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International Monetary Situation (Economic Measures)

Volume 773: debated on Friday 22 November 1968

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Motion made, and Question proposed, That this House do now adjourn.—[ Mr. Ioan L. Evans.]

I understand that the right hon. Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) has forgone his debate on the Adjournment. This will be accounted to him as righteousness.

3.49 p.m.

With permission, Mr. Speaker, I have a statement to make to the House about the international monetary situation and certain economic measures which the Government propose to take.

As the House will perhaps be aware, I have returned within the past half-hour from a meeting of Ministers and central bank governors of the Group of Ten which was convened in Bonn by the chairman, Professor Schiller, Minister of Economics to the Government of the Federal Republic of Germany, in order to discuss the international monetary situation.

The conference concentrated its energies on removing the risks of a major upset to the international monetary system arising from speculative capital movements connected with the rumours of changes in the parities of two currencies, the mark and the franc. As regards the mark, for a long time now the large German trade surplus has led to a persistent flow of reserves to Germany, and this situation has produced suggestions from various quarters from time to time that a revaluation of the Deutschemark would be the easiest way of producing a better balance in international payments. Talk of this kind in recent months has produced recurrent rumours, usually towards the weekends, that Germany intended to make such a move.

The speculation has fed on itself, swelling the flows resulting from Germany's trade surplus. These rumours bear no relation to the intentions of the German Government, who have made it clear that for a variety of reasons, including their experience in 1961, they see overwhelming objections to revaluation and cannot contemplate such a course. None the less, the rumours have proved costly and damaging to the whole world.

The searching discussions of the problems connected with the Deutschemark revaluation which have taken place during these last few days, the explanations which the German Government have given of the reasons for their objections to this step, and the very real and worthwhile efforts that they have made to produce an equivalent but, from their point of view, less objectionable method of reducing the trade surplus, should put paid to these damaging speculations about their intentions. They will not revalue.

Moreover, the method that they have chosen to help to restore balance is not merely constructive in that the trade of other countries will receive a straight competitive advantage of 4 per cent. both in German markets and in third markets, but it also has the result that those speculators who have been hoping to make a quick killing by moving into marks will make no money out of this crisis. In addition, the Federal Government are taking measures to discourage certain short-term transactions of German banks with non-residents which should further reduce speculative flows to Germany.

As regards the franc, until earlier this year the French had a strong balance of payments and an exceptionally good reserve position. Their economy suffered a sudden and severe setback in the events of May and June of this year, and this has led to the view that in due course they might wish to take steps to restore that competitive position. Much of the danger to the international monetary system in recent days arose from the continual rumours that France would refuse any credits or other help from other countries and might take action without the normal international consultation and irrespective of the effect on other countries. The conference has effectively removed this fear.

France has made it clear that these rumours were completely without foundation, that she will follow the normal consultative procedure and that she is prepared to accept assistance from other countries and international monetary institutions in order to maintain stability. Accordingly, a special support operation of 2 billion dollars has been mounted to assist France, in addition to existing facilities open to her of nearly 1 billion dollars.

In a situation of speculative rumours of the kind that we have been through, it is inevitable that a great deal of the burden falls on reserve currencies. We suffered in the week before the conference, but, of course, there is no question of a movement in the sterling parity. This was not considered as a matter for discussion at the conference. However, there was a recognition of the need for effective action to neutralise the effect of speculative flows upon the reserves of different countries.

The immediate difficulties in the exchange markets are, I believe, thus disposed of, and the London market will be open on Monday. But the events of the past week have demonstrated dramatically the urgency of our achieving and maintaining a surplus in the balance of payments of the United Kingdom. We have made considerable progress. On the basis of a three-monthly moving average, the trade figures, including those for October, have shown an improvement in every month since May. The policies we have followed since devaluation are showing their results, especially in the excellent performance of our exports.

