............................................................................... ON THE RECORD JOHN MACGREGOR INTERVIEW RECORDED FROM TRANSMISSION: BBC-1 DATE: 11.10.92 ............................................................................... JONATHAN DIMBLEBY: Secretary of State, the debate, a great deal of the debate about what happens now in the context of Black Wednesday is about ERM, attitudes towards the ERM, when we should go back in, whether we should go back in. Now, they say that one of the reasons why you're tipped as the next Chancellor is that you are agnostic about the ERM - are you? JOHN MACGREGOR MP: Well first of all forget the point about being tipped as the next Chancellor, I've got a big job of work to do at Transport. As far as the ERM is concerned, I've always made my position clear, I was a strong advocate of going in, not least because I spend a great deal of my time with industry and commerce and industry and commerce you will remember were those who wanted the currency stability we got from the ERM. And, also, because it was undoubtedly a great help in bearing down on inflation. So I was a strong advocate. I don't think that the Chancellor had any other choice but to pull out in the wake of the huge currency inflows, quite around the world that we were seeing - the attacks on one currency after the other, quite unprecedented. But I do feel that once we have sorted out what needs to be done to produce an ERM or a post ERM that will assist the Community in dealing with those currency flows, then we should be back in it. DIMBLEBY: Are you with Mr Clarke. He said on this programme last week that it was a disastrous set-back, although he gave exactly the same interpretation of events as you....had to leave. MACGREGOR: I certainly think it was a great pity, but you will know of course that one other country has come out of the ERM, another has re-introduced foreign exchange controls. So it's by no means only ourselves. I mean, France very nearly, I think France was fortunate in coming at the end of all of this, France very nearly...the French Franc very nearly got into real difficulties. So there's no doubt that there are now strains within the ERM because of the huge amount of currency that can move around the world. DIMBLEBY: Would you be in favour, not only of going back in when those conditions that have been suggested are in place, but doing that straight away, as soon as they are in place? MACGREGOR; No. I think Norman Lamont is right that it will take some time before the conditions are right and one of the issues, I mean, we have an awful habit in this country of focusing only on our own internal domestic situation. One of the issues undoubtedly is the costs to the German economy of dealing with reunification which are going to be colossal and of course one of the factors that really pushed German interest rates up and caused some of the strains. Now, that was unpredicted really three or four years ago when the main argument was going on about the ERM. DIMBLEBY: I understand that but.. MACGREGOR: And I think that will take some time to work itself through. DIMBLEBY: I understand that it may take time. My question is: would you go back in AS SOON AS the conditions are right and do you hope that those conditions will be reached sooner rather than later? MACGREGOR: I think it will be some what of a different form of ERM because discussions are now going on and I think they will take some time to see how you actually can have an ERM that can cope with the kind of turbulence that we saw a few weeks ago. So I think that will take some time. But, yes, as a long term aim, as a long to medium term aim, I would be in favour of Britain re-joining, very clearly. But I do not myself believe that that's a pre-cursor to an economic and monetary union. I think that's going to take..I mean, I think that's not an issue for this decade. DIMBLEBY: I wasn't even going to pursue down that territory but you would be in favour of going back into the ERM, you'd prefer to be in the ERM if the conditions are right. MACGREGOR: If the conditions are right. DIMBLEBY: And when they're right, and you hope they will be right, you will be saying "yes, let's go back in". MACGREGOR: And the reason for that is quite simple, that the vast majority of British industry and commerce knows that it's in our interests. It was they who were pressing for it and they who still hope - I think most of them recognise that the Chancellor was right - but they still hope that it will be possible to re-join something of that sort. DIMBLEBY: Meanwhile, we're outside, without that, the discipline. "Cobbling together" is the phrase most economists are using, a strategy which makes - may I put it to you - that makes all those fine words about conquering inflation sound now, like so much hot air. MACGREGOR: But I think this is so much nonsense, this "cobbling together". I mean it's taken other governments and previous Chancellors some time to formulate the complete strategy and I'll give you some of the reasons, that some of the decisions that have to be taken couldn't be taken before the Party Conference and before his speech. But let me just outline them, I think he's been absolutely clear about our determination to deal with