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In exactly the same way as it is co-ordinated in the United States and the Federal Republic of Germany, where the independent central bank is given a responsibility to control inflation. For that reason, it is totally in control of interest rates.
It would be desirable, as my right hon. Friend says, for them to be closely co-ordinated. It is by no means possible, either in Germany or the United States, but I maintain that it is a better position than the one we have here. Monetary policy is not as credible as it might be if the central bank were independent. An independent central bank's position would be very much easier if there were not such a large deficit. I think that my right hon. Friend would agree that monetary policy cannot be conducted with such a large deficit. I will come to that, in a moment.
My right hon. Friend referred to the independence of the central bank and the ERM, as did my right hon. Friend the Prime Minister. Some people think that our membership of the ERM is all we need to explain our present difficulties. They look back to a golden age, before we entered the ERM, and say that entry of the ERM was the cause of our problems. But, as my right hon. Friend said, the root of our difficulties was the surge in credit in the late 1980s.
The Government did not stand idly by at that time. Interest rates had been as high as 15 per cent. for a year before we joined the ERM in October 1990, and for most of the year before that they had been up to 14 per cent. Interest rates were reduced by 1 per cent. on the day we joined the ERM, so there is no question of having an easy time before. It was nothing of the kind. Interest rates cannot be at 15 per cent. for a year without slowing down the economy. That is what it was intended to, and did, achieve.
Inflation was 10 per cent. when we joined the ERM, and it is now less than 2 per cent. In the late 1980s, we went on a spending spree with borrowed money, and we are still paying the bill. We shall go on paying the bill, in my opinion, for some time to come.
It is not surprising that the Government are unpopular in the country. We were not popular after lord Howe's Budget in 1981—I remember the same kind of scenes as we have seen in the House today after that Budget—but I remind the Opposition that we won the 1983 election with a majority of well over 100. The recovery that we are now seeing in better unemployment figures, improved investment and greater company and consumer confidence will continue. Inflation is at its lowest level for many years, as are interest rates. We have the right ingredients for sustained economic growth.
Some economic forecasters and commentators say that we should cut interest rates still further, and allow sterling to fall against other currencies. It is extraordinary how often in the economic cycle there is pressure to inflate the economy at a time when there are clear signs of recovery. Exactly the same happened in 1972, when the Government were persuaded to execute a U-turn and print money. It was wrong then, and would be now.
In those days—I have been a monetarist since 1966—to be right-wing was to oppose printing money, and to oppose prices and incomes policies. To be right-wing nowadays is to cut interest rates to the point of invisibility, and do everything possible to sink sterling. If any policy is more calculated to cause inflation, I do not know of it. After all that the country has been through, it would be criminal to throw away all the progress that has been made after such necessary sacrifices and pain.
The sacrifices and pain have fallen on the private sector. There has been no similar restraint in the public sector, with the commendable exception of public sector wages. As a result, we are due to borrow £50 billion this year, which is simply too much. If we must have value added tax on fuel and power, we might as well have it at once. To be blamed for imposing VAT on fuel and power without getting any revenue for a year seems perverse.
I can understand why economic forecasters believe that it would be better to inflict VAT on fuel and power when the economy is growing faster, but it is a great mistake to try to finesse the situation on clever City forecasters' advice. As for putting their advice in the Red Book—I hope that my right hon. Friend will see that this does not happen again—that is carrying attention to the views of these people to the point of adulation.
The ancient Greeks had a good way of dealing with forecasters. If an oracle got it wrong, he was dragged out of his cave and stoned and his bones were left to bleach in the sun. So it should be with these oracles.
I can tell my right hon. Friend what impresses the City. It is £50 billion. It is far too high, both as a figure in itself and in the scope that it gives for markets to make things difficult for the Government. After all we had a public sector surplus of 3 per cent. of gross domestic product only four years ago. It is the pace of decline that is so alarming. So we need to see some positive signs of addressing this deficit quite soon.
Some favour cutting the growth in public spending, and others favour increasing revenue. Incidentally, the speech of the right hon. Member for Yeovil (Mr. Ashdown) this afternoon was utterly disgraceful. To talk of great matters of principle and of the need to raise taxes, without giving a single idea of any figure, was cynicism of the worst possible kind.
Cutting growth of public spending and increasing revenue are both in order. We have a higher proportion of public spending as a proportion of GDP at 45·5 per cent. than under the last Government of 1979–80, when it was 44 per cent. So what is to be done? There are always scare stories from Departments at this time of year, but it is the Treasury's duty to investigate savings and efficiency in Departments.
I have often wondered why there are so many civil servants in the Ministry of Defence. Come to that, why are there so many admirals and generals? Why has so little attempt been made to release Minstry of Defence property, much of it unoccupied for over a year? There are still substantial savings to be made at the Ministry of Defence, particularly in the procurement programme.
Since district health authorities are now simply purchasing authorities, why do we not cut out two thirds of them by amalgamating them into new single authorities and cut out regional health authorities altogether? What is the point of them?
We shall have a problem in the next century, with more people living longer and fewer people to support them. I know that the Labour party is looking at this matter with great care. We also need a national insurance system which is properly funded. Why do we not therefore abolish the upper earnings limit and have a graduated scheme against which contributors could make separate provision for all kinds of benefit outside and in addition to the state sector? We need to encourage people to provide for themselves in sickness and in old age, over and above what the state can do.
There is a case for increasing the rate of corporation tax. If capital gains tax were reduced, the yield would increase substantially and the assets themselves be put to better use.
I wish my right hon. and learned Friend well in the difficult task that lies before him. There are no easy solutions. We must remember that we cannot be immune from the pressures of the world economy. The best that we can do is get ourselves into a competitive position and remain there. low inflation is the key to the low long-term interest rates and sustained economic growth that we all wish to see.