Pre-Budget Report

My Lords, the debate is taking place on the basis of the Pre-Budget Report, a massive 232 page document, which the Government and the Minister suggest is an appropriate document for European Union members. Although it is dated November 2008, it has been completely overtaken by events, by a series of increases in public expenditure, which are far beyond anything any previous Chancellor of the Exchequer could possibly have envisaged. Despite its length and scope, it has some remarkable omissions. Among the things in which one might expect European Union members to have an interest is the British Government’s policy on the exchange rate. I search in vain in this document for any mention whatever of the exchange rate. In Europe, that might be understandable because members are in the exchange rate mechanism, the monetary system of the European Union, and that is determined for them. But they certainly would have a great interest in knowing whether the recent depreciation of the pound was deliberate or even whether in cutting interest rates the Bank of England took into account the effect on the exchange rate. It is immensely relevant, for example, to the Statement made today by the noble Lord, Lord Mandelson, in relation to the motor industry. Probably the fall in the exchange rate is far more important to the competitive position of the motor industry in this country than anything that he announced. But we look in vain in this document for any indication of the Government’s policy on this matter. Another omission from the report is any discussion of monetary policy in a sensible context. One reason why there is great confusion on this is that when the then Chancellor of the Exchequer, Mr Brown, gave what he described as independence to the Bank of England on monetary policy, he at the same time clawed back into the Treasury responsibility for debt management. I stressed that at the time, but great attention was not paid to it. This is a crucial point, which has led to great confusion. In the present, quite heated, economic debate, we are, truth to tell, in a serious semantic mess and it is important for us to sort that out. It is very important to distinguish between monetary policy, which concerns the quantity of money, and interest rate policy, which concerns the price of money. The Minister is nodding and I am glad to see that I carry him with me. I am pursuing the line which I pursued in the debate on the Queen’s Speech, but I want to develop the argument. The fact is that the Bank of England was not given independence on monetary policy; it was given independence on interest rate policy. But that is wrong because it was given independence, as I have said before, on a single interest rate. We have only to look at what has been happening to other interest rates recently to realise that the Bank of England certainly has not been determining interest rates; it has determined only the one rate. The reality is that the Monetary Policy Committee of the Bank of England is completely misnamed. It is not concerned with money supply. Of course, a movement in interest rate will have an effect, but it is far from being the only, still less the most important, determinant of the money supply. It is very important that we should get this set of issues sorted out. Otherwise, there is great confusion. Throughout the document under discussion, when it refers to ““monetary policy””, it means ““interest rate policy””. There is no indication of what the Government’s policy is on the money supply. That is an extraordinary change in fashion. When I was at the Treasury a long while ago, I was bedevilled all the time by M1, M2, M3, M4 or whatever. There is no mention of it at all, but it is crucially important now. We may all be Keynesians, but monetary policy still has an important role to play. In particular, there is the relationship between this enormous increase in debt that has taken place and the Government’s policy on funding. I intervened in the noble Lord’s speech. He was kind enough to reply, saying that it was the Government’s policy fully to fund the deficit from the non-bank public. That is crucial in determining the money supply. It is not likely to result in the kind of so-called fiscal stimulus which the Government seem to envisage, because it would largely nullify the effect of the fiscal stimulus—that is to say, the debt—on the money supply. In turn, that would have an effect on aggregate demand. The Minister may wish to recant on this point when he comes to reply. It is interesting that, suddenly, over the past few days, there are rumours, which might be the best way to put it in the press, that the Bank of England and its Monetary Policy Committee might be given some control over so-called quantitative easing. Not to put too fine a point on it, that means increasing the money supply, or printing money. Of course, there are many different ways of ““printing money””. You can do it, if necessary, simply by getting a printing press; that is the easiest way of doing it. The more usual way involves the relationship between debt and funding. Is there, indeed, any intention to give the Bank of England—and, in particular, the so-called Monetary Policy Committee—something to do with monetary policy, as against interest rate policy? The real trouble is that at the moment we have no idea where responsibility for these matters lies. I do not believe that it is with the Bank of England. Presumably responsibility is with the Treasury, but we do not really know what their policy is on this point. We are in a difficult situation. In the earlier debate I asked the Minister whether figures are available on the money supply. They certainly do not appear in this book. Since taking office the Minister has been very good in responding to various debates. If noble Lords have asked questions to which they did not get replies, he has written to them with a specific answer. We should be grateful for that; it has not always happened in the past, by any means. Indeed, it is almost an innovation. I hope the Minister will place in the Library a letter or some serious indication of the extent to which the Government believe that the supply of money will change. I am not particularly against an increase in the money supply. I was castigated enough for it previously. It may well be what we need at this time. Clearly, the banking system, in terms of making credit available to those who need it in order to stimulate the economy, has clogged up. Despite the Government’s efforts—I pay tribute to them for this—to unblock the banking system and allow the flow of credit to proceed in wholesale markets normally, it is not happening. Therefore, it may well be that a stimulus to the money supply is the appropriate response at this time. The great danger at present is that in stimulating the economy we build up enormous inflationary pressure for the future. That would be a very dangerous situation. We are starting from a point where inflation, even at this moment, while it has come down substantially, is still above the zero level. Interest rates have now been cut virtually to zero and, certainly in real terms, are negative. I do not understand either how the Government are going to fund any of this enormous debt—if they do not do so at all, there will be huge inflationary pressures—or how they are going to deal with what is now an explosive situation as a result of the increase in debt. We have had no clear statement from the Government, from Mr Brown or from the Chancellor as to where we are going on the central problem of economic management. We are entitled to know that and simply fudging the issue is a dangerous thing to do.