The Economy
Council Tax Rebate
House of Commons debates, 31 March 2009, 3:49 pm
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I beg to move,
That this House
has considered the matter of the economy.
In the week when the G20 leaders and Finance Ministers meet here in London, I am glad to have the opportunity to start this debate on the economy. We are now facing the most difficult economic situation we have seen in generations, with negative world growth this year—for the first time in 60 years—world trade collapsing at the sharpest rate we have seen since 1965 and industrial production falling in 54 of the 57 largest economies. By way of example, in the past year alone 4.5 million jobs have been lost in the United States, and last week we heard that Japanese exports have dropped by some 50 per cent. So this week, we have to show together that we can agree international solutions for international problems.
Thursday's meeting here is the opportunity to show that countries can learn from what has happened in the past, and can work together with a commitment to growth. We want growth to be sustainable, and for that to happen it cannot be kept just for the richer countries but must be shared. Trade must once again drive growth, and a global recovery must benefit both us and the developing and emerging economies, not just to meet what we need to do today, but to serve our long-term interests in the future.
John Redwood (Wokingham, Conservative)
Can the Chancellor tell us what is a prudent limit for borrowing in this country at present, bearing in mind the need to stave off any danger of bankruptcy or inability to raise money?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
It is right that countries borrow if it is for the purpose of supporting the economy at a time such as this, when we are encountering substantial difficulties. That is very important, and I am not alone in believing that. Indeed, I saw on last night's "Newsnight" that the right hon. and learned Gentleman, who sat at the Cabinet table in the last Conservative Government with Mr. Redwood—[Hon. Members: "Who?"] It was the shadow Business Secretary, and I am glad to see him in his place, supporting loyally—as ever—the shadow Chancellor. When the shadow Business Secretary was asked last night by Mr. Paxman what he would do to save jobs, he said:
"What I'd be doing to save jobs—trying to keep stability into the system, trying to join with the others in getting the worst of the global recession over and I would also be concentrating on bailing out the banks, concentrating on the toxic asset problem".
Mr. Paxman then asked:
"Would you borrow any money?"
The shadow Business Secretary replied:
"I'd be borrowing some money in order to go for a loan guarantee to help with the credit markets".
So he would be prepared to borrow to support the economy—
Kenneth Clarke (Shadow Secretary of State for Business, Enterprise and Regulatory Reform, Business, Enterprise and Regulatory Reform; Rushcliffe, Conservative)
Will the Chancellor give way?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I will in a moment. The right hon. and learned Gentleman's appearance on "Newsnight" rang alarm bells in his mind as well as in other Conservatives' minds. He is right that it is important that we borrow money to support the economy now, but at the same time we are ready to ensure that in the medium term—like every country—we live within our means.
Kenneth Clarke (Shadow Secretary of State for Business, Enterprise and Regulatory Reform, Business, Enterprise and Regulatory Reform; Rushcliffe, Conservative)
I am glad that the Chancellor watched me. He probably saw that I agreed with the Governor of the Bank of England, with most of the world's Finance Ministers and with the President of Chile that, in view of the appalling state of our public finances, this Government cannot afford any further fiscal stimulus. I suspect that the Chancellor also agrees with those distinguished gentlemen: will he confirm that?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I certainly agree that it is necessary for us to be cautious. I agree in particular with what the Governor of the Bank of England told the Select Committee when he was asked about the prospects for growth in the world economy and in our economy. He said that the same factors that led the Bank to believe that there would be a recovery in the UK also suggest that there will be one in the world economy, and those factors included the large financial stimulus that has been injected. In other words, the Governor supported the view that we took last autumn that we had to support the economy, and we will continue to do that.
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I shall give way to the hon. Gentleman, but I just want to tell the House that normally I give way to most Members who wish to intervene, but I know that many Back Benchers want to speak in this debate and that Mr. Speaker has been concerned about the length of time that Front Benchers have been taking in economic debates. I shall give way, but then I shall make some progress. No doubt the hon. Gentleman wishes to ask about Europe.
William Cash (Stone, Conservative)
I am sorry to disappoint the Chancellor—[Hon. Members: "Oh!"] I am disappointing the House too by the sound of it.
Does the Chancellor accept that the public sector debt figures that he gave in the pre-Budget report only a few months ago have now tripled, and that the most recent estimate by the Office for National Statistics is that it is £2.2 trillion? Does he accept, therefore, that the reduction in public expenditure and the increases in taxation that go with it make a nonsense of the statements he made in the pre-Budget report only a few months ago?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
No, I do not. As I have said throughout this time, it is necessary for Governments to support their economies, and 19 of the 20 G20 countries are doing so. There is recognition across the world that in these extraordinary times we need to take extraordinary action to support our economy. It is equally true, as I have said time and again, that in the medium term we have to live within our means. I believe that we were right last autumn and that we are right now to continue to protect jobs, to support people and to support businesses. We are right to continue to repair the banking system and to make the reforms we need for the future. We are right, too, internationally to use the International Monetary Fund and other international institutions to support developing and emerging economies; otherwise, that will not only damage them but affect us, too. We need to get world trade going and we need to ensure that the recovery is sustainable in the long term.
That was why last autumn I took the judgment that we needed to intervene. I rejected the suggestion that we should simply sit back and let the recession take its toll. That was what happened in the 1980s and 1990s, with disastrous consequences. We are helping people and businesses, with more than £1 billion going into the Jobcentre Plus network to help people find jobs. That is one reason why, still, more than half the people who lose their jobs get back into work within three months. That did not happen in the 1990s and 1980s.
We have given additional money to pensioners. Next week, the pension credit will go up from £124 to £130 a week. The state pension will go up to more than £95 a week. In January, we increased child benefit to more than £20 a week for the first child. The child tax credit will go up next week, and from Monday 22 million basic rate taxpayers will see a reduction in their income tax. That is real help for people up and down this country, at a time when the Conservatives have opposed every single one of those measures. They would have done nothing, as they did in the past. On top of that, we have put £12.5 billion into the economy through the reduction in VAT. The health in pregnancy grant is another measure that shows how we, even at this time, are ready to help people who need help, and it will come in at the beginning of next week.
It is important that at a time such as this we support people and businesses. It is imperative. I simply do not understand the policy whereby, in the face of all this, we should do absolutely nothing and hope for the best.
Philip Dunne (Whip, Whips; Ludlow, Conservative)
The Chancellor says that he wants to help businesses. Why, therefore, did businesses up and down the country last week receive new business rate demands significantly greater—in some cases, two or three times greater—than those they had paid the previous year? How is that helping business?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I shall come on to that in a moment. The hon. Gentleman supports his party in believing that we should not be spending any extra money. Time and again, Opposition Members say they want more of this and more of that, but they are not prepared to find the money for it. I believe it is important to support businesses, and one way in which we do so is by supporting the wider economy. When we consider what we have done—the £20 billion that went into the economy last year, the automatic payments into the economy through lower tax receipts and higher benefit payments—we see that we have increased such support as a percentage of what we produce. We have provided about the same level of support as the United States, Germany and China—indeed, most countries in the G20 have been prepared to take action because they recognise that it is necessary to support their economies and families and businesses.
We can afford to take that action because we were prepared as we came into this—[Hon. Members: "What?"] To put it another way, I firmly believe that we cannot afford to take no action. If we did so, the cost would be far greater. That is why the IMF said only in February:
"Some countries entered the crisis with greater fiscal space to expand".
It cited:
"Canada, China, France, Germany, the U.K., and the U.S."
We were in a position to take action, and we did so. The Opposition would have turned their backs on the people of this country. They would not have done what was necessary—just as they did not in the 1980s and 1990s. They were wrong then and they are wrong now.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
The Chancellor is talking about the decisions that were taken in the autumn. This afternoon, a letter from the former chairman of the Royal Bank of Scotland to the Select Committee on the Treasury has been published. It says that the evidence that the Treasury Minister, Lord Myners, gave to the Select Committee was not an accurate account of how much the Government knew about the size of Sir Fred Goodwin's pension. In other words, while the Prime Minister was pretending to be angry about the Goodwin pension, his hand-picked Minister knew about it all along. Does the Chancellor agree that unless, by the end of the day, Lord Myners can prove that what he told the Select Committee was true, he must resign?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I know that the letter sent by Sir Tom McKillop has been published. We are considering it and will respond to it, but we are in the middle of a debate on the economy for which the hon. Gentleman has been calling for weeks. He said he was desperate to set out his case, so I thought that he was going to intervene to tell me why it was wrong to do anything and why his policy of inaction and standing by was absolutely right. However, he chose not to do so.
I believe that it is right that we do that—
John Hayes (Shadow Minister, Innovation, Universities and Skills; South Holland & The Deepings, Conservative)
rose—
Angus MacNeil (Spokesperson (Environment, Food and Rural Affairs; Fishing and Tourism; Transport); Na h-Eileanan an Iar, Scottish National Party)
rose—
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I shall make some progress, and then I will certainly give way.
We must continue to make progress with sorting out the problems in the banking system. There is no quick or overnight fix, but it is important that we build on the recapitalisation of the banks. We must strengthen and restructure them where appropriate, and of course it is also important that we strengthen the regulatory system. We have to ensure that the supervision and regulation of institutions—including hedge funds—here and abroad are more extensive than in the past.
We must make sure that regulation is more intrusive than it has been in the past—a point that, to some extent, we discussed with Dunfermline building society yesterday. We need to strengthen prudential oversight: in future, we must make sure that banks throughout the world have sufficient reserves and that systems are in place to put the brakes on lending, where necessary.
We must also ensure better co-operation within the EU. We need common rules but, at the same time, we must respect the need for national supervisors to ensure an adequate system of regulation, here and throughout the world. The process of strengthening and improving the regulatory system is absolutely necessary, and of course it must be accompanied by a long-term culture change in bank boardrooms. Ultimately, it is the responsibility of banks' boards to get these things right, and it is important that they do so in future.
Andrew Tyrie (Chichester, Conservative)
Lord Myners has asserted that the RBS board exercised discretion to enhance Sir Fred's pension. Sir Tom McKillop flatly contradicts that, and he is supported by the minutes. In his letter, he says:
"There was no question of any discretion being exercised in relation to Fred's pension and no discretion was exercised in that regard by any other RBS director."
Does the Chancellor not now think that Lord Myners' position is unsustainable?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
No, I do not. As I said earlier, Sir Tom McKillop's letter has just been released. We need to consider what he has to say, and we will respond in due course. However, we are 15 minutes into this debate and one would have thought that someone on the Opposition Benches had something to say about the economy.
Oliver Heald (North East Hertfordshire, Conservative)
On a point of order, Mr. Speaker. I do not know whether you are able to guide the House, but when a witness is found to have lied to a Select Committee, would it be in order—
Michael Martin (Speaker)
Order. Is the hon. Gentleman referring to a Member of the other place? [ Interruption. ] I want a clear answer, and no interruptions.
Oliver Heald (North East Hertfordshire, Conservative)
I would not do that, Mr. Speaker, because it might be out of order—
Michael Martin (Speaker)
I am going to make this plain. If any Member of the other House is accused in this Chamber of lying, I will make sure that it is not reiterated in the Chamber. I think the hon. Gentleman was out of order in even raising a point of order in the manner he did. It is best that he resume his seat and keep quiet. That is the best thing he can do.
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
We have commitments from the banks in which we have shareholdings. RBS will increase its bank lending by £25 billion this year and next, and there will be £14 billion from Lloyds and more from Northern Rock.
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
Not at the moment. Even those banks in which we do not have shareholdings, such as Barclays, HSBC and others, have said that they will increase lending.
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I will in a moment.
That is important, because it is vital that we help businesses. For example, 100,000 businesses have already benefited from the extra time we have given them to pay taxes. We have also helped small companies by postponing the increase in corporation tax.
It is very important that we help businesses and I want to set out a little more of what we propose, but, before I do so, I give way to my hon. Friend Dr. Ladyman.
Stephen Ladyman (South Thanet, Labour)
As my right hon. Friend says, we have taken shareholdings in banks. Has he estimated how much profit the Government will make if they return the shareholdings to the private sector when the banks' share prices recover?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
Not yet, but I hope to be able to do so at some stage.
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
No, I want to deal with the point about business rates because I am conscious of the fact that businesses in this country faced a 5 per cent. increase in business rates, simply because the increase is linked to last autumn's—last September's—retail prices index rate. However, RPI inflation has fallen to 0 per cent. in the past month and is expected to fall further. I want to help businesses, so I can tell the House that companies will be able to pay only a 2 per cent. annual increase this year and pay the remaining 3 per cent. smoothed out over the following two years. Local authorities will write to business rate payers to let them know what will happen and what their options are, so businesses need not contact local authorities at this stage. I believe that that will provide genuine help to businesses in this country, with 1.5 million properties gaining from the measure and about £600 million of payments being deferred. I am glad that Mr. Dunne raised the matter. I hope that he is still glad that he did so.
Mark Todd (South Derbyshire, Labour)
Has my right hon. Friend received representations from the aerospace sector on loan support to support sales of major items, which are greatly straitened by the present unwillingness of banks to support such sales?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
Yes, I have, and I believe that my hon. Friend has raised the matter with the Economic Secretary in his capacity as a Minister at the Department for Business, Enterprise and Regulatory Reform. I am aware of the importance of supporting the aerospace industry. When I was Secretary of State for Trade and Industry, I was glad that we were able to support the industry in a number of ways. We shall continue to consider what else we can do.
David Heath (Somerton & Frome, Liberal Democrat)
Many businesses will welcome the business rates measure the Chancellor has just announced, but could it be coupled with the concept of automatic business rate relief for small businesses, raised in a private Member's Bill introduced by Peter Luff? If local authorities are already writing to businesses, is there not the capacity at that point to determine whether they qualify for automatic small business rate relief, and so accomplish both measures in one operation?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I shall certainly look into the possibility of doing that. Anything we can do now to help businesses, especially small businesses, is well worth while. I shall ask the Secretary of State for Communities and Local Government, who is sitting beside me, to investigate further.
Doug Henderson (Newcastle upon Tyne North, Labour)
Before my right hon. Friend moves from banking, may I tempt him with, I hope, a slightly easier question than the one asked by my hon. Friend Dr. Ladyman? It is now accepted in Newcastle that the Government did the right thing by Northern Rock, bringing about stability and turning the bank around. Does my right hon. Friend anticipate that the bank will fully repay the loans?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I very much hope that it will. My hon. Friend knows that when we lent money to Northern Rock, there was a lot of scepticism—especially among the Conservatives—about whether we would ever get any of the money back. When we eventually nationalised the bank, there was downright hostility, but few would say now that that was not the right thing to do. Of course, we have new legislation, which would help us in future. However, Northern Rock has been able to repay, ahead of schedule, the money it borrowed from the Government. A loan of about £10 billion is outstanding, but I think it right, in the light of changed circumstances, to allow Northern Rock to re-enter the mortgage market. That is important.
