HC Deb 01 November 1988 vol 139 cc821-39 3.30 pm
The Chancellor of the Exchequer (Mr. Nigel Lawson)

With permission, Mr. Speaker, I should like to make a statement.

Cabinet today agreed the Government's public expenditure plans for the next three years. I am therefore taking the earliest opportunity of informing the House of the contents of the Autumn Statement: that is to say, the public expenditure plans for the next three years, and the expected outturn for this year; proposals for national insurance contributions for 1989–90; and the forecast of economic prospects for 1989 required by the Industry Act 1975.

The main public expenditure figures, together with the full text of the economic forecast, will be available from the Vote Office as soon as I have sat down. They will also appear in the printed Autumn Statement, which will be published next Tuesday.

I turn first to public expenditure. For the current financial year, 1988–89, the public expenditure planning total now looks likely to amount to some £153½ billion, or some £3¼ billion less than was allowed for in the last public expenditure White Paper. In other words, only around £¼ billion of the £3½ billion reserve I provided for is in fact likely to be needed.

The main reasons for this shortfall are an extra £1 billion in privatisation proceeds, a reduction in social security spending of almost £1 billion as a direct result of the sharper than expected fall in unemployment and a saving of some £¾ billion largely due to extra housing receipts under the right-to-buy programme. Taken together with the strong growth in the economy this year, and the containment of debt interest now that the Budget is in surplus, this means that total public spending this year, even excluding privatisation proceeds, will be less than 40 per cent. of national income—the first time this has happened for over 20 years.

Not so long ago, the share of national income spent by the state seemed to rise inexorably. Over the past six years, that trend has been decisively reversed. Since 1982–83, public expenditure, excluding privatisation proceeds, expressed as a share of national income has fallen by seven percentage points—the largest and longest sustained fall since the wartime economy was unwound. Over the whole decade since this Government first took office, from 1978–79 to 1988–89, public expenditure has grown by under 1½ per cent. a year in real terms. This is exactly half the rate at which it grew over the whole of the immediately preceding decade.

Looking ahead, Cabinet agreed in July that public spending over the next three years should keep as close as possible to the existing planning totals, and should continue to fall as a share of national income. The plans I am about to announce meet both those objectives.

For 1989–90, the planning total published in the last public expenditure White Paper was £167 billion. It will remain at £167 billion. This important outcome has been made possible, despite the many claims for increased public spending, by a rigorous reassessment of priorities, coupled with the continuation of two of the factors that have contributed to this year's shortfall; that is to say, benefit savings from lower unemployment and increased receipts from council house sales.

For 1990–91, however, though these two factors will persist, the planning total has been set at £179½ billion, some £3¼ billion more than the previously published figure. For 1991–92, the planning total has been set at £191½ billion. These totals all include the same level of reserves as in last year's plans; that is to say, £3½ billion in the first year, £7 billion in the second year, and £10½ billion in the third. They also incorporate an unchanged estimate of privatisation proceeds of £5 billion a year.

Over the three survey years as a whole, the real growth in spending on programmes will be over 3 per cent. a year. This can be afforded only because of the fall in the burden of debt interest brought about by the dramatic improvement in the Government's finances from Budget deficit to Budget surplus. As a result, overall public spending, excluding privatisation proceeds, will rise by less than 2 per cent. a year, well within the prospective growth of the economy as a whole. In other words, total public spending, excluding privatisation proceeds, will continue to decline as a proportion of national income. At the same time, substantial additional funds have been made available for the Government's most important public expenditure priorities.

The figures which I am about to give all represent increases over the plans in the last public expenditure White Paper.

First, health. An extra £1¼ billion—£1¾ billion—is—[Interruption.] An extra £1¼ billion—[Interruption.]

Mr. Speaker

Order. This is a very important statement, and I am sure that the House wishes to hear it.

Mr. Lawson

An extra £l¼ billion is being provided for the National Health Service in England in 1989–90—[Interruption.] The Opposition may not be interested in the National Health Service, but we on this side of the House are interested in it and are providing a lot more money for it.

An extra £1¼ billion is being provided for the National Health Service in England in 1989–90, and an extra £1½ billion the following year. There will be corresponding increases in Scotland, Wales, and Northern Ireland. On top of that, health authorities are expected to receive an extra £100 million a year from sales of surplus land. Continuing the rate of cost improvement savings achieved in recent years will produce an extra £150 million in 1989–90 and an extra £300 million the following year.

In addition, the Government are accepting the recommendation of the Government Actuary, in a report published today, that NHS employers' superannuation contributions in England and Wales should be reduced, which will save the Health Service a further £300 million a year.

In total, the increases for the Health Service in the United Kingdom as a whole will be over £2 billion in 1989–90 and over £2½ billion in 1990–91. These are by far the largest increases the Health Service has ever received. Comparing next year with this year, the increase in real resources for the NHS should amount to some 4½ per cent.

Second, roads. An extra £220 million is being provided next year for building and repairing motorways and trunk roads, and for strengthening bridges, with a further £250 million the following year.

Third, housing. Gross provision for public sector housing investment is being increased by around £440 million in 1989–90 and £340 million the following year. But thanks to the success of the Government's right-to-buy policy, this is more than financed by extra receipts.

Fourth, law and order. An extra £290 million has been made available in 1989–90 and £430 million in 1990–91, principally for a further expansion in the prison building programme. This will provide a further 3,000 places by 1991–92. Provision for local authority spending on the police has been increased by £240 million.

Defence spending is to be increased by £150 million in 1989–90 and by £600 million in 1990–91. These significant increases are designed to provide a firm framework for the next three years within which our defence programme can be planned with confidence.

So far as the massive social security budget is concerned, lower unemployment has saved more than £1½ billion in both 1989–90 and 1990–91. But substantial increases in planned spending on other benefits, particularly for the disabled, mean that the social security programme will be only marginally reduced in 1989–90 compared with previous plans, and some £1.7 billion higher in 1990–91.

