Autumn Statement

Part of the debate – in the House of Commons at 5:31 pm on 22 January 1992.

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Photo of Mr Terence Higgins Mr Terence Higgins , Worthing 5:31, 22 January 1992

I thank my right hon. Friend the Chancellor of the Exchequer for his kind remarks about the report of the Treasury and Civil Service Select Committee. It provides, I believe, a helpful background to the debate. It was a unanimous report. The evidence that backed up the report is also helpful.

I listened with great interest to the speech of the right hon. and learned Member for Monklands, East (Mr. Smith). The crucial point in economic management is that, if one is to achieve sustainable economic growth, inflation must be brought under control. It is interesting to note that in a speech lasting more than 45 minutes the right hon. and learned Gentleman never addressed the crucial issue of inflation. That is a point of considerable significance, as we know the record of previous Labour Governments on inflation.

It is not easy to get inflation under control. It is vital that the Government maintain their present anti-inflationary posture, based on membership of the exchange rate mechanism and the use of interest rates. The Government are right to resist the cries of those who wish both devaluation and a reduction in interest rates to be used to kick-start the economy. If one kicks with both feet, the economy will probably go up in the air and end up on its back. My right hon. Friend the Chancellor is therefore absolutely right to maintain the exchange rate value of the pound.

In my view, it should also be possible for the present exchange rate to be kept within the ERM limits without an increase in interest rates. That is very much a tribute to the prudent polices of my right hon. Friend the Chancellor, which have led to a gradual reduction in interest rates. There has been a substantial reduction in interest rates. If we had listened to the Opposition's cries for a reduction in interest rates, I do not doubt that now we would find it necessary to raise them again. The trend in interest rates is crucial to business confidence. I believe that the Government have adopted the right approach.

I am bound to say, however, that recently we have had little co-operation from the other members of the European Community. The rise in interest rates in Germany did not help. That may be a warning against the dangers of an independent central bank. It would be very dangerous if we were to listen to those who say that we ought to withdraw from the exchange rate mechanism. If we withdrew, we would cease to have influence in Europe, particularly in resisting protectionist pressures. Even with a cut in interest rates and devaluation, I do not believe that we would achieve stability. There would be the usual J-curve effect. There would be a deterioration in the balance of payments and a succession of devaluations. I strongly support the points that my right hon. Friend the Chancellor put at the centre of his policies, which have led to such a substantial reduction in inflation and in interest rates.

The right hon. and learned Member for Monklands, East referred to public spending. He said that the Government had not placed sufficient emphasis on extra spending in priority areas. I shall take just one example, the national health service, which—outside the broad economic debate—has been the focus of the Opposition's attack. It is important to look at the figures in the autumn statement. They show a massive increase of almost £2.5 billion last year, 1990–91, in expenditure on the national health service, an additional £3.1 billion this year and another £2.4 billion increase next year.

It is difficult for people to comprehend such massive increases in expenditure. It is interesting to note that the announcement that an extra £2 million was to be spent on reducing waiting lists attracted far more publicity than the announcement that an additional £1.5 billion was to be spent on the national health service. The Government are giving priority to the health service. It is absurd rubbish to talk about cuts in the health service. It is important to get that point over to the public at large.

I turn to a more controversial point. Traditionally, we have divided the annual cycle of economic management between public expenditure—the autumn statement—and taxation, which is dealt with in the spring Budget. Some years ago, I chaired the Select Committee on Procedure (Finance) when it looked at the case for bringing the two sides of the equation together.

Treasury forecasts have been singularly fallible recently. The Treasury and Civil Service Select Committee is considering what might be done to improve them. At present, one finds after a short period—perhaps just a few months—that an adjustment needs to be made to the economy because the forecasts were wrong. It is absurd to say that, if it happens in the spring, it must be done by tax changes and, if it happens in the autumn, the adjustment must be made on the expenditure side. One understands the inhibitions against changing that. They are historic. Traditions in this place take a long while to break down.

Because we seemed to have Budgets every other week under the previous Labour Government, we have been reluctant to do anything in the autumn statement that involves tax or something in the Budget that involves expenditure. I do not suggest that adjustments should be made every other week, but a division between expenditure and taxation is not always appropriate. It should be possible to make appropriate adjustments in tax or expenditure at either time of the year. One can always get a stigma to beat a dogma on this sort of historical analogy, but I hope that my right hon. Friend the Chancellor will bear that point in mind.