Nevertheless, as the House will know, the speed of our movement into balance of payments surplus has been insufficient. Despite high exports, our trade figures, while improving, have not done so as fast as necessary. One reason is the continuing high level of consumer spending. Another may be that there has been a rapid build-up of stocks.

In order to accelerate our progress, particularly in view of the international events of the past week, we need to take firmer action to curtail demand, especially demand for imports. We must take action to get back into balance now, without further delay, or without further drawings upon our limited reserves. I am taking action of two kinds, in the taxation field and in the field of credit. I will deal, first, with tax.

The Government have decided to activate the Customs and Excise regulator for which authority was given in Section 9 of the Finance Act, 1961, renewed in successive Finance Acts and given greater flexibility in Section 8 of the Finance Act, 1964. The Treasury has today made an Order the effect of which is to put a surcharge of 10 per cent. on the duties on beer, wines, spirits, hydrocarbon oils, petrol substitutes, power methylated spirits, on the Tobacco Duty and on the rates of Purchase Tax. The effect will be to put 1d. a pint on the price of most beers, 4s. on a bottle of whisky, 5d. on a gallon of petrol and up to 5d. on a packet of twenty cigarettes.

The increase in Purchase Tax will mean that the enlarged rates of tax will become effectively 13¾ per cent., 22 per cent., 36⅔ per cent. and 55 per cent.

The surcharges will take effect from midnight tonight on all these duties except hydrocarbon oil duty where the new rates will come into operation at 6 p.m. today. The effect of the surcharge will be to increase the revenue by about £250 million in a full year.

Following precedent, we propose to exercise the powers vested under the Bus Fuel Grants Act to refund in full the additional duty on petrol and derv to bus operators. A copy of the regulator Order is now in the Vote Office.

I turn now to the field of credit. It is necessary for me to look to the banks for a further tightening of credit, particularly for the finance of consumer spending. I do not propose to inhibit finance for exports. I am aware that the inclusion last May within the ceiling of bank credit of the fixed rate lending for exports for shipbuilding has created problems for the banks, not least because it bears unequally as between individual banks.

From now on, therefore, for the London clearing banks and the Scottish banks the ceiling will exclude export credit at a fixed rate of 5½ per cent. which is guaranteed by the E.C.G.D. and fixed rate credit at the same rate for orders of domestic shipbuilders which is guaranteed by the Ministry of Technology under Section 7 of the Shipbuilding Industry Act. The ceiling will continue to cover all other sterling lending by these banks to the private and overseas sector. The Governor of the Bank of England is asking them to bring this lending by March, 1969, within the ceiling of 98 per cent. of the level of November, 1967.

When allowance has been made for seasonal factors, I estimate that this revised ceiling will require these banks to reduce their non-fixed rate lending to the private sector by about £100 million between now and next March. If, as we hope and expect, guaranteed credit at fixed rates to exports and shipbuilding increases by about the same amount over the period, there will be no increase in credit granted to the private sector.

The other banks, who are only marginally concerned with fixed rate lending, will also be required to bring their lending by March, 1969, within the ceiling of 102 per cent. instead of the present 104 per cent. A similar degree of restriction will be requested of finance houses.

In addition, I propose a further measure of credit restriction designed to squeeze out excessive liquidity in the monetary system in a selective way which is, I believe, particularly appropriate in our current situation.

It being Four o'clock, the Motion for the Adjournment of the House lapsed, without Question put.

Motion made, and Question proposed, That this House do now adjourn.—[ Mr. Ioan L. Evans.]

Parliament will be asked immediately to enact legislation for a scheme of import deposits. This scheme will apply to imports of, broadly speaking, all goods other than basic foods, feedingstuffs, fuel and raw materials and certain categories of goods imported mainly from developing countries. It will cover goods amounting to just over one-third of our total imports—that is, goods valued at something under £3,000 million. There will be provision for relief in certain cases, such as goods intended for export.

