Motion made, and Question proposed,
That, for the year ending with 31st March 2009, for expenditure by HM Treasury—
(1) further resources, not exceeding £1,000, be authorised for use as set out in HC1061, and
(2) a further sum, not exceeding £42,200,000,000, be granted to Her Majesty out of the Consolidated Fund, to meet the costs as so set out.— [ Mr. Timms. ]
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The purpose of this motion is to provide repayment of recent advances from the Contingencies Fund, and resources for the recapitalisation programme announced in recent days. It introduces an out-of-turn supplementary estimate for Her Majesty's Treasury to allow the repayment of the £4.6 billion advanced from the Contingencies Fund on
The House knows of the current situation in the financial markets, and it knows that we have acted quickly in recent weeks to support the depositors of Bradford & Bingley, and of the two Icelandic institutions, Kaupthing Singer & Friedlander and Heritable.
Yes. As I have set out, we are doing two things under the motion: we are replenishing the Contingencies Fund, which has been used for Bradford & Bingley and the Icelandic banks, and providing the resources for the banks' recapitalisation. I will give a little more detail about that in a moment.
In the case of Bradford & Bingley and the Icelandic banks, we took action on the advice of the Bank of England and the Financial Services Authority to secure stability in the financial system. The action that we have taken demonstrates clearly the Government's commitment to doing whatever is necessary to ensure stability, while protecting consumers and safeguarding the interests of the taxpayer.
Sometimes, expenditure is so urgently required that it cannot wait for the voting of provision under the normal Supply procedure. That is why the Contingencies Fund was put in place. I hope that the House will agree that on the occasions when the Contingencies Fund has been used, it has clearly been appropriate to do so. The Contingencies Fund is limited by statute to 2 per cent. of the total amount released as cash from the Consolidated Fund in the previous year—that is, the total of all net cash requirements. On that basis, some £8.1 billion was available in the Contingencies Fund at the start of the financial year. The advances that we have drawn from that fund of £4.6 billion and £600 million leave the fund at a low level, in historical terms. That does not take account of any further call that Departments might need to make on the fund, as they sometimes do.
In the normal course of events, the Treasury would present any winter supplementary estimate in the middle of November, alongside the supplementary estimates of other Departments. The passage of the related Appropriation Act would follow in December, with Royal Assent taking place in the middle of December. Only once all stages had been completed in both Houses would the advance be repaid to replenish the Contingencies Fund. This motion allows us to restore the level of the Contingencies Fund now, so that it stands ready to be used again if required.
As the House knows, over the weekend we negotiated with the banking sector a £37 billion recapitalisation package. This supplementary estimate also provides the Treasury estimate for that spending. Clearly, at £8.1 billion, even the resources of the Contingencies Fund are insufficient for that package. We are taking this opportunity to ask Parliament's approval for that spending, rather than waiting for the normal supplementary process in December, because expenditure may well need to be incurred before the middle of December, when Royal Assent would be obtained.
Finally, Her Majesty's Treasury is seeking a token £1,000 increase in resources to indicate the change to the Treasury's ambit. Elsewhere, we set out what the money can be spent on. That is perhaps the point that Mr. Bone raised. It is a token amount. The remit has been expanded, as it needed to be to cover support to the financial sector of the kind that my right hon. Friend the Chancellor announced. It is normal, albeit perhaps slightly arcane, procedure to present token increases when ambits change in such a way. I commend the motion to the House.
I am grateful to the Financial Secretary to the Treasury for setting out the purposes of the motion. As he says, essentially it enables the Government to restore the money in the Contingencies Fund, following the expenditure in relation to the recapitalisation of Lloyds TSB, HBOS and the Royal Bank of Scotland, and in relation to Bradford & Bingley and the Icelandic banks.
Of course, we on the Conservative Benches support recapitalisation of the high street banks, which accounts for the majority of the funding, and we recognise the particular issues relating to the Icelandic banks and Bradford & Bingley. We have said throughout that we are keen to work on a bipartisan basis. None the less, this is a huge expenditure and it is right that we have an opportunity to scrutinise and question it.
Several of the questions that arise have not been answered as fully as they might have been, and I shall raise some of them with the Financial Secretary. I appreciate the prudence of the Government in seeking to restore the Contingencies Fund now rather than waiting until December, but it might be helpful if the House had the answers to some of our questions, so that we know where taxpayers' money will go. The sums are huge—£42 billion will double the borrowing that the Government previously proposed—and we need to know how it will be accounted for. The US had lengthy debates on these matters, although we do not want a repeat of the uncertainty that they created. In any case, we work on a different basis in the UK, but it is right for the House to have an opportunity to ask some questions.
We need further clarity on the issue of the Government's acquisition of ordinary shares. When the Chancellor made his statement on
"Given the scale of what is necessary...the balance"— between ordinary and preference shares—
"has to be struck in a way that is workable...if too many preference shares were put into an organisation it would impede its ability to get through this period and recover".—[ Hansard, 13 October 2008; Vol. 480, c. 544.]
He added that he was acting on proper advice. That is clearly a change in approach and it would be helpful to the House to hear an explanation of that change. Is it the fear that the deal will involve no dividends until the preference shares are paid off, so that would have an adverse effect on the share prices of banks? Or is it, as The New York Times suggested, that the banks' memorandums and articles did not allow the issuing of enough preference shares to boost the banks' capital ratios to the required levels? The Chancellor referred to proper advice, and it might be helpful if the House could see that advice. That change has put the taxpayer in a different, and arguably worse, position. I am willing to be pragmatic about this issue, but we need to know the reason for the switch.
Each bank is paying a 12 per cent. interest rate on preference shares. It has been argued in newspapers and elsewhere that the risk profiles of the three banks are different. Given the scale of the investment in RBS compared with Lloyds TSB, and the different risk profile, why was the same interest rate required?
Another change in approach seems to have occurred in relation to board representation. On
"In relation to Government nominees sitting in boardrooms, I never thought that a particularly useful course of action to follow".—[ Hansard, 8 October 2008; Vol. 480, c. 286.]
Now we will have five members on bank boards. I do not necessarily disagree with the proposal, but it would be helpful to know why there has been a change in approach. Will it be their role to enforce the various conditions imposed on the banks by the Government? How will those directors work, given that the Government are keen to have an arm's length relationship with the banks? Will the Government directors serve on the remuneration committees, for example? The remuneration policies of banks are causing concern, but it is a particular issue for banks that are partially nationalised. We know that cash bonuses will be curbed, but I hope that the Financial Secretary can provide greater detail on the Government's attitudes to share options for senior and not so senior bank employees.
"The banks have agreed to maintain the availability of loans to homeowners and small businesses at 2007 levels."
We recognise that the purpose of the intervention is to unfreeze the lending market, but does that mean that the Government wish to maintain the same level of borrowing as in 2007? They appear to have backed down from that and now place great stress on the word "availability", but do they envisage that the partially nationalised banks should offer the same types of products as were offered in 2007? Will we see the return of 125 per cent. mortgages, for example? After all, 2007 was part of the age of irresponsibility—to coin a phrase. Do the Government really intend a return to those times? I suspect that it was merely spin, but it puts the Government in an awkward position. They are either guilty of spin or guilty of encouraging a return to irresponsibility. Which is it?
I am grateful to my hon. Friend for pointing that out. It is further suggested that those levels should be maintained for three years. The Government are trying to retreat from that statement as quickly as they can, and the stress is being put on availability and marketing activity. However, greater clarification would be helpful. We welcome the unfreezing of the credit market as that would be helpful, but a return to 2007 levels would be grossly irresponsible.
Earlier today, the Leader of the House referred to trying to re-establish reasonable rates for lending to small businesses and households, but that is not how the policy was presented earlier this week. There is clearly some confusion, which brings into question whether the Government appreciate some of the lessons that they should have learned from 2007 and before.
On the treatment of home owners, the Treasury statement of
"As part of its investment, the Government has agreed with the banks supported by the recapitalisation scheme a range of commitments covering...support for schemes to help people struggling with mortgage payments to stay in their homes".
We recognise and appreciate that point, but we must bear in mind the case of Northern Rock, which has been nationalised for some time. From December 2007 to June 2008, the percentage of its properties in possession increased from 0.29 to 0.56 per cent. That is a substantial increase, and it is particularly striking compared with the 0.16 per cent. figure for properties in possession for mortgaged homes as a whole. Again, clarification would be helpful. Will the partly nationalised banks, and in particular their mortgage arms, take an aggressive approach to repossessions? Is it the intention that they will take a more generous approach than the market as a whole, or will they, like Northern Rock, take a more aggressive approach? Again, it would help the House if we had further details.
Earlier, I touched on the implications for the public finances of those items of expenditure, and I ask again how the Government anticipate that that expenditure will be treated. Will it be treated as borrowing, and will it be treated as part of the public sector net debt? We know that the Office for National Statistics will make a determination on that point, and it looks likely that the expenditure with regard to the high street banks will be treated in such a way. If that is the case, public sector net debt will be at around 50 per cent. of GDP, a percentage which it has not reached since 1976. Where will that leave the sustainable investment rule? We debated that matter last week in the House of Commons, and it appears that the sustainable investment rule has been blown out of the water. The Government were likely to breach the rule notwithstanding Northern Rock—if one includes Northern Rock, they are already in breach—and these particular measures. The sustainable investment rule appears to have been broken. Have the Government abandoned it? It is about time that this House knew the answer.
Have the Government made any assumptions on when the preference shares will be paid off? Have they made any assumptions on when they will be in a position to dispose of the ordinary shares? I appreciate that no precise answer can be given, but are they working on any assumptions at all? Given that we are discussing very substantial items of expenditure, how will that expenditure be accountable to this House? Will we have an opportunity to review, debate and, if necessary, vote on any progress in reducing the level of preference shares and ordinary shares? What opportunities will there be to debate particular policies pursued by banks in the light of their partial nationalisation, over and above the usual methods such as Treasury questions?
On the Icelandic banks, the supplementary estimate refers to £600 million, which relates to the payment to ING under the Transfer of Rights and Liabilities to ING Order 2008. That relates to the transfer of retail deposits of Kaupthing, Singer and Friedlander and of Heritable, as the Financial Secretary has mentioned. As far as I know—I am willing to be corrected on this point—this is the first time that this House has had sight of that figure. The Financial Secretary will correct me if I am wrong, but the figure of £600 million has certainly not been referred to very frequently. We have frequently heard about the £100 million loan—indeed, the Leader of the House referred to it earlier today—but the £600 million figure is new. If it is possible to obtain more details about what that involves and how the Government hope to get their money back—if, indeed, they hope to get their money back—we will be grateful. Equally, on the figure relating to Bradford & Bingley, more details about when and how the Government intend to get their money back would be appreciated.
We all agree that the financial crisis is extraordinary. Some Labour Members, not many of whom are present in the Chamber today, view the measure as a triumph for the Prime Minister. We do not view it as such, although we have been prepared to work with the Prime Minister and the Government to address particular concerns. Finally the bills for the Brown boom have had to be paid. For years, the Prime Minister declared at every opportunity that there would be no more boom and bust. In an interview in the Daily Mail at the weekend, he said:
"I actually said, 'No more Tory boom and bust'".
There are a number of ways one can take that comment. I do not know whether it meant that there would be no more Tory boom and bust because instead we would have Labour boom and bust, or whether he really thinks that he said that. I cannot explain that comment.
