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12.12 am
The Paymaster General (Mr. Geoffrey Robinson): I congratulate my hon. Friend the Member for Great Grimsby (Mr. Mitchell) on securing the Adjournment debate. Quite contrary to what he said about the call to Downing street, I fear that it may still come, but I do not think that he would make quite the same speech if it did. When he gave us the voting figures from the Monetary Policy Committee, I thought that he was referring to
Coventry City's home results in the second half of the season. Of course, his views come as no surprise to me as I have followed them with great interest for many years. If I doubted them at all, I overcame doubt by reading his "Commons Diary" in The House Magazine, titled "Preparing for office", in which, in his 21 July entry, he gave a clear account of how he saw the Chancellor's views and what he thought of them.
The United Kingdom's post-war growth performance has been poor compared with that of other industrialised countries. Our record on stability has been equally bad, with excessive swings in output and inflation. We can all agree on that. Those facts are related, because macro-economic instability has been one of the factors behind the poor growth record. That is why economic stability is a key platform of the Government's economic policy. It will make a vital contribution to our central economic objective of high and stable levels of growth and employment. That is the objective of policy; we have no difference on that.
Stability is important because it gives businesses and individuals the confidence to plan effectively for the long term. That will improve the quantity and quality of long-term investment, and help raise productivity. Confidence that inflation will stay low will also encourage the savings that go to fund investment.
If my hon. Friend talks seriously to businesses, they will tell him that their overriding priority is stability and the ability that that provides to plan for the long term. Macro-economic instability entails substantial personal cost. The loss of security and confidence that arise from recessions is considerable. In addition, instability makes it difficult for individuals to retain or develop the skills needed for long-term employment. High inflation also leads to an arbitrary redistribution of income and wealth. Those on fixed or low incomes who have little or no bargaining power often lose the most from high inflation. If my hon. Friend checks the record of previous Governments, to which I shall come shortly, he will find that that is the case.
High inflation is associated with more volatile inflation. Volatile inflation results in higher-risk premiums in long-term interest rates, and increases the distortionsto economic decisions caused by difficulties in distinguishing between changes in individual prices and changes in the general price level. When inflation is volatile, it increases the risk that policy makers will make mistakes with damaging consequences for the stability of growth and employment. I ask my hon. Friend to bear that in mind.
As soon as the Government took office, we took action to ensure that the UK economy decisively broke with the cycle of boom and bust, which I know that my hon. Friend deprecates as much as I do--especially the two biggest booms and busts that we had in the 1980s and early 1990s. That is why we set out to reform the frameworks for monetary and fiscal policy to secure low inflation and sound public finances. The new monetary policy arrangements were put in place immediately on taking office. The Bank of England Act 1998 gave the Bank of England's Monetary Policy Committee operational responsibility to set interest rates to achieve price stability as defined by the inflation target.
There is a clear division of responsibility. The Government set, as they must, the economic objectives, particularly the inflation target of 2.5 per cent.
The Monetary Policy Committee can then focus on the level of interest rates needed to achieve the target. Subject to the stability objective, the Bank is required to support the Government's economic policy, including our objectives for growth and employment.
The Chancellor appointed leading outside experts to the Monetary Policy Committee to complement existing Bank staff. Whatever my hon. Friend says about them, he must admit that an objective and balanced team has been chosen. The figures that he quoted with some delight clearly show that. The transfer of the responsibility for setting interest rates to the committee ensures that interest rate decisions are made in the country's long-term interest, not for short-term political considerations. That step was absolutely necessary because the old arrangements were not generating the necessary confidence in monetary stability.
Both the Bank and the Government are accountable for the performance of their tasks. To assist this, the framework has many features to strengthen accountability and transparency. In all fairness, my hon. Friend cannot dispute that. They include a clear and simple inflation target of 2.5 per cent. It is only sensible to keep it clear and simple. There is an exceptionally transparent decision-making process, including publication of the minutes, press notices and the Bank's inflation report. Monetary Policy Committee members are held to account through the publication of their votes. I see no alternative to that. If we are to operate a policy that is straightforward, transparent, clear and understandable, we must do that so that we do not get the endless press speculation that would occur in the event of their not being published. My hon. Friend will note that the European bank's chairman proposed never to reveal voting records. My hon. Friend would deprecate such a policy.
Monetary Policy Committee members make regular appearances before the Treasury Select Committee, which is chaired by a distinguished colleague whom my hon. Friend and I have known for years. Under the open letter system, the Governor has to send an open letter to the Chancellor if inflation is more than 1 per cent. above or below the inflation target. That system gives the Bank the opportunity to explain in full why the overshoot or undershoot has occurred, and what it intends to do about it.
