................................................................................ ON THE RECORD RECORDED FROM TRANSMISSION BBC-1 DATE: 7.2.93 ................................................................................ JONATHAN DIMBLEBY: Good afternoon and welcome to On The Record. The credibility of the Chancellor, indeed of the entire government comes under ferocious scrutiny in the Sunday papers today. What is usually referred to as the Tory press is particularly scathing. According to a mocking leader in the Sunday Times, "the government lacks purpose or direction and therefore governs by stumbling from crisis to crisis, usually of its own making". Under the headline "The Government isn't working" The Sunday Telegraph declares that John Major and his Ministers are in a state of frenzied INactivity, powerless to affect events. And in the Mail on Sunday, the former Cabinet Minister John Biffen writes of a policy vacuum and calls on the Prime Minister to take "decisive action" urgently. The principle focus for these onslaughts is the alleged incoherence of the Government's economic strategy as unemployment rises towards three million and more. Can confidence be restored and if so how? With me now are three troubled Tory backbenchers: Ian Taylor, John Watts, the Chairman of the Treasury Select Committee, and John Butcher, who's Chairman of the All-Party Manafacturing Committee. Gentlemen. Eminent and respected back-bencher, former Cabinet Minister, John Biffen, says that there's discontent on the Tory backbenches, that the Party is in a mood of anxiety, that the front-benchers don't seem to recognise it, that the storm cones are hoisted, as he puts it, and it would be well for the Prime Minister to heed that. But do you recognise in that a pretty fair description of your goodselves? Ian Taylor. IAN TAYLOR, MP: There is unease amongst the Tory Party in Westminster - there's no doubt about that and largely it stems from difficulties with the economy, but I don't recognise John Biffen's disaster stakes. He must have had more drinks in the tearoom this week than I. DIMBLEBY: What about you, John Butcher? JOHN BUTCHER, MP: Well, I think I would sooner have John Major's problems than John Smith's problems. He did after all win an Election and Conservative back-benchers I think are in a happier frame of mind than their Labour colleagues because we have power, but we now have to decide what we're going to do with that power over the next four years, and I think it is now time to start producing the "big idea", for example, on the economy and for the forthcoming budget, and to look very hard at things that people are getting unhappy about - very unhappy about - for example, the quality of life in our cities and the breakdown of the social structures in large parts of our cities, and what that means in terms of lawlessness. These sorts of things I think are causing unhappiness which MPs, of course, have to reflect. DIMBLEBY: And John Watts. JOHN WATTS, MP: Well, clearly there is some unease about the economy and that will continue until the elusive recovery can be seen to be well under way. DIMBLEBY: OK. Now let's concentrate on the economy. You have the markets, you have the City, you have business, you have all the economic commentators saying that they have no idea what the Government's up to; that there's a vacuum at the heart of things. Do you understand - let me ask you Ian Taylor - do you understand their confusion on that? TAYLOR: Well, I think there is a doubt as to which is the best way to go. I personally was in favour of the Exchange Rate Mechanism, and I think we are now seeing some of the problems that have arisen since we left it. The fall in Sterling is of concern, it does give inflationary signals and I think that the interest rate cut last week was, let's say, a mistake, because I think it was taken out of context and we would have been better waiting for the budget when we could have seen why it is that if a country has lower interest rates it should also have higher taxation and controls on expenditure. DIMBLEBY: Do you share the sense of confusion, John Watts? WATTS: Well, I think it's inevitable that when we have moved away from the very clear rules based exchange rate pegged system of monetary policy to something which is inevitably much more discretionary, that it will not be clear immediately to the markets how they should expect the Government to react. Now the Chancellor has set out a framework for monetary policy and I think that that framework will need to continue to be developed and particularly to find some way of giving a clearer steer on a future course of interest rates. DIMBLEBY: John Watts, interest rates come down - sorry, John Butcher, interest rates come down, then we're told they can go up again; the pound appears to be going through the floor, then the Bundesbank intervenes - you would be not unnatural if you were confused by what the Government thinks is good or bad, would you not? BUTCHER: Well, I think "Wonderful Wednesday" has liberated us and given us back control of our own economic policy and it is what we're going to do now with this restoration of domestic control of our economy which is exercising the minds of a number of commentators. I think we should say very, very clearly that despite the ambiguity of the Maastricht Treaty we should float the pound for ever and NOT join the ERM, we should allow interest rates to fall further, but I think now is the time for the Treasury to produce "the big idea", and if I may say so the big problem now, internationally and domestically, is the very, very serious shortage of capital. It's happening in Japan, North America and Europe, and if we in Britain can use our budget to make Britain the place where capital will locate too to produce reforms which make us a most attractive place to shift capital to, then we shall have given ourselves another advantage to add to the opt-out from the Social Chapter. I think this kind of thing is what we should be thinking of. DIMBLEBY: I want to pursue a little bit about what you would like to see done, but would you accept - given what you've described - that until the Government makes clear what its policy is, until there is a definable and identifiable "big idea", Mr. Butcher, that the appearance of a rudderless administration is bound to continue? BUTCHER: Well, the Conservative Party has always been agreed on basic principles, which is to control public expenditure, to reduce taxation, to make inflation public enemy number one in order to put all the conditions in place for fuller employment. Now that is what we agree on. The question now is tactical, but they're very, very big tactical questions. DIMBLEBY: Right. Now let me come then to Ian Taylor, just on this question to preface what you would like to see done. Would you agree that until something is seen to be unambigously policy that the problem of the rudderless government will persist? TAYLOR: Well, I think the problem is whether now we have lower