The importers of goods covered by the scheme will be required to pay to the Customs a deposit of 50 per cent. of the value of these goods before the Customs will release them. The deposits will be repayable to the importer 180 days after the date of payment. The Bill will continue in force for a year, but with provision for this period to be reduced, but not increased, by Statutory Instrument. The Bill will also provide for the rate of deposit to be reduced, but not increased, by Order. A Ways and Means Resolution is being tabled today and it will appear on the Order Paper tomorrow. The House will be asked to vote the Resolution on Monday so that deposits will be payable in respect of goods entered with the Customs on and after Wednesday, 27th November.

Although in the exceptional circumstances that have now arisen we have found it essential to take this temporary Measure in order to protect our vital interests, we have no desire to depart from the objective of liberalisation of world trade which has been the basis of our commercial policy. We are sure that our trading partners will recognise our difficulties, as we have shown them that the health of our balance of payments is, of course, in their long-term interest as it is in ours.

The import deposits scheme is likely to involve payment to Customs and Excise of sums of the order of £100 million in each of the next six months, which would build up to a maximum of around £600 million outstanding. The maximum will be reached in May, 1969, but the amount would not then rise further.

No doubt the payment of these deposits will have to be financed to some extent on bank credit, especially in the first few weeks. There may, therefore, need to be some flexibility in the application of the credit ceiling during the period of adjustment. But I do not envisage that bank credit should in the slightly longer term be the main source from which these deposits are found. It is, therefore, being made clear to the banks that any credit for the payment of import deposits will have to be found within the new ceiling and that they should be very careful in the granting of credit for import deposits, particularly where the deposits are associated with the import of goods or materials for increased stocks. Clearly, therefore, bank credit cannot be a major source for these deposits.

The import deposits scheme will, I believe, help our situation in a number of ways. Imports will be reduced directly because of the difficulty and cost of obtaining credit. This credit, so far as it is obtained from bank advances, will have to come within the 98 per cent. ceiling, so that less will be left for other borrowers. So far as the credit is obtained from outside the banking system, for example, through trade credit, company and private liquidity will be squeezed, with some effect on the level of demand, including the demand for imports, or, if credit is obtained from overseas, this will improve our reserves position.

These credit measures as a whole will involve a severe reduction in lending to the private sector. The banks are being asked to concentrate the reduction to the greatest extent possible upon finance for consumer spending, whether directly through lending to persons or indirectly through credit to hire-purchase finance companies and to the retail distributive trades. Within this general framework, the guidance on priorities, favourable lending for exports, for investment, for import saving activities, and for bridging finance for house purchase, remains in force.

The banks will not only have to be very sparing in granting new credit, but will also be obliged to ask for the repayment of some of the lending which they now have outstanding. The representatives of the banks have been consulted. They have emphasised to us the magnitude of the task that they have been asked to undertake, but they understand the need and I am grateful for the assurances which they have given of their readiness to co-operate.

I am well aware that the scheme for import deposits which I have announced to the House is novel in practice even though, in general terms, it has been widely discussed, and will, therefore, create practical problems of a kind that cannot be exactly foreseen. There will be problems not only for the banks, but for their customers, and not least for importers; but the scheme, with all its possible imperfections, is preferable to any alternative way open to me of bringing the deficit in the balance of payments to an end without prejudice to the longer-term improvements which I believe are in train.

The scheme is not one which can or should be kept in being for more than a limited period, but it will have powerful effects over the next few months when we most need its benefit. Questions about the operation of any individual cases should be referred in the first instance to the local customs officer. We shall be keeping the working of these arrangements under constant review. Meanwhile, I ask all concerned to accept them as a necessary contribution to removing the excessive liquidity in our economy which, combined with too great a reliance on imports, is impeding the speed of our balance of payments recovery.

The measures that I have just announced are undoubtedly hard. Taken together they will reduce the level of home demand by one half of 1 per cent. in 1969, but we cannot escape the facts of our international financial position, as the events of the last week have demonstrated. These measures are what is necessary for our overriding objective of achieving and sustaining a sufficient balance of payments surplus. We shall ensure that the movement of resources into the balance of payments that has already begun will persist and accelerate. The action that we are taking demonstrates our determination to put our balance of payments right and to keep it right.

