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Volume 301: debated on Thursday 27 November 1997

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If he will make a statement on his policy for controlling inflation. [16590]

The Government's policy for controlling inflation is absolutely clear. We have a target of underlying inflation of 2½ per cent. We have put in place the necessary institutional reforms to ensure that the Bank of England delivers that target which has been set by my right hon. Friend the Chancellor.

Is the Chief Secretary aware of concern in the City about how the Government will measure inflation in the future? Will he therefore give an undertaking to the House that the Government will not change the basis of measuring inflation from RPI X to the European Union harmonised index of consumer prices?

The Conservative party is so obsessed with Europe that it cannot see anything rationally. The position is quite clear. The Government have set out their target of 2.5 per cent., and that is only likely to change if, when the circumstances are right, my right hon. Friend the Chancellor comes to the view that that target should be revised downwards. It is widely understood that the target is 2.5 per cent.

I hope that the Chief Secretary will accept that the Liberal Democrats greatly welcome the Chancellor's proposals to lock in economic stability, in particular the fiscal code, but can he explain to the House why the Chancellor is forecasting an inflation rate of 3 per cent. at the end of next year, while the Bank of England is forecasting an inflation rate of less than 2.5 per cent? Is that because the Government are concerned that there is a risk of moving to a mini boom-bust cycle, not least because they have revised downwards their growth forecasts for the same period?

I am grateful to the hon. Gentleman if he supports the Government's policy on fiscal stability, which is something of a change from what he has said at treasury questions in the past. The position of the Government and Bank is clear; our target is 2.5 per cent., and we are confident that all the measures that we have taken and the Bank has taken will result in us meeting it.

I wonder whether the right hon. Gentleman can explain to me what is meant by the term that he keeps using—"fiscal stability". Given that the Bank of England has been changing the interest rate virtually every month, will we achieve fiscal stability when it does that every week? Did the Bank get it wrong four out of five times, or is he satisfied that its policy is the right means to get inflation down? After all, inflation is going up while it is changing those rates.

As I have said before, fiscal stability means ensuring that we get stability in public spending and stability in taxation. The hon. Gentleman is referring to the Bank's monetary policy—[Interruption.] They are complementary, but they are different. As I have said on many occasions before, the Bank has had to increase interest rates because, in the six months before the election, the previous Government did absolutely nothing to deal with the inflationary pressures that were mounting in the economy.

We are determined that the necessary action will be taken in terms of monetary policy and the other measures that my right hon. Friend the Chancellor has announced. They will ensure that we have stability so that we can increase the capacity of the economy, and begin to remove the inflationary pressures which would otherwise exist in the economy. Under this Government we will get long-term stability—and, unlike the previous Government, this Government are not afraid of taking the necessary tough decisions.

I am sure that the right hon. Gentleman will have noticed that his right hon. Friend the Chancellor is not a touchy-feely kind of person, but neither of them is averse to a little bit of ear-stroking of the representatives of industry. Has the right hon. Gentleman not noticed press reports that the Post Office, which is the largest corporation remaining in state ownership, recently settled a 4 per cent. increase in wages, and will he not concede that that, combined with his own projections of the growth rate sinking to as low as 1.5 per cent. in a little over 12 months' time, inevitably means that high and rising unemployment will result?

There are two points there. If the hon. Gentleman considers public and private sector wage settlements over the course of this year, he will find that they have been very low. Most people will welcome that, because they know that we have a choice: we can blow our current prospects in higher wage increases, which lead to higher inflation and therefore higher interest rates and higher mortgage rates, or we can take the opportunity to get sustainable growth in the long term, which will mean increasing prosperity for individuals and ensure that we generate the necessary wealth to improve the public services—and we all want that.