Budget Resolutions and Economic Situation — amendment of the law

Part of Oral Answers to Questions — Prime Minister – in the House of Commons at 3:05 pm on 24 March 2010.

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Photo of John Redwood John Redwood Conservative, Wokingham 3:05, 24 March 2010

What we need is new management to stop further relegation. The hon. Gentleman should understand how far this country has already been relegated, as my right hon. Friend the Leader of the Opposition said in his passionate and eloquent speech today, when he pointed out that a country that was fourth in the world for competitiveness-which means more jobs, more exports and more ability to make a decent living-has managed to sink to 84th in the world under this Government, with their too many taxes and their too many regulations.

To understand why our economy has suffered so badly and is not growing rapidly, we have to understand the nature of the national and public finances created by the disastrous mismanagement of this Government. It is now easiest to understand the national finances as being two rather large banks, under Government control and with substantial Government shareholdings, with a medium-sized Government attached. That is because the two banks that the Government partly or wholly nationalised are considerably bigger than the national income-or they were when they took them over-and we need to understand what is happening in those banks in order to understand the background to the Budget, what is happening in the national finances and why the recovery is so sluggish. Unbelievably, the Government proclaim that they have created sustainable and stabilised banking, in the Chancellor's words, but in fact they have done exactly the opposite, by their blundering into owning so many bank shares and their inability to manage those banks properly.

Over the past year, to December 2009, the Royal Bank of Scotland slimmed its balance sheet by £700 billion. When it was taken over by the state, RBS started with a balance sheet of £2.2 trillion, or one and a half times the national income. However, at the end of last year that had fallen to £1.5 trillion only, just a little over the national income. When I asked the Prime Minister about that recently in Prime Minister's questions, he seemed to be completely unaware of that fact. One would have thought that it was the dominant economic fact that might concern him and his colleagues. At a time when they say they want growth and expansion, their bank-the bank they took over and they say they have stabilised-has shrunk its balance sheet by £700 billion, or by the same amount as total public spending in the year.

Of course, the bank shrunk assets and liabilities and was reducing risk. Of course, some of that had to take place. Some of it involved withdrawing loans in overseas economies and not in the British economy, because RBS is a global bank. I put it to the Chancellor and to his representative, the Financial Secretary to the Treasury, who is left to hear the debate, that they will not have a vigorous and strong recovery if the biggest bank in the country, under regulatory and ministerial instructions, is all the time slimming its balance sheet that rapidly. Although a lot of that slimming took place through instruments other than loans and although some of it was not in the UK, all of it is withdrawing liquidity, risk management and financial instruments primarily from the business sector, which is bound to have an impact.

To reinforce that process, Lloyds bank was doing something similar on a more modest scale. Lloyds was a £1.1 trillion bank and by the end of last year it had fallen to a £1 trillion bank-it had taken £100 billion out. Between the two banks that the Government owned, £800 billion was withdrawn. We know from the corporate plan and from the remarks of the chief executive of RBS-approved by the Government, who are the principal owners-that another £300 billion will be taken out of the balance sheet of RBS over the current year. Again, I put it to the Government that if that is the plan, although it might make business sense-I presume that the aim is to turn the thing round into a profit-making bank by getting rid of risk-it is not good news for the British corporate sector trying to use RBS as well as Lloyds. It will make it almost impossible to meet these ministerial exhortations and targets to increase lending.

The Lloyds reduction of £100 billion was more damaging in a way, because Lloyds does rather more lending and has rather more assets in the UK relative to the size of its balance sheets, and £50 billion of the £100 billion Lloyds slimming was a reduction in loans. It does not tell us in the figures that I saw how many of those were outside the UK, but clearly quite a bit of it was UK lending. At the very time when the Government told us they had nationalised the bank to stabilise it and to allow it to lend money, it was doing the opposite and going through a severe restructuring that entailed lending less.

That is the fundamental reason why this economy is not going anywhere: the banks have been broken and they are being nursed back to health in a way that contracts rather than expands activity. I do not know why the Government cannot see that, although I can understand why they never want to talk about it. They pretend that they are not responsible for this £2.5 trillion of assets at risk and that it is somehow nothing to do with them, yet come the Budget they say, "We stabilised the banks. Job done-no problem. All is well."