inflation, he has got interest rates down again, we're now down from fifteen to nine per cent. I think one of the reasons why that's now yet having its full effect on the economy is the huge debt overhang that there are...that there is for many people in many companies. We have.. DIMBLEBY: Those people who have borrowed very, very heavily, borrowed and now want to lower that level of borrowing rather than spending. MACGREGOR: I actually believe that this is different from previous recessions for that reason, that there are a lot of people who borrowed very heavily in '87 and '88 and a lot of companies and that has caused their determination to save or repay debt and that is undoubtedly a major factor in my view in why we haven't moved more earlier and is the reason why you can't be certain exactly when interest rates will bring about the change. But there are other things too Jonathan, I mean public expenditure, we've made our position very clear on that, but the Chancellor has to go through all the detailed discussions that we're having at the moment and will make that..the outcome clear in his autumn statement. DIMBLEBY: Okay. MACGREGOR: In the usual way. Public sector pay we've been very clear about. The anxiety to achieve a successful outcome of GATT, we have a substantial capital infrastructure spending going on at the moment, our industry is much more competitive. There are a lot of issues there that are already in place. DIMBLEBY: All those things take time, one or two of these things we're going to return to very soon. But meanwhile, you say the Chancellor made it very clear, his attitude to inflation, I seem to remember that just before Black Wednesday the goal was zero inflation, now the goalposts have shifted, it's no longer zero inflation, it's between one and four, maybe two if we can get there. MACGREGOR: But it still keeps us at the real goal and the real goal is to have our inflation in line with our major competitors. We achieved a lot of progress in doing that throughout nine out of the ten years of the eighties. We have now seen a considerable success in coming down from eleven per cent to below four per cent and we must maintain that and I believe that's absolutely vital because if your inflation is out of line with your major competitors you become uncompetitive. DIMBLEBY: But you're a man of clear economic vision, you would recognise the distinction between the goal of zero inflation and the goal of low inflation? MACGREGOR: But I would also say that the goal of inflation we're setting ourselves is better than the achievements we've had over the years and in particular in the seventies and it remains an absolutely vital goal. DIMBLEBY: Absolutely but let's just be very clear about this, the goal..it's better than. What you're saying is before we were after zero inflation, we didn't want to get pregnant at all, now we're after low inflation, a little bit of pregnancy is what we've got but that's better than an awful lot of pregnancy. MACGREGOR: I don't know how you make the analogy carry on but I think our level of pregnancy ought to be seen..(both talking at once)...as other people who are pregnant if I can put it that way. DIMBLEBY: John Major reiterated in that CBI speech in Scotland "I want to see zero inflation, low inflation is not enough" he said. Now, if low inflation was not enough before Black Wednesday, why is low inflation quite enough now? MACGREGOR: Because I think it's a realistic target to set ourselves in the current situation and it is still extremely important that we hold to it. DIMBLEBY: But of course you say it's important to hold to it, but what you've actually done is got a nice little get-out clause - it may go up a little bit from time to time. MACGREGOR: Because of movements and international prices.. DIMBLEBY: Circumstances beyond our control, we've been there before haven't we too? MACGREGOR: But I think that's realistic but nevertheless the target is clear and let's be clear about this, in terms of interest rates. I think one of the inter-relationships between interest rates and the position in the exchange rate is that as we know there can be, particulary in periods of substantial growth, a real inflationary effect of a falling exchange rate. Now, the Chancellor has to make judgements all the time between interest rates and exchange rates in order to ensure that that doesn't happen. DIMBLEBY: And I want to pick up on that in just a moment too, but on this particular point, can you tell me what the Chancellor would say when we get up to as some predict five or six per cent - I'm not saying you will - do you then say "we've been blown off course a little, or it's a blip". What do we call it when we got up above the four per cent which is the top end of target? MACGREGOR: Well if you're talking four point one or four point two, it can be a blip but I think we've got to do everything.. DIMBLEBY: If it's five or six what is it then? MACGREGOR: Everything possible.. DIMBLEBY: What is it when it's five or six.. MACGREGOR: Everything possible within the terms of the policy instruments that you have available to you to avoid that. DIMBLEBY: Of course, but as Mr Lamont said "we have to acknowledge that we may go temporarily outside that range". What is it if it gets to five or six per cent which the markets, some of them are saying, is going to happen? MACGREGOR: If that happens and as you rightly say it's entirely hypothetical and you're got to take action to deal with it. DIMBLEBY: And is that being blown off course, or a blip, when it reaches that level? MACGREGOR: I think you're being extremely hypothetical now. DIMBLEBY: Okay. You said, and I just want to clarify finally on this point, in general, moving the target from zero to low
