On Thursday I will be leading a one day debate in the Commons on the UK economy and economic growth. This is possible owing to the excellent reform that gives a Backbench Committee the right to allocate debates for one day a week. I asked for this wide ranging debate on what is needed to encourage decent growth and was granted it.
In the run up to the debate I will highlight some of the issues I expect to arise and some which I will be tackling in my opening speech.
The first requirement should be honest money. For twenty five years now I have found myself in dispute with the ill judged stance of the Bank of England, which has lurched from boom to bust and from boom to bust again. In the late 1980s I wrote and argued against joining the Exchange Rate Mechanism, saying that joining would lead to boom or bust. We subsequently joined, and had both boom and bust as a result. It did huge damage to the UK economy, and plunged the Conservative party into a 13 year political wilderness. People rightly objected to the high interest rates and the recession which ERM membership brought about.
In the middle 200s I found myself arguing with the Conservative front bench about the wisdom of backing the so called independent Bank of England. I thought the MPC was likely to lurch from boom to bust. They did so in a way surpassing even my wildest fears, creating the conditions for the most extreme credit bubble I have ever seen followed by the worst financial crisis since 1929-32.
Today I find myself arguing against more quantitative easing. The direct creation of money is an extreme measure for extreme conditions. If prices are falling or are in danger of falling, if there is a lot of unused capacity and if the money supply is falling there can be a case for money creation once interest rates have been depressed to near zero.
The current situation is very different. RPI inflation is 4.6% and has been around 5% for some time. CPI inflation has been above target for most of the last five years and remains so. Much manaufacturing capacity is now back in use, following a violent shake out in 2008-9. There is evidence of inflationary increases in input costs,with many commodity prices and oil leaping up from the lows of 2008-9. Money growth has resumed.
The public spending figures show how important control of costs, wages and prices are. In an era of low cash increases in total spending each year it is even more important to keep down inflationary increases to maximise what the money can buy. As we import around one third of what we buy keeping the pound up is crucial to avoid more imported inflation.
The first task of the government must be to go forward to honest money. The MPC needs the Chancellor’s permission to print more. He should make it clear his permission will not be forthcoming in this climate. The UK needs to be weaned off inflationary shots of extra money.