On science and technology, we have altered the balance of public support within an increased total. In particular, provision for spending by the Department of Education and Science has been increased by £120 million a year, with the DES science budget up by 16 per cent. in 1989–90 compared with 1988–89. This reflects the importance the Government attach to basic and strategic research.

The new plans imply an overall increase of £2¼ billion in public sector capital spending in 1989–90. This includes extra investment in hospitals, housing, prisons, and roads. There is provision, too, for higher investment by the nationalised industries, including further anti-pollution investment by the water authorities.

That the Government have been able to strengthen their priority programmes within an unchanged planning total for 1989–90 is, in large measure, a reflection of the success of their policies. The improved performance of the economy has eased pressures on a number of programmes, giving the Government more scope than ever before to shift resources where their own priorities, rather than circumstances, dictate. The details of these and other changes are provided in the material in the Vote Office and more details will be published in the printed Autumn Statement next week.

I turn next to national insurance contributions. The Government have conducted the usual autumn review of contributions in the light of advice from the Government Actuary on the prospective income and expenditure of the national insurance fund, and taking account of the statement on benefits which my right hon. Friend the Secretary of State for Social Security made last week.

The lower earnings limit will be increased next April to £43 a week, in line with the single person's pension, and the upper earnings limit will be raised to £325 a week. The upper limits for the 5 per cent. and 7 per cent. reduced rate bands will also be increased, to £75 a week and £115 a week respectively. The upper limit for the 9 per cent. rate for employers will be raised to £165 a week.

Over recent years, we have steadily reduced the Treasury supplement, the taxpayer's contribution to the national insurance fund. From 18 per cent. in 1979, it now stands at 5 per cent. My right hon. Friend and I now propose to carry this policy to its logical conclusion and to abolish the supplement altogether. The necessary legislation will be introduced early in the new Session.

However, because of the healthy state of the national insurance fund, this decision will not require any increase in contribution rates. Thus, the main class I contribution rates will remain unchanged at 9 per cent. for employees and 10.45 per cent. for employers.

Finally, I turn to the Industry Act forecast. Growth this year looks to be turning out at 4½ per cent. compared with the 3 per cent. growth forecast at the time of the Budget. Investment is particularly strong, growing twice as fast as consumption, with manufacturing investment expected to show the biggest rise of all, at 18 per cent. Indeed, it is striking that total investment has grown almost twice as fast as total consumption over the whole of the past five years.

The continuing vigour of the British economy is testimony to the transformation that has taken place in the supply side of the economy, a transformation which has enabled the seven years to 1988 to record a combination of strong and steady growth unmatched since the war.

As a result, unemployment has been falling rapidly. Since the middle of 1986, it has fallen by very nearly 1 million—the largest fall on record. Over the past year, unemployment has fallen faster in the United Kingdom than in any other major country.

Inflation, as measured by the retail prices index, is likely to be a little over 6 per cent. in the fourth quarter of this year. Part of the rise in recorded inflation reflects the impact on mortgage payments of the higher interest rates needed to tighten monetary policy and thus get inflation firmly back on a downward trend. Excluding mortgage interest payments, the RPI in the fourth quarter is likely to be around 5 per cent., compared with the 4 per cent. rise in the RPI forecast at the time of the Budget.

Exports have continued to perform well, with manufactured exports up 7½ per cent. over the past year. Over the past seven years, the United Kingdom's share of world trade in manufactured goods has remained steady after decades of decline. However, with investment booming, and consumer spending increasing fast, total imports have grown even faster than exports, rising by 13 per cent. in the year to the third quarter. This has led to a substantially greater current account deficit than forecast at the time of the Budget. For 1988 as a whole, this now looks like turning out at some £13 billion, equivalent to 2¾ per cent. of GDP. The stronger than expected economic growth this year means that total tax revenues are likely to exceed the Budget forecast by £3½ billion. Both income tax and VAT have been particularly buoyant.

In the Budget, I set a public sector debt repayment—or PSDR—for 1988–89 of £3 billion, equivalent to around ¾ per cent. of GDP. With higher than expected Government revenues and lower than expected public expenditure, this year's PSDR now looks likely to turn out at some £10 billion, equivalent to over 2 per cent. of GDP.

This will be the second successive year of debt repayment, something that has not hitherto been achieved since records began in the early 1950s. Moreover, this year, the Budget would still be in surplus, by some £4 billion, even if there had been no privatisation proceeds at all. No other major economy has such sound public finances.

Looking ahead to 1989, the economy is forecast to grow by a further 3 per cent., with domestic demand also up by 3 per cent. Once again, investment is expected to grow considerably faster than consumption, and once again unemployment is expected to fall.

The slower growth forecast for 1989 inevitably implies a marked deceleration during the course of the year, particularly so far as domestic demand is concerned. Thus, comparing the second half of next year with the second half of this year, overall growth is forecast at 2½ per cent., and growth in domestic demand at only 1½ per cent.

The current account deficit is likely to fall only slightly, to some £11 billion, or 2¼ per cent. of GDP.

Inflation, while it will inevitably continue to edge up for some months to come, is forecast to peak at some point in the middle of next year before falling back again to 5 per cent. by the fourth quarter.

In short, after two years of unexpectedly rapid expansion, growth next year is forecast to return to a sustainable level, and one which compares well with the economic performance of the 1970s, while inflation will resume its downward path.

The public finances are in substantial surplus and will remain so, with public spending on priority programmes continuing to increase, while overall public spending continues to fall as a share of GDP, to a level in 1991–92 not seen for a quarter of a century.

The prospect that lies before us is yet further testimony to the success of the policies we have been pursuing these past nine and a half years and will continue to pursue, and to the economic transformation that those policies have wrought.