would you describe that as the end of a dream or the rebirth of reality? MACGREGOR: I've actually always thought that the most important point is to get inflation down to the level of our major competitors and keep it there and that's what that target range should enable us to do. DIMBLEBY: Now, I want to put a proposition to you if I may, it's this: that what you're really saying, what's really going on here, despite the words is - that given the depth of the recession and to re-formulate a familiar phrase, what you're really saying is - inflation now, in these circumstances, a little bit of it, is a price well worth paying? MACGREGOR: I know that there are some people, particulary those who've got themselves locked into a heavy debt situation, who would argue for that and there are some who would argue that that would enable house prices to start moving again and so on. But I think that's a very short sighted view. I think the crucial thing is to maintain the attack on inflation because experience over most of my political lifetime has shown that when our inflation is well above our competitors our economy suffers. DIMBLEBY: But you have, at the moment, a devaluation, depending where you go from, ten per cent upwards, you have a cut in interest rates and you have a projected, statistically projected increase in public spending. Now, that may be very desirable in the way that you've just described but let me suggest to you that by your own lights this is an incredible way of saying "we're going to bear down on inflation". MACGREGOR: Well we still have interest rates at nine per cent and we have seen movements in the exchange rate up as well as down. I notice that usually the attention is when it goes down and not too much when they go up, the position of the Deutschmark has improved considerably during the week of the Conservative Party Conference.... DIMBLEBY: What I think one economist..(both talking at once)...it goes down, then it goes boom and falls down again. MACGREGOR: He likes it when it goes down but doesn't like it so much when it goes up. But I think the important..there are two points I would make here, in terms of import prices the exchange rate against the dollar is an important one, now the dollar was very weak in August and I think that the pound..our dollar exchange rate then was unrealistic but it's now back at levels that it's been for some considerable time. The second point I wish to make is that there are a lot of pressures in the economy at the moment pressing downward on prices and so, whereas if we were in a high growth situation you would be right in saying that a falling pound against the dollar has real inflationary pressures built in, I don't think that's there at the moment. DIMBLEBY: But you would be with Ken Clarke and Michael Heseltine and, indeed, in that film Judith Chaplin, very concerned to ensure that those inflationary pressures of devaluation aren't allowed to feed into the economy because the real risk of that has to be there because it's biult in. MACGREFOR: Absoltely correct. DIMBLEBY: And would you also say therefore that those who look forward to early deep cuts in interest rates in your judgement - whether they're right or wrong is another matter - in your judgement are out to lunch economically doesn't MACGREGOR: Well I think there was a sort of euphoria among those who were against the ERM in thinking that this would..that coming out would be an easy alternative and they've very rapidly learnt that it isn't. I believe that we have to, of course in terms of (break in tape) look at international interest rates at the moment too and that's relevant to perceptions of the exchange rate and it's significant that our interest rate at nine per cent is about the same as Germany, in France it's roughly about thirteen per cent, in Spain it's fourteen per cent, in Italy it's sixteen per cent. So, in fact, we are really, if you exclude America and Japan and the drop in interest rates there hasn't really helped the American economy, we are in the lower league and that point has to be taken into account as well. DIMBLEBY: Yes. MACGREGOR: Therefore I think that the Chancellor has to make his judgement as the economy and international events move on, he has to make his judgement as to what he does with interest rates. DIMBLEBY: As he starts working out which levers to pull accordingly and how to pull them let's just get absolutely clear where we are, you are amongst the first to acknowledge that devaluation in itself has inflationary pressures, that interest rates cuts of themselves have inflationary pressures and they have to be countered. Now, let me come to the general drive of what I'm saying to you again and it's this: that what you intend to counter these inflationary pressures with public spending, but not