John Hayes (Shadow Minister, Innovation, Universities and Skills; South Holland & The Deepings, Conservative)
rose—
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I want to make more progress before giving way again.
It is important to remember that the fiscal action we have taken is reinforced by the monetary action taken by the Bank of England. Interest rates have fallen quite dramatically in the past few months, which is helping millions of people in this country—mortgage holders as well as business people.
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
No—I am making progress.
In addition, we have given the Bank of England power to put more money into the economy, to ensure that we do not get deflationary pressures and that we do all we can to keep the economy going.
The Bank of England, in addition to buying Government gilts, will buy commercial paper and commercial bonds. As a result of its intervention, the 10-year gilt yields have fallen by about 0.5 per cent. since the announcement. We are doing the same as the United States, Switzerland, and Japan; other central banks will no doubt follow. The point is that in the face of unprecedented conditions, we are prepared to act—to provide substantial help for families and businesses, prevent the collapse of banks, protect people's savings in UK institutions, kick-start credit, and build a sustainable recovery. We are ready to seize the opportunities ahead. That is the difference—
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I will give way shortly, by all means.
That is the difference between our choice, and the choice that the Opposition have made. Our choice is to support jobs and help people to get back into work. More money for pensioners and families with children, more money in the child tax credit, basic rate taxpayers being helped by next Monday—all that is being opposed by the Tories. Those are not their priorities. Their priority is to introduce one proposal to help just 3,000 people in this country. If ever there was a policy for the few, not the many, that is it. That is the path that the Conservative Government have chosen.
John Maples (Stratford-on-Avon, Conservative)
Does not the Chancellor think that all the things he is doing, and wants to do, would be much easier to do if the Government had run a responsible fiscal policy over the past six years, and had run surpluses in the good years?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
The hon. Gentleman has to remember that, over the past 10 years, our economy has had the longest period of stability in a generation. We were able to do more for the health service, housing and education. At no time did anyone anywhere in the House say that we should spend less—quite the opposite. In these debates, Members used to call for even more to be spent, so, no, I do not agree. I thought that at least one Conservative might explain why, when faced with the choice of whether to help people to get back into work, which has cost about £1.3 billion—that is what we are giving to Jobcentre Plus—they would instead spend the money on helping a tiny minority of people. In the scheme of things, one might have thought that the Conservatives' choice would be on the side of the many in this country, not just the few.
Ann Cryer (Keighley, Labour)
I appreciate my right hon. Friend's giving way. Will he briefly comment on the disparity in the contributions made by building societies and banks to the Financial Services Compensation Scheme? Willie Rennie was in the Chamber just now. We have lost one building society; I would hate to see another go.
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
As I said yesterday, we want to do everything we possibly can to make sure that we support stability in the financial sector, including the building society sector. Indeed, yesterday, although it was very sad that the Dunfermline building society got into the position it did, at least we were able to transfer it to another building society; that is important.
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I will give way in a moment, but first I thought I might give the Opposition some further food for thought.
We face the most substantial economic downturn in generations. The whole world faces a financial crisis the like of which we have not seen for decades. The Conservatives might have thought that the No. 1 priority was to cut inheritance tax. Surely they would question not only having such a policy, but the fact that they cannot even pay for it. On
"what I'm saying is with the Conservatives' plans these are funded, on inheritance tax we will pay for it with the long-established proposals we've put forward on non-domiciles."
The next day, again on the BBC, the shadow Secretary of State for Business, Enterprise and Regulatory Reform said:
"We don't know how many non-doms will be here, we don't know how much our policy of raising fair taxation from foreigners who work in this country will raise".
In other words, the policy is not only unfair but unfunded. Does not that tell us everything we need to know about where today's Conservative party is?
Christopher Huhne (Eastleigh, Liberal Democrat)
Given the Chancellor of the Exchequer's remarks, with which I entirely agree, about Conservative policy on inheritance tax, will he reconsider the Government's own cuts to inheritance tax in the forthcoming Budget?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
No, because they are the right thing to do. At every stage, when we take action, we do it because we think it is fair and right. Faced with all the current problems that we and other countries have, it would be utterly wrong to make a priority of a measure that would benefit a very small number of people.
The Tories have a second policy. Not only do they oppose our putting money into the economy, but they are calling for £5 billion to be taken out of the economy, starting next week. That would mean taking money out of the police service and out of the environment at a time when we should be putting money into the economy. We can grow our way out of a recession; we cannot cut our way out of a recession.
Gerald Howarth (Shadow Minister, Defence; Aldershot, Conservative)
The Chancellor of the Exchequer has got a nerve. He is posing as the saviour of the millions of pensioners in this country. Does he not accept that it was his Government's action in removing advance corporation tax relief to pension funds that destroyed the pensions industry and millions of pensioners throughout the country? Furthermore, he accuses my hon. Friend Mr. Osborne of inaction. Where was the Chancellor's action when he set up the Financial Services Authority? It crucified the small independent financial adviser, but it failed to spot the big bankers making a huge mistake with the economy of the country.
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
I do not agree with the hon. Gentleman, as he will appreciate. In the past 10 years we have increased the state pension, we have introduced the pension credit, which is helping millions of pensioners by matching hard-earned savings, and we have taken many more pensioners out of tax. We will continue to do everything we can to help older people, because that is the right thing to do.
I believe that at a time like this, Governments across the world need to take action. They need to support their economies. Yes, of course they must take action to ensure that they live within their means in the medium term, but we must also ensure that we support our economies, continue to get credit going again and sort out the banking system: together, internationally, we must get international trade going again. We need to do everything we can to help the emerging markets and to prevent people from falling into poverty, because that would be a scandal.
There is a moral imperative on every one of us to do everything we can, both here and abroad, to make sure that we help people in this difficult time. We are committed to doing that. The sad fact is that the Conservatives will be committed to doing nothing. I look forward to hearing exactly why.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
I begin by welcoming the Chancellor to one of the debates that we have been having in the House of Commons on the economy, even if he chose to speak for only about half an hour on it.
As always with the right hon. Gentleman, the most interesting parts of his speech were the bits that he left out. I notice that he did not repeat his pre-Budget prediction that the British economy would start growing in 12 weeks. I notice that he did not repeat his prediction that the Budget deficit would be a mere 8 per cent. of national income this year, because he knows that it will be higher. I see that he did not even try to mount a credible defence of the VAT cut, which cost £12 billion—he mentioned it in passing. Perhaps that is because Labour MPs are queuing up to say that it should be scrapped.
I could not help noticing that there was no reference to the grand global bargain, even though the Prime Minister is supposed to sign that in a couple of days. A whole Government White Paper was produced by the Treasury on the grand global bargain, yet it does not even make it into the speech from the Chancellor of the Exchequer two days before it is supposed to be signed at the G20.
Were it not for my hon. Friends' interventions, the Chancellor's speech would not have mentioned the Prime Minister's ambitions for a second fiscal stimulus or the fact that the Governor of the Bank of England has put the kibosh on that. Listening to the Chancellor, one would never know that the Government's entire economic argument that they have advanced against their opponents had collapsed in that defining moment when Mervyn King said that the country could not afford to borrow more for a second fiscal stimulus.
We heard the rehearsed lines on my right hon. and learned Friend Mr. Clarke. Let me say this about the former Chancellor and inheritance. He left this country with a golden economic legacy, whereas the present Chancellor will leave the worst inheritance any Government have left since the second world war. The right hon. Gentleman had a dig at me and at my right hon. and learned Friend. I read the interview with the Secretary of State for Children, Schools and Families in which he openly pitched for the Chancellor's job, and I hear all the briefings from Downing street that the Chancellor is to be moved in the next couple of months. Frankly, by the time of the next election I am a bit more likely to be in my job than the Chancellor is to be in his.
The Chancellor did talk about the G20. I shall come to considerable areas of disagreement, but there is some common ground on the G20. We welcome the fact that the summit is happening and that it is to take place here in London. We hold out real hope that substantial achievements can be made, provided that the Prime Minister resists the temptation that he always has—to fight his domestic battles and look for political dividing lines.
Skilfully chaired, the meeting on Thursday could achieve a real breakthrough on free trade, for example. By "breakthrough", I do not mean warm words in the communiqué about how we will resist protectionism and not turn inwards; we had exactly those words in the communiqué signed in Washington at the last G20. Since then, as the Chancellor well knows, 17 of the 20 leaders who attended the conference have increased protectionism, 47 new protectionist measures have been introduced, the Indians have increased agricultural tariffs, the US Congress has passed "buy American" clauses, the French Government have boasted about the jobs that France is taking from eastern Europe and our own ludicrous Prime Minister has gone around repeating the slogan about British jobs for British workers, even though not a single member of his Government will repeat it alongside him.
Meanwhile, world trade is contracting for the first time in 30 years and the engine of global growth, on which we have come to depend, is spluttering to a halt. Completing the Doha round this spring would send not only a massive boost to the world economy, but a massive message to the world of confidence in our future. The G20 also looks likely to agree a substantial increase in resources for the International Monetary Fund. We welcome that, although I am disappointed that the Chancellor does not think that IMF reform should be on the agenda; I would have thought that, with China, India and Brazil attending the G20, this is a moment when we could get some real reform.
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
indicated dissent.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
The Chancellor shakes his head, but the last time we exchanged remarks about IMF reform across the Dispatch Box, he said that it should not be attempted at the moment because it would be too difficult. As I say, that is disappointing.
We want the members of the G20 to live up to the commitments on aid signed at Gleneagles by the G8, because all of us in the House appreciate that the poorest countries are the silent victims of the credit crunch. On financial regulation, the test will be whether the G20 engages with or ducks the difficult issues. We can, of course, expect a strongly worded statement on bankers' bonuses and offshore tax havens; the Government would have more credibility on those issues if the Prime Minister dealt with Lord Myners. The vote of confidence that Lord Myners got from his boss, the Chancellor of the Exchequer, was hardly a ringing one. We await events this afternoon.
It would also be good to have reform of the structure of banking. I noticed that although Paul Volcker, Nigel Lawson and the head of the Bank of America are all saying that we should look at dividing narrow banking from investment banking, the only person in the world who wants to shut down that debate is the Prime Minister, who has already made up his mind and does not want to listen to any other argument. It would be useful to have that debate in the G20.
Those are all tests for the Prime Minister as he chairs the summit. [Interruption.] I am glad to hear that Mr. Campbell is confident that the Prime Minister will pass all those tests. Of course, the real test will be whether he is focused on the right objectives in the build-up to the summit or whether we will end up with what Lord Malloch-Brown candidly called
"meaningless, empty commitments which don't survive the flight home".
The fear is that the Prime Minister is not focused on those objectives but has instead wasted his energies on trying to use the international stage to fight his domestic political battles. After all, as the Chancellor knows perhaps better than anyone, the Prime Minister will look for the domestic political advantage in everything. He cannot help himself.
The Prime Minister's plan has been pretty clear since the beginning of the year. He wanted to get all the G20 leaders together in London and make them sign up to a second round of fiscal stimulus. He then wanted to unveil the British version of that second fiscal stimulus three weeks later—in the Budget, which he delayed for the purpose—and to leave the Opposition on the wrong side of one of his pathetic dividing lines. Well, if that was the plan, it has spectacularly backfired. The result is hardly the springboard for yet another political relaunch by this Prime Minister but actually proof that the Prime Minister is the one who is isolated, while European Governments are lining up with us to warn about the dangers of borrowing more.
John Redwood (Wokingham, Conservative)
My hon. Friend is making his usual, very powerful, case. Does he agree that the Chancellor should be pitied, because his predecessor set up his own regulatory system, made himself head of it, and had no foresight when six major financial institutions went under for lack of capital, which he had failed to monitor?
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
My right hon. Friend is completely right. One of the most ridiculous positions that the Government have got themselves into, which all Labour Members will be defending come the general election, is that the system of financial regulation that allowed the collapse of the UK banking system does not need to be changed. That is what they will go into the general election defending, whereas we argue that the Bank of England should have back the powers to monitor overall levels of debt in the economy so that we do not repeat the mess that the Prime Minister has visited on us.
Clive Efford (Eltham, Labour)
Can the hon. Gentleman reflect on this for a moment? We are about to have a meeting of G20 leaders in the UK, at the instigation of the Prime Minister, with an agenda to try to tackle globally the current downturn. Does the hon. Gentleman really think that the British people think that he has the gravitas to achieve that sort of meeting and the coming together of minds to try to deal with this? Does he really think that people would listen to him given the several positions that he has held on many major issues over the past 12 months?
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
The last time I looked at public opinion, we were the people who were trusted on the economy, not Labour; the public were opposed to a second fiscal stimulus, not in favour of the Government's policy; and the man chairing the G20 was about the most unpopular Prime Minister that this country has ever had—so when it comes to credibility at the G20, we will see what other European Governments think of him.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
Let me take another question, particularly as we are going to take the hon. Gentleman's seat at the next election.
Stephen Ladyman (South Thanet, Labour)
The Conservatives have been saying that for 12 years now.
Before the hon. Gentleman leaves the subject of banking regulation, would he like to point to any speech that he made prior to this crisis in which he indicated that there was the wrong level of banking regulation? Would he like to contrast that with the speech that he made after Northern Rock went under, when he said that the problem was too much regulation?
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
I can point the hon. Gentleman not only to numerous references by me and my colleagues to the growing debt levels in our economy but to the fact that we fought the last general election—in complete contrast, by the way, to what the Chancellor said—arguing that we were spending too much as a country and needed to slow the growth in spending. Since the hon. Gentleman says that he has been in this House for 12 years—he will not have much longer—I point out to him that 12 years ago my hon. Friends who were in Parliament at the time raised concerns about the tripartite arrangements in numerous debates, and those predictions have been borne out by events.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
The hon. Gentleman is clutching the Whips' handout, so let us hear what is on it.
James Plaskitt (Warwick & Leamington, Labour)
I will tell the hon. Gentleman what I am clutching—the Conservative election manifesto from 2005. As he mentions the Bank of England and the tripartite arrangement, and all his warnings, can he explain why that manifesto, on which he stood for election, includes a discussion about the Bank of England with not one word about the tripartite arrangement, the level of bank regulation or credit expansion? When did he have his convenient conversion on all those subjects?