4.9 p.m.

This is a statement of very great gravity. It is difficult to make any immediate comment in detail, but I want to make several points. We thank the Chancellor very much for making this statement immediately on his return to the House of Commons.

First, the increase in the regulator of 10 per cent.—another £250 million—will be an immense problem for everyone in the country. Will it not considerably increase the difficulties of the right hon. Gentleman's incomes policy, the tenuous nature of which contributes so much to our present problems?

Secondly, the new credit restrictions will come as an immense shock to all who have been assured that no new credit freeze was on the way. The reduction to 98 per cent. is a squeeze of drastic severity which will fall with great hardness on many businesses throughout the country.

May I ask the Chancellor, as so much is being done to restrict credit to the private sector, why did he make no mention whatsoever of the public sector?

On import deposits, he is aware that I have urged this possibility in the past and that his predecessor said that it was not a possibility and could not be done. How does he expect to do away with the difficulties which were then urged by his predecessor when we put it forward?

May I put one final point to the right hon. Gentleman? We on this side do not accept for one moment that the need, if need there be, for these measures arises from the recent speculative movements across the exchanges. Did I hear the Chancellor correctly? Did he say not that these speculative movements were the cause of these measures, but rather that they made it clear that these measures were necessary? Is it not, therefore, the fact that these measures have become necessary already because of the gross miscalculation of the Government in the past?

Nothing that has happened in the last few days has made our own current balance of payments more difficult—nothing whatsoever. Therefore, is it not a simple fact that these measures were necessary but that the necessity had become apparent only during the last few days?

I am grateful to the right hon. Gentleman for his thanks to me for coming straight to the House, about three hours after I left the conference in Bonn. I apologise to the House for any inconvenience which making this statement at this somewhat unorthodox hour may have caused, but I thought that it was right to make the statement as soon as possible, and I was determined to make it in the House of Commons and not elsewhere.

To refer to the three points which the right hon. Gentleman put to me. First, on the regulator, he asked, would this not make it more difficult to put the incomes policy into operation? I would say that one of the problems—the major problem—in demand management in the past few months has been, curiously, that prices have risen far less than was estimated from that Bench opposite at the time of the Budget, and somewhat less than I believed would be the case. There is no doubt that if—as I am constantly urged from those benches—consumption must be kept under control, as I believe it must, to achieve our objectives, we must use the weapons which, as it so happened, I inherited from the right hon. Gentleman the Member for Barnet (Mr. Maudling).

Second, the question of the credit restrictions. The right hon. Gentleman said—rightly in the context of my statement—that I talked about the bearing which these would have on the private sector. He asked, why not the public sector? I will tell him—because we are this year keeping public expenditure under the most tight control—

I do not wish to get controversial this afternoon, but I know that the hon. Member likes noise more than facts.

The fact is that we have stuck almost exactly to the target on public expenditure which my right hon. Friend the Prime Minister laid before the House on 16th January. We have stuck almost exactly to that level, despite the fact that almost every measure of control which we have taken has been opposed from those benches.

On the effect on the public sector, the key factor is clearly the borrowing requirement. The borrowing requirement this year will already be substantially lower than for a long time past. The effect of the measures which I have taken—the regulator, in particular—will be to reduce it substantially further. So there is no question at all of there being lack of control on one side and stringent control on the other.

So far as import deposits are concerned, I recognise, and have said frankly to the House, that there may be difficulties associated with this scheme, but I believe that it is the best one which we could introduce. In view of the level of imports as they have continued—it was, I think, necessary to see whether they were going to continue before taking action of this sort—I believe that it is necessary and desirable in our present circumstances to take this measure at present, and I hope and believe that it will be effective.

The right hon. Gentleman put a number of points and I am endeavouring to answer them and in the spirit in which he put them. He asked, "Why have the events of the last few days made it necessary to do this?" I will tell him the position exactly as I see it.