cuts we now recognise but public spending increases. MACGREGOR: But, Jonathan, that is of course one of the many ingredients in the policy and by no means the only one. But if I can turn now to public spending, it's been known for some time of course that our target this year was two hundred and forty-four point five billion and therefore markets have known that perfectly well and of course - why - because there are so many things in the economy that we seek to do and so many people who are actually at the Tory Party Conference pressing us to do those sort of things. DIMBLEBY: No I won't stop you in the argument - just on that point. The markets - just a minute, cos it's a complicated matter. MACGREGOR: I haven't quite finished. DIMBLEBY: I'm going to absolutely encourage you to go on, because I am very interested in it. But, this, the markets you say knew that public spending figure, that target figure, but they did not know that the pound was going to be devalued. We're talking in a different world now. MACGREGOR: Well, I think that all of these mixes have to be judged at any one point in time, but can I just carry on with my public expenditure argument because there are many very important things that are happening at the moment in terms of our current spending programme. I entirely agree with Judith Chaplin when she said that it's rather odd to have an increase in public spending described as cuts, but the important things are. Like the road programme - in my own field the road programme is at record levels and we see examples of that all over the country and that's all directed to improving economic performance. Similarly with rail, similarly in many other areas. Now I think that the issue for the moment, as far as everyone, including markets, is concerned, is this - there were fears in July that we would be exceeding that public spending target, and certainly - and I speak as a former Chief Secretary - I know that the formal way of doing public expenditure negotiations was that there was always an upward ratchet in the system, because everyone always came in with bids. Now that system has been changed, and that's another big mark-up to Norman Lamont's credit. He's changed the system. I wholly approve of the change he has made, and that means that we are now having to undertake difficult negotiations to ensure that we get the right priorities and keep our public spending within the limits we've already set. DIMBLEBY: But we're in this bizarre situation now. He have the Cabinet talking all over the place, leaking all over the place from Departments about the severity of the cuts - there's blood over every departmental carpet, blood in the Treasury, blood at Number Ten - what do we actually....and you've just yourself described it - in real terms there is an increase (and just to remind ourselves of the figure), a real term increase if you hit the target, get down to the target, a real term increase of eight and a half thousand million pounds. Maybe very desirable in the way that you said. It may indeed be necessary given the level of the recession, the horrors of unemployment, bankruptcies and so on. But by no stretch of any political or economic imagination is that a cut. MACGREGOR: No, but that was known in the public expenditure programme last autumn. DIMBLEBY: Where's the pressure downwards? MACGREGOR: Can I just say this, Jonathan, because you said that we're full of stories at the moment about Cabinet Ministers going out and talking about cuts and blood on the carpet and all that sort of thing. I'm a pretty old hand at these public expenditure games and I actually don't remember a year in which there've been fewer of those stories than there are this year. There are a number of journalists going out trying to create stories, but they're not getting any of it from us, and there is a determination... DIMBLEBY: I heard, I heard you on that film there, and it was from the Conference. You, Redwood, Lilley - the three of you saying - you, in the kind of language that you characteristically use - we have to restrain our ambition. The point is that what is being talked up is cuts, whereas what is really happening (and that's for the markets benefit) what is really happening is increases and that's for the public benefit. MACGREGOR: But there will have to be cuts in some programmes in order to keep within the target level and to meet unavoidable increases in others, and we all recognise that and that is why we've been talking about restraining our ambitions. But what you do have to recognise is that the Cabinet completely is united on this policy of hitting this target. DIMBLEBY: I understand that, but my suggestion to you is that with... MACGREGOR: I know what you're saying. You're saying we should below two hundred and forty four point five.... DIMBLEBY: ....yes, what I'm saying to you is for you to be consistent by your own lights and credible with the markets. If you don't find somewhere to bear down then you're going to be in trouble and the pound's going to be in serious trouble. What you've got is a devalued pound, you've got interest rate cuts and you're proposing public spending increases. What are you going to do - put taxes up? MACGREGOR: I come back to the point that the public