The facts that the UK was so badly prepared for the financial crisis, that the regulatory system was unable to cope with this bust and that the public finances are woefully unprepared for this downturn suggest that maybe the Prime Minister believed throughout the 10 years when he was Chancellor that there would be no return to bust, whether it was Tory bust or any other kind of bust. That is deeply disturbing, because it means that he believed he could defeat the business cycle, which has existed for ever. The consequence of that was enormous complacency. No attempt was made to use the good years to prepare for bad years; no attempt was made to fix the roof when the sun was shining. We have been left in a terribly vulnerable position in which we are more exposed than almost any other economy in the world to a global economic downturn with inflation at three times the level of '97, with unemployment rising at a faster rate than at any time in the past 17 years and with the public finances in one of the worst positions of any particular economy in the world. No more boom and bust—if only it were so. Today, we are paying the bills.
I realise that the narrow issue of the supplementary estimates is a peg for discussing some of the wider financing issues around it. A great attempt is being made these days to portray good news, but the idea that we are buying out the banking system for £1,000, as the Minister seemed to suggest in his introduction, stretched things a little far. None the less, there is good news as far as it goes.
This issue is important because it leads us from the complicated issues of the banking bail-out to the wider question of how that affects public finances and how the market perceives the state of public finances. At the moment, markets in Britain, the United States and elsewhere trust Government paper but not the paper of banks and other financial institutions. Perhaps that is a reflection of how we see Governments—perhaps more positively than has historically been the case. None the less, there are limits to the extent to which the markets will absorb Government paper.
Although in the current environment it is possible to float gilts at attractive terms, there will obviously be limits to that. In the spectacular case of Iceland, not only the banks, but the country—the Government—have gone bust. Its creditworthiness as a country no longer has any credibility. Of course there is a vast difference between Britain and Iceland, but equally there is a vast difference between Iceland in October and Iceland in April; its position deteriorated very rapidly, and we need to be careful that the same does not happen here. In addressing that issue, we must focus on how these vast public liabilities, of different kinds, are to be represented in terms of public presentation and the relationship to public debt.
Yesterday I read two rather obscure articles in the financial pages. They were not an attempt to talk up the drama around the public debt figure, but one of them suggested that the whole £500 billion aspect, rather than the £50 billion aspect, of the bail-out should be covered in the public debt. I do not know the statistical or financial basis for arguing that, but if the £500 billion—the contingent liabilities around underwriting inter-bank lending—were to be treated as public debt, we would be talking about 100 per cent. of GDP, not 40 or 45 per cent.
Quite independently, a separate article argued that there was a case for treating the liabilities of the Royal Bank of Scotland as public debt; that would add another staggering sum and, independently of the first point, take us up to about 100 per cent. of GDP. If we add the two together, we get up to 150 per cent. of GDP. Those are rather meaningless numbers, but somebody needs very quickly to produce a proper, accurate and transparent assessment about what the public liabilities are.
One of the lessons that we have learned—the banks certainly have—is a hatred of uncertainty, which causes panic and loss of confidence. We therefore need a completely open statement about what the various Government liabilities are, including the ones to do with public sector pension liabilities, the private finance initiative and the rest of it, which we have endlessly debated in the past. We need an open, transparent statement about the different components of the liabilities that the Government are now taking on—some are direct stakes, some are guarantees and so on—so that the markets can make their own assessment.
I do not believe for one moment that there is any imminent danger of the Government breaching their debt ratio to the extent of people calling into question the value of Government bonds, but the Government need to be careful. This is partly a presentational issue, about how we present statistics; I hope that the Government will apply themselves to that.
I have little to say on the substance of the bank bail-out; we have had plenty of opportunities to discuss it, including yesterday. However, simply because it is relevant to the specifics of the supplementary estimate, it is worth drawing attention to the fact that Bradford & Bingley shareholders are on the march. I had an altercation with one of them on the radio this morning; they clearly intend to go for litigation with the Government to find out why they have effectively been wiped out when the share prices of other banks a few days later, although badly depreciated, have had the chance to recover. I did my best to defend the Government's position but they are going to find themselves in court to offer an explanation, which will be tricky.
The other issue specifically raised by the supplementary estimates is the Icelandic banks. My hon. Friend Mr. Heath wishes to say something about that from councils' point of view. I want to raise the broader policy issue. The problem arose because the Icelandic banks could be passported through the European economic area rules. I do not think that anybody saw this coming, but there is a slightly odd arrangement in which there is a claim on the host country following that of the home country. I assume that the Icelandic banks made no contribution to the British financial services compensation scheme. Some have posed the question of whether we should now seek a change in the European Union regulations to make sure that when EEA banks act here, they are fully part of and covered under the financial services compensation scheme and therefore make full contributions to it. Does the Minister have any views on whether such a regulatory change would be helpful?
I could not contribute to the debate yesterday for the agreeable reason that I was at Buckingham palace, so I welcome the opportunity to make a brief contribution today.
This banking crisis did not emerge from old-fashioned banking at all; it emerged from the kind of banking, known in the trade as "originate to distribute", that has developed in recent years, whereby banks put together packages of securities and then pass them on to each other in collateralised debt obligations, or CDOs, which have proliferated and become far more complicated. The amounts involved are enormous. The derivatives are inter-traded and cut in different ways; the original asset may go through many different manifestations and changes before it eventually ends up in the book of one bank. It has become a matter of enormous complication and vast financial implications. No bank can be completely confident that the asset that it holds is sound; all banks are contaminated to a greater or lesser extent by loans or investments that they may not be able to recover. All banks are toxic because of the massive amount of inter-trading that has taken place.
There is an urgent need accurately to identify each bank's assets and liabilities. The issue has to be resolved because most businesses, large or small, depend on bank gearing and bank borrowing to a greater or lesser extent. Most businesses have bank loans or facilities, many of which are not being rolled over. Many smaller businesses in particular are being offered much less advantageous terms; banks that had been borrowing at 8 or 9 per cent. are finding that their facilities are being reoffered or not offered at all. If they are being reoffered, it is happening at about 15 per cent. Moreover, all trade depends on bank facilities; goods in ships may not be unloaded and sent on to their ultimate destination unless the bank facilities for their transit are available. Something must be done.
In many ways this situation is unprecedented, but it is not completely so. A week ago, I drew attention in the House to the fact that what evolved at Lloyd's of London in the 1990s is a close analogue to the current situation. I became an underwriting name at Lloyd's in 1972. In 1989, when I ceased to be a Minister, I could see that things were going wrong at Lloyd's. I could come out of Lloyd's, stay there and worry or stay there and try to do something. I stood for the council of Lloyd's as an external member and was elected. I later became a member of its audit committee, so I was closely involved in the resolution of the problems in the 1990s.
The problems were similar to the ones that we have now. I put that point to the Chancellor of the Exchequer two days ago, but he brushed it aside saying that the Lloyd's situation was very different. But it is not: it is the nearest that we have to an accurate analogue. Lloyd's syndicates were underwriting risks and passing them on by way of reinsurance. The syndicate that had reinsured would then reinsure further, and there was a whole cycle of investment and reinvestment. The problem was that the syndicates were not entirely sure what risks they were underwriting. There was uncertainty because no one knew the reliability or soundness of the risks. That situation is very similar to that in which we find ourselves with the banks now.
Let us imagine—my comparison is a rather ugly one—that every single loan is a tiny piece of spaghetti, all the pieces are mixed up in a great big bucket, and we end up with a massive asset so that no one knows what they have got when they buy a share or slice of it. What we must do—this is the parallel that we draw from Lloyd's—is identify and isolate the unsound assets. Lloyd's created a new vehicle, Equitas, into which it transferred the unsound or questionable assets, so that it could move forward with purged units or entities that were free of the unsound or doubtful assets that were there previously.
In fact, I thought that the first Paulson plan to inject $700 billion into the banking sector was fundamentally misconceived because it did not identify and isolate the toxic assets. Paulson suggested an investment of $700 billion in the unsound part of the market, and the money was intended mainly to acquire the assets that were known to be unsound at a price higher than market value.
I am listening carefully to my hon. Friend, but I wonder whether the Equitas parallel works. In that case, the toxic waste was transferred to a body that remained the responsibility of the private sector and where the liability ultimately remained with those who created it. In the case of the banks, and of the Paulson plan, it was transferred to a public body, with taxpayers being directly at risk.
I will come to the main thrust of my argument three points further down the line, if I may. Obviously, the situation is vastly complex. We have to respect Mr. Paulson's background and experience, and we must assume that he built into his plan safeguards that I have perhaps been too naive to understand. I am not saying that Lloyd's is a complete parallel and that I have the answer that nobody else understands, but I am convinced that there are lessons to be learned from the Lloyd's experience that I have not yet seen Government taking on board.
The next point to draw from Lloyd's is that we are all in this together. The Lloyd's community realised that if the Lloyd's ship sank everyone would drown, so we had to find a way through. That leads to the need for a strategy for burden-sharing.
My next point concerns moral hazard. We should ensure that those who took the greatest risks bear proportionately more loss. That requires an overarching strategy to identify those who took the risks to ensure that they suffer.
Why should anyone—taxpayers or Government—invest in an institution that is known to be unsound or at least questionable? Why should not Government money—taxpayers' money; our money—be put into vehicles that we know to be sound, their having been purged of unsound or questionable risk? More needs to be done to ensure that Government money is invested soundly and that unsound or questionable assets are put into a situation of run-off so that they bear their own risks.
My penultimate point is that there is one piece of good news. Nobody knows exactly where the risks lie, so banks and other institutions have inter-traded, with the same unsound and questionable assets being passed from bank to bank and institution to institution and carried as risks on the balance sheet of everyone who has handled them. If the questionable assets can be identified and isolated, I am certain that we will ultimately find, on adding them up, that they are the subject of double, triple or multiple counting, so the obligations are not as great as we first feared.
Finally, I challenge the Financial Secretary to the Treasury to demonstrate to the House that the investment that is being made and the vast increase in funding that the Government propose is to be made in sound securities that in the longer term will be seen to be robust in the eyes of the taxpayer.
My hon. Friend Sir Peter Viggers makes an extremely important point about treating the causes rather than the symptoms of the problem and removing the toxic liabilities from the banks, but nowhere is that addressed in the central Government supplementary estimate that we are considering.
On the technical point that I raised with the Minister, I understand that the vast bulk of this is cash accounting, but if there is a resource accounting element that is not provided for, the whole thing might fall. I am sure that his officials have considered that, but I am surprised that only £1,000 was included, whereas perhaps it should have been, say, £10,000 to cover all eventualities.
In the course of the next three hours, assuming that the debate runs its full course, we will write a blank cheque to the Government for £42.2 billion—an increase in the cash estimate for the year of nearly 10 per cent. That is an unprecedented increase in an out-of-turn supplementary estimate. During those three hours, we will have spent £234 million of taxpayers' money per minute, yet what we know of how that money is to be spent is sketchy at best. It equates to £1,361 for each and every taxpayer in the country. It is to be spent as the Government want without proper debate or consideration, and without full parliamentary scrutiny. It is like the Government taking £1,300 of our money along to the local casino and betting it on black, hoping that it will not turn out to be red. On the roulette wheel, at least one knows the odds, but in this situation we have no idea what the possible return, if any, will be for the taxpayer.
This supplementary estimate is part of the Government's £500 billion bail-out of the banks. It is the biggest bail-out in the world so far, paid for by the biggest peacetime increase in debt. It will lead to the Government's debt rising to 50 per cent. of gross domestic product—in other words, £8,200 for every man, woman, child and baby in the country. It asks us to approve an enormous amount of borrowing to support and bail out irresponsible banks. Only now are members of the public beginning to realise just what the Government are about. I recently received an e-mail from a constituent, which I should like to read because it adds light to the situation:
"My partner brought it to my attention about a small banking situation where she accidentally missed a credit card payment to a major bank, who is in line for government/tax payers backing. A letter was posted to her with an amended payment figure and date of 20th october, but last friday the bank was on the telephone to her, high pressure, demanding cards and payment, luckily, she is not easily scared and told them otherwise!
