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The Economy (Supporting Business)

My hon. Friend's question could be rephrased, "How are we to know when too little money has been printed, when too little money is available or when too much money has been destroyed by the banks' retrenching?" We have to make a judgment. The Bank of England spelled out what it thinks is necessary and it will do it in a series of tranches. It is not proposing a Zimbabwean type of inflation, but an increase of a few percentage points in the supply of money. In general, an economy needs to see the money supply growing by a few percentage points more than the real growth that one hopes to achieve. We need to get back to that, and as long as the Bank does not overdo it, that is sensible. By contrast, reliance on a fiscal stimulus seems likely to be less effective, and there is less scope for it in the British economy than might be desirable. If we started from a position whereby the Government had a very low deficit, or a surplus, it would be worth a try. It would be worth the Government's saying, "Let's give a fiscal stimulus by borrowing to spend." However, when a Government start with a huge deficit, any further increase in that deficit is likely to destroy confidence, and as a result, have a negative rather than a positive effect on the total level of demand in the economy. That is not just a theoretical point. The European Central Bank and economists from the European Commission have both separately carried out analyses of all the studies that have been published of attempts to use fiscal stimulus, in Europe and elsewhere, to stimulate the economy in the post-war period. They both show that on a majority of occasions when Governments have attempted to use the Keynesian weapons of borrowing to boost demand, it has had the opposite effect to what simple-minded Keynesians might have predicted. On half the occasions when Governments have boosted borrowing, that has led to deflation. On other occasions when they have reduced borrowing, even in a recession, it has led to a resumption of growth. That is not something that should be too unfamiliar to us in this country. We have had three major recessions since the late '70s. In 1976, the Labour Government faced a terrible recession with a huge and burgeoning deficit. The Keynesians among them said, "Let's add to it. Let's borrow even more, spend even more and try to get out of this recession." Unfortunately, there was a run on the pound and they had to call in the International Monetary Fund—the only time the IMF has ever been called in to a developed economy—and the IMF said, "Stuff that for a lark. Forget about Keynes. Just get your books balanced again, raise your taxes, reduce your spending and that will restore confidence and get things going." And it worked. I went to a seminar recently at which someone who was one of the Government's chief economic advisers at the time said that they were astonished at how rapidly it worked, and how rapidly the economy started recovering thereafter. In 1980-81 the economy appeared to be in freefall, with a decline in output. At the same time, there was a terrible deficit. The then Chancellor, Geoffrey Howe, had the courage to say, "We've got to get the public finances back into order if we are to restore confidence and resume growth." Then 364 economists, led by the man who taught me monetary economics—or tried to, as I am happy to say that I did not imbibe all his views—published an open letter to the Chancellor saying that there was no reason in theory or in past experience to believe that if he persisted with his policy it could lead to anything other than an intensification of the recession. If we plot what happened, we can see that the economy was in freefall until 13 March, the day that they published that letter. From then onwards, a V-shaped recovery began. They were completely factually wrong. We know from experience that it can sometimes be right to get a grip on the public finances. That restores confidence and leads to a resumption of growth. The same applied in 1992. That, of course, is why the Government, despite all their rhetoric and talk about an additional fiscal stimulus, have not introduced an additional fiscal stimulus on top of what is already happening through the automatic stabilisers. They are right not to take that risk. On the other hand the German Government, which is in a much better position, ought to be increasing spending, borrowing and trying to get their economy going. Other economies that are in that happy position should do likewise.