spending increases are already known, but I think the whole drive ... DIMBLEBY: But I put that to you, just on that one point - they are already known but they were known, as you know, in a very different economic context, without the devaluation. With the devaluation we inhabit a different world and the question that the markets want answered, and you heard part of it coming up in that film...., is where is the pressure downwards on inflation in that package. MACGREGOR: Well, the pressure is going to come downwards on, for example, public sector pay. I think we're going to be very tough on public sector pay this year and I think that's absolutely right. One of the difficult choices that you always have in Government on public expenditure is the options between current and capital spending. Now I think it's important that we maintain as much of our capital spending programmes as we can. But if you're working within an overall limit - again I know as Chief Secretary that you sometimes have wholly unavoidable increases in programmes beyond what you've set last year - and this is where I think a lot of the difficult choices are going to be made and if we make them I believe the markets will see that we're being determined. DIMBLEBY: John, in a moment I want to come to these projects that you speak of, but just one more thing on this. However you assess or judge it, you acknowledge that there is a real increase in public spending, would be if you ... (TALKING TOGETHER) DIMBLEBY: Let me put it to you that in the eye of the markets, you saying you're bearing down on inflation under those circumstances is about as convincing as an alcoholic saying "I'll just have one more drink". MACGREGOR: I think you'd better wait and see the autumn statement, because that's when it will all come together. But you must allow me to make just one other point and that is that I've been looking very carefully at all alternatives that people have been putting forward. In fact, there aren't very many. The only real alternatives that have been put forward are from Gordon Brown who is arguing that we must have (and it's becoming a gramophone record) we must have a programme that deals with employment, that deals with housing, that deals with investment and so on, and all he can mean by that is a substantial increase in spending, although he won't quantify. DIMBLEBY: I'll doubtless have a chance to talk to him a before long about that. Let's come back to you. Let me suggest to you .... MACGREGOR: We're avoiding all of that. DIMBLEBY: Let me, let me suggest to you - I wonder whether you agree that you are caught between a rock and a hard place, because the deeper the cuts that you impose to reassure the markets the more pain (and it's now really serious pain that people watching this programme out there are enduring) the more pain there is going to be. MACGREGOR: I don't think you can have it all ways in your argument. Can I just put it this way - that throughout Europe, throughout the Community, Governments are having to make difficult choices at the present time. We know that industries are under pressure - I've just been reading this morning in the Sunday newspapers articles about the German economy - so there are difficult choices to be made and this is the time when you have to be steadfast and prepared to take them. Now in terms of public expenditure, I hope that we can maintain as many of our capital programmes as possible, but I do recognise that within the targets and within the inevitable increases that you find in some of the Social Welfare and Unemployment Benefit programmes, we will have to make some decisions that involve putting some projects off from this year to later years. DIMBLEBY: You want to hold on to your capital... MACGREGOR: That's where I think we're going to have to take some of the pain. I hope as little as possible because I'm very much aware of the state of the construction industry at the moment. DIMBLEBY: Well, you're aware of the state of the construction industry, you're aware of the needs of infrastructure. The reason why you want to hold on to your capital projects - and you're being particularly involved in this as Transport Minister - is not because there's some self-indulgent pleasure in spending other people's money, it's because you think it's vital to a sound recovery. Is that right. MACGREGOR: That's correct. And a very important point here, Jonathan, is that in fact the road programme (if I take that alone) is up forty per cent in real terms compared with 1989, so we are actually spending a very great deal of money and with very great economic and environmental benefits as well. DIMBLEBY: But if you lose, if you lose your projects in this spending round - let us say whether it's the Jubilee Line -
which everyone says you're going to lose, and some people say a jolly good think too, others say you ought to keep it, if you lsoe so many roads, ditto - you believe, and you have to argue that Britain will suffer as a consequence. MACGREGOR: The point I'm trying to make is that we've already increased these programmes very considerably. Now, of course it matters - it matters that we continue over, to fulfil our long-term commitment