My issue is, in the light of the current banking problems, and WE the public are footing the bill for the banks errors in judgment, should it be "assumed" by the banks that just because they are in dire straights, everyone else is. It is not as if my partner is an habitual late payer, it was a one off.
I feel that these banks should be humbled to the public in some way and not come on heavy handed at the slightest opportunity. With government intervention should these issues be taken into consideration? How many other people are being submitted to this style of treatment?...Yours sincerely,
We can all relate to that. Anyone who has ever run a small business will know how unsympathetic, ruthless and heavy-handed banks can be, literally putting companies into liquidation at the drop of a hat. Yet taxpayers are being asked to bail out the banks to the tune of £1,361 each.
It strikes me that it is a duty of Parliament not to write a blank cheque, but to scrutinise the Government's proposals in much greater detail. This out-of-turn supplementary estimate is the first opportunity we have had to scrutinise the Government's banking recapitalisation plans. Indeed, it is the first time that many Back Benchers have even had the opportunity to discuss the issue. Yes, there have been a number of statements from the Chancellor, but on each and every occasion Back Benchers have been left standing. Many Members have not been able to put even one question to the Chancellor about the extraordinary amount of expenditure that we are considering in this Government supply estimate.
Things are different in America. Full congressional scrutiny took place and the revised package was far better than the original one proposed by the Executive. But in this mother of Parliaments, no time has been allocated to debate a substantive motion on which the Government could be defeated. The Government are spending the most extraordinary amounts of our money in nationalising, or part-nationalising, certain banks. Today's three-hour debate will be the first time that many Back Benchers have had an opportunity to discuss the matter.
I find it quite extraordinary that this week we have found it possible, on non-substantive motions, to discuss democracy and human rights, access to primary care trusts, local government and energy providers. We have had hours and hours of debate on what are no doubt important issues, but clearly they are not as important as the biggest financial crisis in 100 years, with the Government heading from boom to bust at breakneck speed.
I might be the only Member of the House who thinks that the Government's proposals have significant flaws, and that there should have been a far more market-oriented solution, but there should have been proper thought and consultation, and detailed proposals should have been brought to this House. I am sure that if that debate had occurred, many Members would have made improvements to the package. If we pass the supplementary estimate today, the Government will be able to do what they want with £42.2 billion of our money.
I turn to the proposed, out-of-turn supplementary estimate we are considering. As I have said, we know little detail of how the £42.2 billion will be spent. Some detail on the estimate is outlined in House of Commons document 1061, and some supplementary information was provided by the Chancellor, who placed in the Library a number of documents two days ago. It was rather difficult at the time to get hold of the documents, but they were eventually released. The documents were the preference share subscription agreements between the Commissioners of Her Majesty's Treasury and the Royal Bank of Scotland plc, between the Commissioners of Her Majesty's Treasury and HBOS plc, and between the Commissioners of Her Majesty's Treasury and Lloyds TSB Group plc. In addition, we were provided with the placing and open offer agreements between the Royal Bank of Scotland plc and UBS Ltd, and Merrill Lynch International and the Commissioners of Her Majesty's Treasury, and the placing and open offer agreement between HBOS plc and Morgan Stanley & Co. plc, and Dresdner Kleinwort Ltd and the Commissioners of Her Majesty's Treasury. We were also provided with the placing and open offer agreement between Lloyds TSB and "blank", and "blank" and the Commissioners of Her Majesty's Treasury. We have not even been told which merchant banks will be involved with the Lloyds TSB agreement.
We know in broad terms that the estimate deals with £42.2 billion, and it is broken down as follows. RfR 1 of the supplementary estimates is entitled:
"Raising the rate of sustainable growth and achieving rising prosperity and better quality of life with economic and employment opportunities for all"— a rather strange way to raise the issue of the biggest banking collapse this country has ever seen. The section "Reason for change" refers to
"Changes relating to movements in budgets" and
"Changes in annual managed expenditure".
The detail is as follows. First, the £4.6 billion for the transfer of the retail deposit book and the branch network of Bradford & Bingley plc to Abbey National plc following the Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008 No. 2546—in other words, the cost of allowing Bradford & Bingley to collapse. Interestingly, that is a totally different approach from that taken to the nationalisation of Northern Rock or the part-nationalisation of the Royal Bank of Scotland, HBOS or Lloyds TSB. There is a significant lack of consistency on the part of the Government, which was raised by Dr. Cable. That lack of consistency has been a trend throughout this ordeal.
Secondly, we have the £0.6 billion going to ING under the Transfer of Rights and Liabilities to ING Order 2008 No. 2666—in other words, money to protect depositors in Icelandic banks. Thirdly, and this is where we turn to the capitalisation of the banks that has been discussed in recent days, we have the purchase of shares in Royal Bank of Scotland—£20 billion broken down into £15 billion of ordinary shares and £5 billion of preference shares. Fourthly, we have the purchase of shares in HBOS at £11.5 billion, of which £8.5 billion is in ordinary shares and £3 billion is in preference shares. Fifthly, we have the purchase of shares in Lloyds TSB at £5.5 billion, of which £4.5 billion is ordinary shares, and £1 billion is preference shares. When one says that quite quickly, it does not seem to be very much, but when we think of the enormity of what we are discussing, we can see that it is quite staggering.
I know that other Members intend to speak, so I will not comment on the £4.6 billion relating to Bradford & Bingley or the £0.6 billion relating to the Icelandic banks. I want to talk about the huge investments of taxpayers' money into the three commercial banks, and the market capitalisation of the banks. First, I would like to discuss how the capitalisations relate to the money we are proposing to inject. On
It is not clear how we reached such low market capitalisation. The last reported profits for those banks were: RBS—£9.9 billion; HBOS—£5.5 billion, and Lloyds TSB—£4 billion. The auditors' reports on those banks included no qualification, and it appears that the auditors will have signed off the companies' assets at a much higher value than they are now worth.
The role of rating agencies in the fiasco should also be considered, but such issues should have been properly debated before we arrived at the mega supplementary estimate that we are being asked to approve today. How can we approve a blank cheque for £42.2 billion when we do not know the true strength of the three banks to which the estimate refers? It is impossible that due diligence was exercised. The ideas seem to have been thought up on the back of an envelope during night-long meetings. The detail of the offer and subscription agreements shows the folly of that.
Let us make a UK-America comparison. Later, I want to consider in detail the individual estimates that the various documents show, but the British Government's proposal clearly differs significantly from the American package that was announced last night. The latter is market oriented and designed to benefit the American taxpayer and the larger economy. The British Government's approach neither protects the taxpayer's interests nor allows the banks to recover—it is deeply flawed.
There have been huge regulatory failures to control the banks over many years and a huge bubble of debt has ensued. It appears that the banks have been lending more and more debt between themselves, which has little or no value. The boom was built on debt and was therefore bound to crash. If a small prick is made in a big balloon, the whole thing will collapse. The housing market's collapse has pricked the balloon and all the financial air is rushing out. The out-of-turn supplementary estimate constitutes an attempt to put a patch over the escaping air, but it does nothing to tackle over-lending, which is the root of the problem. How could it be right to lend mortgages of 125 per cent. of the value of property? How could it be right to allow self-certified mortgages or lend five or six times a person's annual income?
The position was made worse by the insistence that there would never be a return to boom and bust—that was the Prime Minister's mantra. That was clearly nonsense because it defied economics and trade cycles, but it encouraged ordinary people in this country to take on more and more debt because they believed that the value of their houses would always increase. The banks were happy to lend because they thought that the value of assets would always go up. The Prime Minister must accept a great deal of responsibility for that boom. The £42.2 billion in the supplementary estimate is the colossal price that we are paying for his incompetence.
Many people will ask why we are protecting the banks and bank jobs at colossal risk when we allow other companies to go to the wall. The employees of XL travel or Travel City Direct and others in that group, who lost their jobs overnight, must wonder why they are being asked to bail out bankers. Today, it was announced that total unemployment had increased to 1,792,000—5.7 per cent. of all those economically active. Inflation is running at 5.2 per cent., which is more than twice the Government's required rate, and house prices are in a nose dive.
All those factors form a significant background to the out-of-turn supplementary estimate. I believe that British taxpayers will be outraged if we approve the estimate today without proper and due consideration of the relevant issues. In my constituency, 1,721 people are on jobseeker's allowance: in 1997 the figure was 1,643. In Wellingborough, we have therefore already reverted to the position of 11 years ago. The unemployed in Wellingborough must be astounded at the amount of money they are effectively being asked to spend in the estimates.
It is difficult for hon. Members and the public to accept the Government's consistently moving the goalposts. We are considering estimates, but proposals for spending the money change from day to day. I have no faith, given our limited knowledge today, that the money will spent in the way that we think—it could be spent totally differently.
Let me illustrate the point with some of the Chancellor's statements. When he discussed the nationalisation of Northern Rock on
"I want to set out the reasons for the decisions that I have made and to outline what the new legislation will do. Before that, let me remind the House that last September there was almost universal agreement that the Government were right to intervene to save this bank to stop its problems spreading to the wider banking system. There was also an agreement that, ultimately, the long-term future of the bank must lie in the private sector. Even those who advocated nationalisation in the autumn did so on the basis that this could be only a temporary step—a stepping stone—to return the bank to the private sector, when market conditions made that possible... The Bill potentially applies to a range of financial institutions, but I want to make it clear that the Government have no intention at present to use it to bring any institution other than Northern Rock into temporary public ownership."—[ Hansard, 18 February 2008; Vol. 472, c. 21-2.]
Clearly, the Government's position then was that nationalisation was a one-off—an individual, specific situation—and that the bank should be returned quickly to the private sector. It was to be a temporary stepping stone, not long-term nationalisation; a one-off, not a problem with the whole banking system.
"We need, too, to work with other countries to tackle the causes of these problems, as well as dealing with their consequences. Let me briefly remind the House of what we have done to stabilise the banking system as a whole. Since April, the Bank of England, with support from the Government, has introduced the special liquidity scheme providing funding to the banks. The Government have made available in excess of £100 billion of long-term funding to be lent through the scheme, and the Bank of England has extended it until January. I am willing to make further resources available as necessary and the Governor has made it clear that
'In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity'".—[ Hansard, 6 October 2008; Vol. 480, c. 21-2.]
The goalposts had been moved. The problem was no longer the temporary nationalisation of one bank but liquidity in the banking system.
Two days later, on
"I also said that the Government were ready, with the resources and the commitment, to do whatever was necessary—in terms of liquidity and capital—to maintain stability in the banking system. That is why today I put forward measures designed to restore confidence in the banking system and to put banks on a stronger footing.
There are three strands to what I have outlined today: first, to provide sufficient liquidity now; secondly, to make available new capital to UK banks and building societies to strengthen their resources and to restructure their finances, while maintaining their support for the real economy; and thirdly to ensure that the banking system has the funds necessary to maintain lending in the medium term."
"The eight major UK banks have today announced that, in aggregate, they plan to increase their capital by £25 billion. Banks can raise that capital in the open market, in the usual way, or they can raise it through the newly created bank recapitalisation fund. Other eligible banks and building societies can also take part.
Through the fund, the Government stand ready to buy preference shares in the participating banks. Preference shares rank above the stock of ordinary shareholders. The Government will receive a fixed regular payment for holding those shares and will get better protection against any future losses. In addition to that, the fund will be ready to provide at least another £25 billion of capital to strengthen the balance sheets of any interested bank. The taxpayer, therefore, will be fully rewarded for that investment."—[ Hansard, 8 October 2008; Vol. 480, c. 277-278.]
