John Redwood

I remind the House that I am involved in business in a global manufacturing company and I am an investment manager of a company, but I am not, of course, here to speak for those companies.

Like most Members, including my right hon. and hon. Friends, I come here because I want my country to be prosperous. I come here because I want there to be more jobs, not fewer. I come here because I am appalled by the tragedy of unemployment that we see in our streets in our towns and villages today. I am appalled by the devastating impact that both domestic and global errors of policy have made on our economy and our country.

What I find most difficult to accept is hearing Government Members suggest that Conservative Members are here to argue the case for the banking industry, that we take great delight in having to cut public spending or that our motive is to have more people out of work or to make the poor suffer more. On the contrary, we are here because we want more opportunity and we are here because we want a wealthier and more prosperous people. Our recommendations to the Government come from the heart and from our experience. Surely Government Members can see that it is they who have messed it up: they should be a little more contrite; they should listen more and lecture less; and they should understand that this country needs many changes in order to give more of our people more of a chance.

We have heard a lot from Government Members about Japan, but they have misunderstood the history and the economics. They say that Japan cut spending, which created a 19-year recession, yet the right hon. Member for Oldham, West and Royton (Mr. Meacher) said that Japan has the biggest accumulated Government deficit and biggest stock of public debt in relation to the size of its economy of any major country he spoke about. Quite right. It does, and the reason it does is that it has had fiscal stimulus after stimulus year after year for 19 years—and they have not worked. Labour Members need to ask why they did not work. They did not work because that country did not mend its banks. If the banking system is not mended, throwing more money into public capital and into public works does not create a prosperous economy with many more people at work; it creates bigger problems.

If Labour Members cared to look at Canada, they would see that the country got into such a public deficit mess some years ago that it had to put through massive cuts on a scale that none of us would like to see. After that was done, however, the economy performed extremely well. The Canadian economy has got through this world crisis so much better than the British economy in part because its public sector is in better shape and making fewer extraordinary demands on its economy. If we look at the Australian economy, there has been no downturn at all. Again, sound public finances are part of the Australian response to the crisis.

Even the United States, which some people very stupidly try to blame for the whole thing—when, as my hon. Friends have said, this is a British problem made in Britain as well—has had a gentler downturn than the UK's over the last year, largely because of the strength and depth of the American economy and the Americans' refusal to go to the extremes of policy response that the British Government have adopted. The American Government did not subsidise and put as much public money at risk in their banks, relative to the size of the economy, as we did.

The problem Britain faces and the reason we are doing so badly relative to many other countries around the world at this time of danger and difficulty is that we have the worst treble crisis of all the major countries. Yes, we have the excess credit from the easy money days, the bad monetary policy days, of 2003 to 2007, when policy mistakes by the Government and the Bank of England allowed and fuelled a mighty boom in private-sector credit. Yes, we also have the worst problem of all major countries with our Government deficit. On top of the over-borrowing in the private sector, we are now heaping unbelievable amounts of extra debt on taxpayers through the public sector. We then have the third deficit—the banking deficit—where, quite wrongly I believe, the Government decided to force the effective nationalisation of two of our largest banks when they could have seen them through at much less cost and risk to the taxpayer.

Again, I deeply resent the way in which, in the past, some Ministers have tried to suggest that I wanted to bring the banks down, as if that would be a good thing to do. Of course no sensible person would have wanted our major banks to go down. What we wanted—what I wanted—was for Ministers to do a better deal and to be ahead of the game. We wanted them to regulate the banks effectively when they could have been pulled back from the brink, rather than taking them over the brink and then lumbering the taxpayer with so much risk and so much extra cost.

We did not need to draw Lloyds into HBOS, but the Government decided to do that. We did not need to allow the mega-mergers that created RBS, but the Government decided to do that, perhaps for Scottish reasons. We did not need to go public with the view that the banks were weaker than they should have been, which was bound to starve them of access to money markets and capital markets—the access that they needed—and then force them on to the taxpayer, who now carries far too big a burden.

In order to create the jobs that I think any sensible Member of Parliament wishes to see, and in order to ensure a recovery in the United Kingdom that is much more vigorous and faster—not as fast as the recovery in China, which has been in progress for many months and is doing extremely well, and probably not even as fast as the recovery in more broken America, but faster than any recovery that we are likely to see at the moment—the first thing that the Government need to do is go back and help to mend the banks. Nothing will work properly in this country until the banks are sorted out.