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
I think that the hon. Gentleman will remember that during that election campaign we repeatedly raised concerns about the levels of debt. As I say, he has a choice—
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
That is rich coming from the Liberal Democrats, who are proposing to spend even more than the Government. We would be in an even bigger hole if they had, by some miracle, won the general election. [ Interruption. ]
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
The truth is that given all that has happened in the last 18 months, Labour Members are going to fight the next general election on a commitment to maintain the tripartite committee—to maintain exactly the relationship between the FSA, the Treasury and the Bank of England. That is not a credible position given what has happened, and we are the ones coming up with answers about how to reform it.
In the last few days, a whole string of European leaders have queued up to agree with our arguments about debt. The German Chancellor said:
"I will not let anyone tell me that we must spend more money."
The Spanish Finance Minister said:
"In these conditions, I...believe there is no room for new fiscal stimulus"
The Czech Prime Minister, and the current President of the European Council—before the Chief Secretary to the Treasury sneers at him—says:
"All...these steps are the road to hell".
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
The German Government went into this downturn with a surplus and the scandal is that the Government of whom the right hon. Gentleman was a member, and those at the Cabinet table around which he sat, agreed to spending plans that were completely unaffordable and which left us with the biggest budget deficit of any western economy going into this downturn. He did not fix the roof when the sun was shining and we are all having to pay the price now.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
The right hon. Gentleman can explain himself.
John Reid (Airdrie & Shotts, Labour)
The shadow Chancellor has given a long answer to a question that was not asked. Will he confirm that despite what he has said, twice, about the German Government agreeing with his position of not having a fiscal stimulus, their fiscal stimulus is the equivalent of 4 per cent. of GDP, which is 1 per cent. more than ours?
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
Let me just say this to the right hon. Gentleman: the question is—[Hon. Members: "Answer!"] I will answer his question. He is the one handing out the Whips' handouts. Of course the German Government have engaged in a round of fiscal stimulus, just as the US Government have. But the difference between the German Government and the British Government is that the former were led by people who put aside money so that Germany would be better prepared when the economy turned down. The truth is—this is what the right hon. Gentleman will have to reflect on when he thinks about his time in the Cabinet—that he never once challenged the Chancellor of the Exchequer of the day, who was spending and spending and spending, racking up debt in the good years, so that when the economy turned, there was nothing left for us to deal with the economic downturn. That is the true story of the Blair years.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
It is very odd; I usually take interventions from the hon. Gentleman, who is sort of bidding for the job of finance spokesman, even though he is the shadow Home Secretary—or whatever they call themselves in the Liberal Democrats.
Christopher Huhne (Eastleigh, Liberal Democrat)
I am grateful to the shadow Chancellor for giving way. Given what he said about the German position, how does he explain the fact that the German general government-to-debt ratio was substantially higher at the beginning of this recession than ours was—in fact, it was a matter of some 20 percentage points of GDP?
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
If we had a true account of British Government debt that included the PFI and Network Rail liabilities, British debt would be significantly higher. Secondly, British debt is now rising at a faster rate than anyone else's because our budget deficit is higher than anyone else's. Surely the hon. Gentleman cannot be happy with the fact that this Government are running the highest budget deficit that Britain has known in peacetime—higher than when Denis Healey went to the IMF. Surely he cannot be happy with that.
As I was saying, European Governments are now lining up in agreement that there should not be a second fiscal stimulus, which completely shoots away the ground on which the Prime Minister thought that he would stand at the G20. Faced with that icy response, he went on that rather bizarre trip to south America last week. Even his most loyal henchmen would struggle to call that trip a success. First he went to a half-empty European Parliament and found that the response to his speech by a Conservative MEP got 1.6 million hits on the internet and no one noticed a word that the Prime Minister said. Then he crossed the Atlantic to continue his campaign for more spending, only to find that while he was away the Governor of the Bank of England had said that the country could not afford more fiscal stimulus, and in effect had cut up his credit card.
Finally, the Prime Minister made it to south America, where not only was he ticked off by the President of Brazil and stood up by Pelé, but the President of Chile gave him a lecture on sound public finances. Instead of addressing the G20 agenda, the Prime Minister was reduced to saying that he would reform the monarchy and that we would keep the Falkland Islands. That is how the chairman of the G20 used the week before the meeting to prepare for that summit. Where is the sense of priority in this Government?
What is left of the main economic argument that the Government have deployed against us since the autumn—that Britain needs to spend and borrow its way out of recession? It was striking at Treasury questions last week that, when pressed twice, the Chancellor could not bring himself to agree with the Governor of the Bank of England on fiscal stimulus. He was challenged twice to agree with the statement that the
"fiscal position in the UK is not one that would say, 'Well, why don't we just engage in another significant round of fiscal expansion?'"—[ Hansard, 26 March 2009; Vol. 490, c. 443-44.]
That is the argument that we have been making, and the Chancellor did not take the opportunity that he was given to agree with it. Indeed, when my hon. Friend Mr. Burns asked the Chancellor to express confidence in the Governor of the Bank of England, he ducked that question too.
I would have thought that the Chancellor of the Exchequer should see the Governor of the Bank of England as a key ally. For weeks, presumably with the Chancellor's knowledge, the Treasury has been briefing everyone that actually he agrees with the Governor, the CBI and all the other organisations that are lining up to say that this country cannot afford a second fiscal stimulus. The Chancellor's disagreement is not with the Governor, but with a Prime Minister who thinks that we can borrow our way out of debt.
Even if the right hon. Gentleman makes it to the next election and, by some remote possibility, his party wins that election, he knows that he will not be reappointed as Chancellor. Everyone knows who the Prime Minister's top choice as Chancellor is—the Secretary of State for Children, Schools and Families. This is the Chancellor's moment in that great office of state. Does he want to go down as the Chancellor who stood by and let his Prime Minister lead the country down the road to fiscal insanity, or as the one who did something to stop that Prime Minister? That is the choice that he has to confront in the next three weeks—does he do the right thing and face down his neighbour, in which case he will earn the gratitude of the country, or does he cave in? [Interruption.] Ann Coffey wants to talk about the measures that the Government are taking. Let me take one example, the working capital scheme.
For five months, since November, we have been calling for a national loan guarantee scheme to support businesses that need credit. In early January, the Government finally conceded that we had a point and promised a guarantee scheme of their own. It was called the working capital scheme and was supposed to start on
Of course, that is the truth of so many Government schemes. The home owners mortgage support scheme, announced in December—not a single home owner has been helped. The automotive assistance programme was announced two months ago—still not a single loan has been made to car firms. The national internship scheme—it was never heard of again. The Government's slogan of "real help now" is a cruel joke to businesses and people losing their jobs up and down the country.
Philip Dunne (Whip, Whips; Ludlow, Conservative)
Is my hon. Friend surprised to learn, as I was, that the directors of Technorton, a small business in my constituency that went into administration this morning, laying off several constituents, had been trying for the past few weeks to get access to the enterprise finance guarantee scheme? The scheme is much trumpeted by the Chancellor as one of the few that actually work, but when the directors applied for it, they were told that funding would be available only if they first put in personal guarantees. They had already exhausted those by backing the business, so they looked to the Government for help. None was available, hence the business is now in administration.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
I suspect that almost every hon. Member could tell a similar story. The Chancellor sits there and will not even answer the basic question of why the working capital scheme and the loan guarantee scheme, which we have discussed in the House for months, are not operational now that we have reached the end of March. Will he intervene and explain that to the House?
Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour)
indicated dissent.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
Why will he not intervene?
John Baron (Whip, Whips; Billericay, Conservative)
Does my hon. Friend accept that, although the Government may scoff at individual examples that Members present to the House, surveys throughout the country, especially from the Federation of Small Businesses and local chambers of commerce, show time and again that the majority of local businesses do not believe that any Government schemes will improve lending or terms? That is third-party confirmation that the Government schemes are not working.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
My hon. Friend is right. Not only Conservative Members have complained—if the Chancellor had attended some of our previous economic debates, he would have heard Labour Members complain regularly about the schemes not being operational. Last week, Mr. Robinson said that
"as far as industry is concerned, we just don't have those schemes working yet. And that's where we've got to put the pressure at the moment."
Hon. Members have an opportunity in this debate to put pressure on the Government to fulfil their promises. Getting credit flowing is crucial in a credit crunch. Agreement at the G20 is important, but in the end, confidence will not return and recovery will not come until we have a Government who understand that the debt-fuelled model of economic growth which they pursued for the past 10 years is fundamentally broken.
Our Prime Minister shows no sign of that understanding. He continues to assert that Britain is better placed than most economies to weather the storm. Yet, when he looks around the table of G20 leaders, he will see no one else with a budget deficit as large as Britain's, according to the IMF, and no one else who will have a longer and deeper recession than the United States, according to the OECD. He continues to argue that the recession is caused by a banking crisis that blew in from America on an otherwise sound economy. [Interruption.] Mr. Watts, who is the Government Whip, says he never said that. The problem is that the Prime Minister kept saying it from the Dispatch Box. That has been the Government's main economic argument—that we are suffering some banking crisis from America. The truth is that it is caused by 10 years of building an economy on debt and the Government are now reaping the consequences.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
I must give way to Mr. Hoyle, since I visited his constituency on Friday.
Lindsay Hoyle (Chorley, Labour)
Which the hon. Gentleman failed to tell me. Not to worry, it is the second time, so it is not a problem.
The hon. Gentleman rightly uses the Federation of Small Businesses as an advocate of how policies should be developed. If he accepts its recommendation and that of JCB, Corus and other major industry, will he back short-time work subsidies as a way forward to ensure that we protect the jobs that matter to all of us and save manufacturing for the future?
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
Of course I am sympathetic to those who are desperate to keep their jobs and to people who have lost their job. I would like to help them by providing a national insurance rebate for employers who take them in. The problem is identifying the cost of the hon. Gentleman's proposal. He asks a good question. I think that I am right that he opposed the Government's VAT cut and proposes that they should give back that money. Perhaps he will suggest that they use it for his scheme. So that we have it on the record, will he confirm that he does not support the Government's principal fiscal stimulus—the VAT cut?
Lindsay Hoyle (Chorley, Labour)
Let me give the hon. Gentleman the answer that he seeks: the scheme would cost £1.8 billion, which would save 600,000 jobs a year. That is the sort of stimulus that one could use if we ended the VAT cut.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
There we have it: another Labour MP who does not agree with the principal component of the pre-Budget report announced by the Chancellor just a few months ago.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
I promised to give way to the hon. Gentleman, but this will be the last time that I give way before I conclude.
Richard Burden (Birmingham, Northfield, Labour)
When the hon. Gentleman answers my question, perhaps he could start by also answering the question that my hon. Friend Mr. Hoyle asked about whether he supports a short-time subsidy, to which I did not hear an answer. How would the hon. Gentleman's loan guarantee scheme work? Does he insist that a national loan guarantee scheme would work if it had no money behind it, or does he say that it would indeed have money behind it? In which case, does he agree with the shadow Business Secretary, his right hon. and learned Friend Mr. Clarke, who says that if such a scheme were introduced, the taxpayer would take some kind of hit?
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
The person whom I agree with is the Economic Secretary to the Treasury, who says of the loan guarantee scheme:
"We expect the measures to be run on a break-even basis".—[ Hansard, 14 January 2009; Vol. 486, c. 220.]
That is the Government's assessment of the cost for loan guarantees: a "break-even basis". The Economic Secretary is right in that judgment, which is also the judgment on which we rest our argument.
What we have is a Prime Minister who presides over this economic wreckage, who clings to the seat of that aeroplane, who says that he has nothing to apologise for and who really believes it. That shows how detached he is. The country faces a fiscal crisis, yet all the anchors of fiscal policy have been cut loose. There are no fiscal rules and the spending reviews have been cancelled. It is the Opposition, therefore, who have to come forward with proposals for an independent office for budget responsibility and genuine restraints on public expenditure, so that this country lives within its means.
The country faces a crisis in the institutions of banking regulation. We have a Prime Minister who refuses to accept that anything went wrong because he happens to be the person who set up the system. It is therefore the Opposition who have put forward the detailed plans to give the Bank of England more power. The country faces a crisis of growth because the economy is contracting. The narrow engines of economic prosperity upon which the Government relied for 10 years—property and finance—have disappeared, yet in the words of the director general of the CBI, the Government have
"little sense of a coherent strategy"
about what to do next. It is the Opposition, therefore, to whom the country now turns to reform our education and welfare systems, wean our economy off its addiction to debt, provide support for savers, encourage low-carbon technologies, rebuild manufacturing and restore confidence in the economic prospects of our children. The truth is this: we are the future and Labour is the past. The sooner the country can vote for change, the sooner confidence will return and the recovery will begin.
Sylvia Heal (Deputy Speaker)
Order. May I remind all right hon. and hon. Members that Mr. Speaker has imposed a 10-minute limit on Back-Bench contributions?
John Reid (Airdrie & Shotts, Labour)
We are facing problems the likes of which none of us here has ever seen during our time in the House. The shadow Chancellor referred to the legacy of the Blair Government. I share responsibility for that and I share pride in it. When I consider the 700,000 people who are not on NHS waiting lists now or the people who are not losing their sight waiting for a cataract operation or dying because they need heart surgery because we have reduced the maximum time between the doctor's surgery and the operating theatre from some three years to 18 weeks and the average time to eight weeks, I think that, far from being useless expenditure, that is money well spent.
Let me also tell Mr. Osborne that as we spend that money during the good times, so we aim to protect people during the difficult times. Although today the shadow Chancellor made a few telling points against the Government, who must share some responsibility, as everyone else does—indeed, as his party leader has said, the Conservatives share some—nevertheless, to take the position that during such a recession we will do nothing and ought to do nothing to protect ordinary people is not sustainable. I genuinely believe that the hon. Gentleman has not risen to the occasion that the opportunity gave him. When he said that he will be in his position as shadow Chancellor right up to the election, perhaps his ambition is too modest. I fear that he may well be in his position as shadow Chancellor well beyond the next election.
Let me turn to the great challenges that face us, and they are indeed great. We are dealing simultaneously with a fairly typical recession and, on the other hand, a very far from typical financial crisis. The first of these requires a huge stimulation of demand and the second—the financial crisis—requires intervention to ensure solvency, liquidity, oversight, regulation and transparency in the financial sector. That statement is agreed by just about everyone in the world so far as I can see—except for Conservative Members. Both those elements require the widest and most measured range of co-ordinated international action.
For most of the world, this is not actually a debate about whether we should borrow or not, or about whether we should have stimulus or not; rather, it is a debate and discussion about the extent, the quantity and the measure of that stimulus and of that borrowing. This debate is taking place with every Head of State who is arriving here and with every Prime Minister, too. The only people sitting outside the framework of that discussion are, unfortunately, Members of the Conservative party—with the exception of the shadow shadow Chancellor, Mr. Clarke.