The goalposts were therefore moved, to £25 billion of preference shares with regular dividend payments—not a direct investment in common stock, but an investment in preference stock. I could understand that logic, but the position has changed significantly in the current estimates, which are not the same as the position set out in that statement.
The Chancellor came to the House with another statement on
Thank you, Madam Deputy Speaker. I do apologise, but I wanted to get on record the fact that I was not misrepresenting in any way what the Chancellor had said. Basically, we had moved from the idea of preference shares to massive investments in common stock. Only in today's estimates are we being asked to provide £9 billion of preference shares, when a few days ago we thought that we were going to be providing £25 billion of preference share stock. Instead, my calculation is that we have £28 billion of ordinary shares to buy, which came out of the blue. That is an extraordinary departure. The goalposts have moved so quickly and with so little scrutiny that I do not see how the House can approve today's out-of-turn supplementary estimates.
Let me say something about the political impact of the statements and how the Government and the Opposition have worked. I would like to praise the Leader of the Opposition and the shadow Chancellor for what they have done in the past few weeks, which has not been easy for them. It would have been easy for them to attempt to make political gain, but instead they have acted in the best interests of the country. In this sobering time of financial crisis, they have put aside their differences and worked with the Government.
The Leader of the Opposition and the shadow Chancellor deserve great credit for that. I fully respect their actions in putting the good of the country first. They have suggested amendments to Government actions and, at a time of extraordinary crisis for the country, have supported the Government to ensure that there is no panic in the system. The manner in which my right hon. Friends have conducted themselves has been admirable. They have done extraordinarily well. Indeed, today we have yet again heard a helpful and constructive statement from the Opposition Front Bench, from my hon. Friend Mr. Gauke, who posed a number of questions that are of great importance to the country.
However, that does not abrogate the need for a proper parliamentary discussion about today's estimates and the Government's decisions behind them. Having the issue debated in Parliament is the tried and tested way of ensuring that matters of such high national and international importance are comprehensively and successfully concluded.
Let me turn briefly to something that appears to be missing from today's supplementary estimates, which is the situation of Equitable Life. I cannot understand why there is no provision in the estimate for the money that the Government will have to pay in relation to Equitable Life. By not bringing that forward today, they will have to return to the House and take up more parliamentary time introducing a provision to cover the cost of compensating Equitable Life pensioners.
There is no question but that the Government will have to do that, because the ombudsman has ruled against them. Unless they totally ignore what the ombudsman has said, why on earth was a small additional provision not included in today's estimate to cover the potential cost of compensating Equitable Life pensioners? If I were an Equitable Life policyholder, which I am not, I would be outraged that the Government are providing £42.2 billion of taxpayers' money to prop up the banking system while dragging their feet in supporting pensioners whom the ombudsman has already ruled should be compensated. I would be grateful if the Government could explain that omission.
Let me turn to the detail of what we are considering, which is the central Government supply estimate and the documentation relating to it. This large document—the placing and open offer agreement—is what the Government have supplied as background reading, and it was great fun to spend many hours reading through it. It is about spending £37 billion of our money. I have looked at many share subscription agreements in the past, but the ones in this document seem to have so many holes in them that we could spend the rest of day going through each one. I am not going to do that, but I want to address the main points that we are considering today.
I should point out that we are talking about only three banks, not the whole banking system. In fact, in his statement on
It is extraordinary that the preference share subscription agreements could be so different and written in such a different style. I note that the US Government's proposals, issued overnight, are common for all banks, and I am amazed that the same is not true for the three banks that we are talking about. I am not talking about just the details of the dividend rates; I am talking about the style and manner in which the agreements are written. One document refers to a floating dividend rate plus LIBOR, another to a floating dividend rate of LIBOR plus 7 per cent. They may refer to the same thing, but they are written totally differently.
I have personal experience of dealing with a Government preference share issue. It was many years ago, when I was running a small, expanding manufacturing company, but the principle is the same. In my case, we were helping to expand a new manufacturing company, but the issue could equally have been to support the working capital of an existing company. And we are seeing exactly the same principle today. My case involved £100,000—if we add a few noughts, we can compare it with what we are dealing with today—and it involved non-voting, fixed-rate, cumulative, redeemable preference shares. Preference shares are ranked more highly than ordinary shares, so if there is a liquidation, the holders of those shares get their money back before the ordinary shareholders. However, the holders of preference shares rank lower than creditors, so they in fact become the capital of the company.
In the supplementary estimate that we are considering today, we are told very little about the terms involved. We have to look behind it to the supporting documents, which are not entirely clear. If I make errors when I talk about what I think the Government are proposing, it is because we have not had a clear, proper explanation of exactly what they are doing.
In the case of a cumulative preference dividend, if a company cannot pay a dividend, it does not have to do so. However, when its trading recovers, the dividend is collected in subsequent years. For example, a return of 5 per cent. might not be paid in year one or year two, but a return of 15 per cent. would be paid in year three. That dividend would be paid before anything was paid to the common shareholders. Why have the Government not made the preference share agreements cumulative? According to the documents, they are non-cumulative. There is therefore a possibility of there being no return at all for the taxpayer from the preference shares.
In my case, the preference share dividend was paid, the shares were redeemed and the company flourished. I would hope that that is the outcome that we want from the banks. However, the Government have done some extraordinary things. First, there is the non-cumulative aspect of the preference dividend. Secondly, the notional preference dividend is an extraordinary 12 per cent., at least until 2013. After that date, it splits, and Lloyds TSB will pay 7 per cent. on the preference dividend, while HBOS and RBS will pay that amount plus LIBOR. I do not understand how that will work if the Government are planning to put Lloyds TSB and HBOS together as one company. That is not explained in any of the documents or in the supplementary estimate. The rate of inflation is 5.2 per cent. at the moment. I could understand the Government setting the notional preference dividend at 12 per cent. if they thought that there was going to be an explosion in inflation. At this stage, however, it appears punitive, and it will prevent the company from making any preference share dividends. In the United States, the Government have come up with a 5 per cent. preference dividend.
Another issue that concerns me greatly is the restriction on when the preference shares can be redeemed. They cannot be redeemed before 2013, plus five years from the date of issue plus one day. That makes them a medium-term investment. The decision whether to pay a return on them is entirely a matter of discretion for the board of directors. That is made clear in the documents. If I were one of the directors, I would not declare any dividend before 2013, given that the directors would not be allowed to pay an ordinary dividend until all the preference shares had been redeemed, and that they could not redeem the preference shares until at least that date. If they repaid the preference shares at that point, there would be only one dividend payment. If that were divided by the minimum number of years that the preference shares had been held, the rate of return for the taxpayer on the billions of pounds invested in those preference shares would be 1.4 per cent.
We have already seen outrage in the financial press at the idea of preventing the banks from paying ordinary dividends until the preference shares have been redeemed. I cannot imagine why people would want to invest in banks that they know cannot pay a dividend until at least 2013, and possibly much later, when there are at least five other banks in which they could invest. That is a huge error on the part of the Government. They do not seem to have thought this through, and it is their rush to take action that concerns me most. I would have liked them to say that they would look at the provisions for preference shares, think the matter over in more detail and come back to us early next week with a properly thought-out motion that we could discuss before debating the supplementary out-of-turn estimate. The problem with agreeing to the estimate today is that a Bill was automatically generated under the motion passed last night on which we are allowed no debate whatever. We will be allowed only to vote on it.
My suggestion to the Government is that they follow the American example of having a much lower preference dividend rate, and that they allow dividends on the ordinary shares. Let us face it, we are going to be huge holders of the ordinary shares, and such a provision would get a return for the taxpayer right away.
I want to make a couple of points relating to the massive common share issue, which is totally new and has had no parliamentary scrutiny. Originally, we were told that Lloyds TSB, a strong bank, was to take over HBOS, so that there could be a market solution to HBOS's problem. We were told that we were going to throw away the competition laws to allow that to take place. I am not sure that that was the right thing to do at the time, but the principle was that the two banks were being put together to provide a market solution. I really want the Government to explain why Lloyds TSB is not being allowed to go its own way, like Barclays and the others, now that we have nationalisation—or part-nationalisation—on a massive scale. It is a much stronger bank. We would then have only two banks in part-nationalisation. I have seen no ministerial statement, either in the House or in public, on that issue.
Finally, I turn to the supplementary estimate that we are being asked to consider today. There has been an enormous amount of talk across the Dispatch Box about the terms and conditions that would be put on these companies. I have hunted high and low through the documents to find out what kind of controls are to be placed on the directors. When I was in business and a mere £100,000 was being invested, we had a thick booklet to tell us what we could and could not do. Our emoluments were controlled. Only two pages among the several hundred pages of documents before us deal with this issue. They state that the directors cannot have a cash bonus this year, but they can have a bonus in stock. Most bonuses are in stock anyway, so no control is being placed on these greedy bankers about whom there has been so much fuss. The Government might be trying to hide the fact away, but there is nothing in the documents that will control those emoluments. That is an extraordinary omission.
At the same time, however, the documents set out a wholly unacceptable condition—my hon. Friend the Member for South-West Hertfordshire was right to correct me on this earlier. They state that, for three years, the level of lending must be at the 2007 level—the very time when too much lending was going on. The Government are imposing only very limited conditions on the directors, yet they are imposing a condition on the banks that is completely wrong for them and for the country. There are no time scales on these investments. The documents just have blank spaces where the time scales are supposed to be. They say 20—something. This week, we have been debating important issues, but not ones of fundamental significance, yet we are being asked today in a three-hour debate to approve a blank cheque for £42.2 billion. That is just plain wrong.
I strongly support bank recapitalisation. We therefore have no choice but to support the estimate.
Before I go on to discuss that, I want to allude to an issue raised in the debate on the Banking Bill yesterday. A number of people, including the press, have raised with me the allegation of Mr. Todd, who I see in his place, that my article in The Times of
When I heard about the issue this morning, I was at first flattered that someone had taken the trouble to read my article, but I have now realised that, given the calls that I have had, I cannot let the matter rest. The hon. Member for South Derbyshire suggested that my article was derived directly from the briefing, and I am told that he has not been the only one to make the point, as a number of press briefings to the same effect have come to my attention.
I want to make it clear that the allegation is complete nonsense. I had no knowledge of any secret briefings between the shadow Chancellor and the Bank, although I have subsequently learned that a meeting did take place on
I wrote the first draft of my article in mid-September, immediately after the decision taken by Paulson to let Lehman go bust. In view of that decision, I concluded that a general collapse in trust between banks about each other's solvency was very likely and that bank recapitalisation would probably be an essential part of the solution. I discussed the article with The Times quite early on and a first draft was sent well before the
I would like to make it clear, first, that I entirely accepted the assurances given by the shadow Chancellor in yesterday's debate about the lack of provenance of any linkage between the article and his briefings. Secondly, I accept that it is entirely appropriate for the Governor to brief the Opposition in confidence; I certainly intended to cast no aspersions and I do not think that I expressed any to the effect that doing so would be wrong. It is, as I say, entirely right and appropriate. Thirdly, I withdraw, of course, any implication that Mr. Tyrie might have been involved in any deep-laid plot. My reference was focused on the issue of the requirement for confidentiality in the preparation of a complex package of this sort; it was not an attempt to link the hon. Gentleman with the issue.
I am very grateful for those remarks and I appreciate the hon. Gentleman's alerting me earlier today of his intention to make that statement.