We have two mighty banks with combined balance sheets of £3 trillion—twice our national income—which are hobbled. They are hobbled by the regulations imposed on them, because, most extraordinarily, the Government and the regulator have decided to tighten the cash and capital rules at the bottom of the cycle, having failed to tighten them when some of us asked them to do so as we approached the top of the cycle. So we have pro-cyclical regulation. We are making the problem worse at the peak by making it too easy, and we are making it worse at the nadir by making it too tough.

In my opinion, the reason for that asymmetric regulation is quite clear. The Government are following an election strategy, not a recovery strategy. The election strategy is about spending as much as possible in every way in the public sector while knowing that that cannot be sustained beyond the election. It is about assuming that a future Government, if there is a change of Government, will obviously have to make cuts because that level of spending is not sustainable. If by some miracle the Government got away with it, they would say "Of course we had to make some adjustments, because the Treasury officials suddenly told us that none of the arithmetic worked."

Far from fuelling a better recovery—far from offering hope to all the people who have lost money and jobs in the private sector—that strategy is doing the opposite. We have a completely lopsided economy. We have a public sector that is still taking none of the hit and none of the pain, and a much bigger private sector that is suffering, anaemic, emaciated and under pressure because the banks cannot lend it the money that it needs, and there is not the necessary demand to create that money through the turnover in the businesses.

— from debate entitled “Economic Recovery and Welfare”

The three speeches/headings immediately before

  1. 1 earlier: Alan Haselhurst

    Order. Having done some simple mathematics in order to be as helpful as possible to hon. Members, I propose that, after the hon. Member I am about to call next, the time limit comes down to 12 minutes.

  2. 2 earlier:

    Several hon. Members:

    rose —

  3. 3 earlier: Michael Meacher

    No, I will not, because I would be cutting into my own time. Much as I respect the hon. Gentleman, I prefer, now that I have the floor, to keep it.

    There are two ways of tackling the deficit, which is, of course, reducing Government revenues through rising unemployment and increasing Government expenditure through social benefits, including the so-called automatic stabilisers. Those activities are in turn ballooning the budget deficit. We all know that that is the problem. One way of dealing with the deficit is to tackle the supply side of the equation by drastically cutting other Government expenditures across the board. The other way is to tackle the demand side of the equation by initially spending more, not less, in order to put in place massive public investment programmes across the country, to get a large and increasing proportion of the population back into work. That is clearly right.

    The first way was the policy that was ruthlessly pursued by the Bank of England under Montagu Norman in the infamous 1930s. The second was the approach adopted by Roosevelt in his 1933 new deal and, increasingly, after the war, by western Governments across the spectrum until it was discarded by the Thatcher-Reagan neo-liberal counter-revolution in the 1980s. That is the capitalist model of market fundamentalism, which is now bust. The second policy is unquestionably right, for several reasons. At the most basic political level, people are asking why the public sector, which contains many of the poorest workers in the country, has to take any hits at all, when the credit crunch crisis was caused exclusively by the bankers and the super-rich. I imagine that even Conservative Members have had that question put to them.

    There is another, much more profound, reason on which I prefer to concentrate, however. The real economy—main street, as opposed to Wall street and the animal spirits in the City of London—is still sinking, as revealed by the fact that joblessness, repossessions and bankruptcies are continuing to rise, albeit more slowly. This continues to reduce the overall level of demand throughout the economy, and in these circumstances, further massive cuts in public expenditure will simply turn a bad recession into a deep slump. That is the fundamental point that Labour Members continue to press very hard.

    There are two crucial considerations to confirm this view. First, there is ample historical evidence of the consequences of following a budget-cutting policy. As I said in an intervention on the right hon. and learned Member for Rushcliffe (Mr. Clarke)—who gave a long historical discourse but did not answer my point—the Japanese Government, against the background of a precarious economic recovery at the end of the 1990s, raised their sales tax and made cuts in public expenditure in order to lower their budget deficit. That is exactly the argument that is being made today. That precipitated a second, deeper slump, which is, sadly, still in place in Japan today.

    Even more relevant is the example of Roosevelt, who came to office in the US in 1932 and launched the new deal, involving a massive public works programme that initially brought down unemployment quite significantly. People do not often remember, however, that he was instinctively a balanced budget man, and, in 1935, he lowered public expenditure and edged up taxes, with the result that unemployment started to rise again. He was then forced to reverse engines. The only thing that finally brought down unemployment in the United States was war expenditure.

