Below is the text of Mr Major’s speech on the economy, made in Huntingdon on Saturday 10 September 1988.
To read some recent commentators one could believe we are facing economic catastrophe. Far from it. The foundations of our economy are sound and strong and British firms are doing extremely well.
Take manufacturing for example. Exports are up 8.5% over the last year, taking them to record levels. Total order books are strong and the CBI’s surveys indicate that firms are confident that they can do better still. As a result, there is an investment boom underway as British industry equips itself with the best and most up-to-date equipment.
The astonishing transformation of the economy which has taken place since 1979 has spread new prosperity. Living standards are up at all levels of earnings. And unemployment has been falling steadily for over 2 years, month in, month out. And it is now coming down in every single region of the country – without exception.
This healthy state of affairs is no accident. It has come about because we have set the right policy framework and stuck to it consistently for the best part of a decade. Nigel Lawson has pursued policies for the long-term, designed to liberate an economy that had fallen further and further behind our competitors during much of the 1970s. That is why he has pursued policies of deregulation and tax reduction. And above all he has pursued policies which have tamed inflation. This clear framework has given industry the stability it needs to plan for the future with confidence. We have earned that confidence by holding to our principles, not pursuing the short-term solutions that others urge upon us.
So, what is the fuss about? The recent current account deficit figures are certainly unwelcome. No-one doubts that. But the increase in the deficit is not so much a problem in itself as a symptom of a different concern. Although much of the deficit is accounted for by the investment boom, there is no doubt that demand overall in the economy has been growing unsustainably fast. Faster than even our revitalised industry’s ability to expand output. As a result imports are drawn in, and the mismatch between imports and exports has led to a current account deficit.
There is a fundamental difference between this state of affairs and the crises we were facing time after time again in the 1960s and 1970s. Then, the trade deficit reflected profligate government spending financed by massive borrowing. The contrast with today could not be greater. The public finances are in better shape than for a generation. We have turned the Government from being the largest borrower in the economy to the largest repayer of debt. The Budget is in surplus. And for the last two years we have not only cut borrowing, but we have simultaneously cut tax rates and increased public spending.
The trade deficit we are now seeing is the result of private sector activity. This is because of strong growth in individual spending, and even stronger growth in industry’s reinvestment programme.
I can understand that people may be puzzled when the Government asserts, with perfect truth, that the economy is doing excellently and yet interest rates rise and the balance of payment deficit widens. They ask, naturally, why is this happening? Why is demand growing so strongly? Why are companies and individuals spending more? Precisely because they are so confident about our future prospects. Industry is investing in order to produce higher output. Individuals are buying the goods which are the mark of a better quality of life and the tangible sign of a more prosperous Britain. Because they are confident they are tending to save less. They borrow, in the expectation of being able to put money aside in the future to pay back their debts. Or they spend out of savings. That confidence is welcome and justified. But the resulting borrowing must be sensible and responsible. And it must not lead to spending at a rate which the economy cannot sustain. That is a recipe for inflation.
That is why the Government has responded. The Chancellor has taken timely and appropriate action by raising interest rates. Interest rates change the balance of attractiveness between saving and borrowing. And they are well directed at the housing market which has been a particular source of concern.
This is the right response. It is consistent with our underlying philosophy. We are not going to introduce credit controls, as some are urging us to do. Credit controls would be unwise and unworkable. In today’s more open and international economic scene they could be avoided all too easily. We believe that people are able to make their own realistic judgements about the level of repayments they can afford.
So there will be no panic response. No credit controls. And no Autumn Budget either. The March Budget was a crucial and far-reaching supply-side reform. In years to come it will be seen as an historic opportunity, which the Chancellor had the courage to seize. The country will reap the economic benefits of the Budget reforms well into the future.
My message is simple. There was a need to nip inflationary pressures in the bud. That is why the Chancellor raised interest rates. It will inevitably take time to work through. But the economy remains in excellent shape and the policies which have brought this about will remain in place.