitably drive up interest rates, but it would add to public expenditure because of the amount of debt interest that would be incurred. We took no account of debt interest in our £35 billion calculation. At least one City analyst has said that that would add £5 billion to public expenditure in the last year of Parliament.
Yesterday the right hon. Member for Finchley (Mrs. Thatcher) said that she still agreed with the decision to enter the exchange rate mechanism but thought that the width of the band should not be reduced from 6 per cent. Does the right hon. and learned Gentleman agree?
When my right hon. and learned Friend last met the Governor of the Bank of England, did he express any anxiety about the level of pay settlements in the public sector and the effects that they could have on public expenditure at a time of negative economic growth, or was his insouciance over his own salary matched by his public attitude to the matter? Does he have any feelings about the exorbitant and grotesque level of settlements in the public monopolistic utilities?
There is no doubt that sensible levels of pay settlements in the public sector are crucial, especially at a time of recession and rising unemployment, when job security in the public sector should count for a great deal and when people should have regard to job security issues when deciding what would be a fair increase in their remuneration.
Mr. John Smith:
No doubt the Chief Secretary is aware of the research, funded by the Bank of England and carried out by Shelter, which has revealed that a staggering number of home purchase mortgages—790,000 or one in 12 of the total—are now in arrears and that repossessions have jumped from 20,000 to nearly 48,000. He will also be aware that many people fear that rising unemployment will make the problem even worse. Does he think that that is a price well worth paying for Tory economic policies?
Those figures deal with short-term mortgage debts—with arrears over two months. High interest rates are, of course, uncomfortable for those who pay mortgages. That is one reason why we wish to return to conditions of sustained low inflation, which bring with them lower interest rates and lower mortgage rates. The right hon. and learned Gentleman still has to explain how he would manage to achieve that. He keeps advocating the fact that there is a pain-free solution to the problems of high unemployment, but when he was last a member of the Cabinet, he presided over rates of inflation and mortgage interest rates that were certainly nothing to be proud of.