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Interest Rates And The Economy

Volume 413: debated on Monday 20 October 1980

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2.50 p.m.

My Lords, I beg leave to ask the second Question which stands in my name on the Order Paper.

The Question was as follows:

To ask Her Majesty's Government whether they have yet assessed the effects of persistently high interest rates on the economy as a whole and whether they will publish a forecast, covering the next six months, showing the consequences of their continuance during this period on output, productivity, unemployment and bankruptcies.

My Lords, forecasts under the Industry Act will be published in November. A substantial and lasting reduction in the rate of inflation is central to the Government's policies. Only in this way can we restore the economy to health and pave the way for substantial growth in both output and employment. The present level of interest rates is a necessary part of that policy: but interest rates will be reduced as soon as it is possible to do so consistent with attainment of the Government's monetary policy.

My Lords, is the noble Lord aware that his Answer is, of course, thoroughly unsatisfactory and that he has not in fact answered the Question that I tabled, which asked—if I may repeat it—whether the Government had assessed the effect on various factors in the British economy of high interest rates? The Answer, as I gather from him, is that they have made no such assessment. Therefore may I ask the noble Lord whether he is aware that the Treasury model computer has facilities whereby, by feeding in alternative data as to interest rates, the effects on various aspects of the British economy enumerated in my Question can be assessed? Will the noble Lord give the House an undertaking that the Government will investigate this aspect of the matter in order that the country may more accurately assess the disastrous results of the Government's own policy, determined by the Treasury Ministers, of maintaining interest rates at an arbitrary and high level?

My Lords, the Answer given to the noble Lord was a clear, comprehensive reply to the Question that he asked. The Industry Act 1975, which was passed by the previous Administration, provided a programme for the publication of information relating to the major factors affecting the development of the economy. The next such forecast under the Industry Act is due to be published next month, and I should have thought that the right thing to do would be to await the publication of those forecasts.

My Lords, arising out of the fact that the noble Lord, Lord Bruce of Donington, included unemployment in his "shopping list", may I ask the Minister whether Her Majesty's Government have consulted the Treasury model as to what would be the likely effect on unemployment of each 1 per cent. reduction in MLR?

My Lords, the noble Lord includes a large number of items in his shopping list. It has not been the practice, either of this Government or indeed of the previous Government, to publish forecasts of unemployment. Working assumptions are included in the Government Actuary's Report on the National Insurance Fund, but I repeat that it has not been the custom of previous Governments or of this Government to publish forecasts of unemployment.

My Lords, would not my noble friend agree that one of the essential differences between money and any other commodity is that everybody needs it to a greater or lesser extent, no matter what the price? Furthermore, will be not agree that getting control of the demand for money mainly by the price will not reduce supply significantly?

My Lords, I do not entirely accept my noble friend's analysis. The main weapon for controlling the level of the money supply is the rate of interest, and there is no evidence that any other method is as effective. As noble Lords opposite show such interest in the level of unemployment—a level which we greatly deplore—may I draw their attention to the fact that in the year ending in August earnings increased by 21·6 per cent. against an increase in prices of 15·9 per cent., and it is that very great excess of the increase of earnings over the increase in prices which is so largely responsible for the present level of unemployment. I should have thought that it was in the interests of everybody to draw the attention of wage bargainers on both sides of industry to these undisputed facts and to the effect they have on the level of employment.

My Lords, will the noble Lord the Minister be good enough to educate a very innocent layman? He has repeated this afternoon what he said last week to my noble friend Lord Beswick and my noble friend Lord Kaldor: the Government's policy is to restrict the money supply through interest rates. Does he not agree that his Government's own figures show that the money supply has been running way above the projected level? Is it not therefore logical that the interest rates should have been raised before now; and is it any other reason than political cowardice that they have not been so raised?

My Lords, if the noble Lord is now advocating a further rise in interest rates he would seem to be somewhat out of step with the rest of his noble friends.

My Lords, does not the Industry Act 1975, as amended by your Lordships' House, provide for the use of the Treasury model and the Treasury computer in producing the information which my noble friend has said is coming in a few weeks' time; and will that information therefore not be what is required by the noble Lord, Lord Bruce of Donington?

My Lords, what my noble friend says about the Treasury computer is of course entirely correct.

My Lords, is the noble Lord aware that the figures which he gave regarding earnings are a direct result of Government policy? When there is a free-for-all the workers are part of the "all". Furthermore, is he aware that, after 17 months of the present Government's policy, we have a decline in industrial output of 8 per cent., 2 million unemployed and still have inflation at 16 per cent.?

No, my Lords, they are not the direct result of the Government's policy—in fact the contrary. In almost every speech I have made in your Lordships' House I have drawn attention to the connection which exists between excessive pay settlements and the level of unemployment, and nobody regrets more than I do that what I have made so clear to the House on so many occasions has in fact come to pass.

My Lords, while sharing the admiration expressed by his noble friends behind him at the Minister's ability to answer questions which were not asked, may I ask whether he will be good enough just to answer the simple question as to whether he believes that output has been lowered as a result of high interest rates and, if output has been lowered, does not that presuppose that the volume of money supply will also have to be reduced? May I further ask him whether, in the new figures in two or three weeks' time, we shall see an even lower target of money supply?

My Lords, what we shall see in a few weeks' time must obviously await upon a few weeks' time. So far as the level of output is concerned, a whole range of factors has entered into this. There is, first, the world recession; secondly, there has been the effect of the high level of pay settlements and, thirdly, the Government's policy to reduce and ultimately eliminate inflation means a transitional cost in the terms of loss of output, but that loss will be minimised to the extent that people are prepared to show realism, as increasingly they are in wage bargaining.

My Lords, can my noble friend ask the Treasury model computer what would be the effect on the inflation of this country if the public sector settlements had been comparable to those in the private sector; and is not one of our gravest disadvantages that we have a larger public sector than any other of our competitor countries in the world?

I think, with respect to my noble friend—and I entirely appreciate the point he is making—that we are now entering the realm of speculation. The most important thing—and I have said this before—is that we should tackle the problems with which we are now faced, and this does demand a much lower level of pay settlements in the public as well as in the private sector.

My Lords, may I ask the noble Lord to answer my question? According to his own logic, why have the Government not increased the interest rates in order to keep down the supply of money?

My Lords, there is every evidence, including not least the fall in the rate of inflation, that monetary conditions are in fact sufficiently tight, and in those circumstances the Government regard the present level of MLR as the appropriate level.

My Lords, is the noble Lord aware that in the course of his previous answer, when he was dealing with what he described as the three factors making for an increase in unemployment, he did not mention the high interest rates once? Are we to infer from that that the noble Lord really believes that high interest rates have had no impact at all upon the level of output, unemployment, bankruptcy?

My Lords, I said quite clearly and specifically that the measures that it was essential to take to reduce and eliminate inflation had a transitional cost and those measures include the present level of interest rates. But the burden imposed on industry by interest rates is only a fraction of the burden imposed upon industry by excessive wage settlements.