It is always easy to criticise the Prime Minister, as the shadow Chancellor did today. I think, however, that that is grossly unfair. The Independent on Sunday said that, and I agree; indeed, it not only unfair, but untrue. If the Prime Minister set his sights high and if the plans he pursued were of a magnitude unprecedented in the experience of most Members here, that is only because the challenges that we face are unprecedented. If the Prime Minister—it is the Prime Minister who is leading—fails to achieve everything he set out to achieve, or if he achieves only half of it, it will still be a light year away from what would have been achieved by a policy of doing nothing. The nation ought to be grateful for that.
So I believe we should avoid undue pessimism this week, as we tried to avoid the over-hyped press expectations last week. Let us remember three or four aspects of this whole debate. First, we have a range of weapons in our armoury, so the debate is not just about an additional stimulus. As I understand it, the Conservative party did not agree with the Governor of the Bank of England, because it objected not only to the next potential stimulus but to everything that has been done up to now, which is clearly different from the Governor of the Bank of England. We have automatic stabilisers, discretionary stimuli and quantitative easing, so we should not get particularly hung up on one specific example.
Secondly, let us remember that national predilections and preconceptions are not just irrational or political or ideological stances; they are shaped by the history of each of our countries. I do not blame a country such as Germany, with its sensitivity and great concern about the effects of hyperinflation in the light of what happened in the 1930s, for being rather cautious when it comes to the question of stimuli.
Thirdly, the point I made is absolutely correct. Even with that caution, Germany's stimulus has been 1 per cent. above what has been done in this country up to now. In the UK, our stimulus has already been significant; although a discretionary stimulus amounts to only about 0.5 per cent., the automatic stabilisers brought in about 2.5 per cent. of gross domestic product of further stimulus. It is significant by international standards.
John Redwood (Wokingham, Conservative)
Will the right hon. Gentleman tell us why, despite the slump, inflation is still 60 per cent. above target? Is he at all worried about printing lots of money?
John Reid (Airdrie & Shotts, Labour)
It is a matter of measure, is it not? Yes, I would worry if we printed too much money, but we have to take the advice of the Bank of England and others on quantitative easing, as we have to do on other matters. Again, there is no issue about whether we should have quantitative easing or printing of money; the debate is about the extent, the application and the effect they will have.
I want to speak about an issue that has unfortunately not been mentioned in either of the speeches so far. When it comes to the second area—that of financial regulation—I shall express my view about the leaked communiqué. I do not usually like using such communiqués, and my right hon. Friend the Chancellor will know that for many years I condemned anyone using leaks; on this occasion, this was thrust into my hand as I approached the Chamber. Sections 14 and 15 are, in my view, very weak on a question that I believe is vital to the oversight and regulation of the financial sector—I refer to the word "transparency".
I believe that the three Graces that are necessary in order to revitalise that sector effectively are oversight, regulation and transparency, and the greatest of these is transparency. It is a crucial area with which to enhance oversight and regulation, but it must be done in a way that works with, rather than against, the market. That should be one of our primary objectives, because if regulation becomes an imposition—a punishment, a central diktat—that effectively tries to run the markets, rather than regulation, oversight and transparency being a means of assisting the rational workings of the market, we will end up not curing, but killing, the patient.
John Reid (Airdrie & Shotts, Labour)
Let me avoid Europe for now, as I shall address it later.
I say to the Chancellor that I hope he and the Prime Minister will set down as one of our primary G20 objectives the restoration of a degree of confidence in the financial sector by doing, in so far as is possible, the following four things: first, we must make sure that the information necessary for market transactions is available to everyone; secondly, we must ensure that market participants have access to all data; thirdly, that must not be restricted by cost; and fourthly, the data and information must be provided from neutral sources. If we do not achieve that, I do not believe we will go any way towards having significant oversight, regulation and improvement in the financial sector. This—
John Reid (Airdrie & Shotts, Labour)
I have two minutes and 30 seconds left, and I hope the hon. Gentleman will accept that I must make some progress because, unlike the Conservative party, I want to put forward concrete proposals.
I urge the Chancellor to recommend the following key principles when he meets world leaders at the G20 later this week. First, there is the principle of non-discriminatory access to pre and post-trade data, which includes accuracy and timely data, an essential ingredient for transparency. Secondly, data should be made available at reasonable cost as described under the European legislation, MiFID—the markets in financial instruments directive. There must be clearer guidance on what constitutes reasonable cost. Thirdly, there should be high-quality raw data; that is imperative for sound decision making, and I believe greater transparency is needed to identify who is submitting incorrect data. I come to this subject having never held a Treasury post among my nine Ministries. That is not a statement of avoidance of responsibility; it is a confession of relative inexperience in this area. However, it surprises me that sourcing data do not exist in financial markets. Finally, there must be effective consolidation of raw data, and in Europe that is currently impeded by an absence of common reporting.
I believe these principles should be introduced in the discussions and that the Government should set up an ongoing transparency group under the auspices of the G20 to assist in the implementation of the principles agreed at a global level. Why? Because of liquidity. I have previously spoken about inter-bank lending. As we look further into the opacity of some of these deals, through derivatives and into the credit default swaps, it will become clear that it is impossible to return confidence to the market unless there is more transparency than exists at present. The most obvious example of this is the market in credit default swaps. Some of the information that is put out in this most difficult of areas is largely controlled by the banks. If ever there was a case of people marking their own homework, it is in the credit default swaps market, where there is lack of both transparency and control of regulation. I believe doing this is essential for confidence, and that it should be a major element this week. I commend this approach to my right hon. Friends the Chancellor and the Prime Minister.
Vincent Cable (Twickenham, Liberal Democrat)
I welcome the debate. I know that the Chancellor has to leave for another meeting, but his participation was welcome. I specifically welcome the one proposal he made, which was in relation to business rates and the smoothing out of the increase. It has been called for by the Federation of Small Businesses and the CBI and it is absolutely right. I hope he will follow it up with the suggestion made by my hon. Friend Mr. Heath. We know from surveys that half of all small businesses are not even aware that they are entitled to business relief; it is very much dependent on the activism of local councils to bring it to their attention. If this could be done automatically, it would save a great deal of grief among small companies.
Listening to the contributions that we have heard from both sides, one gets the impression that the dominant issue in economic management is the size of the fiscal stimulus, which is a very odd perspective, regardless of whether one is in favour of it or against it. The International Monetary Fund has just published a very interesting analysis of what is happening in the British economy and where the stimulus is coming from, and it puts things into an interesting perspective. The IMF calculates that the value of the Government's fiscal stimulus over a three-year period is about £20 billion and contrasts that with some £90 billion of stimulus that is coming from interest rate cuts and monetary easing and with the stimulus that dare not speak its name—devaluation—which is providing an extra £40 billion. Although the Government do not acknowledge it, and nor do the Conservatives, for their own reasons, what is actually happening is that the Government are very carefully following the doctrines of Milton Friedman and we have, in essence, a monetary response to the crisis, which is absolutely right, provided it is effective and gets money into the economy. The argument about the fiscal stimulus, although it may be amusing and politically interesting, is fundamentally a sideshow.
While we are discussing the sideshow, I just wish to reiterate the view that Liberal Democrats have been expressing, which has been reinforced by experience and by the conviction of a growing number of Labour Members. It is that although the VAT cut may have seemed a bright idea, as the Government needed to do something in a hurry, it was not the best way of using £12 billion of taxpayers' money. There is a strong argument for simply stopping it and using the money instead for a much more carefully targeted programme of public investment aimed at social housing, insulating people's homes, and public transport, so that at the end of it there will be assets, many of which will produce an income, which will directly stimulate employment and also do something for the environment.
An interesting survey has just been produced by HSBC on the environmental impact of the Government's fiscal stimulus, small though it was. It estimates that about 70 per cent. of that package contributed to environmental improvement, as opposed to figures of 15 per cent. internationally and 80 per cent. in countries such as South Korea. The Government have covered themselves in this mantle of the green new deal, but their policies are nothing of the kind and are completely bereft of any environmental value.
Before I leave the fiscal stimulus, I should note that it was interesting that the Chancellor threw out a challenge to the Conservatives when he said that they were proposing a cut—a negative fiscal stimulus—of about £5 billion. That is probably correct, but what he did not mention was that the Government, according to their own figures, are proposing a negative fiscal stimulus in the next financial year, because, of course, public investment has been brought forward and will be cancelled next year. If unemployment is astronomically high next March, as many of us expect it to be—it could be 3.5 million or 3 million; it will certainly be very high—and we are still in a recession, this Government, who seem to attach so much importance to fiscal stimulus, will be proposing that we have a negative one. I do not know whether that was intended or whether it was just the way the arithmetic came out, but the Government will have to solve this problem of how to sustain their commitment to the economy should this recession continue and not be a temporary blip, as they initially thought it would be.
I turn now to the quantitatively much bigger issue of the banking system. The following question was asked by Members from several parties yesterday: how much are we now exposed to the banks as a result of the various takeovers and the commitments that have been made? The total balance sheet of the British banks is about £8 trillion—about five times Britain's gross domestic product—and we are now liable for most of it. A lot of that is the gross value of derivatives and if we take them out, the figure becomes quite a bit less; but none the less we are talking about commitments that are several times bigger than the British economy.
The IMF has, again, produced some helpful estimates, although they are very speculative. It estimates that when this banking crisis has finally resolved itself, total losses of about £200 billion will have to be absorbed by the British economy and, in effect, by the British taxpayer. Now, it is not quite as bad as that, because—as Dr. Ladyman intervened to point out—there may be a gain from selling the banks, if they are run properly. That might happen in 10 years' time, so the net cost may be a good deal less, but the taxpayer's commitment is substantial, even if it is phased over some years.
The question that the Liberal Democrats would ask is whether we are getting value for our money. We profoundly disagree with the way the Government are pursuing their involvement in the banking system, because we have the worst of all possible worlds, with large-scale public investment in the equity of the banks, but without effective public control and without the banks being run in the national interest. I thought that it was pathetic when the Chancellor waved a bit of paper and said that he had an agreement of some sort from RBS and Lloyds bank to lend a bit more money. Well, he told us that in October. We have no idea what the banks are doing, and whether they are lending more or less. What we do know is that the banks are doing what they think they have to do, which is to be obsessed with their tier 1 capital.
Nobody on the board of the banks, in UKFI or in the Treasury is asking how we can maximise taxpayer value. That is the question that should be asked, and it is not being asked because the Government are desperately trying to maintain an arm's length relationship with the banks. As a result, there is no pressure on the banks to ensure that they lend to solvent British companies with a liquidity problem. We know that there are many of those because the companies in our constituencies all tell us the same story—whenever they try to raise money, even if they have a good business or a full order book, they cannot get money from the banks; or if they do, it is on punitive terms with large arrangement fees and demands for massive amounts of security. The Government should intervene to stop that.
I am told that in France the Chancellor's opposite number, Christine Lagarde, has a daily conference call with the chief executives of every leading bank and insurance company in France to ensure that taxpayer value is aggressively pursued, with the Government working actively with the banks. People may not like the French model, and in normal times I do not think that we would advocate such a dirigiste approach to the banking system. However, the idea that the Government have to grasp the nettle and treat the state-supported banks as nationalised industries is shared across the political spectrum. Those who have advocated that approach include John McCain, the defeated Republican candidate for the US presidency, and Alan Greenspan, so this is not an ideological point. It is a recognition of the reality that if vast amounts of taxpayers' money go into the banking system, it should be run in the national interest.
Ruth Kelly (Bolton West, Labour)
Does the hon. Gentleman accept that if every country followed the French model that he proposes, there would be a real danger of financial nationalism, which would in itself pose a threat to a global economic recovery?
Vincent Cable (Twickenham, Liberal Democrat)
There would be that danger, and that would obviously be a problem for the UK, because we have several global banks here. But RBS, which is a global bank, is not being rescued by the globe. It is being rescued by British taxpayers, and it is not unreasonable in the circumstances for it to make it a priority to lend to solvent British companies. The Government have to pursue that in the interests of the people whom we represent. I am not a nationalist, but that is the reality of the world that we now live in.
Instead, the Government are pursuing what they call the asset protection scheme, which the Conservatives also support. I argued from the outset, and I probably used strong language at the time, that that is a fraud against the British taxpayer. The leading banks are taking their bad loans to the Treasury—the banks know a lot about those loans and the Treasury does not know as much—paying a fixed fee of insurance and walking away. I have discovered, although I have not yet been able to obtain the documentary evidence of it, that the banks are then promptly closing down the companies that they have insured. That is fraud in a real sense, as well as in a metaphorical sense. That is happening under the noses of the Treasury. There is no reason for that scheme. It does nothing to promote new lending, which is much better done by direction or through credit insurance of the kind that the Conservatives have promoted—both valid approaches to the problem. The scheme is also a massively expensive commitment for the British taxpayer.
Kelvin Hopkins (Luton North, Labour)
I am following what the hon. Gentleman is saying with great interest, and I agree with much of it. Anatole Kaletsky, writing two or three weeks ago in The Times, suggested that if we completely nationalised RBS and it became a state bank, others would quickly follow, dominoes would fall all over the world and we would very quickly have a world where the banks controlled public investment. Publicly owned banks and state banks would run the economies of the world. I would welcome that, personally, because I am a socialist. Other people might not. Does the hon. Gentleman think that Anatole Kaletsky's concerns are valid?
Vincent Cable (Twickenham, Liberal Democrat)
If non-socialists want reassurance, they should probably consider some of the models from when that has been tried before. The obvious one is Scandinavia, where the banks were nationalised and re-launched as private banks a decade later. That made money. I talked yesterday night to the ambassador of Israel. I did not realise this, but the Israelis had an enormous banking crisis 25 years ago, nationalised all their banks, cleaned them out and sold them on at a big profit to their taxpayers. Their banks have had absolutely no trouble in this recession because they were cleaned out and prevented, among other things, from engaging in securitisation. There is a model that is not a socialist model but shows a practical, common-sense way of dealing with the problem.
I was talking about the asset protection scheme and it is probably worth quoting one of the more distinguished members of the Monetary Policy Committee, who was one of the first to serve on it—Willem Buiter. His comments, I think, have been valued throughout this crisis. He notes:
"Like its American and Dutch counterparts, this toxic asset insurance scheme is without redeeming social value: it is inefficient, unfair and expensive".
One positive bit of news about the asset protection scheme in the past week, however, is that it looks as though our second biggest bank, Barclays, will not use it. That is very good news. Barclays was probably scared off by the bad publicity surrounding the potential exposure of its tax activities, and the British taxpayer has therefore been spared a great deal of grief. That remains to be seen.
