| Previous Section | Index | Home Page |
Mr. Forman: I am following the right hon. Gentleman's argument. I remember similar points being made by my right hon. Friend the Member for Worthing (Sir T. Higgins), with whom the right hon. Gentleman agrees on this issue. However, he should remember that it is always open to Opposition parties to use one of their supply days to debate the economy. It has been noticeable in recent years, when the economy has been doing well
14 Jan 1997 : Column 166
under the management of my right hon. and learned Friend the Chancellor, that Opposition parties have not taken the opportunities available to them to debate the economy. They know how strong our position is.
Mr. Sheldon: I am talking about the formal arrangements for managing such matters. That is the essential issue. Of course Opposition days can fill in the gaps, but there is no formal arrangement for a debate between those in October, November and December and those in July. I believe that there should be. I hope that that will be considered in due course.
Several commentators have argued that my right hon. Friend the Member for Dunfermline, East (Mr. Brown) will receive a splendid inheritance. That assumption is behind the speeches that we have heard and are yet to hear. The argument is that there will be low inflation, reasonable growth, a reducing budget deficit and low taxation. The reality is that those commentators have got it all wrong. We have an artificially low level of inflation because of the rising value of the pound. I know that Governments facing an election have a partiality for an over-valued exchange rate. That has always been so, because a high exchange rate makes for a lower retail prices index. Cheaper imports feed into the RPI. The standard rule of thumb that I used in my days at the Treasury was that each 1 per cent. change in the exchange rate resulted in a 0.25 per cent. change in the RPI. I was encouraged to hear that that calculation is still roughly correct.
Mr. Legg:
I am interested in the right hon. Gentleman's argument. Why did that relationship not work when we left the exchange rate mechanism? The pound then floated downwards. Imports rose in value, but inflation fell.
Mr. Sheldon:
There are long-term effects of such matters. It sometimes takes a long time for import prices to feed in. There is no question but that if the value of the pound is increased, imports become cheaper. Given equal conditions, such cheaper import prices will eventually feed into the RPI. There may of course be other short-term considerations, and the pressures of competition are one among them, but the general rule still applies. One can argue about the precise nature, but that is the broad direction of movement.
In the past 12 months, the trade-weighted exchange rate has risen from 83.5 per cent. on 2 January last year to 96.1 per cent. today--an increase of about 15 per cent. On the basis of the calculation by Goldman Sachs International Ltd., inflation has been dampened by about 2 per cent. So, the 2.5 per cent. target for inflation has been met only by endangering our manufacturing industry. If we accept the Goldman Sachs argument, the level of inflation today would be about 4.5 per cent. Nobody can doubt that the increase in the value of the pound has meant that the level of inflation today is much less than it would otherwise have been.
Mr. Butterfill:
The right hon. Gentleman suggests that damage to export industries is an inevitable consequence of a rising exchange rate, yet that is not borne out by the examples of many other countries. If that were ultimately true, how does the right hon. Gentleman explain the success of the Japanese and German economies and their
14 Jan 1997 : Column 167
Mr. Sheldon:
If the hon. Gentleman will forgive me, he has got it a little wrong. The strength of such countries' industries brings about an increase in the level of currency. Here, the increase in the value of the pound is motivated not by the strength of industry but by the level of interest rates, to which I shall refer.
The target on which the Government have prided themselves above all others has been obtained purely temporarily and is having serious economic consequences. It is damaging our exporters and, of course, our home industry, because it is easier for people to bring in goods from abroad and compete with our industrial manufacturers to their disadvantage. There were enormous such difficulties in the 1960s when so many goods were brought in from outside this country, damaging especially manufacturers' white goods and affecting them for the whole of the 1970s and 1980s, and even now. The question is what would the RPI have been if sterling had remained at the level of 12 months ago? One can take one's choice, but Goldman Sachs' projection is probably about right.
The current overvaluation of sterling has serious dangers for our manufacturing industry, because its exports may be priced out of the market and competition in home markets may be increased. After all, manufacturing industry was saved only because of black Wednesday, which cost us billions of pounds but produced a realistic exchange rate. It was that which enabled the economy to emerge from the savage recession.
The Government are storing up trouble for the future. The only way in which our economy can really improve in the long term is through our manufacturing industry. Meanwhile, there is the benefit of the "J"-curve effect. The initial effects of devaluing are disadvantageous, as the exporter is committed to a lower value of sterling for his goods and services. With an upward movement of sterling, the invoice value to the exporter for current deliveries will be increased--but at the expense of future orders. So, for a very short time, the Chancellor of the Exchequer will find the balance of trade beneficial, but in that way he is bequeathing to my right hon. Friend the Member for Dunfermline, East an unwelcome legacy. Unfortunately, that is not all.
My right hon. Friend the Member for Dunfermline, East may find that the level of the economy is unsustainable. Apart from the increase in house prices, which is always reflected inadequately in the RPI--the level of house prices and its effect on inflationary expectation is much greater than anything that shows up in the RPI--I do not believe that we are seeing anything like a boom. We are however seeing a recovery that may not be sustained. After all, that is the reason why the Governor of the Bank of England will want a greater increase in interest rates than the Chancellor of the Exchequer is likely to find acceptable.
Even all that does not complete the problems that my right hon. Friend the Member for Dunfermline, East will inherit. There are the problems of public sector pay, too.
14 Jan 1997 : Column 168
It is the credit of my right hon. and hon. Friends that they have seized on the only lasting solution to our problems: investment and education--investment in industry and investment in people. The Government's 18 years might have been regarded as a little less than disastrous if they had undertaken such measures. After all, they had more than £100 million of North sea oil revenue, let alone the balance of payments advantages that flowed from it, as well as privatisation receipts. They had a unique, once-and-for-all opportunity to invest in education and industry, but threw it away. Now, in much poorer circumstances, we have to find the means to undertake the task of rebuilding this country's real wealth, our industry and the skills of our people.
I see that once again the question of company taxation is being examined. I believe that it was a fundamental mistake to change from the classical to the imputation system of taxation. The encouragement to pay dividends means that that main source of investment--the retention of earnings--is not available in the same way as the classical system allowed. Reluctantly, some years ago I came to the view that such fundamental changes in company taxation would have to be forgone. One cannot keep changing the system year after year or even decade after decade. We have lived with the present system for more than 20 years and witnessed the disadvantages of it, especially for investment. If we are to look at the matter again, it might be worth considering the arguments that were put forward at the time that the system was introduced. In any event, the level of capital allowances in the Bill does not provide the incentives to invest that we should be offering.
The increase in the rate of insurance premium tax came as no surprise. I always expected that the Chancellor of the Exchequer would follow the sound principle of first getting the structure right. I have seen the introduction of a number of taxes where revenue was the first consideration and sacrifices of structure were made. Much the best way of proceeding is to get the structure right first and the revenue later. I would be interested to hear the views of the Chancellor's predecessor but two, Lord Lawson, on the matter. He prided himself again and again on the abolition of taxes. Any comments that he makes on the insurance premium tax as well as the air passenger duty will be worth reading.
| Next Section
| Index | Home Page |