interest rates we can also restrain public expenditure and this is the big battle. I think in fact the recent interest rate cuts have made the Chancellor's job much more difficult in the budget next month because he will have, not only to look at increase in taxation, but also I think he will have to look right across the board as to a longer term strategy to rein back the public deficit. DIMBLEBY: Then what do you think, I mean, John Butcher talks about White Wednesday, for you it's Black Wednesday, he says wonderful, let the pound go down, it doesn't matter, don't worry about exchange rates, what's your view of his version of how things should go? TAYLOR: Well John and I don't see eye to eye on the Exhcnage Rate Mechanism, I was a supporter of it, I think the exit was inevitable in the circumstances of what's been happening in Germany. I think at some stage in the future we will return to some form of managed exchange rate policy, but what is absolutely clear is that no British government can set its own monetary policy ignoring what is happening elsewhere and that was why we had turbulence in the foreigh exchange markets last week. DIMBLEBY: John Watts, do you worry about the pound going into free-fall apparently until the Bundesbank steps in or is that something that we can live with? WATTS: No it isn't, although I was never a great enthusiast for the ERM and I look upon the events of last September as Golden Wednesday rather than Black Wednesday, it has never been my view that it's in our interest to have a weak pound and even outside of the ERM we can't ignore the level of the pound. DIMBLEBY: Now let me get that right then, what you would like to see is clear signals from the Chancellor saying, we ..the pound not only was going down in a way which we didn't like, but we are going to take action to ensure that that was below the bottom and if anything, we want the pound to go up again, is that what you would like him to do? WATTS: Well I don't think it will be sensible for him to have any explicit exchange rate target, I think the reason the pound continued to fall last week was because the cut in base rate to six per cent excited expectations that base rates would go even lower, so I think what needs
to be done is to convince the markets that six per cent for the foreseeable future is the floor for base rates and therefore, the pound should not be falling on the expectation of an even lower interest rate in this country. DIMBLEBY: And Mr. Butcher, you want him to convince the markets of exactly the opposite do you not? BUTCHER: I think the markets will cheer up if we eliminate this ambiguity about whether or not we will re-enter an Exchange Rate Mechanism a la Maastricht Treaty. I think that if we were to say we are prepared to let the pound float forever, let it reflect the strength or otherwise of our economy, the pound will gradually appreciate as our economy strengthens, as we use the competitive edge that we now have. If we have an inflationary problem starting to emerge later, then the Chancellor now that he has got domestic control of his economy back again can take appropriate measures, but the thing now is to get some momentum going, keep it going, that will help to attack the deficit and let's see some reforms on making Britain a haven for capital influence. DIMBLEBY: Well let's look at that deficit, the Chancellor is a victim of all kinds of advice, the markets are very uncertain what the policy is, has he got to do something now about the deficit or can he let it go..hang for the time being on the assumption it's all caused by the recession, Ian Taylor. TAYLOR: Well I think he's got to give the market a pretty clear indication, that he knows how he is going to finance this deficit and how he is going to rein it back, because otherwise it will carry on inexorably. There is no way that .. DIMBLEBY: And what constitutes, what constitutes the signal to the markets that would be appropriate? TAYLOR: Well I think broadening the tax base and the longer it's left, the more severe that will need to be. DIMBLEBY: Does that mean tax increases in this budget, with unemployment upto three and a half milion next year? TAYLOR If you are going to have a monetary policy based on very low rates of interest, then you will need some tightening of the tax base and the longer we leave it, the worse it will be. Part of the problem is you see we have to finance this deficit abroad, you can't finance it entirely domestically, therefore, we have to pay attention to what's going on in other countries, our long-term interest rates in this country are above those of Germany, even though our short-term rates are below. DIMBLEBY: Cuts this year in the budget Mr. Watts? WATTS: Not increases in taxes, I think that there is a great danger that premature tax increases would further delay recovery and it is largely from economic growth that tax revenues will rise, there is a danger that putting up rates of taxes would actually not achieve the objective of increasing the flow of revenue. But what the right response is this fundamental review of government spending which has been announced over this weekend, which is putting in place a strategy for the medium term for bringing government spending down and that is the other side of the equation, we've got to bring spending down and let revenues rise. DIMBLEBY: Mr. Butcher is a review enough? BUTCHER: I think the markets need a very very clear signal that we are going to be very very rigorous in the reductions of public expenditure - that rather than tax increases is the signal to give them and I think we are going to have to be very very radical. We, for example, in the medium-term are going to have to look at this question of the eighty billion Social Security budget, that monster is not what Beveridge envisaged when he talked about his safety net. DIMBLEBY: Now you all three have slightly different emphasis, some of you want directly opposite things from the Chancellor, is it possible that while this Chancellor is in place, with everything that is being said about him, with the markets and the rest and the city people being extremely clear that they don't trust a word he says, is it possible to get either a clarity or what any of you want out of it, while he remains in place. John Watts. WATTS: Well I think it is possible, but clearly there are difficulties because of the unwillingness of the city to put its
confidence in the Chancellor. DIMBLEBY: Ian Taylor. TAYLOR: Well I don't think it's a question of personalities, I think it is a question of policy, how are we going to finance our deficit, how are we going to convince the markets that that's what we are intending to do, and we wait until the budget to find that out. DIMBLEBY: And a word Mr. Butcher. BUTCHER: I think Norman's incredibility will be improved when he produces the big idea, I hope it will be the big idea in the budget, I hope along the lines we've discussed. DIMBLEBY: All right you three, thank you all of you. ...oooOooo...