I want one issue clarified when the Minister sums up. Where do we stand on taxation and the asset protection scheme? It is very clear from the original terms issued by the Treasury that any company that wanted to avail itself of the scheme, whether it is nationalised or non-nationalised—this provision is in section 5 of the Treasury paper on the scheme—has to disclose any information available to it or any opinions given to it on tax matters. Within the last week, the Treasury has appeared to dissociate itself from that and has said that tax matters are entirely separate. When I asked the Chancellor of the Exchequer about that during Treasury questions last Thursday, he confirmed that from the Treasury's point of view, tax is a separate issue. Is it, or is it not? It seems to me, from the point of view of the taxpayers' interests, that we cannot possibly use taxpayers' money to underwrite banks that do not pay their British taxes but try to avoid them. There is massive ambiguity on that from the Government and I hope that they will clear it up.
Let me make one final point about the asset protection scheme. It is very clear that all the leading Treasury officials and several of the leading Ministers involved in the scheme are preoccupied, night and day, with trying to make the scheme operate. As a result, they are not focusing on potentially much more important issues. Why, for example, have the Government not yet focused on the problem of how to convert debt into equity? If many companies are over-leveraged and need to acquire fresh equity, which many of them do, the Government can use that process through their control of the banks. The banks have no interest in doing that, obviously, so the Government will have to require them to do it or to set up a scheme to do it. There is no evidence that that fundamental problem is even being faced.
We also know from the evidence given to us by many of the businesses that have talked to us that there is a major crisis in trade credit insurance. The system has completely broken down, which is one reason why supply chains are collapsing. I understand that in France that problem was fixed last December. It could be dealt with in the UK through the activities of the Export Credits Guarantee Department, but again it would appear that nothing is happening and that nothing is being done. The Government are clearly distracted from these important and pressing issues.
Mark Todd (South Derbyshire, Labour)
The hon. Gentleman may have noted my oblique reference in my intervention on the Chancellor to the fact that major, entirely credit-worthy companies with solid orders appear to be having difficulty with their loans from banks and the ECGD. Does he agree that further assistance may involve applying some compulsion to the banks under Government control to support those loans?
Vincent Cable (Twickenham, Liberal Democrat)
I am not familiar with all the details, but I believe that there are three specialist institutions in the business, none of which is now working. All their potential customers are being left high and dry, with disastrous consequences. That is a clear example of market failure: the Government should intervene and deal with such situations, but that is not happening.
Andrew Love (Edmonton, Labour)
Before the hon. Gentleman moves on from the asset protection scheme, may I ask what alternative to it he believes exists? I understand some of the criticisms that have been made of the scheme, but how else can we deal with the problem of bad assets on banks' books? The public-private scheme that the US Federal Reserve and Treasury Secretary have produced has been roundly condemned, but what alternatives are there?
Vincent Cable (Twickenham, Liberal Democrat)
There is no doubt that the bad debts have to be separated out, and in some cases it might be sensible to convert them into equity of some kind. At some point in the future, the bad debts can be sold off, but it is not clear to me that they are a priority. The overriding need is to get new lending going, and that is what the banks are not doing. The Government are trying, in a very oblique way, to create confidence in the banking system, when they should be directing the nationalised banks. That is the answer: the hon. Gentleman may not agree with that approach but, if he accepts—as my party does—that there is no alternative to the de facto nationalisation of the banks and the effective direction of their strategy, the asset protection scheme becomes, if not unnecessary, then certainly a lower priority.
I turn now to this week's G20 meeting. I agree with the Conservative shadow Chancellor that it was odd for the Chancellor not to address it at all. That was very strange, because the meeting is something that we should very much welcome. People in a negative frame of mind ask why we are having it and say that it is a waste of time and money, but of course it is not. The world economy is in peril, and it is absolutely crucial that there is a collaborative approach to the problems.
Some fundamental things can and probably will be done at the G20 meeting—for instance, on getting agreement on the IMF funding that many countries, especially in eastern Europe, need, and on securing a more effective role in decision making for China and the other emerging powers. Most important of all—and again I agree with the Conservative spokesman on this—progress will probably be made towards a meaningful agreement on preventing protectionism, both in traditional trade and more widely.
Those are obviously essential tasks, but I am perplexed by the overriding priority that the Government are giving in the short term to issues of international financial regulation. Of course we need such regulation, but many of the things that must be done can be done at a national level.
For instance, there is a broad consensus that banks will need to be regulated through their capital on a counter-cyclical basis, but that can be done at a national level. It is already in hand in some countries: Spain has tried to do it, and there is plenty of discretion in that regard in the European rules and the Basel process. There is no reason why countries need an international agreement before they get on and introduce regulation.
Another problem involves tax havens, on which the Government are quite rightly focusing. Tax havens are a long-term problem, in part because of money laundering issues but also because of tax policy. However, most of the tax avoidance in the UK takes place under the Government's nose and with the Government's full knowledge. In the case of the banks, it is happening with the active complicity of the British authorities. To say that there needs to be an international agreement to deal with the problem is perverse. That is simply escapism, and an example of our Government failing to face up to their responsibilities.
In conclusion, I want to make a final point about financial regulation. We have had Lord Turner's report since we last debated the matter, and it is a very important milestone in how we look at financial regulation and the City. The debate has often been presented as meaning either more or less regulation, but that is not a sensible way of looking at the matter. There was plenty of regulation going on, and an enormous amount of box ticking, but the problem was that there was very poor supervision.
Supervision is not regulation—the two are fundamentally different. Custard pies may fly backwards and forwards across the Chamber about whether we need more regulation or less regulation, but that argument comprehensively misses the point. Plenty of institutions in the City do not need heavy regulation; for them, light-touch regulation is perfectly relevant, because they pose no systemic risks. What is absolutely clear, however—this goes back to the Cruickshank report—is that the banks were different: they needed to be supervised much more actively and regulated in a different way from other types of financial institution. That is the conclusion that should have been drawn.
William Cash (Stone, Conservative)
Following the line the hon. Gentleman is taking on the importance of national supervision, does he rule out the proposals in the de la Rosière report and the European Commission's proposals to have European supervision of banking and financial services, which the Government appear to be pretending could be supervised at national level, when in fact the legal framework would be decided through the majority voting arrangements and the ultimate jurisdiction of the European Court of Justice?
Vincent Cable (Twickenham, Liberal Democrat)
I do not rule out the proposals in Mr. de Larosière report, which, as I understand them, involve much closer collaboration between European regulators—he uses the concept of a college of regulators, I believe. Surely all our experience last autumn and the panic induced by the Irish independent policy on bank deposits suggest that European co-operation is needed more than ever. That is not to say that we would support an ending of national regulation—that is the bedrock on which the collaborative structure is based. A combination of the two is needed.
John Reid (Airdrie & Shotts, Labour)
The hon. Gentleman is making a most interesting speech, but does he accept the point I tried to make earlier, which is that it is not a matter of just regulation or supervision? Regulation and supervision are impossible if there is no transparency. If the counter-party's assets are completely untransparent; if some of the derivative products were not understood even by those who were selling them, far less those who were reinsuring them; and if the credit default swaps—in extremis, verging on speculative gambling—are covered over the counter with a total lack of transparency, unless we have some way of putting the information in the hands of all the parties in the market, we will not have a rational market or the means to supervise and regulate.
Vincent Cable (Twickenham, Liberal Democrat)
The implication of the right hon. Gentleman's argument is that some sort of clearing house is needed internationally to create a market for those products. As I understand it, that has been agreed in principle. There is a particular problem with one type of derivative—credit default swaps—but most of the others, contrary to some pessimistic expectations, have not exploded in the way that was feared. Certainly, in that respect, effective international co-operation is needed.
In addition to the broader point on regulation, we may draw several conclusions from Lord Turner's work, one of which is that he, like the Prime Minister, bottled out of answering the question whether the banks should be split into their relatively low-risk utility operations and what the Governor of the Bank of England calls their casinos. In practice, in a world of rather complicated financial products, that split is technically difficult to achieve, but the principle is right. I am pleased that the Opposition parties are of the same mind on that matter, and I think that many Labour Back Benchers take the same view. I am utterly perplexed as to why the Prime Minister, uniquely, seems to be standing in the way of such a reform.
John Redwood (Wokingham, Conservative)
It is clear in the RBS accounts which is the casino bank and which is the utility bank. The question is: why did the Government buy both?
Vincent Cable (Twickenham, Liberal Democrat)
At this stage, we are arguing about how we progress from that to a reformed system. In a world of securitised products, it is quite difficult to separate the two types of transaction, but that is what needs to happen. Instead, however, we are hearing a lot of excuses, based on technical problems, for failure to implement what people who have fairly sophisticated knowledge of the area, including many in the banking system, accept is a reform that simply has to happen.
To summarise, I welcome the debate. The Liberal Democrats agree with some of the points the Government made, but there are several points on which we disagree. We think that the approach to banks' not accepting the responsibilities that go with nationalisation is fundamentally wrong, and we disagree with the make-up of the fiscal package. We believe—we will deal with this when we discuss the Budget in a few weeks' time—that, within a public financial system that we all recognise is highly constrained, there is a great deal of scope for rebalancing the tax system in the interest of greater fairness.
Ruth Kelly (Bolton West, Labour)
It is always a pleasure to follow Dr. Cable. I always enjoy his arguments, about half of which I fully and strongly support, and half of which I disagree with vehemently. However, he makes his arguments with great authority and I am pleased that he has now converted his party to the idea of a fiscal stimulus. Not many weeks ago, he argued that any tax cuts, or indeed spending increases, should be fully funded. While he correctly says that the fiscal stimulus is only part of the solution, at least he now accepts that it is something on which the UK and other Governments ought to be engaged.
I congratulate my right hon. Friends the Chancellor and the Prime Minister on the strong and robust leadership that they are showing. They are leading the way, across the globe, with a concerted, robust response to what must certainly be the biggest financial crisis within living memory. It is accompanied by the first global economic slow-down since the second world war. Indeed, the Governor of the Bank of England said only last week:
"I cannot recall any previous experience of such a sudden, severe and synchronised downturn in world output of the kind that we have seen in the last three to four months."
Of course, most severe recessions are caused by mistakes made by policy makers, rather than by any global economic shock that has come along and hit the financial or economic system. We should never forget that it took the world years to recover from the 1929 Wall street crash. However, the problem was not a function of the crash itself, but of the response by global policy makers to that crash. It is timely to remember that the London summit in 1933 collapsed in disunity as the world retreated into a downward spiral of protectionism and depression.
Kelvin Hopkins (Luton North, Labour)
Is it not a fact that the depression in the 1930s arose, at least primarily, from the deflationist policies operated after 1929 by certain Governments, notably the Government of Germany— [Interruption]—and Britain? A degree of tariff protection enabled countries to reflate their economies. Protectionism came later, and actually helped the recovery. It was the deflation at the beginning that caused the problem.
Ruth Kelly (Bolton West, Labour)
My hon. Friend is right in parts. Of course, the overwhelming problem was deflation, but how the world reacts to deflation decides whether it will manage to come out of it properly. There is always a case, in specific areas, for really well targeted tariff protection, but overall, the world system has to remain open to growth. We have to accept that 70 per cent. of world trade comes from developing nations. Without that contribution, the whole world's growth would slow down. It was not until the Bretton Woods economic summit in 1945 that the world was able to unite to agree a new international economic and financial architecture that laid the foundations for half a century of peace and prosperity.
The G20 meeting this week is a huge opportunity for world leaders to agree to stimulate the world economy as much as is necessary, either this year or next, depending on their specific circumstances; to continue to take the measures necessary to restore trust in the banking system to get credit moving again; and to design a system to minimise the risk of any repetition in future. It is clear that, to date, Britain has been leading the way on the international stage, arguing for bank recapitalisation, designing an innovative scheme to protect and insure banks against toxic assets, and putting in place a significant monetary and fiscal easing to stimulate the economy and get growth going again—policies that are being replicated, in one form or another, around the world. Indeed, only this morning the OECD said, in an interim report on the world economy that it produced to inform the G20 meetings:
"While some have dubbed this severe global downturn a 'great recession', it will remain far from turning into a repeat of the 1930s Great Depression, thanks to the quality and intensity of government policies that are currently being undertaken."
Mr. Osborne talks about fighting domestic battles on an international stage; I would argue that it is the Conservative party that has been attempting to do that. Unfortunately, the debate at home has constantly been subject to distortion from the Conservative party, so I want to take a moment to explore some of its hypotheses before outlining the measures that I think that we ought to take, as well as some of the most pressing risks to the current approach taken by the Government, particularly for those in the developing world.
Let me start with the statements of the Leader of the Opposition. I was reading a speech that he made last week, which continued his well-worn theme, attributing the cause of this recession to the weakness of the British economy. He said:
"Our banking system is not separate from our economy, it is a reflection of it...The unsustainable debts in banks are a reflection of the unsustainable debts in our households, our companies and our government."
At first sight, that seems a completely unremarkable thing to say, as well as politically expedient. But unfortunately that leads him and his party to formulate completely the wrong policy prescriptions to deal with the current crisis, because he continues:
"So while of course it's true that some of our problems are global...we've got to recognise that the underlying policy failures were national."
I do not know of any serious economic commentator in the world who says that this synchronised global downturn is due to British national policy mistakes.
George Osborne (Shadow Chancellor of the Exchequer, Treasury; Tatton, Conservative)
I am sure that the right hon. Lady has read the report from Lord Turner, the first chapter of which states that one of the reasons why Britain is particularly exposed to the international storms is that we had very large macro-imbalances. Our banks were highly leveraged, our households had borrowed more than households in the United States and our housing boom was larger than that of the United States. Surely she will accept that national policies put countries in different positions in terms of their ability to weather the storm.
Ruth Kelly (Bolton West, Labour)
I do accept that, but I want to go on to quote the Governor of the Bank of England, whom the hon. Gentleman is so fond of quoting, who so pithily expressed it by saying that
"banks are global in life and national in death."
That is precisely the opposite argument to the one that the Conservative party has been making. In other words, of course Britain was exposed to the global economic downturn because it had a large financial sector. It had lots of global banks based in London. Those banks were indeed global; they operated across the world. When it came to saving those banks, it was the responsibility of the British Government, as of course it should be. We need only to think of the Icelandic banking crisis, which affected individuals and local authorities across the UK, or the collapse of Lehman Brothers, which reverberated across global boundaries, to realise that that is true.
Ruth Kelly (Bolton West, Labour)
The right hon. Gentleman's Front-Bench colleagues are arguing that the only thing we need to do in this recession is to try to get our national banks, and international banks based in London, lending more to people who want to borrow for mortgages and businesses here. I see he is distancing himself from their remarks. I think there is a danger there, too, as I said in an intervention on the hon. Member for Twickenham.