We are being asked to stump up an unprecedented sum to bail out the banks and shore up the financial system. I strongly support the main elements of the bail-out; I just regret that the Government did not get to it earlier. Judging by the thinness of the Chancellor's first statement, which was clearly no more than a holding operation, it is likely that Ministers had not undertaken adequate contingency planning for bank recapitalisation over the last few weeks and months. Much of that work should have been done after the failure of Northern Rock. It should have been clear then that something further might be required. Such work should have been at an advanced stage by the time of the Lehman collapse. History will, of course, tell us what Ministers were doing and what was really said, done and commissioned during that period. I am sure that officials were hard on the case; the question is whether the Chancellor and the Prime Minister realised the gravity of the situation.
In my view, the bank recapitalisation plan should have come as soon as solvency risk grew sharply between the banks and they more or less completely stopped lending to one another. That was almost a month ago, and the delay may prove to have been very costly, not only in lost confidence in parts of the financial system, but in costs to the real economy.
What of the package that we are being asked to fund today? First, we need more information. The US Administration got out of the traps a few days later than us with their bank recapitalisation package, and they appear already to have provided more detail about their rescue than has our Treasury. My hon. Friend Mr. Bone alluded to this issue, and I have picked up information about the details of the package as much from Lloyds bank press releases as from the Government. From that, I learned about the terms of the preference shares, which my hon. Friend also mentioned. I agree with him that their terms are draconian. The coupon is 12 per cent. and it is not tax-deductible; nor can it be redeemed for five years. I shall not comment on whether I believe that that is right in the present context, as it would need a lot more information and thought before doing so, but it is certainly a matter that I would ask the Government urgently to review.
My general point is that Parliament and the informed public are not in a position to conduct the necessary form of scrutiny because the information is, in many cases, simply not available. I realise that it is difficult for the Treasury to put such information into the public domain on the hoof, as there is always the risk of being picked up for any mistakes in what is published. However, there is a case for getting on with it and getting it into the public domain as fast as possible, even if, in some cases, what is put out is work in progress. We also need to know more about the competition exemption. I strongly agree with what my hon. Friend the Member for Wellingborough said about that earlier. I now have grave doubts about the retention of a competition exemption for banks in which the Government have sizeable stakes.
I do not want to go on for too long, but I want to make a few remarks, which may perhaps collectively form a plea for a sense of perspective over what we have just been through. There are about half a dozen points to be made.
My first point is about the nature of prosperity. We need to keep our focus on the source of the prosperity that we have enjoyed. Over the last 25 years, we have been through, arguably, the greatest increase in welfare and freedom that the world has ever seen. Globalised capital markets played a crucial role in securing that prosperity, as, of course, did the collapse of socialist economics. It is extremely important that we do not lose sight of that in reacting to the crisis.
A second related point is that we really must not end up blaming all global financial instruments as somehow pernicious. Many of those instruments have not been responsible for the crisis; indeed, they helped to spread the risk and reduce systemic dangers. It would be an absolute disaster if, in response to the crisis, we tried to return to segmented global financial markets.
Thirdly, we must not draw the wrong conclusions from the fact that we face a sharp downturn and possibly, I fear, a recession. We will, of course, have a cyclical downturn and it could be large, but it was a big mistake to imagine that we could abolish the business cycle. I recall the Prime Minister saying that time and again when he was Chancellor about a decade ago. I was not present for Prime Minister's Question Time earlier, but I gather that this issue was raised. The Prime Minister was charged with saying 180 times—in this House alone—that he would put an end to boom and bust. It is not just that he was wrong, but that saying it caused damage because it gave people, businesses and financial markets a false sense of security. That applied to millions of people who take their own individual financial decisions, who were encouraged to take on even greater risk than they would have done otherwise. The truth is that, despite the spilling of several centuries' worth of ink on the subject, as far as we know at the moment the business cycle is ineradicable, and any attempt to set a policy to remove it is bound to fail.
My fourth point concerns regulation. There will be calls from all sides for more regulation, re-regulation and heavier regulation, but I feel that we must avoid a panic reaction. I was struck by what Congressman Oxley said when he came to London a couple of years ago. As was widely reported, including in the Financial Times, he said that the Sarbanes-Oxley package had been an overreaction, and that those responsible were now repenting parts of it at their leisure. That package probably did not reduce risk very much, and certainly did not reduce it in the way intended. What it did was transfer a good deal of listing to the United Kingdom and other markets around the world.
I have two or three more points to make about regulation. There has certainly been a failure of transparency in the pricing of risk. This may appear to be a recondite issue, but accounting standards definitely need to be tightened. There has been far too much managerial discretion on the part of banks in regard to how to value their assets. We shall need to return to that subject on another occasion, as there is no point in elaborating on it now, and in any event it is not clear exactly what needs to be done; all that is clear is that we should not continue as we are.
Then there is the regulation imposed by the Financial Standards Authority in other ways. We must be extremely careful not to allow ourselves to be drawn into thinking that prodding the FSA to become a more vigorous policeman will necessarily afford us better protection from this type of risk. The FSA's periodic investigations of firms are akin to compulsory risk management consultancy activity, and, like any consultant, its work is only as good as the information that is given to it. It always knows less about the companies that it investigates than the management of the companies themselves, and in any case the work that it does can easily become just a business cost: in other words, the consumer pays for it but gains very little protection. I make no specific recommendation, apart from that we should be very cautious about demanding far more of the FSA in terms of risk-based regulation of individual firms in response to this crisis.
I think there is a case for strengthening boards, especially those of financial companies, in a number of ways. For example, could the combined code be strengthened to trigger greater shareholder activism, particularly to secure the appointment of more truly independent-minded non-executive directors? I think there are far too many comfort-zone appointments of "non-execs". It is partly their job to pick up the growth of this kind of risk on the balance sheet. We have all been appalled by a number of the financial instruments that have found their way into the asset base of banks. The sad truth is that many, perhaps in some cases all, of the directors on the boards of huge institutions who make the decisions have failed to ask the right questions about the content of instruments such as collateralised debt obligations and special purpose vehicles. It is very difficult for them to do their job, but we must have people who are prepared to ask tough questions of management about such instruments.
The Government have improved depositor protection, and I think that they were right to respond in the way in which they did. They were, I think, also right to be cautious about blanket protection for deposits, whatever their size, certainly at this stage in the development of what I hope will now become a containable crisis. If all risk is removed, customers will simply chase the highest yield, which creates a form of moral hazard. That is pernicious in the long term. Such a blanket commitment would also be extremely difficult to reverse should a future Government wish to take such action, as I think they probably would.
I want to say a little about the monitoring of systemic risk, which clearly failed in the run-up to this crisis. It is not just banks that missed what was on their balance sheets; the Government, and the structure of systemic risk management that they introduced, have also failed. The institutional arrangements that were established as a consequence of Bank of England independence were clearly seriously deficient. The tripartite committee was created as a residual body, as an afterthought after the decision to strip the Bank of England of its regulatory function had been taken.
How should we deal with the systemic risk issue? During the Committee stage of the Bill that became the Bank of England Act 1998, I observed that it was crucial for the financial markets and the wider public to see one person in charge and leading the response to a systemic crisis. The creation of the tripartite committee, however, meant the creation of two independent statutory bodies with their own vested interests to deploy, plus, of course, the Government. At the time of the Northern Rock crisis, we saw those institutions initially minding their own backs and guarding their turf, rather than working collectively to reach a common position. We have now arrived at a point at which we have clear leadership. It is belated—it has taken 14 months—but thank goodness we have it. I believe that the tripartite arrangements must be altered to leave one person ultimately and clearly in charge of systemic risk management, and in my view that person should be the Chancellor of the Exchequer, accountable to this place.
Let me end with a point that may seem out of place at the moment, but to which we shall all have to turn our attention in the months and years ahead as a consequence of the passing of this estimate and the banks' partial nationalisation, as we are now told to call it. That means mentioning the word "privatisation". A key job for what I hope and expect will be a Conservative Government in a few years' time will be to get rid of these shareholdings: to offload them and privatise the banks. It is essential that that task is accomplished as quickly as is reasonably possible. If we do not take such action, the losers from the retention of these state-influenced banks will be customers, as a consequence of higher bank charges, and the whole economy, as a consequence of a less efficient banking sector than would otherwise exist.
Even as the Government put this package together, I very much hope that they are giving deep thought to how to unravel it in a systematic and intelligent way. They must have in mind all the time where we want to end up. We do not want to end up where we are as a result of the package; we want to end up somewhere very different.
We have narrowly avoided disaster in the last few days and weeks, but the fact that we have narrowly avoided it should not deflect our attention from the fact that we have been faced with a very serious risk indeed. We should, of course, support this rescue plan, but we are only in the foothills of learning the lessons that will flow from the events of the past few weeks and months. If I am to leave the House with one thought, it is that I am very confident that panic overreaction in the regulatory field, and in the other fields to which I have alluded, would be the wrong response.
Thank you, Madam Deputy Speaker, for calling me to speak in this supplementary estimate debate. I had a good crack at this subject in yesterday afternoon's debate on the Banking Bill, so I shall keep my remarks short and concise, which I am sure will come as a great relief to you.
That is very rude of my hon. Friend.
The first principle is that the Government have absolutely no money whatever. All money that the Government spend ultimately belongs to the taxpayer; after all, money is raised from the taxpayer. Today, we are looking at a further £42 billion being placed on the public sector borrowing requirement. In recent days, we have moved effortlessly from tens of billions of pounds to trillions, so £42 billion may not sound like a lot of money any more. It sounded like a lot of money three months ago, but now we are in the world of trillions of pounds. It is, however, a huge sum of money, and eventually—sooner or later—it will have to be paid back by the taxpayer.
The sum is, of course, not just the £42 billion of today; a huge amount of borrowing is currently going on outside this £42 billion. Indeed, it is highly likely that by the end of this financial year the Government will have borrowed more than £100 billion, and next year that figure may be exceeded by many tens of billions of pounds. That could mean that next year one in every five pounds spent by Government is borrowed. Clearly, that is not a sustainable position in the long term, and even in the short term it will put our public finances under huge stress for many years to come.
I have had the benefit of the good times. I am 41; I have prospered, my house prices have gone up and my assets have risen in value—admittedly, they have come down a bit in the past few months, but I will have to live with that. However, what worries me most is that this debt we are signing off today—and I am sure we will be called back on numerous occasions over the next few months to sign off even more debt—will be paid back by my children, and there is every possibility that it will be paid back by my grandchildren. Therefore, we are saddling future generations with a huge burden at a time when they themselves will probably have to start paying for things such as their own university education, long-term care and certain drugs not provided by the NHS. Let us be in no doubt, therefore, that what we are doing today will have long-term ramifications for many years and decades to come.
I want briefly to focus on the preferential shares the Government have taken in banks. The Government are charging a hefty return of 12 per cent. interest per year. We could say, "Isn't that brilliant? The banks are getting it taken to them. They are going to get screwed down. They will have to come up with that 12 per cent. My word, they deserve it." However, we all know that, ultimately, it is the customers of these banks who will pay the 12 per cent. People on very limited earnings will face increased bank charges, and will get letters that are even more threatening when they go into an unauthorised overdraft, and will receive phone calls saying, "Your mortgage is about to change rate, and, by the way, you were on 5.5 per cent., but you are now going to 8 per cent." Good, profitable businesses will get phone calls saying, "By the way, we are doubling"—or even trebling—"your interest rate." These measures will hurt immensely. All these routes lead back to the poor bloody infantry—the taxpayer. There is no free ride here; the taxpayer is funding this.