Mr. Gordon Brown (Dunfermline, East)

With the Chancellor's admission just before he sat down that inflation will rise beyond 6 per cent. by Christmas and that the balance of payments deficit will be an unparalleled £13 billion by the end of the year, will the Chancellor concede that the economic prospects that he promised us in the spring were not the economic realities of high interest rates, high deficits and higher inflation that we face in the autumn?

With imports rising this year by an astonishing 12 per cent. but exports by only 1.5 per cent., with our trade deficit of £2.5 billion now quadrupled for each of the next two years and with the deteriorating trade gap that is the Government's distinctive trade mark, will the Chancellor confirm that the trade deficit that he defends is almost as big a share of our national income as was the American deficit that he once so deplored?

Will the Chancellor confirm that inflation is running at almost twice the level of January, that it is more than twice as high as in our competitor countries—France, West Germany and Japan—that Britain will have the highest inflation rate of our competitor countries in 1988 and well into 1989, and that, far from being a temporary blip, 1989 will be the fifth year in a row when inflation will be above the European average? Does the Chancellor recall his objective, set out in 1984 and 1987, of zero inflation? Does he think that that promise is still credible when, after five Budgets and six Autumn Statements, inflation is now higher than when he became Chancellor?

Last November, when inflation was 4 per cent. and falling, the Chancellor told us that the minimum figure for public spending for next year would be £167 billion. After adjusting for the extra inflation that the Chancellor has caused, that figure should be £172 billion. Now that the Chancellor tells us that he will provide only £167 billion and that there is therefore a shortfall in real terms of £5 billion, will he confirm that by failing to compensate for inflation there will be a real deterioration in our essential public services and that over the next year this Chancellor will preside over cuts in housing, essential services, investment and the environment?

Opposition Members welcome any additional resources for the National Health Service and any plan to break down the appallingly high waiting lists. However, is it not the case that the nurses' and doctors' pay rise will cost almost £1 billion in 1989 and that inflation adds another £1 billion to the Treasury's own figures? When health costs are rising faster than even ordinary inflation, the sum that the Chancellor has provided today will barely cover the basic inflationary pressures that the health authorities face, far less deal with their huge backlog of structural repairs. I ask the Chancellor to confirm specifically that even after his announcement today we will still be spending, throughout 1989, a smaller share of our national income on health than almost all our major competitors.

Is there anything more revealing of the Government's priorities than the fact that in the month when the Chancellor went to the Conservative party conference to affirm a new round of top rate tax cuts for those who are already rich he still refuses to find even the tiny amount that would save free eyesight tests and free dental check-ups, even for pensioners?

This is the first financial statement since the Prime Minister announced that she was converted to the cause of the environment. However, it is clear from today's figures, which show a cut in spending on the environment, that the Prime Minister has not converted the Chancellor. Will the Chancellor confirm that there will be not just cuts in spending on the environment, but huge reductions in housing investment, which will be virtually halved over two years, which will mean that thousands of young couples will have to keep on waiting for their first home?

Will the Chancellor also confirm the cuts in educational investment which will widen the training gap between Britain and our competitors at a cost of economic efficiency and our future prospects?

When, last week, Ministers awarded a 5.9 per cent. increase for pensioners and only a 4.7 per cent. increase for families on income support, did they know that they would have to come to the House this week to announce that inflation was above 6 per cent., and still rising, and that therefore the standard of living of millions of our citizens would inevitably fall? Is it not obvious for everyone to see that in this, as in so many other areas, the top rate tax cuts that the Chancellor gave to a few individuals in the spring are now being paid for by reductions in public investment for all our communities this autumn?

This is an Autumn Statement which compounds rather than corrects the errors of the Budget. It is an Autumn Statement which condemns an already congested Britain to further deteriorations in our public services. It is an Autumn Statement which, by the neglect of investment and a policy of high interest rates, leaves the British economy ill equipped and ill prepared for the challenges of the 1990s.

Mr. Lawson

It is apparent, I think, to the whole House that the hon. Gentleman had carefully written all that out before he had seen or heard the statement that I have made. Let me reply to the various points he made.

The hon. Gentleman said that next year, in 1989–90, there would be a real deterioration in public services. That is what he said. It is nonsense. If he looks at the figures, spending on programmes next year is due to rise by 2¾ per cent. in real terms. That is the truth of the matter.

Secondly, as far as the Health Service is concerned, the hon. Gentleman failed to listen to what I told him—and I explained carefully how this was arrived at. Real resources for the National Health Service next year will be 4½ per cent. higher than this year, far and away more than anybody has ever hitherto suggested. And I may say, spending on health as a proportion of total public spending is far higher today than it ever was under Labour.

As for housing investment, the hon. Gentleman alleged that there would be cuts in housing investment. That again is totally untrue. What he is talking about, of course, is the right-to-buy programme, but gross housing investment by local authorities and new towns will be up in real terms as well as in money terms. He said public investment will be down. In fact, public investment will be up by £2¼ billion. It was the Labour Government—the last Labour Government—who slashed public sector investment and we have maintained it and, indeed, outside the housing sector, it has increased under us.

The hon. Gentleman also called for more investment. As I pointed out to the House in my statement, over the past five years, total investment in this country has risen almost twice as much as total consumption. Indeed, taking the whole of our period of office since 1979, investment has risen more than consumption. Under Labour—they had admittedly a much smaller increase in consumption—the increase in investment was infinitesimal, only about one eighth of the increase in consumption. That is what happened when they were in office. Indeed, the hon. Gentleman's account of the economy showed again that he has no contact whatever with reality.

The hon. Gentleman talked about inflation. I am not going to take any lessons on inflation from the hon. Members opposite, when inflation, when they were in office, averaged 15½ per cent. and never once—not in one month, not in their most favourable month—was it ever as low as it is at the present time, even though it is still too high and it has to come lower; nor did he mention once record exports, record productivity, record investment, record output and record employment, too. I would have liked to have heard some acknowledgment of that from the hon. Gentleman.