One of the key differences between the 1930s financial crisis and the current one is the extraordinary degree of interdependence that has developed between our complex major international institutions, so that the failure of one part of the system reverberates around the globe. Indeed the Deputy Governor of the Bank of England, Paul Tucker, put it like this in answer to the Treasury Select Committee about the Government's new toxic asset scheme:
"We cannot cut ourselves off from the international nature of this crisis."
To go back to the Turner report, Adair Turner says:
"The origins of the crash lay in the US housing market".
[Hon. Members: "Read the rest of it."] The rest of the quote is,
"with growing evidence that excessive credit extension and weak credit standards had resulted in rapidly rising credit losses, with implications for the price of many asset- backed securities",
the point being that asset-backed securities are held by institutions right across the world and have been affected by the sub-prime mortgage issue in the United States.
If the Conservatives cannot understand the nature of the credit crisis, how on earth can they be expected to be the ones entrusted to solve it? Indeed many of their policy prescriptions seem to stem from that flawed analysis; putting forward a prescription based on fiscal rectitude; promoting saving and living within our means; and reining in public debt at a time when liquidity and demand both need to be supported to prevent this recession from turning, indeed, into a great depression.
I am glad that the Conservatives seem to have rowed back from immediate cuts in inheritance tax, now to be implemented, I think, within the first term of Conservative Government, rather than on day one. However, they still seem to be recommending £5 billion of public spending cuts in this financial year—the same prescription that was made in the Thatcher recession of the early 1980s, which led to the massive unemployment that became entrenched for a generation.
It may suit the Conservatives as a matter of political strategy to pin the downturn on the British Government, but that is plain wrong. Not only is it wrong, but the argument is further confused by obscuring the situation on debts and deficit. The facts of the matter are that we entered the recession with public debt low by international standards. Even after the recession, after any fiscal boost, according to the OECD, we are likely to come out of the recession with public debt, although significantly higher, still likely to be one of the lowest in the developed world.
I accept that we have run and will run very large fiscal deficits in years to come. We are likely to do so largely because as tax receipts fall and benefits rise—we have to accept the fact that automatic stabilisers are much stronger in this country than in other countries—we naturally support our economy through any downturn. How much will the VAT cut, the fiscal boost that we have already seen, contribute to the deficit?
The Institute for Fiscal Studies has said that the VAT cut and the fiscal stimulus package more broadly will make little difference to the scale of the deterioration in the UK's public finances over the next five years. The stimulus package contributes only one fifteenth of the increase in public sector net debt that the Treasury expects by 2013-14. In fact, providing a strong economic stimulus, both fiscal and monetary, to support spending during the downturn is precisely what the British economy and the global economy need.
As the IMF said in a note this month:
"Some countries entered the crisis with greater fiscal space to expand, including more favourable levels of deficits, public debt, contingent liabilities and interest rates",
referring to Canada, China, France, Germany, the UK and the US. It is a travesty to misdiagnose a problem that is clearly international as a domestic regulatory failure in order to pin blame on the Government.
I accept that there was a collective failure around the world to see the downturn coming. In retrospect, the huge global economic imbalances that emerged between China and the west were never going to be sustainable. As those surpluses searched for yield across the globe, that gave a huge impetus to global financial institutions developing more complex financial instruments.
The G20 comes at a critical moment. The first priority must be preventing the recession from turning into a depression. Secondly, we must craft principles to reform the international financial system. Thirdly, we must protect the world's poor, rejecting trade protectionism in any form.
Peter Lilley (Hitchin & Harpenden, Conservative)
It is always a privilege to follow Ruth Kelly since she returned to the Back Benches. She has consistently given the House thoughtful and well-informed speeches on economic matters, even though in this case I profoundly disagree with her, on both her analysis and her prescription.
Unless we establish the cause of the current economic crisis, we will not be able to find a cure or a way of preventing a repetition of the problem. Unfortunately, so far analysis has focused not on establishing the ultimate cause, but largely on allocating blame to greedy bankers, impotent regulators and incompetent Americans.
Incidentally, following the point that the right hon. Lady made, the Prime Minister cannot say, as he does when he is trying to escape any share of the blame himself, that the problem arose solely in the US, and simultaneously blame the British bankers. Either the problem was caused exclusively in the US, in which case not only is the Prime Minister innocent, but so are the British banks, or the British banks contributed to their own downfall and aggravated our economic problems, in which case not only are they guilty—I believe they do share in the guilt—but given that he was responsible for regulating the banking system over the past 12 years, so was the Prime Minister, the former Chancellor, guilty of his share of aggravating our problems.
I am sure that all the alleged guilty parties deserve some of the blame, but I will argue that their behaviour was essentially a symptom of a much more fundamental underlying cause of our woes. Take greedy bankers. I am sure that bankers were greedy, but bankers have always been greedy—I cannot remember a time when they were not accused of being so. It is a fundamental axiom of logic that we cannot explain a change by a constant. If bankers have constantly been greedy, why has that only now resulted in this change in our economic fortunes?
The interesting thing is that, in the past bankers, were accused of being greedy because they would lend only to the rich, who had ample collateral, and to low-risk projects at high interest rates. This time they are accused of greed because they have lent to poor people at low interest rates with inadequate and inflated collateral and a risky repayment profile. Bankers' greed has been a constant feature; it is the form that it has taken that has changed and needs explaining. I shall come in a moment to a more fundamental explanation of that change.
The second alleged culprits are impotent regulators. The common accusation is that deregulation stripped the regulators of the power that they needed to prevent the excesses of the past decade. In fact, under the regime that the Prime Minister introduced in one of his first acts as Chancellor, the regulators whose duty was to supervise the banking system in the UK had every bit as much power as they had ever had.
The other day, my right hon. and learned Friend Mr. Howard reminded the House—and, indeed, me—that I was the shadow Chancellor when the Bill that became the Bank of England Act 1998 was introduced. In the debate on that Bill, I warned the House:
"With the removal of banking control to the Financial Services Authority...it is difficult to see how...the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse."
I went on to say:
"The coverage of the FSA will be huge; its objectives will be many, and potentially in conflict with one another. The range of its activities will be so diverse that no one person in it will understand them all"—
and so it turned out. I added that I feared that
"the Government may, almost casually, have bitten off more than they can chew. The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day."—[ Hansard, 11 November 1997; Vol. 300, c. 731-32.]
I could foresee that then, because the problem was not deregulation but the regulatory confusion and proliferation introduced by the former Chancellor. The regulators have never had more power, employed more people or spent a bigger budget than now, but they have failed. The problem with the regulators worldwide was not lack of power, but lack of foresight and insight; until the eleventh hour, they were as convinced as the bankers that everything was going swimmingly. In its global financial stability report in April 2006, a year before the crisis erupted, the International Monetary Fund no less, referring to securitisation and other complex derivatives, said:
"There is growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risk on their balance sheets, has helped make the banking and overall financial system more resilient...The improved resilience may be seen in fewer bank failures and more consistent credit provision. Consequently the commercial banks...may be less vulnerable today to credit or economic shocks."
That is what the pinnacle of the regulatory system worldwide was saying a year before the crash. The truth is that the behaviour of bankers and regulators was not so much the fundamental cause of the crash as a symptom of a long period of easy money and irrational exuberance fuelled by excessive credit.
John Redwood (Wokingham, Conservative)
Does my right hon. Friend remember that the Government introduced a lot of mortgage regulation relating to process? When we criticised them and said that they needed to regulate the institution, which was where the damage was being done, they said that we were wrong. Do they not now see that we were right and that the institution, rather than the individual transactions, had to be regulated?
Peter Lilley (Hitchin & Harpenden, Conservative)
My right hon. Friend is absolutely right. The bulk of regulation was focused on consumer protection rather than systemic stability. There was not enough prudential supervision; if anything, there was too much detailed regulation of the consumer-lender interface.
John Reid (Airdrie & Shotts, Labour)
The right hon. Gentleman has succinctly described the causes of this situation, and I do not want him to go off that point. Basically, he is saying that people were lending money they did not have to those who should not get it, in a form that neither side understood, for returns that were too high and with a risk that was too high, and then persuading themselves that if they spread-bet all that across the world, everything would be fine. If they had gone to Ladbrokes, they would have been told by any spread betting expert that if a bookmaker is accepting all the money on a hot favourite and all the other horses in the race have only three legs, they can reinsure all they like, but ultimately they just lose a fortune.
Peter Lilley (Hitchin & Harpenden, Conservative)
The right hon. Gentleman puts it extremely eloquently. He demonstrates why he should have been Chancellor during the past few years instead of the person who has occupied that place on the Front Bench—a point on which I am sure we are similarly agreed.
The monetary authorities allowed lending and borrowing to outstrip personal incomes. They ignored bubbles in dotcoms and house prices, and promised to limit the downside risk by what became known as the "Greenspan put"—the promise to cut interest rates and pump in money if ever the economy faltered. However, it was not just down to Alan Greenspan in America—the monetary authorities on both sides of the Atlantic pursued almost identical policies. Indeed, it is a bit rich for our Prime Minister to blame the United States and, by implication, Alan Greenspan, when he slavishly copied Greenspan's policies, appointed him as his adviser and awarded him a knighthood for, let it not be forgotten, services to financial stability. Of course, he went on to give knighthoods to most of the bankers he is now vilifying—for services to banking.
Underlying that "easy money" policy was the willingness of half the world to run savings and balance of payments surpluses, tempting the other half—the Anglo-Saxon and "Club Med" countries—to run deficits fuelled by borrowing. It was lovely while it lasted, but it could not go on for ever. Our banks had to find people to lend their surplus savings to, and as they ran out of rich people with good collateral and low risk of default, they started lending increasingly to poor people with inadequate and inflated collateral and a high risk of default. The ultimate cause of our problems, which we must recognise if we are to come up with the correct solution, is that we took advantage of the cheap savings from the surplus countries until we were so over-borrowed and inflated that the system was ripe for collapse.
We now face a huge dilemma. The cure for too much borrowing cannot be yet more borrowing—least of all for the UK, which as well as having incurred excessive private debts is running an unprecedented public sector deficit and, unlike the US, does not enjoy what General de Gaulle called the "exorbitant privilege" of having the world's reserve currency. The deficit in this country is expected to exceed the entire defence budget, the entire children, schools and families budget, the yield from doubling corporation tax and the yield that would come from increasing VAT to 25 per cent. If we are contemplating any further discretionary borrowing on top of that, we must be mad, and we would destroy confidence in the markets.
Ruth Kelly (Bolton West, Labour)
Does the right hon. Gentleman accept that by far the main cause of those high deficits is the operation of the automatic stabilisers?
Peter Lilley (Hitchin & Harpenden, Conservative)
Well, let us not add to that problem by some un-automatic excessive borrowing.
The other half of the dilemma is that if the whole world tries to save less than it is producing, output and/or prices will fall in a deflationary spiral—the point that the right hon. Lady was making. The only way in which we can reconcile those two truths—that we cannot solve too much borrowing by more borrowing, and that we cannot simultaneously, across the world, all try to spend less than is being produced—is that the countries that have borrowed too much must, sooner or later, start saving, and those that have been running prudent surpluses should start spending more. The Prime Minister is misguided in trying—to offer himself cover—to persuade everyone to do the same thing: to run discretionary deficits simultaneously. Equally, the German Chancellor is mistaken if she is correctly reported as telling everyone to do the same thing: to strive to reduce their deficits simultaneously. The spenders need to start saving and the savers need to start spending. It will not be easy to co-ordinate that, but if the Prime Minister, as chairman of the G20, does not realise that we need such a bifurcated approach, it will not happen. That should be the agenda for the G20. It is sad that he has mistaken the recipe that he is trying to cook up at that meeting.
Frank Dobson (Holborn & St Pancras, Labour)
Some people will feel that I am looking to the past, but we have to accept that the British economy, the world economy and what we call the real economy are in serious trouble because of the crash of the casino economy run by bankers for the benefit of bankers. It has become fashionable to say, "Let's not be too hard on the bankers." I agree, because it is impossible to be too hard on the bankers. There are only two possible explanations for the mess they have got us into: either they could not tell the difference between liabilities and assets, in which case they are too stupid to be bankers; or they could tell, and they managed to sell liabilities claiming that they were assets, in which case they are fraudsters. Those are the only two possible explanations. If I may say so, there is no third way.
We are told that the bankers had to be paid millions because they were risk takers. We certainly could not deny that they were risk takers, but they were not taking risks with their own money. Many were not taking risks with their own jobs, and in some cases they were not taking risks with their own pensions. The consequences for many of them have been minimal, whereas for everyone else they have been dire. Other people's jobs and pensions have gone; 25,000 jobs in financial services went in the last quarter of last year, but few of those jobs belonged to the people at the top who were really coining it. It is bank clerks' jobs that have been disappearing. In that quarter, 160,000 jobs, including those of some of the regulators, went as a direct consequence of the stupidity and greed of the banking system. Jobs are not threatened because there is anything wrong with JCB equipment, Leyland-DAF vehicles or products in the aerospace industry; they are threatened because of the bankers. But people still argue that the bankers concerned are worth huge pay and bonuses.
Kelvin Hopkins (Luton North, Labour)
Nick Leeson was sent to prison for his banking practices. Would it not concentrate a few minds if some more bankers were sent to prison?
Frank Dobson (Holborn & St Pancras, Labour)
Yes, indeed.
We were told that if these people did not get huge pay and bonuses, they might go elsewhere, to Dubai, Mumbai or Shanghai. I am trying to envisage the interview. They might be asked, "Who did you say you were working for in the City of London? Was it Lehman Brothers, Royal Bank of Scotland or HBOS? Were you helping Bernard Madoff, or were you working at Merrill Lynch?" The idea that those people would be welcomed by any sane banker—assuming there is such a thing—is quite ridiculous, but they still say that they ought not to be regulated, which is one of the arguments their apologists make.
Our Government, like other Governments around the world, have tried to introduce extraordinary measures to counter the extraordinary damage that these stupid, greedy people have caused, intending to limit the length and depth of the recession through tax changes, changes to monetary policy and monetary relaxation, and by trying to get credit flowing again. That means huge costs for the Government and for taxpayers. Needless to say, the Tory party—the political wing of the banking industry—is spending all its time blaming the Government and attacking the Prime Minister as he makes the preparations for the G20 summit in London in two days' time.
Stewart Hosie (Spokesperson (Economy; Home Affairs; Treasury; Women); Dundee East, Scottish National Party)
Will the right hon. Gentleman give way?
Frank Dobson (Holborn & St Pancras, Labour)
No, I have not got time.