As I mentioned yesterday, my main concern is that over the next year or two taxes on the very poorest will have to increase to fund this. Our tax burden will go up across the piece, but those in the worst position to pay the increase will carry an unfair burden. There are many people who earn at or just above the minimum wage, and who do not have bank accounts, savings or mortgages. It is true that we are safeguarding the savings of those lucky enough to have them and the situation of those with mortgages, but there will be a huge transfer of wealth, in the form of taxes, from people who have none of those things. They, too, will be caught up in this terrible web of debt and payment, and that is a great shame.
Will my hon. Friend comment on the fact that it is the very people he is talking about—those who have not enjoyed the fruits of the Brown boom—who will pay the price? How much greater might their taxes be in future, while those of great wealth have been most protected?
My hon. Friend makes a very good point. People on every income scale will pay more tax, but those at the very bottom are least capable of doing so. They are already living week by week, and sometimes day by day, waiting for the next pay cheque. This will be a huge burden on them, and it is a burden that all parties in this House have a duty to ease sooner rather than later.
The taxpayer will be paying more income tax, but there is also a great danger, owing to the fact that the Icelandic banks went bust, that the taxpayer will also pay more council tax. We really must wonder what the rating agencies were doing to earn their money. In Hertfordshire, £28 million of taxpayers' money has potentially been lost as a result of the failings of the Icelandic banks, and I know that Hertfordshire took advice from rating agencies and that the agencies said, "Well, we did downgrade the Icelandic banks," but they downgraded them from AAA ratings to AA ratings. As local authorities seek to rebuild their reserves, that will, of course, result in either work not being done in the affected counties or the tax base of council tax payers having to rise in the short to medium term. This is another way in which taxpayers will be forced to pay for regulatory failings and the failings of this Government.
Members should not be in any doubt as we sign off this £42.2 billion that a huge amount of pain is in store over the next few years for a fair number of people. I wish that was not going to be the case, but it is. Good businesses will go to the wall; families will lose their homes; men and women are going to lose their jobs. There will be a huge, and somewhat unnecessary, amount of pain.
It is hugely refreshing that we are having this debate about the Government's record and the failings of the regulatory system and the rating agencies, because that is the very essence of democracy. I was amazed that a number of colleagues and commentators in the newspapers sneered at what went on in the House of Representatives a few weeks ago, because that was the essence of democracy, too—the Executive were being held to account. At a time when Members of Parliament are held in such low esteem, we must not let these opportunities to hold the Executive to account pass. I am therefore disappointed that so few colleagues are present to take advantage of this opportunity—and I was also disappointed that so few were present to take advantage of the opportunity afforded by yesterday's debate on the Banking Bill.
We have heard a lot of talk about consensus politics, but I do not like consensus politics because we live in a multi-party democracy. If we want consensus politics, we should go and live in China. What we want is constructive politics, which centres on robust debate and forensic examination of what is before the House. I therefore ask for less consensus politics and more robust and constructive politics because, after all, that is why we are sent here by our constituents. We must rise to the challenge at this important moment in our history.
It is a pleasure to follow the typically thoughtful contribution of Mr. Tyrie and that of Mr. Walker. I challenge the latter on only one point. He says it is inevitable that those on the lowest incomes will suffer most from future taxes, but that is a political and fiscal decision for us in this House to take. It is my firm belief that those who can least afford it should not bear the weight of the measures that we are putting in place; it should be borne by those who have the finances to pay their fair share towards the running of this country.
I am extremely grateful. My hon. Friend Mr. Walker was absolutely right to say that the burden will fall on those with the lowest incomes. It is difficult to structure our fiscal policy so as to protect them, because at the moment 40 per cent. of the largest single tax take, income tax, is paid by 5 per cent. of the people. In a globalised world in which the super-rich can easily leave the country, it will be those at the bottom of our society who are left to pick up the tab. That is why it is so important that Governments do not repeat the gross errors made by this one, which have helped to put us in the position we are in.
The hon. Gentleman tempts me into a debate that is for another day, but I hope I have made my views clear.
I welcome the comments of Mr. Bone. I do not agree with everything he said, and he would not expect me to, but his most important point was that this is the first opportunity that Back Benchers such as myself have had to say anything about the biggest international and national crisis that the House has had to cope with for many a long year, and that a debate such as this is an inadequate vehicle for that purpose.
I would go further: I have said more than once how badly the House deals with matters of supply, which some would say is our prime purpose. It is why we are sent to this House, yet we are unable properly to scrutinise Government expenditure. I suppose that we do a reasonable job of scrutinising the raising of revenue, but expenditure is largely a matter of the House rubber-stamping estimates during wholly inadequate estimates day debates. If the House is serious about holding the Government to account for the vast amount of taxpayers' money that they spend, it needs to consider major reform of that procedure.
As the hon. Member for Broxbourne said, it is extraordinary that so few right hon. and hon. Members have felt it appropriate to come to debate the spending of £42 billion. They will come and debate other things, but £42 billion? "Oh, well, that's nothing important, is it? That's not why we're sent to Parliament. We've got far more important things to do." Well, I disagree; I think it is exactly why we are here.
Various hon. Members have mentioned the difference between how we debate these matters and the American system. There is much to criticise about American governmental and administrative structures, but it is entirely misplaced to argue, as some have, that it was wrong for the House of Representatives to debate at length and in detail the package that was put to it a week or two ago. Whether or not we agree with the views expressed, it gave those representatives the opportunity to express the views of their constituents, which are easy to forget in the desire to establish consensus. That is not an unreasonable or incorrect impulse, but there seems to be a desire to demonstrate how clever we all are about matters economic and financial. I am certainly not clever about them. My hon. Friend Dr. Cable is, which is why I trust implicitly the views he has expressed in recent weeks. I claim no expertise, but I do claim a right to speak up for my constituents and discuss the concerns that they have expressed to me. I shall therefore talk about those concerns.
I am not against the step that we have reluctantly taken to recapitalise the banks through the mechanism that has been set up. It raises enormous questions, of course, and at one stage I was worried that there would be an almost free injection of cash into the banking sector. I could not have countenanced that without at least some return for the taxpayer. I am satisfied that that is at least partly covered in the Government's proposals, but the people in our communities who examine what the House and the Government are doing have real concerns that have perhaps not yet been satisfactorily met.
Our constituents have suspended disbelief at the moment. They accept that there is an enormous crisis. It was often referred to last week as "staring into the abyss", but a more apt metaphor would be the mediaeval maps of the world on which there would be a vague bit around the edge, where would be written "Here be dragons". Nobody knew quite what would happen if they sailed off the known world into the areas where the dragons were assumed to lie in wait. We do not even know the nature of the dragons, but it was an extremely scary place to be.
I hope that what has happened in the past week or so, in this country and internationally, will have allayed some fears and staved off some of the dangers, but there is still genuine concern. I think that people are beginning to realise just how important the whole process has become to their real lives and the real economy. The interconnection was not immediately apparent. People in Somerset do not lie awake worrying about merchant bankers. If the merchant banking system were to crash suddenly, it would not cause many tears among my constituents until they realised the consequences for real jobs and businesses and real people's private finances.
I received a tragic letter from a constituent about events a long way away, in the United States. Sometimes we wonder whether we worry unduly about events in the economy and politics of the US, but the letter was from a 94-year-old lady in a nursing home, all of whose savings had been invested without her positive agreement—it was done by one of those advisers who manage such things—in Lehman Brothers. When she wrote to me, she had no idea whether she had anything at all left to ensure that she would be looked after in her old age. That shows the real interconnection between events that may seem distant but actually have direct consequences in our communities.
The big question that my constituents and, I am sure, those of other hon. Members are asking is where the conditionality is. They say, "We are putting into play vast amounts of our money, so what do we get out of it, other than stability?" Stability is a perfectly good end in itself, but what else do they get? One issue that has been raised with me many times is the culpability of those who took risks and played fast and loose, and whether there will be a degree of retribution. Will those people get their come-uppance?
It is unfortunate to use another north American example, but when the chief executive officer of Lehman Brothers was before a congressional committee, he was taxed on why he was walking away from the crash with—what was it?—$500 million. People do not understand why somebody who appears to have been criminally irresponsible with their money gets to keep $500 million. That sticks in the craw of many people in this country; they do not like the idea of a one-way bet. They do not like the idea that someone can win only if they have the money to pay the entrance fee to these casinos that we call the City, because if they find themselves losing, somebody else pays the bill. The view that this is a one-way bet whereby people can only win and cannot lose offends not only the Chapel sensitivities of people in Somerset but ordinary British people, and we must be careful not to create that impression.
People are worried about the vulnerability of the money that is being invested by the Government. They want to know that it is not simply being poured down the drain and that there will be a return on the investment. I look at what is proposed, but I am not sufficiently expert to be convinced that there is a lock on those investments that will ensure a return for the taxpayer—I hope that there is. Most people have to accept at face value the assurances that they are given, but, not too far away, there will be a reckoning when we will see whether there is such a return.
People want to see equity between different interests and between different sectors, because it cannot be right that the Government are interested, for strategic reasons, in propping up only one industry and will allow others to fall. That takes us into tremendous conundrums of national policy: are we then to intervene in every failing company in every failing sector, or are some sectors considered more equal than others? I do not know the answer to that, but I know that the question will be asked. There have been recent company failures in my constituency. Usually the companies involved are not household names. They are not big companies that attract the headlines, but for the people who find themselves redundant as a result of such failures, it is every bit as important as the collapse of some big name in the City.
That brings me to my next concern. Unemployment is rising, and we have explored that over the past couple of days. I remember when I was first elected, the town of Frome, which I have represented for nearly 25 years in one capacity or another, had a 17 per cent. unemployment rate—it was crippling. The town was in deep and long-term recession. Over recent years, the town has been blessed with almost zero unemployment—almost full employment. It has been very good for the town. There have been hiccups along the way: companies such as Cuprinol and Coloroll, the carpet company, both of which people will have heard of, lost their way, but we recovered from that because the underlying local economy has been strong. Now, unemployment is creeping up again. Although the increase is not huge in empirical terms, in proportional terms we are talking about quite a high percentage. What worries people in rural areas—areas off the main communications system—is how we win those jobs back in a competitive environment if there is a national recession.
I am not satisfied that we have right even the basics for dealing with failing companies. Only this Saturday, a gentleman who had just been made unemployed—along with a number of his colleagues—came to my constituency surgery. He had not been paid his last month's wages, but the company was carrying on trading. It was doing so despite failing to pay these employees for their last month—they were owed that money. That is not a unique experience, but it is wrong; it is robbery and theft from the people who can least afford it, and I object to it.
We talk a lot about the need to refloat the business economy, particularly small and medium-sized businesses, which are so dependent on bank loans in order to maintain their business. I have yet to see clearly that the steps that have been taken have had the desired effect, although I have faith that they will do so. A big risk is involved over the next few months. I supported the Bank rate reduction, and my hon. Friend the Member for Twickenham had called for it, although he would perhaps have preferred a slightly more aggressive reduction. However, if it is not even passed on to those who have loans with a bank in Government ownership, why should we trust that other banks will pass it on? What mechanism is in place to ensure that banks make business loans both available and affordable, rather than merely to exhort them to do so?
Housing and household repossessions also need to be addressed. The biggest growth industry in Somerset is in the courts dealing with repossession orders: there are not enough people to hear the repossession cases in order to clear the backlog, and the position is worrying. I have been warning for many years about the situation in my constituency, which has one of the country's highest ratios between average house price and average earnings. The fact that people are paying such large multiples of their average wage to keep a roof over their head is unsustainable—indeed, many people cannot have a roof over their head, at least not in the village or small town in which they were brought up.
Foreclosures are now occurring, and it is not clear to me that what the Government are proposing and what we are being asked to support will reduce them. Measures could be taken to do so: we could offer to take equity in houses in order to keep people in possession of their own homes. There are ways that the banks, building societies and others could make a real difference, but it is not clear that such measures are included in the proposals before us.