On a number of occasions the Treasury and Civil Service Committee has pointed out that membership of the exchange rate mechanism of the European monetary system substantially inhibits the use of monetary policy. Therefore, we have argued that there is a strong case for a more active fiscal policy. I am glad that my right hon. Friend the Chancellor accepted our views on the use of automatic stabilisers, but we have suggested for a long time that there is a case for changes in discretionary expenditure.

I congratulate my right hon. Friend the Chancellor on maintaining our right in this country, and in the House of Commons in particular, to have a fiscal policy. If we had gone along with what the Labour party supported, the negotiations at Maastricht would have seriously inhibited the future use of fiscal policy. That would have been damaging. My right hon. Friend was right to fight for that, and I am glad that he succeeded in ensuring that we can continue to use fiscal policy when it is appropriate to do so —I hope that he will not now hesitate to do so if necessary.

We well know all the arguments against fine tuning. I understand the concern of my right hon. Friends the Chancellor and the Prime Minister about the need to avoid the situation in which one stimulates the economy and then has measures coming into operation when a boom is already under way. The Government's experience is reason to believe that that is important. Nevertheless, it is possible to take some public expenditure measures which are time limited and which would stimulate the economy without endangering the crucial medium-term control of public expenditure. We should not say that, because we may sometimes get the timing wrong, we should not take measures where the timing is specifically under control.

It has been said in this debate and previously that the recession has been deeper and longer than any of us hoped or anyone, except the Treasury and Civil Service Select Committee, had forecast. It is true that, regrettably, the recession has been deeper and longer than was expected. It is important to say why that has happened. Clearly—my right hon. Friend recognised this—we have had a substantial cut in interest rates and a corresponding reduction in mortgage rates. I looked at the figures the other day. A person with an average endowment mortgage of £30,000—the position is not much different for a repayment mortgage—is £82 a month better off than when we joined the ERM. A person with a £60,000 mortgage is £192 a month better off and a person with a £120,000 mortgage is £413 a month better off.

It is surprising that those cuts, which are important for householders, have not worked their way through into the economy. People have tended to pay off other debts, particularly credit card bills that they have run up during a time of high mortgage rates, or saved the money. As the Select Committee points out in its report, the role of savings is crucial in this respect. That being so, one must realise that that cushion is having a delaying effect. However, I do not doubt that the cuts in interest rates will gradually work through into the system. I do not go along with the so-called double-dip recession which has been forecast by some people. I believe that we shall see a steady improvement.

A cut in direct taxation now would probably suffer from the effects of a similar cushion. There is some case for avoiding the pushing-on-a-string effect. We should see whether something can be done with time-limited public expenditure.

I want to talk about local authority expenditure and the vast accumulated balances that local authorities now have. In a report which was formally published a few days ago on the Bank of Credit and Commerce International and the role of local authorities and money brokers, we pointed out that the conjuncture of Government policies and market conditions had led to a considerable increase in the level of local authority external investments. The investments have increased from £4.4 billion in 1986 to £11 billion at the end of 1989 and the figure is just short of £8 billion now. Local authorities are not allowed to spend that money. I am not advocating that the brakes should be taken off and that they should be allowed to spend it all but we should seriously consider whether some relaxation on a time-limited basis might be appropriate.

It is clear from our report that the financial decisions of local authorities have been pro-cyclical rather than anti-cyclical. We point out in our report that in 1989–90 local authority capital expenditure was £10.5 billion and that it fell to £7.7 billion in 1991. In short, the decisions of local authorities have made the boom bigger and the recession worse. We need to look carefully at the way in which the huge accumulated balances and the decisions of local authorities have- been distorting the operation of the economy as a whole. They are big enough to have a significant effect on the management of the economy. We cannot hope simply to sterilise those balances indefinitely. A recession is an appropriate time to ameliorate the matter to some extent.

I have restricted my remarks to the Government's policy, except for saying that the Opposition do not give the slightest priority to the control of inflation. The Opposition believe that the cap on national insurance contributions should be removed. I have tried hard to think of any insurance premium where the amount paid for any given level of benefits depends upon one's income. I have not managed to do so. Once one carries out the Labour party's proposal, any idea that it is a national insurance premium would go out the window. It is a straight increase in taxation.