Before this, our balance of payments situation was improving steadily on a three-monthly average basis. It was not, as we all recognise, improving quite as fast as we would have liked. The events of the last few days brought home to me, and, I believe, to the whole House, the vital need for us to be in a strong balance of payments position at the earliest possible moment, and I therefore thought it necessary to take these measures.

Order. I remind right hon. and hon. Members that we have 15 minutes left.

We on this bench associate ourselves with the expression of gratitude to the Chancellor for coming here at such short notice.

We wish to study his statement in detail, but may I ask, first, since he is taking at the minimum £350 million out of the economy, what effect will this have on employment, on the cost of living and on house building and purchase? Secondly, since the events of the past few days have shown the extreme vulnerability of individual national currencies, will there, following the Basle Central Banks Agreement on special drawing rights, be any initiative by the Group of Ten to create a new reserve currency based either on Europe or on the world itself?

The immediate effect of the regulator on the cost of living is about 1 per cent. By the end of the year it will be somewhat higher than that.

During the past two, possibly three, months we have seen unemployment, though still high, falling very rapidly indeed—more rapidly than at any time during this decade, with the exception of about two other periods. We have also seen a substantial increase in the number of unfilled vacancies. Indeed, unfilled vacancies—which are, in a way, the best measure of the tightness of the labour market, are at a level, which, in previous periods, would be consistent with a level of unemployment far lower than we have at present.

There are a number of other strong indications of pick-up in the economy. I do not want to prevent that pick-up. I do not believe that I shall be doing so. But my overwhelming duty in the present circumstances is to see that that pick-up is channelled in the right direction—and the right direction means exports, import savings and investment. I believe that, by taking this course, I am not destroying the recovery of the economy, but pushing it in the right direction and helping to make it permanent and not insecure.

Is my right hon. Friend aware that the £250 million that the regulator will take out of the economy will have the effect of increasing unemployment by between 60,000 and 100,000 over the next few months? What steps is he suggesting to try to modify the effect of this?

Is he further aware that the policy of Germany in building up its large reserves has been an abuse of the machinery of the international monetary system? Will he use the intervening period over the next few months to try to obtain some sort of conference where an orderly process for varying exchange rates may be worked out?

I thought that I had to some extent dealt with the effect of the use of the regulator upon employment in reply to the right hon. Member for Devon, North (Mr. Thorpe). I must apologise to the right hon. Gentleman in that I now recollect that I did not answer two of his questions. But had I done so I would have verged on a very long answer. I shall endeavour to deal with them in the debate which is to take place on Thursday.

I thought that I had to some extent dealt with that point. Any measure of demand management in itself reduces the level of activity in the economy. But the problem of demand management is to reduce certain levels of activity to allow other activities to go forward. If one does not do that one is unable to take any measures to deal more effectively with the balance of payments.

On my hon. Friend's last point, I have just come from a long and exhausting, but I believe successful, conference. No doubt we can have another conference in future—I hope in a calmer atmosphere—to consider wider questions, although I am not sure that I would want to spend too much time at international conferences.

On the point about Germany, I should like my hon. Friend to notice that Germany, which is, after all, perhaps the most formidable competitor of this country—and, indeed, of any trading nation—has given to us and to other countries a 4 per cent. advantage in her markets and, even more important, a 4 per cent. advantage against her in third markets. I believe that this, if exploited—and my measures are designed to try to help exploit it—can have a very substantial and beneficial effect.

This is a most distressing statement which the Chancellor has put before the House, because of its connotations for the industrial people of the country. The Chancellor will no doubt realise, with his sense of history, that it is one thing in the fortunes of political parties to reach a point of no return, but a very different thing for the nation to meet a point of no return. This is, indeed, a very heavy package for the nation to swallow.