Mr. A. J. Beith (Berwick-upon-Tweed)

I am grateful for the additional funds that the Government have provided for the National Health Service, but am concerned that the Chancellor is taking more money out of housing through local authority council house sales revenues than he is, on his own admission, putting back into it. Is he not singing, "Don't worry, be happy", when he is presiding over a high-risk strategy with interest rates which will remain high and feed through into mortgages and pay claims, with inflation which could touch 8 per cent. even within the forecast that he has given, with a balance of payments deficit which will not go down significantly so far as the eye can see, with the risk of a sterling crisis and with the money supply not within the target range? Is itnot obvious that, instead of merely introducing an autumn statement, he should have brought forward an autumn Budget at the same time or, at the very least, indicated that he would not make further tax reductions in his next Budget, or does he not expect to introduce another Budget?

Mr. Lawson

I am grateful to the hon. Gentleman for letting me know about the difficulties of conducting economic policy. I have to tell him that I was already well aware of them and am already satisfied that the policies that we have in place are adequate to the situation, as, indeed, they have been for the past nine and a half years. There is no question of an autumn Budget, I can tell the hon. Gentleman. That only happened under the Labour Government which he supported.

Sir William Clark (Croydon, South)

The House will agree that my right hon. Friend would be well advised to ignore the carping criticism of the Opposition, particularly with their record of the management—or mismanagement—of our economy when they were in office. Does he agree that his statement will be welcomed, not only in this House, but in the country? I hope that he will emphasise the fact that the Government are unique in that they have cut taxation, increased public expenditure in real terms and have been repaying the national debt. Those are three very good things.

I am sure that the House will wish to congratulate my right hon. Friend the Chief Secretary to the Treasury on the admirable way in which he has dealt with the £167 billion. It will be welcomed that the percentage of national income going on public expenditure is now below 40 per cent. and is going lower. It is an achievement to have stuck to the £167 billion and he deserves our congratulations.

Mr. Lawson

I agree with everything that my hon. Friend said and, in particular, with his congratulations to my right hon. Friend the Chief Secretary. Of course, I have to confess to the House—I did not expect my statement to be welcome to the Benches opposite. I did not expect them to welcome the fact that we have succeeded in holding the planning total at £167 billion. I did not expect them to welcome the fact that we have got total public expenditure below 40 per cent. of GDP for the first time in over 20 years because, of course, the only thing they know about is increasing public expenditure, increasing it faster and faster, and faster than the economy can afford, and we know where that led to. It led to the humiliation of having to go cap in hand to the IMF, and they have learnt nothing from their experience last time.

Mr. Bruce Grocott (The Wrekin)

Is the Chancellor aware that, by his performance today, he has confirmed the Prime Minister's assessment that he is not leadership material? Is he also aware, in the light of his confident statement, that last Thursday the Shropshire health authority confirmed a large hospital closure programme for want of £3 million? If he is now putting his money where his mouth is, will he please write to the Shropshire health authority, telling it that it is no longer necessary for it to undergo those cuts because he is in fact proposing a real increase in income?

Mr. Lawson

As the hon. Gentleman knows—even though he has had to switch constituencies, I think he is probably now reasonably familiar with his new one— unlike the slashing cuts in hospital spending under the Government that he supported, there have been substantial increases in hospital building programmes under this Government, not least the large new general hospital at Telford.

Mr. Terence L. Higgins (Worthing)

I welcome an autumn statement which shows that it is possible to combine the tax cuts of the last Budget with substantial increases in public expenditure and a far greater repayment of the public debt than anyone expected at the time of the last Budget.

Clearly, a growth rate of 4.5 per cent., which was also higher than predicted, is not sustainable. Is it now my right hon. Friend's intention to keep the growth in demand in line with the productive potential now being achieved?

Mr. Lawson

I am grateful to my right hon. Friend. Yes, indeed, it is necessary that we should keep the growth in demand in line with productive potential, and the growth in productive potential, fortunately, is the success of the supply side policies of this Government. The growth in productive potential now is greater than we have ever known in the past, but, of course, it is not as large as 44½ per cent. and there has to be a slowing down. That is right.

Dr. David Owen (Plymouth, Devonport)

I ask the Chancellor of the Exchequer to be more specific. In the economic prospects for 1989, he forecasts that there will be a slightly smaller current account deficit than £13 billion. Will he put a figure on that? Is it £12 billion or £11 billion? He goes into the question of a 5 per cent. inflation rate in the fourth quarter of 1989 and warns that it will peak in mid-1989. Is he talking of an 8 per cent. rise in the second or third quarter? The Chancellor also forecasts that unit labour costs will grow more rapidly than 1 per cent. over this year. What figure is he estimating for unit labour costs?

Mr. Lawson

On the last point, I do not have in my head the figure for the expected increase in unit labour costs, but the right hon. Gentleman will be able to find that in the material that is published today. It is, of course, only a forecast, and has the same status as other forecasts made by anybody. As regards the current account of the balance of payments, I did quote the figure that is being forecast for the current account deficit next year. It is a deficit of £11 billion. I am not surprised that the right hon. Gentleman did not hear it because of the barrage of noise that was coming from the Opposition Benches, which is such a deplorable feature of the House of Commons these days.

Mr. Leon Brittan (Richmond, Yorks)

May I join in congratulating my right hon. Friend the Chancellor of the Exchequer on his formidable achievement in continuing the downward path of public expenditure as a proportion of national income while at the same time providing extra resources for priority areas of expenditure? Does he agree that if top priority is to be given to reducing the present levels of inflation, fiscal policy must reinforce monetary policy? That means envisaging an even higher level of debt repayment in the coming year than would otherwise be necessary.