Frankly, the Tories hope that the G20 will fail—it would be to their political advantage—and their friends in the press, TV and radio have been taking every opportunity to contribute. They even quoted on BBC TV, with approbation, the Czech Prime Minister's denouncement of the policy of Obama and the British Prime Minister, but they did not mention—and I think it was germane—that the preceding day, he had lost a vote of confidence in his own Parliament due to his ludicrous running of the Czech economy. That did not get a mention. He was treated like some economic guru by virtually everybody who reported him.
The G20 must try to shorten and lessen the depth of the recession. Different approaches will be suggested by different Governments, employing all possible methods, including trying to strengthen the International Monetary Fund to make it a trifle less stupid than it has sometimes been. As my right hon. Friend John Reid pointed out, we will need to toughen the regulatory system, both national and international, and make it much more transparent.
We have to act on tax havens, which we all know private profiteers and corporations exploit to evade tax due on transactions and profits in places where the transactions occur and the profits are actually made.
We also have to act against commodity speculators. The oil price shot up to $140 a barrel, but there was no shortage of oil. Sometimes, in the time it took a cargo of crude leaving the Gulf to get to Halifax, Nova Scotia or Rotterdam, it was bought and sold 10 times. There were massive speculative increases in prices, and that has to be stopped.
Worse still, the price of rice practically trebled at one point, which was attributed to the fact that the Chinese had started eating more rice. Actually, a lot of filthy speculators in this country, in the United States and in European exchanges were trying to get more money out of rice. I was in Bangladesh recently, and I was assured by some of the rice farmers that they had not been paid three times as much for the rice they produced. We have to stop those speculators, because what they do is also part of banking's greed and stupidity. We have had difficulties in this country because of the credit crunch, but in many parts of the third world, what is happening is at that horrid boundary between life and death. People will die because of the greed of bankers, and it is shameful that bankers have continued to do what they have been doing. We need a changed world system; we do not want to go back to the old system. We cannot leave such matters to lightly regulated bankers, or to the apologists for bankers.
Some of the apologists are unable to make up their minds. Some say they do not want regulation, but others say they were not properly regulated. They cannot have it both ways. The latest line is that the old ways were the best: "Perhaps we could go back to the old ways when the Governor of Bank of England had influence." It is argued that people were constrained by the Governor's "raised eyebrows". You've got to be joking. The only thing that would have restrained the worst offenders who caused this crisis would not have been the Governor of the Bank of England raising his eyebrows, but the police feeling their collars.
The Governor's remarks were somewhat exaggerated by the newspapers, television and radio, and used to undermine the Prime Minister. The Governor expressed caution. Well, that is what Governors of the Bank of England do—it is their job to express caution. I remind the Governor that he has some very undistinguished predecessors. One of the greatest contributors to changing the Wall street crash into the great depression was the great Montague Norman, who absolutely insisted on rejecting Keynes' policies, which might have rescued the whole world from the '30s depression and Germany from Hitler.
I wish the Prime Minister well at the G20 in London and the subsequent G20 meetings. Nobody believes that things will be sorted out in one meeting, and there will be a long series of such meetings and many meetings of officials to thrash out the changes that are needed. If anyone does not wish him well and hopes that his efforts will fail, as I believe many Opposition Members do, they might be thinking about what is good for the Tory party but not about what is good for the people of this country.
John Maples (Stratford-on-Avon, Conservative)
Frank Dobson had a good go at bankers, who are a pretty easy target, but there is nothing new in the behaviour of banks creating financial crises, which is why they need regulating. I think it was Warren Buffett who observed of this crisis that banks have spent the past 10 years inventing a whole load of new ways of losing money, which was completely unnecessary as the old ways were working fine. I am afraid that there is not much new in what the right hon. Gentleman's target has been doing.
I wish to spend my few minutes talking about how we go forward rather than how we got into this crisis. There has been a huge amount of analysis of how we got here, but what are the sensible things to do to get out of the crisis? I do not agree with some of the Government's policies, but I do with others. One must spend a moment reflecting on what happens in a recession, which is the hangover after the binge.
We have had years of excess monetary growth, which has gone into living beyond our means at both public and private level. There has been too much private sector borrowing, and the Government have been running deficits and living beyond their means. Monetary growth and excesses have found their way into asset prices, particularly houses and property, rather than into consumer price inflation. Those things have to be corrected, which will take some time and will not happen overnight. We have to move to an economy in which savings are higher, asset and house prices are lower, money is tighter in the long run and bad loans and investments are written off. That is a painful process, but the mistakes in policy are behind us. There are no options in front of us that could enable us to avoid that process happening, which it must.
We certainly want to help the victims of the recession, as the Conservative Government did in a recession and as this Government are doing. We want to help people who are unemployed or in danger of losing their houses. Of course one wants to do that and to let the natural, automatic stabilisers work, but from what I have read they account for about 3 to 3.5 per cent. of GDP. The fiscal stimulus is an awful lot bigger than that. I do not believe that in the current circumstances, an additional fiscal stimulus involving the numbers being talked about will make any difference to the recovery from the recession. It is a monetary phenomenon with a monetary cause, and the correction will be in monetary policy.
This recession started in the banks, which is perhaps why it is unusual among the recessions that have happened in my adult political lifetime. Usually, recessions that start in the financial system last longer, because it takes the first year for the system to sort itself out, so the Government are right to concentrate on sorting out the banks and getting them back to lending. We can argue about whether their schemes could have been introduced better, sooner or cheaper, but certainly their strategy is right. However, those policies have to be given time to work. They have had only a few months, and there is a misplaced sense of panic about what is happening. If the panic had happened a year or two ago we might have been able to do something different, but from where we are now the measures taken in the monetary markets must be given time to work.
We need four things, the first of which is prudential regulation, which has been discussed a lot, including by the right hon. Member for Holborn and St. Pancras. Regulation has clearly failed, and it is no good anybody pretending it has not. What we need is not more regulation, more regulators or more money spent on them. As my right hon. Friend Mr. Lilley said, we have had that in spades for the past 10 years. What we need is more intelligent regulation. The difficulty is that the people in the FSA are not as good as the people in the banks, who despise them and say that they are all 28-year-olds who do not know anything. With a lot of unemployed, smart people from the banks around, perhaps the FSA can employ some of them and be slightly better.
However, the next stupid thing that bankers do in making ridiculous loans will not be the same as they have just done, but something new. In the past it was the Latin American debt crisis, Russia, the far east and then the dotcom bubble. The next one will not be one of those, so it is no good regulators now shutting that stable door. They have to think about what is coming, and that is what I mean by more intelligent, rather than tougher, regulation.
John Redwood (Wokingham, Conservative)
Was it not really very easy? All that one regulator had to do was read the balance sheets of the top half-dozen banks in Britain, and it could have seen that they were grossly over-geared.
John Maples (Stratford-on-Avon, Conservative)
Yes, although other things were going on, too. Monetary policy was too loose during that period, and the problems were pretty obvious from monetary statistics, without analysing the banks' balance sheets.
Adair Turner has basically got his prescription right. I disagree with him about only one thing, which is the Glass-Steagall Act and the splitting of the casino from the utility—of the commercial banks from investment banking. That is worth considering, because the two are much more interrelated than they were, and in investment banking there is a risk of counter-party default. As we saw with Lehman Brothers, if one bank goes down it risks dragging a lot of other securities institutions with it. However, the problem in the current case was irresponsible lending by commercial banks. If we can isolate the deposit-takers and their business from the business that investment banks do with either their own capital or money borrowed on the bond market, we can be much tougher on investment bankers. We can say, "Right, you can write off your equity, and your lenders are not going to get their money back." However, we have a responsibility to protect commercial banks because there is a risk of system failure. I hope that the Government will insist on a tougher look at that.
We have discussed the remuneration structure, which led to people behaving rationally as individuals but produced a totally irrational outcome—the upside for a banker of taking risks and making money, which was his bonus, vastly outweighed the downside. The worst that could happen to him was not getting a bonus, or perhaps in extremis losing his job. Regulation of that area will have to be considered in future, but there is a danger of over-regulation. The City of London has, on the whole, been doing quite well for Britain and making money for 500 or 600 years. There is a danger that we and the United States will over-regulate our banking systems and lose what is good about financial markets to other places. If we could just stop what is bad that would be fine, but if we risk losing what is good through over-regulation, we will create a new problem. The City is a very important part of the British economy, and hopefully it is not going to go away.
All recessions are preceded by a monetary boom and lead to irrational lending, high asset prices and consumer price inflation or house price inflation. Recessions have monetary causes and monetary solutions. The Government and the Bank of England have put in place very low interest rates and a bank bail-out that is now worth £500 billion. Such amounts terrify me—a hundred billion here and a hundred billion there, and pretty soon we are talking about real money. A vast percentage of our GDP is at stake and we must keep very tight control over quantitative easing, which is a wonderful euphemism for what we would call printing money if it were being done in Latin America. I am not trying to second-guess the Government on that, but a huge amount of money is being pumped into the system. I hope that when the recovery starts, we will be ready to start getting that money back out again. Otherwise, we will end up with huge consumer price inflation in two, three or four years' time.
The debate has been about fiscal policy, which I believe is wrong, because the remedies are in monetary policy. We are already running a huge fiscal stimulus, which will be 9 or 10 per cent. of GDP this year and next. The idea that we are somehow not running a fiscal stimulus is completely wrong. As I have said to the Chancellor, we should have been running a surplus in the good years, although there might be room to do a bit more now, as the Germans are finding. However, the United States and Britain are in the almost uniquely weak position of having serious financial and balance of payments deficits. I therefore believe that the US President and the British Prime Minister are wrong about this. They should let the stabilisers work, but we simply cannot afford to spend so much. The Treasury has run out of our, the taxpayers', money. No more of it can be used without seriously endangering the recovery when it comes. If we are saddled with huge quantities of debt that invade the corporate bond market, drive up yields, drive down the currency and leave the taxpayer with interest to pay for years to come, we will endanger the recovery. We have run a fiscal deficit of £200 billion over the past six years, and we look like running another £250 billion over the next two. Frankly, that is enough. We are getting into dangerous territory.
The recovery will come from the private sector, and I want to make a couple of suggestions about what the Government might do to help that. First, the Government have been regulation junkies—frankly, they have been even worse than we were. A mass of regulation has been introduced and it has cost business a huge amount of money. That is a social luxury, which we can afford in good, but not in bad, times. Five EU directives on employment and four sets of UK regulations are in the pipeline, all of which will impose costs on business and deter job creation. The Government could score a lot of brownie points and do the economy much good through a moratorium on regulation that imposes costs on business or on the Government—regulation imposes costs on the Government, too—until the recession is over. Afterwards, we can debate whether it is a good or bad idea.
The Government could help the private sector through tax policy. I do not simply mean tax cuts to put money in consumers' pockets. We need to encourage private sector investors to start taking risks again. They are currently risk-averse and are trying to find the safest possible way of conserving their cash. We need to try to alter that equation for them. We could do that if, for example, we provided that any business investment in the next 12 months was free of capital gains tax, or that capital allowances could be enhanced for the purchase of business investments. We could also allow offsets on capital losses made on investments in, for example, the next 12 months, against people's income tax. That would encourage people to invest in business—get investors investing again—by altering the ratio of risk to reward in the tax system. I do not believe it will cost much. Without the investment, there will be no gains on which to pay the tax, but the Government could genuinely help the private sector to contribute to the recovery.
My final point is that the crisis is of the banking system, not of globalisation or free markets. We must not endanger free markets and free trade, which have given the world the most fantastic growth. They have taken more people in the third world out of poverty than any other system. We must not endanger that when addressing a crisis in the banking system.
Richard Burden (Birmingham, Northfield, Labour)
Time is short and I hope that the House will forgive me if I am a little parochial. I want to say a few words about the impact of the economic downturn on my region, the west midlands. The newly formed West Midlands Regional Committee is currently conducting an inquiry on that, and we hope to present a report before long. However, with the Budget approaching and given the severity of the economic downturn in our region, some key issues will not wait, and practical action can and needs to be taken. I want to illustrate that with examples from the region as a whole and, in some cases, my part of Birmingham.
The West Midlands Regional Observatory noted that the fall in output in the west midlands is worse than the UK average and the worst of any UK region. It has experienced the sharpest job losses of any region in the past quarter and has the second highest unemployment rate of any UK region. The decline has been especially sharp in manufacturing—20 per cent. of manufacturing firms expect to reduce their work force this quarter. That is not to say that the service sector has not also been hit—the equivalent figure is 11 per cent.
However, manufacturing has long been the bedrock of the west midlands economy and its centre is the automotive industry, with approximately 1,800 companies, 115,000 employees and gross value added of about £5 billion in 2006. Yet the manufacturing redundancy rate stands at 22.8 employees per thousand in the last quarter of last year, and there were more than 5,500 redundancies in the last quarter in 2008 in the automotive industry. In the region, redundancies between November 2008 and January 2009 were up 265 per cent. on the previous year.
I make those comments not to spread gloom or depression—some parts of the regional economy are holding up well. However, I want to emphasise that the west midlands is not only suffering from a severe economic downturn, but that damage is in danger of being done to the foundations of the regional economy. If we lose those foundations now, we will not be in a position to respond when the upturn comes. We could lose not only strategically significant companies, but the skill base that they maintain, and that will not easily return.
Action is important to ensure that the west midlands gets a fair deal. I welcome the automotive package that Lord Mandelson announced on
We need to move quickly on matters that the Government are considering—I welcome the consideration, but decisions and action are required. We need to introduce a scrappage scheme in the automotive industry. There are different views on that, but the evidence from Germany shows that it has a positive effect on stimulating demand, and I hope that there is good news about that in the Budget.
I want to take up a point that Dr. Cable made and emphasise that a key part of ensuring that firms in the automotive industry and other parts of manufacturing can trade effectively is getting the trade credit insurance industry working again. It is not working, and that does tremendous damage.
We need to ensure that the strategic firms on which so many other firms depend get loans and loan guarantees quickly, not because they need bail-outs but because they need support to realise their potential. Other local Members of Parliament and I are therefore joining local papers, such as the Birmingham Mail, the Birmingham Post, the Coventry Evening Telegraph and others, to say that we must stand by Jaguar Land Rover.
Lorely Burt (Solihull, Liberal Democrat)
The hon. Gentleman knows that Land Rover is in my constituency and, like him, I am worried about the slowness with which European Investment Bank money is coming through. LDV is also in a precarious position and I am sure that all hon. Members hope that that company will survive. Does he agree that perhaps the Government could do a little more to try to ensure that the desperately needed money comes through speedily?