The question that I want to ask the Chancellor is whether he will consult immediately the Prime Minister and his Cabinet colleagues to establish a rapport which is missing beween the people and the Legislature so as to try to remedy, once and for all, the sense which is prevailing in the country of ungovernment by the Government? For goodness' sake, let us try to get some order into things.

My hon. Friend has raised some very wide questions in that intervention. I have always made it clear that my basic policy was to get the balance of payments right and that I was prepared to take whatever measures I believed necessary to that end. I believe that there could be nothing more distressing for the people, industrial and otherwise, than to fail in that central task at present. I shall never apologise to the House for taking measures, even if they be hard, which I believe necessary to achieve that central objective.

Is the Chancellor aware that what he has said this afternoon will have a grave effect on every person in the country and will inevitably bring about a slowing-up of trade and thus further unemployment during the winter months? Is he further aware that he gave the impression this afternoon of trying to pass responsibility to outside events? Is he aware that many people will think that his dereliction of duty during the last 12 months has a great deal to do with what has happened?

The first part of the hon. Gentleman's question is the same as that of the right hon. Member for Devon, North (Mr. Thorpe) and that of my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), which I have already answered.

On the second point, the hon. Gentleman, like anyone else, is entitled to use phrases like "dereliction of duty." I take it that he means that I should have done more at the time of the Budget—[Interruption.] We are now dealing with a situation six months after the Budget. I would remind him and the House, as I did a few weeks ago, that the right hon. Member for Enfield, West (Mr. Iain Macleod), with all his knowledge, when pressed for an answer, said clearly that in his view I had done too much, and time and again hon. Gentlemen opposite voted in favour of my doing less at that stage.

Is my right hon. Friend satisfied that this country has had all the co-operation it has a right to expect from the Federal Republic of Germany in this difficult situation, in view of the considerable financial sacrifices which Britain has made since the war in defence of the free world?

I believe that the most important form of co-operation—there are other matters, certainly—which we needed from Germany in the past few days was that the Germans should remove beyond all shadow of doubt speculation about the future parity of the Deutschemark which was gravely damaging. That, I believe, has been done. Indeed, it has been done thoroughly, completely and convincingly, and I regard it as a real move forward.

Did the right hon. Gentleman's answer to my right hon. Friend the Member for Barnet (Mr. Maudling) indicate that it is not his intention to complement the stringent cuts on credit and consumption for the private sector by any reduction in public expenditure? If so, does he realise that this will make his proposals singularly unacceptable to the bulk of public opinion?

No, Sir. What I intend to do is to stick to the targets which were laid down. We are sticking to them very well indeed; and they are for a very limited growth in public expenditure this year and a still more limited growth next year. [HON. MEMBERS: "Why no public expenditure cuts?"] I will explain why. It is because public expenditure this year is almost exactly in line with what we said it would be. [HON. MEMBERS: "Oh".] Private expenditure is substantially in excess, and I believe that it is sensible to take action against the aspect of demand which is out of line with what was laid down rather than against that which is in line.

Is my right hon. Friend aware that the insufferable arrogance of the West German Federal Government in refusing to revalue the Deutschemark has made the Bonn conference in all likelihood abortive and a future foreign exchange crisis almost inevitable? Is he further aware that while we welcome the scheme for prior deposits for imports—a long overdue step—an economic policy based on deflation and foreign borrowing is now utterly played out and that the imperative need now is for the Government to adopt a new economic policy based on the lines which many of us have advocated in the House in recent months?

It does not help to use the sort of language which my hon. Friend used in the early part of that supplementary question. As I pointed out, we have a 4 per cent. advantage in the German market—the Germans have forgone a 4 per cent. advantage—and we have a 4 per cent. advantage in neutral markets.

On the wider points, which I appreciate my hon. Friend was prevented from developing because of the shortage of time—although he could not develop them at length they are to some extent familiar to me; he and I have debated them before and we will no doubt do so again—

The Lord President of the Council and Leader of the House of Commons
(Mr. Fred Peart)

With permission—

On a point of order. Is it possible for an Ulster hon. Member to be heard?