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Balance Of Payments

Volume 131: debated on Thursday 14 April 1988

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To ask the Chancellor of the Exchequer if he will make a statement about the impact on the current account of the balance of payments of the basic and higher rate income tax cuts announced in the Budget.


To ask the Chancellor of the Exchequer if he will make a statement about the impact on the current account of the balance of payments of the basic and higher rate income tax cuts announced in the Budget.

The current account deficit is forecast to remain below I per cent. of national income in 1988.

Is the Minister aware that the CBI trend survey for March suggested that manufactured imports would grow more than twice as fast as exports in 1988? If so, will he explain to the House why the Chancellor gave away billions of pounds in tax cuts to the rich in the same month? Does he not understand that, as well as being socially divisive and unjust, those tax cuts can only serve to damage the long-term economic interests of the nation? They will lead to the sucking in of even more imports and thereby worsen an already critical trade imbalance.

Our forecast for the balance of payments in the coming year is based on the tax cuts that were announced in the Budget. I do not know whether the hon. Gentleman is suggesting that instead of running a surplus of £3 billion we should run a surplus of £7 billion. We are running a surplus on public account, and he believes that that has some impact on the balance of payments. So far, our track record in forecasting the economy is much better than that of most outside bodies. Of course, there is a degree of uncertainty about it, but we believe that that is the best estimate that can be made.

Is it not right that, on the Government's own estimates, we are facing in the current year a deficit of £4 billion, that, even worse, in the first two months there is a deficit of £1·6 billion, and that tax cuts will only suck in more imports? Why can the Government not recognise that the Budget was no good for the poor or for the economy?

The deficit forecast for the coming year is, at less than 1 per cent. of GDP, a fraction of the deficits that were run by the previous Labour Government. It is clearly easily manageable. I repeat the point that I made earlier. If the hon. Gentleman is against any tax reductions in the Budget, he is presumably in favour of running an even larger surplus, which is the exact opposite of the Labour party's policy at the time of the election.

Does my hon. Friend agree that the small balance of payments deficit that we are facing is easily contained in the huge reserves that Britain now has, compared with the overall deficit of the previous Labour Government? Since 1979 this Government have had a £20 billion surplus on the balance of payments.

My hon. Friend is quite correct. As a country, not only do we have large official reserves, but we have large net assets overseas amounting to some $90 billion. That puts us in a much stronger position than we were under the last Labour Government.

In view of the sizeable increase in net disposable income which will derive from the Budget tax cuts, and the possibility that some of that spending will be on imported goods, will my hon. Friend pay some attention to the possible effect on our balance of payments of such a move? In particular, will he reassure me that the whole business of control of credit is being given some attention at the Treasury, as to some of us it seems to be getting out of control?

The estimates and projections that we have made take into account the effect of tax deductions on expenditure. I can assure my hon. Friend that the growth that we forecast will be very balanced. We expect consumer expenditure to grow somewhat less rapidly in the coming year than it did in the last year—by some 4 per cent. By contrast, we expect business investment to grow at 9 per cent. per annum. We envisage very strongly investment-led growth in the coming year. Naturally, we keep an eye on credit, and we believe that credit growth is perfectly containable at the moment.

In view of the fact that the current account figures for the months so far this year have been very bad indeed, and that the deficit appears to be getting steadily worse, will the Minister tell the House clearly and precisely what is the Government's strategy for reducing the deficit in the balance of payments?

Clearly it is too early to come to conclusions on the basis of the first two months of the year, when there may well have been exceptional factors resulting from the introduction of the single administrative document. We never make changes in forecasts on the basis of the figures for one or two months. We believe that the sort of deficit we are forecasting is easily containable, and, as I pointed out, it is substantially smaller than that which the Labour Government seemed content to run.