Mr. Lawson

My right hon. and learned Friend obviously speaks with the particular authority of a former Chief Secretary to the Treasury, and I take note of what he says. The fiscal policy—the fiscal stance that we have now in the United Kingdom—is exceptionally tight, and looking at the fiscal stance one has to look at both sides, taxation and public expenditure, and, indeed, at the surplus, which is the difference between those two. As for the question of the Budget judgment, my right hon. and learned Friend will understand that I am not going to be tempted on to that ground now. The Budget judgment is something that I will take at the appropriate time in the normal way.

Mr. Jack Ashley (Stoke-on Trent, South)

Will the Chancellor of the Exchequer please take note of the fact that yesterday I received a letter from a man who is paralysed from the neck down—a tetraplegic. He said that, as a result of the Government's cost-cutting social security changes in April, he is £13 a week worse off despite transitional protection. Will the right hon. Gentleman write to this man and thank him for contributing to his pot of gold in the form of a budgetary surplus? Will he console him with an assurance that, despite the appalling fall in his income, the British economy is bigger, stronger, more successful and so on?

Mr. Lawson

Well, of course, I do not know about the particular circumstances of the individual case that the right hon. Gentleman spoke about. What I do know is that spending on the disabled has increased by 90 per cent. since this Government took office, and there is provision for a further substantial increase in spending on the disabled in the public expenditure plans which I have published today.

Mr. John Townend (Bridlington)

May I congratulate my right hon. Friend and his Treasury colleagues on withstanding the blandishments of some of their high-spending colleagues and keeping the planning total down to the level that was published last January? Does my right hon. Friend agree that repayment of the national debt, much of which was incurred by the profligacy of the last Labour Government, brings continuous benefit to our children and grandchildren? What is his long-term target for reducing public expenditure in terms of gross domestic product? Will it be reduced to the level of the 1960s, when we had another successful Conservative Government?

Mr. Lawson

My hon. Friend is right about the enormous value in having a Budget surplus and repaying the national debt year by year. There is the benefit in the short term that we see—being able to spend more on public expenditure programmes because debt interest is taking a smaller amount of the total public expenditure cake. It also, of course, is very important for future generations—reducing the burden of debt interest that future generations have to bear. It was the Labour Government who were entirely, if I may coin a phrase, a "me now" Government.

Mr. Dafydd Wigley (Caernarfon)

The Chancellor of the Exchequer partly attributed the increase in inflation to the increase in interest rates and the effect on mortgages. Does not he realise that eight of the 10 large building societies are not increasing mortgage payments until April 1989? That means that a political and economic time bomb will hit inflation in April, May and June 1989, just in time for the European elections. Will he reconsider the use of interest rates as a short-term lever, and will he tell the House what his assumptions on interest rates are for the next two years?

Mr. Lawson

The hon. Gentleman is under a misapprehension about what he calls the political and economic time bomb. The way the RPI is constructed, the increase in mortgage rates is fed into the RPI immediately the building societies announce it. It does not wait until they implement it. Therefore, there is nothing further to come in April. It does mean, of course, that because one or two building societies, notably the Halifax, do not in fact require the people it is lending to to pay more until April —some of them do it much earlier and, of course, for new mortgages it is earlier—the tightening in monetary conditions that occurs as a result of putting up interest rates, and mortgage rates going up, is not something that happens instantaneously. It happens progressively, and there will be a progressive tightening for the very reason that the hon. Gentleman said, but the effect on the RPI is immediate.

Mr. John Watts (Slough)

Does my right hon. Friend the Chancellor of the Exchequer recall that when he made his Autumn Statement last year there was well-founded apprehension that the crash in world stock markets would have a damaging effect on the British economy and the world economy generally? Will he accept that today's statement is a great tribute to the underlying strength of the British economy and to the timely measures that he took to ensure that the effects of the crash did not have a damaging effect on the British economy? Only the churlish would use hindsight to say that he was wrong in taking those steps in terms of ensuring adequate liquidity, or would criticise the measures that he has now taken to tighten monetary conditions so as to squeeze inflation out of the system.

Mr. Lawson

My hon. Friend is right. I do vividly recall the very different circumstances in which I introduced last year's Autumn Statement. I believe that the measures that we took to avert a world recession at that time were fully justified, even though, as I have said on another occasion, they may have stored up some problems later on. What I do recall is that the Labour party was urging me to cut interest rates far more and to expand far more than I thought it prudent to do at the time. I also recall more recently, incidentally, in our Budget debate that the hon. Member for Dunfermline, East (Mr. Brown) said: current taxation revenues without privatisation receipts should exceed current expenditure, he did not balance the Budget last year or this year, and he will not balance it in years to come."—[Official Report, 21 March 1988; Vol. 130, c. 103.] I hope that he will now concede that that is precisely what I have done.

Mr. David Blunkett (Sheffield, Brightside)

Will the Chancellor of the Exchequer confirm that the base from which his announcements on the Health Service funding were predicted was £25.683 billion? That has been increased already by the announcements made over recent months to £26.571 billion. Contrary to what the right hon. Gentleman said to my hon. Friend the Member for Dunfermline, East (Mr. Brown), this means that, taking into account the Government's optimistic prediction of 4.7 per cent. inflation and the dubious statistics on once-off sales of land and superannuation changes, the Government will be short of £200 million in meeting the 4.7 per cent. increase in inflation for the Health Service. If this is not a sleight of hand, it has to be misleading and mischievous given the impact that it will have on those working in the Health Service and on those who receive the services that are provided by it. Will the right hon. Gentleman confirm that there has been a decrease, not an increase?

Mr. Lawson

I confirm no such thing. For example, it is absurd to suggest that the £300 million a year superannuation contribution—which NHS employers used to have to pay and will no longer have to pay and therefore the money will go straight into providing health care—should not be counted. That is an absurdity. That is £300 million of extra money. As I said, even after taking into account inflation, the real increase in health spending next year is around 4½ per cent.