    A crucial point that has not yet been mentioned in the debate is that the current ratio of Government debt to gross domestic product in the UK, although high, is still the second lowest—after Canada—in the G7. That indicates that there is certainly no cause for a panicky, counter-productive orgy of cuts. The IMF estimates that, even in 2014, when gross debt might peak—we shall see—the UK debt-to-GDP ratio will be 87 per cent. It estimates that that of France will be 89 per cent., that of Germany will be 91 per cent., that of the US will be 106 per cent., that of Italy will be 129 per cent. and that of Japan will be 234 per cent. I could add that, during the second world war, Britain's debt-to-GDP ratio rose to 250 per cent. I do not think that anyone disagreed with the proposition that that was necessary at the time. By the 1950s, however, it had fallen to below 50 per cent. without any programme of systematic cuts. Indeed, that was achieved by a huge programme of public expenditure expansion to promote employment.

    So, what is obviously needed is a huge public investment programme of job creation in housing, which has been terribly neglected, in infrastructure such as rail extension, which I hope we are now getting round to, in manufacturing, in energy conservation, in skills training, in public services, including social care of the elderly—which would certainly offer a lot of employment—and in the greening of industry. That would turn around a budget deficit far faster and more effectively than hugely painful cuts in public services. I am sure that Opposition Members do not believe me, but perhaps they will pay attention to Martin Wolf, the financial guru at the Financial Times, who said recently in the FT that the public debt crisis was a myth. He said that a normal economic recovery would resolve the problem, and that widespread cuts would create a crisis. Amen to that.

    So how do we pay for this? That question has already been raised. Now that the City has gone back to business as usual, with its paying of bonuses and its colossal profiteering, a windfall tax could be levied on its ill-gotten gains, as my right hon. Friend the Member for Holborn and St. Pancras (Frank Dobson) has said. I think that the vast majority of people in this country would agree with that.

    Also, let us be honest, we will need to cut public expenditure where it is ineffective, wasteful and unnecessary. That is why we should cut the £75 billion Trident renewal programme, which even the chiefs of staff now admit is irrelevant, the £10 billion-plus—whatever it is—ID cards that are not, according to their originators, "fit for purpose"; and the vast Government IT databases, which are costing tens of billions of pounds and are constantly leaking. We need to add a real crackdown, which the Government are starting to do, on the hyper-rich individuals and mega-corporations that squirrel away a sum that even the Treasury admits is somewhere between £13 billion and £25 billion a year.

    At present—I have to say, by contrast—economic policy making has got rather stuck in a groove. Both new Labour and the Tories, for the same ideological reasons, have refused to nationalise the banks, which would have been far cheaper than bailing them out at a potential cost of nearly £1.5 trillion, and would have been a far more effective way of achieving control over the banks and their functions. Both new Labour and the Tories—again, for the same reasons of "hands off the banks"—have opposed forcing them to lend to businesses and home owners, which was of course the ostensible reason for bailing them out in the first place. Both parties refused to impose any significant regulation on the banks—here I very much agree with my right hon. Friend the Member for Holborn and St. Pancras—even though their greed and recklessness has nearly capsized the entire world financial system. Now, to cap it all, it seems to me that both parties are competing in this fixation on public-sector cuts—mugging the victim, not the culprit.

    What is really needed in order to shorten the recession and prevent unemployment rising even beyond its current 15-year ceiling of £2.5 billion is to require the banks—requiring them is something that we have not done; I simply cannot understand why not—to switch from their current policy of consolidating their balance sheets, which they have already done to a significant degree, to raising their lending substantially to businesses and home owners. It is the lack of credit for businesses, particularly small businesses, that is at the continuing root of rising unemployment.

    The Government's own M4 money supply figures, which measure lending, show a catastrophic fall from annual growth of 20 per cent. in early 2007, just before the credit crunch, to nil today—indeed, they are actually negative, which means that the banks are now extracting more from their business clients than they are lending to them. The top management of the part-nationalised RBS and Lloyds groups should, in my view, be instructed to make that change as an immediate priority, with published quarterly reports to demonstrate that the policy is working, particularly in respect of lending to small businesses. That is the one area where I have some sympathy with the terms of the Opposition motion, as we need to do more in that respect. The best way of doing so is the way I am suggesting. I believe that any failure to comply should lead to a change of management. That, plus a huge public investment programme, as I have said, would absorb a very large number of the unemployed.

    What is certainly not needed is a fire sale of public-sector assets or the shadow Chancellor's pay freeze for 5 million public sector workers, which will again lower aggregate demand and prolong the slump. What really takes the biscuit is the gall of the Leader of the Opposition, who told the Tory party conference that it was "more government" that has got us into this mess. Well, anyone—surely even a Tory, even him—can see that what got us into this mess was market fundamentalism, the doctrine that the market always knows best. [Interruption.] The Government had a role in preserving the banks and the economy, and it was actually the Government who ensured that global capitalism remained. To dismiss the role of the state, as the Leader of the Opposition did, is an extraordinary perversion of the truth, which will be noticed by many people in the country.

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