Richard Burden (Birmingham, Northfield, Labour)
I know that the hon. Lady has a great constituency interest in Jaguar Land Rover as a firm that is strategically important throughout the region and beyond. Discussions have been going on for some time between the company and the Government about ensuring that support is there and that the loans from the European Investment Bank come through. It is vital that those discussions are brought to a successful conclusion.
The hon. Lady mentioned LDV, which I intended to consider next. I often criticise the current administration of Birmingham city council because what it says about itself often exaggerates what it does in practice. However, it was right this weekend to announce waiving business rates for LDV, and it is looking to make orders for that company's products. That was the right decision, and I welcome today's announcement by the Chancellor on doing more about business rates. It is also important that Her Majesty's Revenue and Customs is as flexible as possible in its dealings with LDV. We must all do what we can to ensure that the company gets the support that it needs from the EIB and that other public authorities use their procurement powers to buy the kind of vehicles it produces. In Britain, we have the capacity, skills and technology to produce the low-carbon vehicles of the future, but people and firms must buy them. Public authorities are in a great position to do that. We can also help stimulate investment in the private sector through purchasing those products in the west midlands and elsewhere. Some extension of annual investment allowance would help.
Let me make two other points. First, my hon. Friend Mr. Hoyle mentioned training subsidies and subsidies for short-time working. When an economic downturn happens, it is far better to invest to keep people in work and upskill them than to pay for the consequences of their losing their jobs. Contrary to the position in many parts of the country, the west midlands still invests in training. The figures there are still better than in a lot of other places, but we need to do more to help. A temporary wage subsidy for short-time working must be an important part of that. Part of providing the training is that we have to have the facilities to train people. That is why I want to mention something that straddles both training and construction.
There are genuine questions about how the Learning and Skills Council's capital programme has got into the position that it is in and about how it has become so over-committed. When investment in infrastructure in the third and fourth quarters of last year was still positive nationally, but dramatically falling in the west midlands, now is not the time to allow vital capital projects to go down, either for training reasons or for the construction industry.
A central plank of the regeneration of the Longbridge site in my part of Birmingham is the relocation of Bournville college to that site, with a state-of-the-art building whose construction will provide new jobs in the short term and new opportunities for quality skills training for generations coming through. That will be a visible catalyst to enable south-west Birmingham not simply to win through the current economic downturn, but to deal with the continuing effects of the huge blow that local communities suffered in 2005 when MG Rover collapsed. People in and around south-west Birmingham deserve that kind of fair deal. Keeping faith with the Longbridge project, including Bournville college, is part of that.
My right hon. Friends in the Government face formidable challenges. Their job is made no easier by the sniping from the sidelines by Opposition Members, who complain about the effects of the economic downturn but will not commit the resources that are needed to beat it. Ministers do not have the convenient luxury of opposition, but that does not alter the fact that the west midlands region needs urgent action in the short term if we are to seize the opportunities for the long term. That means urgent action on the automotive industry and doing more on infrastructure, particularly those infrastructure projects that are about building the human capital of the region. Colleges are part of that, including Bournville college.
Michael Fallon (Sevenoaks, Conservative)
I remind the House of the interests recorded in the register.
I want to say something about the origins of this crisis, the structure of the economy that we are now left with and the state of our public finances. So far as the origins of the crisis are concerned, I fundamentally agree with my hon. Friend Mr. Maples. It is not a crisis of markets; it is a crisis of regulation and controls. It is Governments who control the allocation of credit through the central banks to which they give their mandates; it is Governments who control the holdings of capital through the capital adequacy rules that they require banks to follow; and it is Governments who have controlled lending, in effect, through the supervisory regimes that they have established.
Ten years ago, the amount that the major British banks lent out was covered almost exactly by the deposits that they held. By 2007, the gap was £625 billion and their assets—or perhaps we should say their loans—amounted to three and a half times our GDP. I think it was my right hon. Friend Mr. Redwood who put it so well: this country has become a banking business with a medium-sized state attached to it. Who allowed all that? Who encouraged it? Who cheered it on? It was the Prime Minister, as Chancellor, who set up and welcomed light-touch regulation.
In November 2003, the Prime Minister told a conference organised by The Wall Street Journal:
"Capital markets can and should help us manage risk more efficiently between sectors, over time and across national boundaries...there is a need to remove barriers to diversification of investments across borders"
in Europe. In other words, he wanted more American-style investment houses here. He wanted more Lehmans in Europe. It was the regulator that he set up that failed us so badly and the rules that he agreed to under Basel that encouraged pro-cyclicality, drove the search for yield off the balance sheets and, by incorporating self-serving rating agencies into the regulatory process, helped to downgrade the role of risk management. Those failings are now well understood.
James Plaskitt (Warwick & Leamington, Labour)
Does the hon. Gentleman not recall what his party's then Front-Bench spokesperson said in the debate on the Financial Services and Markets Bill, which introduced the Financial Services Authority? He said:
"we believe that regulation should be minimal".—[ Hansard, 28 June 1999; Vol. 334, c. 43.]
Michael Fallon (Sevenoaks, Conservative)
My right hon. Friend Mr. Lilley has already reminded us exactly what he said from the Front Bench at that time. It was a huge mistake to take banking supervision away from the Bank of England and give it to a supervisory authority that employs 2,500 people and will cost us £415 million a year from
Those were British mistakes of regulation, made by British banks and British supervisors, under a system set up by the British Government. It is for us to put that right—to put the Bank back in charge of banking supervision, not just financial stability, as the lender of last resort and the institution that will sort out failing banks, and then to establish counter-cyclical rules for capital, tougher requirements for liquidity and a much better understanding of the risks that such institutions are taking on.
Michael Fallon (Sevenoaks, Conservative)
If my hon. Friend will forgive me, I will not give way because of time.
We have to rebalance our economy. I hope that there might now be support across the House for the view that we cannot build a long-term, sustainable, wealth-creating and reskilling economy on the back of an over-inflated housing market, an over-exuberant financial services sector and a bloated public sector, because over the past 10 years, all three have combined to distort how our economy is growing, frustrate innovation across different sectors and prevent the reallocation of resources in response to the change that we now face. All three of those sectors have also been created and sustained on a mountain of debt—private debt in the housing market, to the extent that British households now have debt equal to 70 per cent. of disposable income; public debt, which I shall come to in a moment and which has sustained the vast expansion of the public sector; and commercial debt, which allowed the expansion of financial services.
We need to look again at how we treat debt in the commercial sector. I welcome the intriguing and thoughtful proposals made a couple of weeks ago by my hon. Friend Mr. Osborne, the shadow Chancellor, about how we might move from a debt-driven economy to an equity-driven economy that no longer has a tax system that favours debt over equity finance and which moves us forward towards reinforcing our skills base and building a better value-added economy.
We also have to put our public finances in order. With all the extra taxes from the boom years—the additional stamp duty from the housing market, the income tax from City bonuses and the corporation tax from the financial sector—the Government were able to double public spending from £320 billion when they came in to £623 billion in the current financial year. However, the Government have failed in that period to balance the budget since 2001. That is not a deliberate strategic failure and the failure to control our public finances is not sudden or recent. On the contrary: in the 2003 Budget, it was planned that we would be in surplus by 2006. By 2005, that had slipped to 2008, and by 2007 it had slipped to 2009. By last year's Budget, that target had slipped out to 2010-11 and now it appears to have been postponed sine die—which, for the benefit of the House, means "until a Conservative Government."
That matters, because in the end, unless we properly control the public finances, we cannot achieve our goals as a country, and we are failing to invest for the long term. It is that systemic failure to get a grip on our public expenditure that explains why no new power stations have been built, thus jeopardising our future energy security; why only half our school leavers achieve good GCSEs, thus risking our future competitiveness; why our welfare rules rose in the good years, well before the recession started; and why our dilapidated infrastructure continues to put us to shame in front of foreign visitors.
In conclusion, I think our economy is in very poor shape. I think it is badly positioned for the future. Our financial system has been badly regulated and our overall economy has been lopsided in its growth and dominated by debt on such a scale that it is undermining both our private and public finances. Once again, it will be left to a Conservative Government to clean up the mess.
Anne McGuire (Stirling, Labour)
Like my hon. Friend Richard Burden, I want to drill down a wee bit to the impact of the current situation on many small businesses in my constituency, and perhaps replicate the experience of other hon. Members, probably on both sides of the House.
We need to recognise that while we hold big strategic debates, there are actually real people out there who are deeply concerned about what is happening. When I heard Mr. Osborne talking about the golden legacy of 1997, I remembered what that "golden legacy" was built on. It was built on the destruction of Ravenscraig and of Hillington and Bathgate in Scotland; it was built on the destruction of a mining industry and the decimation of a shipbuilding industry; and it was built on the fact that one in three of this country's children were living in poverty. We should never forget the practical implications of that so-called golden legacy.
If there is one thing I hope the people of this country will congratulate my Government on, it is that we were not prepared to walk by on the other side when there were dire straits. Sometimes when I look across to the Opposition Benches, I realise why I was angry in 1997 when I first came to this House. It was because of what I had seen—and some of the very right hon. and hon. Members sitting in their places today were part of the architecture that created the decimation of communities, not just in Scotland but right across the United Kingdom. Frankly, our Government have had to pick up that legacy over the last 12 years.
Let me return to the local circumstances, as I want to reinforce the House's knowledge that the majority of businesses in this country are from the small and medium-sized enterprise sector; certainly in Scotland, they comprise about 90 per cent. of all businesses, while 93 per cent. of all Scottish firms employ fewer than 10 staff. It is their size, agility and adaptability that make small businesses so ideally placed to react to market conditions.
Unfortunately, as many of us recognise, size is also a weakness. When it comes to the circumstances we are facing just now, small businesses' room for manoeuvre is a little less flexible than it is for some larger businesses. I think we all recognise that credit provides the oxygen that allows these businesses to survive. As someone once said, small businesses are the sort of economic equivalent of the canary in the mine: they are the first to suffer when credit dries up, and they are a good indicator of whether help is getting through.
The Federation of Small Businesses in Scotland surveyed its members at the beginning of this year, and found three main reasons why they are suffering. Yes, they have seen a drop in demand; yes, they have also seen an increase in the length of time they have to wait for payment of invoices; and, lastly, they have seen their credit decrease over the last few months. In some cases, credit is almost impossible to come by.
My contribution to this debate is based not only on surveys—no matter how credible—but on the experiences of businesses in my constituency. One of my constituents has a small export business, employing 30 people, and has had a long-standing and little used credit facility withdrawn by the Royal Bank of Scotland. I am told that the business is not insolvent, but as an export business, it depends from time to time on overdraft facilities, which the bank will simply not renew this year.
Another of my constituents runs a small commercial property consultancy and has banked with the Bank of Scotland for 24 years. The business turns over a modest profit and, against the trend in the property sector, it is projected to break even this year, yet its overdraft facility has been reduced by 20 per cent. and it has been charged a fee for the privilege.
Another example is from the tourism industry in my constituency. For those who have never visited Stirling, I suggest they do as it is a massive tourist magnet. Every battle ever fought in Scotland appears to have been fought in my constituency: there are the battles of Bannockburn and Stirling Bridge, and the ghost of William Wallace runs around the area. The tourism industry is thus crucial to the local economy, but the tourism businesses have had their "comfort" facilities withdrawn, making it very difficult for them to meet contingencies during the winter and early spring period when there are so few tourists around to generate income.
I welcome the Government's clear agenda of getting help out there as soon as possible. As has been said on many occasions on this side of the House, it stands in stark contrast to what the Opposition would have done, as they would have let the recession take its course and done nothing. I also know that my right hon. Friend the Chancellor is committed to continue to take whatever action is necessary to bring Britain through the downturn—hopefully stronger and hopefully soon.
However, I need to impress on ministerial colleagues the fact that, according to the feedback I am getting from the businesses in my constituency, there appears to be a singular lack of knowledge among the banks of the help that is available. Certainly according to actual stories given to me and anecdotal evidence from the Federation of Small Businesses in Scotland, it appears that high street banks are either not aware of the Government schemes that we have spoken about this afternoon or they do not know how they operate. I understand from reading some of the reports produced after the Treasury Select Committee's tour of SMEs around the country that the same message was given to them. Yes, it is fine for us to have strategic discussions and take strategic decisions here, but we have to recognise that information must get through to the grass-roots businesses that are so crucial to the existence of our local communities. I know that there is some evidence that the Royal Bank of Scotland is beginning actively to promote schemes and to offer to work more closely with the business community, which is obviously welcome.
Let me make this concluding point. There is now a level of expectation of what the banks, particularly those in which the taxpayer has majority control, can and should do—and I think the banks need to be aware of that expectation. That should apply not just to their dealings with small businesses, but to how they conduct their own business. To use one final example from my constituency, I received a communication from a small IT company that had a successful relationship with the Royal Bank of Scotland over some years. According to my constituent, it is now a stated aim of RBS to seek offshore services to replace suppliers such as his company—regardless of the logic and, in some cases, in complete disregard of the business case. He accepts the need to get the best price for the job, but is aggrieved—and, I have to say to my right hon. and hon. Friends, with some justification—that firms such as his are being excluded by a bank that he feels he has a stake in. I hope that Ministers will continue to use the influence we have on banks under our majority control to ensure that we not only exercise that control, but exercise it in the best interests of British business at a time when it is facing major difficulties.
Finally, let me say that small businesses did not cause the recession, but they will be vital in getting us out of it. I know that my Government will continue to take all necessary action to ensure that small businesses are supported through these difficult times, but let me make one final plea: we can talk all we like about this, but the partners—the banks, the business gateways, the local authorities—must ensure that the information is getting through. Otherwise, if there is a complete disconnect between what we say nationally and what is happening locally, we will undermine the credibility of all of us, and perhaps make this situation last longer than necessary.
Robert Smith (Aberdeenshire West & Kincardine, Liberal Democrat)
I pay tribute to Mrs. McGuire for highlighting the importance of small businesses to the economies of our constituencies, and I echo what she said about their frustration that the banks do not always seem to understand what schemes are in place and how they can be best delivered. There is also the general frustration felt by our constituents when they see the big—global—sums going into the banks and then how little seems to be coming out the other end. The banks must be encouraged to recognise the importance of small businesses to our economy.
I want to raise a specific constituency issue that is of major importance to the UK economy too: the future of the oil and gas industry, which has been a great success story for the UK economy. The Treasury has a vital role to play, and now, in the run-up to the Budget, the timing could not be better to reinforce to the Treasury how important the industry is to the country. I should declare some of my interests as registered in the Register of Members' Interests. The most relevant of them are shareholdings in Shell, an oil and gas company, and a visit to the Offshore Northern Seas conference and exhibition in Stavanger, funded by oil and gas companies.
Let me first, however, address some of the general issues that have come up in the debate. I echo the view of my hon. Friend