Mr. Jeremy Hanley (Richmond and Barnes)

Does my right hon. Friend agree that his reduction in income tax rates have helped to fuel extra taxation revenues and that the highest rate taxpayers now pay a larger proportion of those revenues than they did under a Labour Government? Will he also agree that, with the extra 3 per cent. above inflation for future spending programmes, the Conservative party has more humanity, more justice and more ability than the Labour party ever possessed?

Mr. Lawson

Certainly the Conservative party in government has a great deal more success in achieving economic growth as well as getting inflation down, therefore enabling more resources to be put to the purposes which I understood the Labour party was in favour of. Of course, the Labour party is totally oblivious to the facts and, after five and a half years as Chancellor of the Exchequer, I am beginning to believe that it is extraordinarily difficult to educate Labour Members.

Mr. Stuart Bell (Middlesbrough)

While it may be true that the British economy weathered the stock market crash in the autumn of 1987, it has weathered less well the chaotic and catastrophic handling of the exchange rate and the tax reductions for higher earners introduced in the Chancellor's Budget this year. Will the Chancellor confirm that he is relying on the speculative movement of capital into this country to finance the deficit in our balance of payments which is now four times what it was forecast to be in last year's Autumn Statement? If that balance of payments deficit is to continue into the 1990s, how will it affect public, national and international confidence in our economy? If interest rates are to be the only barricade against the loss of confidence, how high will they have to go to maintain that international confidence?

Mr. Lawson

Clearly, so long as there is a deficit on the current account of the balance of payments, there must equally be an inflow of capital from overseas because the balance of payments must balance. Some of that inflow capital will be money that is lent and is securing interest. Some of it will be direct equity investment in this country. There will be and there are both kinds. More and more mobile funds today are looking for a good home and for a home where they have confidence in the political stability and economic policies of the Government concerned. That is why there is so much capital actively seeking a home in this country. The deficit on the current account of the balance of payments will in due course diminish quite significantly, but in the meantime, as the markets show very clearly, there is complete confidence in this country and no problem whatever in financing the deficit that we have.

Mr. Ivor Stanbrook (Orpington)

While dealing with the many large and justified claims on the public purse, was my right hon. Friend this year able to accommodate a small one, and remove the injustice suffered by colonial service pensioners who are not allowed to count war service in their pension entitlement?

Mr. Lawson

I certainly recognise the very determined work of my hon. Friend and some others in lobbying for this. I am pleased to be able to tell them that provision has been made for war service credit in the calculation of pensions of ex-colonial service men. Up to 6,000 pensioners should benefit from that.

Mr. Giles Radice (Durham, North)

When does the right hon. Gentleman expect the balance of payments to come back into surplus?

Mr. Lawson

Fortunately, under the Industry Act 1975 I am not required to forecast any further than the year ahead. It will not come back into surplus in 1989.

Mr. Quentin Davies (Stamford and Spalding)

I know that my right hon. Friend is a very kindly and sympathetic man. His statement sets out the most magnificent record of economic management and very reassuring prospects for our economy. Will he spare a thought for the appalling problems that he has caused the Opposition? It is quite impossible to argue with such a record and say anything remotely sensible, as was demonstrated from the Opposition Front Bench. The prospect of £10 billion of public sector debt repayment next year is splendid, but its effect on demand will be negated if it is compensated by net household dissaving. I know that my right hon. Friend is concerned about this and that is why he has raised interest rates. Will he give us some estimate of how he sees the savings ratio moving over the next 12 months?

Mr. Lawson

My hon. Friend is clearly a most perceptive observer of the political scene. It is essential that there should be an increase in the savings ratio and that is why I increased interest rates quite substantially which will both deter borrowing and increase the incentive to save. It will incidentally provide an enhanced income for savers among whom, in particular, pensioners tend to be numbered. That is something which the Opposition have failed to acknowledge at any time during our debates. As for when the savings ratio will turn, that is one of the hardest things to forecast, but I expect that it will not be too long before we can see a turn up in the savings ratio.

Ms. Marjorie Mowlam (Redcar)

The Chancellor told us today that the RPI increase will be about 5 per cent. in the fourth quarter assuming that mortgage interest payments are excluded. If they are included in that equation, will pensioners receive a 5.9 per cent. increase or less?

Mr. Lawson

As I have said, RPI in the fourth quarter is likely to turn out at 6¼ per cent. Under this Government pensioners have had an uprating every year and will continue to have that, according to inflation in the previous years. They will not, as occurred under the last Labour Government, be cheated by the switch from the historic basis for uprating to uprating on the basis of some spurious forecasts.

Sir Trevor Skeet (Bedfordshire, North)

I congratulate my right hon. Friend the Chancellor of the Exchequer on granting an additional £120 million for basic research in the United Kingdom. That will be a tonic to British science and we hope that he will bear it in mind in future contributions. How much of this money will be applied to our international commitments in CERN and in space?

Mr. Lawson

I know my hon. Friend's long-standing interest in this and a number of other scientific and energy matters. I am afraid that I cannot answer his question, but I am sure that if he puts his question to the Minister responsible for these matters he will receive an answer.

Mr. Ron Brown (Edinburgh, Leith)

I congratulate the Chancellor on a wonderful statement and speech but may I tell him—[Interruption.] The figures surely represent lies, damn lies and Tory propaganda. If he does not understand that, there is something wrong. The reality is all around us. There is a major crisis in the economy and that will not be resolved simply by juggling the figures or by the Chancellor making pretty statements here.

The Chancellor has not mentioned Scotland. We appreciate in Scotland that there is a struggle going on against the poll tax, a very regressive tax which obviously benefits the rich at the expense of the poor. Will he not appreciate that, unless that tax is removed or controlled in some way, there will be a major challenge next year? The Chancellor must understand that increasingly more and more Labour Members will be backing the struggle even if that is against the law. It is the Government's law, an unjust law and a class law.