on the road programme. But the other point we have to take into account and hear what you say about recent events in the currency markets and their impact on our economy, is right. The other point we have to take into account is that if the public sector borrowing requirement is too high, that puts upward pressure on interest rates and that will certainly not help the private sector and all the companies that I am keen to see through this period, and so that you have to again make a balanced judgement on these matters. DIMBLEBY: And in this balance if something has to give - even if I'm suggesting it's not as much as the markets would like - you believe that, am I right, that capital projects ought not to give, and however painful it might be, spending projects on public, public sector wages, even if that's nurses, on invalidity allowances, something has to give there. MACGREGOR: Yes, and I think public sector pay certainly is one area. I do think that some of the demands that are being made by some of the public sector unions are just wholly unrealistic and it's very important to bear in mind what's happening in the private sector to wages as well as to jobs at the present time. So there has to be restraint in public sector pay - I have no doubt about that whatever. DIMBLEBY: So if capital spending has to come as a priority because of the needs of the economy, what you have to be prepared to say, and what you want the Chancellor to say afterwards to the British people is "Yes, we are in the depths of a recession, but I'm sorry we're going to bear down, freeze public sector pay, whatever it might be. We're going to bear down on nurses' pay, we're going to bear down on housing benefit, bear down on family credit, bear down on maternity benefit". Is that what you're after? MACGREGOR: Now you're putting words into my mouth. These are all decisions, these are all decisions we're going to have to take in the next month, but what I am saying is that we have to meet the targets, we have to restrain public sector pay and I think most people recognise the importance of that when there are other people losing their jobs and having very, very low increases in pay, if at all. But we have - and there are obviously areas, such as the ones you mention: housing benefits, social security payments, where we are a compassionate society and we have to meet our commitments. DIMBLEBY: But those, Mr. Macgregor, but those are porecisely the current spending areas that you referred to when you said, persuasively from your own point of view, that capital spending was in the order of priorities that you would like to see, and you said unambiguously - save capital spending at the expense of current spending. MACGREGOR: Can I just make it absolutely clear. What I said was that capital expenditure is very important for the economy, but in a situation like this, and we are by no means alone (most other countries are in the same position) you have ... DIMBLEBY: That's not much comfort to anyone. MACGREGOR: No, but it's a fact. You have to contain your ambitions, you can't do everything at once. You may not be able to achieve all the projects, to set out on all the projects that you want to do
this year, but the programme remains and, therefore, there will have to be some restraint on all sides, but the precise details I think are still to be
negotiated and the outcome will be clear in the autumn statement. DIMBLEBY: Let me summarise. The more persuasive you are in bearing down on inflation, given this real increase in public spending, the more you've got to try and limit that real increase, the more pain you have got to impose. The more people that have to be out of work, the more redundancies there have to be, the more bankruptcies, the more ... MACGREGOR: You really can't have it all ways, Jonathan. Not at all. The..of course, DIMBLEBY: This is your predicament.. (TALKING TOGETHER) MACGREGOR: Can I just make another point to you, because when you refer to inflation coming down, of course, that's another important factor that's got to be taken into account in relation to pay. It also is a factor that this has to be taken into account in a lot of the Social Security and other benefits and if you get inflation down, therefore, you don't
have the same huge increases as we sometimes have in high inflation periods ..(break in tape) social spending. But when you talk about pay, the fact of the matter is that if the public sector borrowing requirement is too high - I repeat this is a very important message to all those who are in difficulties in the private sector at the moment - if it's too high then that puts an upward pressure on interest rates, which is the last thing that they want to see at the present time. DIMBLEBY: Secretary of State, you have participated in a description of what is a pretty grisly prospect one way or the other. Would you really like to be Chancellor? MACGREGOR: I think that the Chancellor is doing an extremely good job in very difficult circumstances, as other Finance Ministers
are finding, and I repeat, I have very important work to do in Transport. DIMBLEBY: But you wouldn't say no if asked? MACGREGOR: That's not a fair question to ask me because I'm very happy to be doing what I'm doing in Transport. DIMBLEBY: I'll give a fair answer - which is thank you very much Secretary of State.