Together, those arrangements make the framework of the UK's monetary policy among the most open and transparent in the world. Indeed, a recent Organisation for Economic Co-operation and Development survey said:
My hon. Friend may say that that is damning with faint praise, but compared with what other countries have done, there can be no question but that the arrangements that we put in place seek to achieve those objectives, to which my hon. Friend attaches as much importance as I do.
It was clear last May--some 15 months ago--that stability required action to head off inflationary pressures that had been allowed to build up before the election. My hon. Friend must accept that successive advice from both the Treasury and the Bank of England to the former
Chancellor was that inflationary pressures were building up. We found them when we came to power, and interest rates had to be raised to hold them back. That is why short-term interest rates have gone up by 1.5 percentage points. Combined with the deficit reduction plan, those measures should achieve the necessary slowing of the economy so that it gets back on track for steady and sustainable growth, as forecast in the past two Budgets. I shall say a few words about the forecasts in a moment.
The Government recognise the difficulties that higher interest rates cause businesses and individuals, but history has shown that the bigger the boom, the bigger the bust. In the 1980s and early 1990s, we had the biggest boom and the two biggest recessions since 1945, and that was under a system that had so discredited itself that the incoming Labour Government had to do something about it if they were to gain the credibility of the markets, which was essential. We were right to take action.
Early action to reduce inflationary pressures was essential to minimise the size of the adjustment. Interest rates remain reasonably low by historical standards, and at 7.5 per cent., they compare favourably with the mid-teen rates of the late 1980s and early 1990s.
Mr. Mitchell:
Real interest rates.
Mr. Robinson:
I take my hon. Friend's point, but if he checks the figures, he will find that, even in real terms, they are considerably lower than they were during that period. The fact that our booms and busts were out of sync with the rest of Europe accounts for part of the difference.
The failure of the old "Ken and Eddie show", to which my hon. Friend appears to want to revert, was that people had no confidence in its long-term ability to deliver low inflation. A measure of the success of the new arrangements is what has happened to long-term interest rates and inflation expectations. As my hon. Friend said, he is a fair and moderate man, but he is also a man of fixed views. One can admire that while not agreeing with him in this instance. To be fair in these matters, one cannot take any particular point in time--certainly not one after only 15 months in office--and say that that is the position. We must look at the long-term position as projected by those who know best--those in the market--who determine such matters.
Interest rates on long-term measures, such as 10 or 15-year gilts, have fallen from some 7.4 per cent. to some 5.9 per cent., and are now at their lowest level for 33 years. That must help long-term investment, which is what the whole policy is about. The long-term differentials between UK interest rates and those in other counties have also fallen. The differentials in forward rates five years ahead--it can also be said for 10 years--have fallen from 1.1 to 0.5 per cent. with respect to Germany, and from 0.7 per cent. to zero with respect to the United States. That is where the markets think that we are going. That must be our aim, which is why we have this policy for the long term.
On inflation, the average of the comparison of independent forecasts for inflation in the fourth quarter of 1998 has fallen from 3.1 to 2.7 per cent. The average inflation forecast for 2000 has fallen from 2.9 to 2.5 per cent.--exactly what the inflation target is. Thus the markets are taking a different view. I do not know what my hon. Friend's experience is, but it is hard to prove the markets that wrong over a number of years.
The markets have taken a different view from the one that my hon. Friend has taken. He appears to be trying to repeat the arguments of the past, but we are doing something substantially different from what was done in the past. If he looks closely at the policies, he will see how they are playing out.
Success will not come easily and everyone has a part to play. As the economic and fiscal strategy report noted, it is vital that those involved in wage bargaining in the private sector recognise that the new environment means low inflation permanently and adjust their expectations accordingly. We are determined to deliver on that in the medium and the long term. I must say that I disagree with my hon. Friend here and that I would have disagreed with him in any of my previous occupations in the private sector. Failure to achieve that on the part of those involved in private sector wage bargaining will lead to unnecessary job losses and lower growth. In addition, as the OECD report commented, the credibility of the new framework could improve further as the Monetary Policy Committee continues to establish a track record.
I am not trying to duck the issue, so I hasten to add that some hon. Members have said that we should tighten fiscal policy. In fact, when the opportunity has arisen, the Government have used fiscal policy precisely to support the stance of monetary policy--the two have gone hand in hand. My hon. Friend will be aware that the fiscal
stance has tightened significantly over the past year, by about £20 billion or 2.74 per cent. of GDP. That is the largest fiscal tightening in one year since 1981. My right hon. Friend the Chancellor's recent statement on the economic and fiscal strategy report ensures that that fiscal tightening is locked into the medium term--that is why we have gone on to three-year programmes. My hon. Friend will appreciate that that is utterly different from the whole cast of previous Government policy. The speeches made and the stance taken by Treasury Ministers, in particular by the Chancellor, show utter determination to make the policy stick this time. We cannot change and tack from side to side.
"Transparency and accountability requirements are very strong in international comparison."
It was referring to the system that the Government have set up since coming to office.
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