Mr. Lawson

This particular occasion is one on which we talk about public expenditure. Therefore, I shall content myself with informing the hon. Gentleman that public expenditure per head in Scotland is far far higher than public expenditure per head in England or Wales.

Mr. Tim Smith (Beaconsfield)

Does my right hon. Friend agree that it is now clear that the British economy is heading not for the crash landing for which the Opposition are so desperately hoping, but for what economists are apparently wont to call a soft landing? Is not the remarkable thing about that so-called soft landing that it involves a growth rate next year of 2.5 per cent., which is extremely respectable by both international and historic standards?

Mr. Lawson

My hon. Friend is right in what he says about the Opposition. It is a matter for considerable concern that the Opposition should all the time be hoping and wishing to see economic disaster. What is causing such frustration on the Opposition Benches is that year after year since they have been in opposition they have predicted it, and year after year it has failed to turn up and it will continue to fail to turn up.

Mr. Dick Douglas (Dunfermline, West)

Will the Chancellor give us some insight into certain aspects of the international economy, particularly the movements in the price of oil, which vitally affect his tax-raising powers? Secondly, if a growth rate of 4.5 per cent. is not sustainable, due to certain elements of overheating which particularly affect the midlands and the south-east, and we are reduced to a growth rate of 2.5 per cent., which leaves Scotland with high and unacceptable levels of unemployment, how will his policy correct the disastrous regional imbalances which persist in the United Kingdom?

Mr. Lawson

On the first part of the hon. Gentleman's question, the British economy's dependence on oil and oil tax revenues was never nearly as great as many people imagined. Indeed, since the collapse in the oil price in 1986, the importance of oil tax revenues to the Exchequer's total revenues is really very slight indeed. Therefore, the hon. Gentleman need lose no sleep over that. What I think we would obviously most like to see is the absence of a high degree of volatility in the oil price because that makes it rather harder for the oil companies to plan their investment programmes. As for regional imbalances, the Scotish economy is doing better now than it has ever done before. As the hon. Gentleman knows, continuation of that improvement is overwhelmingly in the hands of the Scottish people themselves.

Ms. Joyce Quin (Gateshead, East)

Has the Chancellor any idea of what the regional breakdown in the expenditure that he has announced will be? For example, in the inadequate amount of public sector capital investment that he has announced, will there be any guarantee that the regions will get the direct links to the Channel tunnel that they badly need?

Mr. Lawson

My right hon. Friend the Secretary of State for Transport has received a particularly large percentage increase in his programme. A substantial amount of extra money will be spent on roads, but how that is allocated between different road projects is, to a considerable extent, a matter for him.

Mr. Nicholas Budgen (Wolverhampton, South-West)

Is it not disturbing that even in the third quarter of this year the clearing banks lent a record £5 billion on mortgages? Does that not clearly show the extent of the overheating in the economy and how long and hard it will be to contain inflation?

Mr. Lawson

The battle against inflation is one that has to be waged all the time and is always a struggle, but I think that my hon. Friend should realise that what has been happening lately is that the banks have been securing an increased share of the market at the expense of the building societies and in looking at the mortgage market it is necessary to look at the banks and the building societies together, not just one part of the whole market. It is fairly clear—most people who are close to the housing market are aware of this—that the housing market has softened considerably since the summer of this year.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

Will my right hon. Friend accept that these figures are truly remarkable and better than many of us expected the outturn to be, and that many of us are extraordinarily pleased about the extra money being given to the overseas aid programme, particularly bearing in mind the tragedies that have happened in the past 12 months? Do the National Health figures, which are much more than the leaked figures that we all heard yesterday, mean that Her Majesty's Government will encourage the Department of Health to spend more on preventive medicine, and will that help the outcome of tonight's debate?

Mr. Lawson

I am grateful to my hon. Friend for his earlier remarks. Priorities within the health programme are, in the first instance, a matter for my right hon. Friend the Secretary of State. The whole question of improving further the NHS is very much at the heart of the review of the Health Service and health care that we are conducting under the chairmanship of my right hon. Friend the Prime Minister.

As for the outcome of tonight's debate, I very much hope that the measures that the Government are proposing, which are desirable and right on their merits, will be approved by the House. But I have to make it clear that if, by any mischance, that were not to be the case, there would be no question of additional funds being made available for the NHS over and above the massive increases that I announced earlier today.

Several Hon. Members


Mr. Speaker

Order. I must have regard to the subsequent debates that the Chancellor has just mentioned, and we also have a ten-minute Bill today. I shall allow questions on this important statement to continue for another 10 minutes and then we must move on.

Mr. David Winnick (Walsall, North)

Is the Chancellor proud of the fact that since the Government have been in office there have been cuts in housing public expenditure of nearly 70 per cent. which have resulted in a great deal of housing misery and which could be seen by the Chancellor in a five-minute walk from Downing street to the Embankment? Does not he recognise that so many of those people in housing need cannot afford a mortgage and certainly cannot afford the market rents that will arise from what is now being proposed in the Housing Bill? If all is so well in the economy, why does the Prime Minister take the view that the Chancellor is not the person to succeed her? Is he not at times humiliated by the way that he is treated?

Mr. Lawson

The Government's housing policy has two main planks. One is to switch resources from the public to the private sector, and that we have done with enormous success by private sector housebuilding increasing very substantially and, of course, by the right-to-buy programme—the purchase by council tenants of their own homes. The other element which has come to the fore more recently is the resuscitation of the private rented sector. That again is of the first importance and that was why the new business expansion scheme arrangements were put in place in this year's Budget and they are again proving extremely successful.