Mention has been made of local government and the difficult position that so many councils face in respect of their investments in Iceland. I looked at the list of such councils, and I could see no discernible political difference between the councils that had invested in Icelandic banks and those that had not done so. Many of the local authorities involved are considered to be the most astute in the country at financial management, so something has gone wrong with the advice they were given. I find it difficult to blame councillors of any political persuasion on this matter, unless I have evidence that they acted rashly. I suspect that most councillors will have had no part in the decision-making process. When I led a council, we were given regular reports on the investments of our pension fund, but they were in generic terms; such reports dealt with the sectors rather than the day-to-day management of investments. I would be worried if elected members had direct control of the route by which investments were made. Although I do not attach blame directly to councillors—or even to councils, provided that they were shown to have taken proper precautions—we must do something to get the assets back.
It is very important to get those assets back, despite the fact that, compared with the turnover of the councils, the investments are relatively small. The figures sound huge when they are quoted down the pub, but they are only a small part of the annual spend of large county authorities. However, the sums are significant and need to be returned. The Government and the Local Government Association—and anybody else who can help—need to be fully engaged in ensuring the return of those assets, because if they are not returned, the money cannot be used for investment in the local community, be that in the direct provision of services or in long-term capital investment and so on. Thus, the return of those assets is an imperative.
Does the hon. Gentleman agree that the Financial Secretary owes the House an explanation of the guidance given to local authorities so that the House and the British people can better understand how local authorities, police authorities and others invested so much public money in Icelandic banks?
That is right. We need to look at the work of the rating agencies as a whole, because if the advice that they were giving was so inadequate they are not carrying out their primary function. We should be aware of that and should perhaps take with a pinch of salt any advice that they proffer in the future.
I am listening with great interest to the hon. Gentleman's very powerful speech. I did not touch on this issue in my speech, but does he think that the out-of-turn supplementary estimate should have a provision equivalent to the amount of money that local government has lost to Iceland, in case it is necessary to resort to that? As he said, it is not the fault of individual councils that such things have happened—it is just pot luck.
It is difficult to answer that, because I want to see that money returned from where it is sitting. I do not want to pre-empt the argument and, to an extent, if we made provision for that money as a bad debt we would be pre-empting the position. I urge the Government and everybody else involved to show the utmost vigour in ensuring that those assets are returned because they are of such value to local communities.
I want to conclude, but let me deal with two more areas of concern. One has been mentioned several times, but I shall repeat it. I fully expected in the recess that the first thing we would come back to would be a statement about how the Government would respond to the ombudsman's report on Equitable Life. In fact, I said in writing to my constituents that although we did not receive such a statement before the recess, we would of course hear one in October and that the Government would tell us how they would respond and that they would make appropriate recompense to those people who were so badly let down by the regulatory authorities. We still need that statement. We need it even more urgently because, quite rightly, people will ask how such measures can be taken for some people while in the case of the people affected by Equitable Life, who have a clear independent arbiter's review that shows they have been let down by the regulatory authorities, the matter is apparently not even to be mentioned, let alone dealt with. That is a matter of urgency.
The other statement I fully expected to hear this week was an explanation of the details of the insulation grants announced by the Prime Minister over the recess. It might be said that that issue is very far removed from the supplementary estimate, but it is not. The single biggest financial problem faced by many of my constituents is how to heat their homes over the winter. Telling my constituents that they can have grants for cavity wall insulation, when most people have houses with solid walls because it is a country area and the houses are built of rubble stone, is not an adequate response to the huge increase in heating costs. That increase in costs is a particular problem with heating oil, which is another difficulty in rural areas that perhaps does not apply in some suburban and urban areas. Those old-age pensioners who will see the value of their investments, if they have them, reduced and are on a fixed income will find it very difficult to get through the winter.
When this is all over—when the war is over—big questions need to be asked about the regulatory process. I agree that we do not want heavy-handed regulation, but we want regulation that works and that is effective. It is clear that we have not had that. We want to see financial products that are properly transparent. I cannot begin to understand the intricacies of some of the financial products that have been marketed over recent years. We seem to be piling one bet on another on another until we reach the point where we cannot possibly have any trail of understanding that allows people to know what exactly they are investing in. People take a pride in the complications that they have introduced into financial products. It is all very clever, and I am sure it looks good when calculating the bonuses in the short-term financial environment, but it is not good business. It is not sound business, but that is what banks ought to be engaged in.
I agree absolutely with the point made by the hon. Member for Chichester about the role of boards of directors and how they should be strengthened. We all know that some people have 25, 26 or 27 directorships, but they are not doing justice to their fiduciary role as directors. They cannot be. One cannot devote that many hours in each day to the proper care and governance of companies. We need a much clearer idea of the role of directors, and in particular the role of non-executive directors in asking the difficult questions.
Finally, I do not think that the point about the complete failure of audit has been made sufficiently. It is incredible that we have auditing systems across the country that are so incompetent in advising shareholders, potential investors and anybody else on the strengths or otherwise of a company's position, including the position of the banks. My suspicion is that that has something to do with the conglomeration into the big three—or big four, or however many there are—large auditing firms, which seem to be unhealthily close to the companies that they audit. What I want to emerge from the situation is a hard look at the process of audit and at the strength of the auditing system. Perhaps rather than Chinese walls, there could be some real separation between auditors and the companies that they audit so that candid advice is available about the strength of a company's balance sheet and its position. Banks, building societies and financial institutions are meant to be the bedrock of our economy, and we are having this debate today and proposing to spend £42 billion because we cannot live without sound financial institutions. We have allowed them to rot from inside, and that is not good for the British economy.
I apologise for not being here at the beginning of the debate. I share colleagues' disappointment about the number of Members who are present for such an important debate.
We have been lucky in the quality of the speeches we have heard—that has certainly been the case since I entered the Chamber. Mr. Heath and my hon. Friends the Members for Wellingborough (Mr. Bone), for Chichester (Mr. Tyrie), and for Broxbourne (Mr. Walker) made thoughtful speeches, and all raised many questions. We look to the Financial Secretary, who is an experienced Minister and has served on the Treasury Bench before, for more answers than we received at Prime Minister's questions earlier today—I thought that the failure to answer some of the key points that were put was worrying. There are many questions to which we need answers this afternoon.
One key question being asked is about the pledge to return to the lending levels of 2007 for the banks in which the Government take stakes. Perhaps that was just an off-the-cuff remark that was meant to reassure people that when the banks were taken over the Government would ensure that money flowed. Members have asked that question already, but we have had no answer from Ministers. We can all accept that there has been a deep crisis and that Ministers have struggled, at times, to control their panic and that of the markets. However, given the importance of the messages going out to markets, we deserve an explanation from the Financial Secretary of what the promise of the return to 2007 lending levels means. Perhaps it would be more sensible if the Financial Secretary were to alter that promise this afternoon and give us a clearer steer on the issue.
There are also questions about the time scale of the vast public investment going into ensuring our banks' liquidity. We all recognise that it is difficult for the Minister to give any tight promises today, but I hope that he will give my constituents some reassurance. They have seen inordinately large sums go into the City of London, and they need some idea of when the money will be returned to them.
Many hon. Members have remarked on the fact that it will be those in our society with least who will find themselves paying for the expense incurred for so many years to come. You, Mr. Deputy Speaker, will be aware that this country only in the past few years finally paid off its debts to the US incurred under the lend-lease arrangements following the second world war. My constituents want to hear from the Minister about the extent and time scale of the moneys committed by the Government in the past fortnight. Are their children going to be paying additional taxes to pay for the bail-out, or their children's children? We need reassurance from the Minister about that.
I spent Saturday morning and afternoon knocking on doors in Thorngumbald in my constituency. It is a village on the A1033 east of Hull, and people there are a bit like the residents in the constituency of the hon. Member for Somerton and Frome. They feel very distant from the world of merchant banks, Lehman Brothers, Barclays, wealth and the rest of it, but they are aware that a dark cloud is coming towards them. They pay their taxes on time and always try to meet their obligations. They have been brought up not to borrow money that they are not confident they can repay, and they want to know what penalty they will pay because those in pursuit of vast wealth have gambled and lost. I hope that the Minister will address all the people, wherever they are in the country, who are sitting and worrying this afternoon.
On Saturday, the people in Thorngumbald repeatedly told me that this country has not been put in a strong position to weather the economic storm. They are starting to pick up on the fact that, although the problem is global, not every country has been affected the same. In some countries, the banks have been regulated more tightly. Regulators in those countries and, effectively, the head of finance—or in our case the Chancellor—have ensured a more prudential basis for lending by the financial institutions than there has been in this country. My constituents are aware that this country has been spending money based on a false boom and that the coming bust will cost them dear, and probably in their public services.
In particular, my constituents want Ministers to put up their hands and accept some responsibility. So far, that has not happened. When the Prime Minister has spoken about the crisis, he has sounded as though it had been visited on us from out of space, and as though he was not one of the world's leading financial secretaries, influencing colleagues around the world and working with them nearly every week on the problem of regulation in the financial markets. He has been in that position, and my constituents want to hear the Government accept some responsibility for the weaknesses in our system, whose results we are now seeing.
Colleagues have mentioned the fact that the Government promised an end to boom and bust, and that there would be stability for ever more. They note that the Prime Minister, who used to be the Chancellor, began to believe that he had some unique financial Midas touch that had been denied to all those who had ever served in that post. As so often happens, that hubris has been shown up as a hollow failure. The Minister would go a long way to reassuring people that they will be able to trust the Government more in future if, on behalf of the Government, he sounded a note of humility or apology this afternoon.
Other hon. Members have touched on the subject of accounting standards. In the EU, the European Commission is rapidly working up some proposals for changing accounting standards to tackle some of the systemic weaknesses in our system. May I suggest to the Minister that he work with colleagues to ensure that we do not look for any quick-fix solutions? We do not need the equivalent of Sarbanes-Oxley legislation to be visited on the City of London by a remote, unelected European Commission, when the British people are given no opportunity to vote out those who would be responsible for it. I ask the Minister to have caution in that regard.
There has been a great debate about whether the current crisis is a body blow to capitalism and free markets. It has been suggested that the global Thatcherite revolution that brought the end of socialism has hit the buffers, with people realising that, after the nationalisation of the banks and so on, we need greater state control. However, I do not believe that. We have had a failure of regulation—a subject to which I hope the Minister will return—but we have also had a form of depersonalised capitalism. The people in the City responsible for pension funds and the directors of our largest companies tend to work with, spend and risk other people's money rather than their own. It is the lack of personal accountability and ownership of assets at the very heart of the capitalist system that has contributed to the irresponsible behaviour of the past few years. That has been fuelled, as I have said already, by the former Chancellor's hubris.
My hon. Friend the Member for Chichester and the hon. Member for Somerton and Frome commented on the need to strengthen boards. Every time a problem threatens British business, Members of Parliament rightly want the boards of our companies to be strengthened. They believe that imprudence would somehow end if only we had more independent non-executive directors.
I have some sympathy with that view, but the real problem is that there is a herd instinct in our depersonalised capitalist system. It means that people do not keep their jobs, get appointed to other boards or remain as investment analysts if they go against the herd. As a result, they all move together: they use other people's money, without being cognisant of the risks.
Useful though independent non-executive directors can be, that herd instinct places massive pressure and responsibility on the regulator. Only the regulator has the overall framework responsibility for ensuring that our financial system, and the entire economy on which it relies, is soundly maintained.
