Economic Policy

Part of Prayers – in the House of Commons at 7:28 pm on 24th September 1992.

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Photo of Mr John Townend Mr John Townend , Bridlington 7:28 pm, 24th September 1992

I should like to preface my remarks by expressing my support and sympathy for the Chancellor. He was given a virtually impossible job—to manage the economy in a straitjacket. He had to fix interest rates not at a level appropriate to the British economy but at a level appropriate to the German economy. I was delighted when he took the brave decision to come out of the ERM. If we had stayed in and interest rates had stayed above 10 per cent. for any time, we would have been in danger of the recession turning into a slump. I submit that membership of the ERM has not been beneficial to Britain.

We should look at the facts and compare our economic performance when we had a floating pound with that of the past two or three years. Between 1979 and 1987, when we had a floating pound, the rest of Europe talked about the British economic miracle. Inflation fell from 22 per cent. in 1980 to 3.4 per cent. in 1986. The budget deficit was progressively eliminated and we went into surplus. Trade was mainly in balance. We had economic growth for eight years. Manufacturing productivity rose faster than in any other European country. We had an explosion of enterprise and initiative throughout the country. Thousands of new firms were founded. During that time, the pound declined by no less than 25 per cent. against the deutschmark, but we had no currency crisis and we never heard the word devaluation.

How did we achieve those magnificent results—by following two basic policies. First, we made monetary policy the cornerstone of economic policy and, secondly, we exercised strict control over Government spending and strove to balance the budget. We should compare those golden years with what is happening today. We have a double deficit—a large public sector deficit and a large balance of payments deficit. We have had three years of minus growth. We have soaring unemployment arid tens of thousands of bankruptcies and closures. We got it right and we threw it away. What went wrong? We changed our two basic policies.

The Government repeatedly relaxed their policy on public spending and were regularly interrogated by the Treasury and Civil Service Select Committee on that subject. It does no good to say "I told you so", but year after year in debates on the autumn statement I warned the Government of the dangers of letting public spending rise too quickly. Ministers were unable to resist the pressure groups, the health service and the aid and arts lobbies, and no matter how hard they tried, they could not keep local government spending under control. All the time, the Opposition demanded even higher spending.

We abandoned our monetary policy. Lord Lawson, the architect of our monetary policy when he was Financial Secretary, for some reason, on becoming Chancellor, abandoned that policy and decided that the exchange rate would be the cornerstone. Because the then Prime Minister did not allow him to join the ERM, he shadowed the deutschmark, thus sowing the seeds of his destruction.

The economy was expanding quickly and Lord Lawson reduced interest rates when he should have increased them. In 1988, broad money rose by 20 per cent. Is not it ironic that we abandoned British monetary policy and put in its place Germany's monetary policy dictated by the Bundesbank? That might have been less damaging if Germany had remained a low-inflation, low-interest rate country but, unfortunately, Herr Kohl made a mess of reunification and the Bundesbank retaliated by putting up interest rates. As a result, we were prevented from cutting our interest rates when we were in the depths of a recession. Our membership of the ERM has made the recession six to nine months longer than it need have been. That has been the cost of our membership of the ERM and excessive public spending.

The events of last week were not a defeat just for Government policy. They were a defeat for the collective political leadership of the country. The leaders of the Opposition are equally responsible. I remember sitting on these Benches during the 18 months before the former Prime Minister was pressurised into joining the ERM. Every week, the former Leader of the Opposition demanded that we join, as did the present Leader of the Opposition. The new Leader of the Opposition does not seem to know what his policy is. A few days ago it was to rejoin the ERM almost immediately. Will they never learn that one cannot buck the market? A fixed exchange rate will not work unless the currencies of the EC converge completely, which, as has been said, will not happen.

The main casualty of last week was the ERM. It has failed to deliver. It has been shown that the aim of monetary union and a single currency as set out in the Maastricht treaty is a dead duck. In my view, that makes the treaty a dead duck.

Conservative Members should not regard what has happened as a defeat. We should see it as an opportunity. We should put this experiment behind us and never rejoin the ERM. We should not put British jobs and businesses at risk. We should unite behind the Chancellor to recreate the prosperity of the 1980s.

What must be in our economic package? Our first priority must be to stimulate economic recovery. Now we have a floating exchange rate, the value of the pound need no longer dominate policy. Monetary policy should be brought to the fore once more. We should fix targets for broad and narrow money but, because of the severity of the recession, broad money should be allowed to rise by up to 10 per cent. over the next 12 months. To prevent inflation, monetary growth should be reduced by at least 1 per cent. per annum. Interest rates can now be fixed at a level to suit the British economy. Because of the depth of the recession and the weakness in the growth of money supply, I should have liked interest rates to have been cut by 2 per cent. That would have given a fillip to confidence and taken pressure off the exchange rate at the same time. I think that there will be another 1 per cent. cut soon.

We must take the knife to public sector spending. The public sector deficit—it is approaching £40 billion—is unsustainable. We have to bring the budget back to balance. Reductions in spending should be limited to the revenue side, however painful that might be. The construction industry is in a terrible state and a cut in capital spending would do untold damage to that industry and serious damage to the British economy. None of the sacred cows can be exempt. Overseas aid is paid for by borrowing from foreigners. Spending on health, arts, social services, local government and even benefits should not automatically be increased.

During the recession almost all the pain has been borne by the private sector. Firms have closed and people have lost their jobs. The number of people who have had wage increases is small. Now is the time for the pain to be shared. To get the deficit down, there should be a moratorium on all public sector pay increases for one year. It should affect all employees—doctors, nurses, Members of Parliament, judges, firemen, the police—the lot. I do not think that it is unjustified in the circumstances.

There should be a housing package to help recovery in the housing market. We shall get no recovery in consumer spending until the housing market recovers, as the greatest asset of 70 per cent. of the population is their home.

I ask the Government to approach banks and ask them to relieve the pressure on small and medium-sized businesses. If the pressure is caused by lack of capital, the Governor of the Bank of England should tell them to have a rights issue and recapitalise. The Government should reduce the burden of the state and the EC on industry and advise Customs and Excise, the VAT department and the Inland Revenue to be more amenable to small and medium-sized firms with cash flow problems. We need urgent action on the trade deficit, with which I do not have time to deal.

The City has given its verdict on recent events. There is now a feeling that we are once more in charge of our destiny. For the first time during his tenure of office, the Chancellor has been given an opportunity to run the economy for and in the interests of Britain. The Conservative party was given a new mandate at the general election in May. We must honour that confidence and deliver to the British people in the 1990s the economic miracle that we achieved in the 1980s.