Mr. David Curry (Skipton and Ripon)

My right hon. Friend correctly identifies the preoccupation with inflation. Therefore, does he agree that it is doubly important that the Opposition should not egg on every wage claim for the next 12 months? Further, will he make it clear to industry that it cannot count upon a progressive deterioration of the exchange rate to compensate for any failure to control industrial costs?

Mr. Lawson

I underline that. I believe that that is a point I have made on a number of occasions over the past two years. I happily reiterate it now. It is, after all, of the first importance that businesses have to control their own costs in order to remain competitive, and that means controlling their own wage costs. They will not be bailed out by a devaluation of the currency.

Mr. Nigel Griffiths (Edinburgh, South)

Does the Chancellor of the Exchequer accept that the Autumn Statement shows high interest rates and a high pound, which have inflicted so much damage on manufacturing and commerce, and does he also accept that, having inflicted damage on our public services, the future is bleak? If not, what is the future?

Mr. Lawson

I know what the future would be if there were ever to be a Labour Government, which there will not be, based on the recipe which the hon. Member for Edinburgh, South (Mr. Griffiths) has put forward. It would be certainly a much lower pound, lower interest rates in the short term but then having to rocket up later, an economic crisis, and raging inflation. That is what we would see if the policies which the hon. Gentleman is advocating were pursued.

Mr. Michael Jack (Fylde)

I hope that my right hon. Friend accepts the fact that the views of the Opposition are blinkered. There has, as a result of my right hon. Friend's economic policies, been massive private sector investment in north-west England, to the benefit of all concerned.

I wish to ask my right hon. Friend about National Savings—another product of the north-west. In the light of his excellent tax revenues, I seek his assurance that National Savings products will continue to be developed, to assist savings.

Mr. Lawson

I appreciate my hon. Friend's continued interest in the National Savings department. Indeed, it will have a continuing role to play. He will recall that I announced at the Conservative party conference in October of this year that we will be launching in January an entirely new National Savings instrument, the capital bond, which I hope will prove to be extremely attractive.

Mr. A. E. P. Duffy (Sheffield, Attercliffe)

The Chancellor of the Exchequer made no mention of interest rates—his sole regulator—or of monetary growth, which is truly alarming. Given his deteriorating balance of payments deficit, is it not certain that one crucial question that should be asked of his statement is how soon it will propel him into yet another round of interest rate rises? What assurance can the right hon. Gentleman give the House, in view of today's reinforcement of domestic demand, sustained monetary growth, and the world trend towards interest rate rises?

Mr. Lawson

I am always particularly interested in what the hon. Member for Sheffield, Attercliffe (Mr. Duffy) has to say, not least because it is always in complete 180-degree contradiction to everything that his hon. Friends have to say. As I have always said, the level of interest rates will be whatever is necessary in order to keep downward pressure on inflation, and they will be kept at that level for as long as it is necessary to do so.

Mr. Phillip Oppenheim (Amber Valley)

Does my right hon. Friend accept that there is a huge gulf between his Autumn Statement and the series of mini-Budgets and almost monthly crises that studded the last Labour Government? Will he bear in mind that there are millions of savers in this country as well as borrowers; that those savers need to be encouraged; that higher interest rates encourage saving and will improve the savings ratio—in marked contrast to the situation in the 1970s, when savers found their returns continually outpaced by inflation?

Mr. Lawson

My hon. Friend the Member for Amber Valley (Mr. Oppenheim) is absolutely right. It was the last Labour Government which robbed the savers, and the elderly in particular, by inflation—which not only gave them profound anxiety as to what their pension would buy next month, next week, whatever it happened to be, but also of course meant that they had a negative real return on the savings they had. Now the real return is positive. It has been positive for many years past, and it has now been increased. That is something which is very important to savers, and it is important at the present time to the health of the British economy.

Mr. Rhodri Morgan (Cardiff, West)

The Chancellor has berated the Opposition for waiting for an economic disaster to happen. I put it to him that what really concerns us are two aspects of the Government's economic policy. First, unemployment is still twice what it was when the Government came to office. If there had been the supply side miracle to which the Chancellor has referred, that would not be the case after nine and a half years. Secondly, the Chancellor said that the cumulative balance of trade deficit for the fiscal years 1988, 1989 and 1990 will total well over £30 billion and possibly £35 billion, thereby taking up most of the £50 billion oil price cushion that has been built up in United Kingdom assets owned abroad. The Chancellor is surely really saying that he is waiting for a supply side miracle.

Mr. Lawson

The supply side miracle has already happened and we are seeing the benefits of that. As for unemployment, I will tell the hon. Member for Cardiff, West (Mr. Morgan) that there are more people at work in this country today than ever before in our history.

Mr. Conal Gregory (York)

I congratulate my right hon. Friend on his admirable statement. Bearing in mind that the personal ratio of debt to assets has increased to about 33 per cent. and that the principal instrument that he is using is interest rates, will he give consideration to the possibility of controlling personal finance through, for example, urging the credit card companies to increase the minimum return on a monthly basis and by controlling hire purchase? The National Association of Citizens Advice Bureaux says that almost 1.4 million people approached its offices last year with debt problems. With that in mind, will my right hon. Friend give urgent consideration to the other mechanisms that I have mentioned?

Mr. Lawson

I do not think that what my hon. Friend the Member for York (Mr. Gregory) says would really help in the present situation—not least because personal borrowing and household borrowing is overwhelmingly borrowing on mortgages. Both credit cards and hire purchase are a very, very small proportion of the total—it is overwhelmingly borrowing on mortgages. No, there is no escape from the need to raise interest rates, and that is why I have raised them and will continue to keep them as high as they need to be for as long as is necessary.

As for what my hon. Friend says, however, that does not mean that there is not a responsibility—there is—on both lenders and borrowers: for lenders not to lend to those whom they think might get into difficulties, and for borrowers not to borrow beyond their capacity to repay and to service.