I have a number of questions for the Minister, but in particular I should like to know whether he agrees with my hon. Friend the Member for Chichester that the Chancellor of the Exchequer is ultimately responsible for the regulation of the UK economy and the risks that are taken. Nothing has shown so clearly as the events of the past few weeks how failures in that systemic risk management affect everyone in the country. It is essential that that responsibility is held, and is seen to be held, by an elected politician, in the form of the Chancellor of the Exchequer. I hope that the Minister will make a comment on that.
However, the problems that we have seen are not all due to greedy bankers or failed regulators. They are also down to a failure of personal responsibility—and many of us will have been guilty of this at times—with people borrowing money that they could not pay back. There has rightly been criticism of banks that have given 125 per cent. mortgages, but for every one of those there has to be someone who signs the form and pledges that the money will be paid back. It is important that we send out the message that all of us, not just those who lend the money but those who borrow it irresponsibly, accept some responsibility for what has happened.
One of the key principles behind creating a sounder system for the future will be that there must be greater transparency. We are all aware that the complex financial derivatives that have been created are often not understood by the directors of the banks trading in them. Most famously, of course, Barings crashed because of that.
The principle of transparency needs to be maintained across the system. So far, no Minister has explained why the Government, acting on behalf of taxpayers, are taking on those enormous liabilities but not making them part of the national debt. I hope that the Minister will explain that to the House this afternoon, so that we can understand it. Off-balance-sheet borrowing guaranteed by the taxpayer—Enron economics—leads, in the private sector, to prison sentences. In this country, now in the 12th year of a Labour Government, private finance initiative projects have gone ahead specifically because they are designed to keep borrowing off the Government balance sheets, even though the Government are ultimately responsible for that finance.
Is my hon. Friend aware that, if we add the off-balance-sheet PFI scheme debts to the liabilities that now encumber every taxpayer in this country, it adds up to about 54 per cent. of the United Kingdom's gross domestic product? As he will no doubt be aware, the last time we had that level of public debt, which was under a previous Labour Government, the International Monetary Fund was forced to step in and insist on swingeing public expenditure cuts. Does he agree that that would be a very serious development, but that it is very likely to happen, unless the Government take drastic action in the next year or so?
I agree with my hon. Friend, and in some ways I am even gloomier than he is. I feel that the costs are being masked. Ministers are suggesting that we will get all our money back. They have almost suggested that there will be a profit to the taxpayer as a result of the Government's intervention in the markets. I fear that there will be heavy costs for the taxpayer, and that the dark clouds will visit places such as Thorngumbald in my constituency.
The earlier Labour Government who my hon. Friend mentioned were, of course, in exactly the position that he described. We had to be bailed out like a third-world country, and there were swingeing cuts to public services. We all remember the unburied bodies, and the rubbish cluttering our streets, yet here we are again. It is the 12th year of a Labour Government, and the Bank of England is again running out of money, with the only option being to print more of it.
A Labour Government are impoverishing this country. Fortunately, a Conservative Government will come to power, but, unfortunately, they will yet again inherit an economic mess left behind by Labour utopian politicians. However, those politicians fail to deliver that utopia and, most importantly, spend the hard-working taxpayer's money. They always visit misery on those with the least. [Interruption.] Labour Members do not like to hear that. At the end of that 12-year period, the gap between rich and poor has actually widened. The gap between the educational outcomes of the poorest in our society and those of people at the top have widened under a Labour Government. Health inequalities have widened under this Government. John Robertson may want to laugh because of his arrogant assumed moral superiority to those of us on the Conservative Benches, but I am proud of the fact that health, education and wealth gaps were narrower when we left power than they are today. That is before the cost of the Prime Minister's spending spree and irresponsibility is taken into account. However, it will come home to roost, and will have to be paid for by the British taxpayer.
I would like the Minister to comment on the issue of transparency, and on the need to declare, on the Government books, the liabilities that the Government are taking on. In a similar vein, it is absolutely essential that we have some idea of the risks that are being taken. What is the extent of the liabilities? I know that the Chancellor was asked whether any limit would be put on liabilities. The Economic Secretary to the Treasury, when winding up yesterday's debate, said in response to that question that the Government would "do whatever it takes", repeating the mantra of the Prime Minister and the Chancellor. Is there to be no limit to the liabilities to which the Government are prepared to sign up, and no limit to the number of future generations who will pay additional taxes because of the bail-out, which resulted from the Government's failure of regulation? I hope that the Financial Secretary to the Treasury can reassure us on that point, because the issue should not, and cannot, be avoided. The House needs to hold the Executive to account, and if it cannot do so on the issue of vast liabilities, it really serves no purpose at all. The various hon. Members who commented on that point this afternoon were right to do so.
I hope that the Minister will answer the question on Lloyds TSB and HBOS. The issue has been mentioned by others, so I mention it only in passing, but to repeat the argument briefly, the whole reason for bringing the two banks together, and for ignoring competition regulations, was to stop HBOS from failing, and to prevent a domino effect in the wider financial community. Now that the Government have intervened, that rationale is no longer there, and there will be loss of competition on the high street. If the Minister cannot give an answer today, please will he work with his colleagues on the matter and bring some common sense to it? It cannot be right for the consumer to have less choice on the high street while the state is intervening in our banks.
I hope that the Minister will allow me to ask him this once again: what advice was given to local authorities? Why did so many of them leave their money in the Icelandic banks? The hon. Member for Somerton and Frome said that none of them could be blamed for doing so, and he may well be right, but when I telephoned my mother a few days ago, she said that she had considered the Icelandic banks. She had looked at their interest rates, which were very attractive, but thought that they looked a bit too good to be true, so she stuck with the Royal Bank of Scotland, with which she has shares. Admittedly, she said that she was equally disappointed with it. She accepted a lower rate of interest because she reckoned that if an offer seems too good to be true, it normally is, and that if one has savings that one cannot afford to lose, one should put them somewhere sensible and safe. She thought that the Royal Bank of Scotland was sensible and safe, and I hope that it will be in future. I would be interested to hear from the Minister on that point, and on why so much public money was invested with those Icelandic banks.
I know that the Minister is aware that local authorities face a real crisis in social care provision. Already, people with moderate needs have lost their right to social care in the home. I have disabled constituents who can no longer get any support from the local authority because their needs are not severe enough; only those with critical or severe needs are getting that care. The loss of local authorities' money might lead to the withdrawal of even more of that social care. I know that Members on both sides of the House will spend time each week working constructively with their local council to try to ensure that vulnerable people get the support that councils struggle to provide from their budgets. I hope that we can count on that.
I should declare an interest, as I am still an owner and director of a small business. I remember talking to others who ran businesses, whether in the pub or elsewhere, about the rapacious, greedy, fat, selfish, lazy banks and how they dealt with most small businesses. I always used to say, "There's only one thing worse than lazy, fat, rapacious, greedy banks, and that is bust ones." Banks may behave in the way that I describe, and they may, as the old saying goes, offer you an umbrella only when the sun is shining, but at least when they are in business they can lend money. In answer to the question asked by the hon. Member for Somerton and Frome, to whom I seem to be referring constantly, banks are in a different category. Without them, British business does not survive and prosper. The main banks therefore cannot be allowed to fail. That has been shown in the past weeks by the Government's action. The question is how the Government will ensure quid pro quo. How will they ensure that the banks are regulated and carry out their business prudentially? How will they ensure that there is no loss of creativity or innovation? We would not want that. So I welcome the fact that the banks are being saved, because they are absolutely necessary.
I forgot to mention Equitable Life, and many of my constituents have written to me on that topic. Within the billions of pounds that are being spent to sort out the financial system, surely it would be right to rectify the injustice that has been visited on so many people who tried to be prudent. They saw Equitable Life as a safe place for their money. They had researched the matter, and they were not being greedy and wanting the highest possible returns. They had looked to place their money somewhere sound and safe, and they felt that they had had promises from Governments, Conservative and Labour, that regulation would protect them. As the Financial Secretary well knows, they have not been protected. The ombudsman found against the Government and those people cannot believe that this Labour Government, who claim to deliver justice for people, can continue to ignore their righteous pleas for fairness.
The other comment that I remember from the streets of Thorngumbald on Saturday was from someone who said, "Surely your priority"—they see me as part of this place and of government in all its forms—"should be to protect those who are trying to pay their mortgages?" I agreed, and he asked, "Why then are you spending hundreds of thousands of pounds of taxpayers' money through the EU on a pay-off for the new Trade Secretary who has voluntarily moved to a new job?" How can that be right, especially for the Labour party, which claims to be on the side of ordinary people like my constituent, who is struggling to pay his bills and his mortgage?
We have had a wide-ranging debate, and several points have been made to which I wish to respond. I shall aim to do so briefly, given that I opened the debate. I wish to emphasise again that the motion has two parts. The first part is designed to replenish the contingency fund, which has been drawn on for the reasons that I set out. On a technical point, I should clarify a matter raised by Mr. Gauke. We are not drawing on the contingency fund for the recapitalisation programme. At £37 billion, that is much larger than the entire contingency fund. So the first part replenishes the fund after the calls that were made on it because we think that it would be imprudent to wait until the normal point of repayment late in December. We want to replenish it now, in case we want to make further calls on the fund over the coming weeks.
The second part of the motion is in respect of the additional capital required—the £37 billion—for bank recapitalisation. Several hon. Members have queried the way in which that sum will be treated in the national accounts. It will be for the independent Office for National Statistics to make that judgment and decide how the deals will be classified in the public finances. In the case of Northern Rock, the decision was that the figures should count as part of the public debt, but the ONS will also decide how the subsequent deals should be accounted for.
It is worth underlining the fact that the impact for the taxpayer and the public finances will be exceptional. It will mainly be temporary, but the liabilities being placed on the public sector balance sheet will be backed by financial assets. Our view—and it is widely shared by, for example, the Institute for Fiscal Studies in its comments on this issue in recent months—is that the sums should not be counted in our assessment of fiscal sustainability against the sustainable investment rule. We will, of course, produce an update on where we stand against the sustainable investment rule at the time of the pre-Budget report, and all the figures will then be in the public domain. Not to have taken action would have exposed the taxpayer to greater risk, and that is the basis for the package that we have put before the House.
In the debate, the hon. Member for South-West Hertfordshire and others mentioned the relative proportions of preference shares to ordinary shares. We did say last week that the Government would also consider acting as underwriter for ordinary shares, so the announcements that we have made are in line with that. Following detailed discussions between the Treasury, the banks and the FSA, it became clear that it would be necessary to build up the core tier 1 capital ratio in the banks that intended to take advantage of the arrangements that we had proposed. That required the proportion of preference shares to be limited. The desirable proportions of preference shares to ordinary shares have appeared in the announcements, and Opposition Members have read out the numbers of preference shares and ordinary shares for the three banks taking advantage of recapitalisation.
If the Financial Secretary is saying that it was necessary to make the arrangements in the way in which the Government have with the proportion of ordinary shares that he has set out, why was that not clear when the deal was reached at 5 o'clock in the morning on Wednesday? That supports the widely held view that the deal was put together quickly. My hon. Friend Mr. Tyrie has pointed out the lack of preparation for recapitalisation.
Events certainly moved very quickly, and the Government had to respond very quickly. The conclusions that were reached and the precise figures that have been quoted in debate were the outcome of detailed discussions and analysis between the parties to which I have referred. I think that the judgments were right. We made it absolutely clear last week that we were open to underwriting ordinary shares as well. The package reflects not, as has been suggested, memorandums and articles, constraints or things that were not clear at the outset, but an assessment of the position in each of the institutions.
The hon. Gentleman knows that I returned to the Treasury only 10 days ago. [Hon. Members: "Hear, hear."] I am grateful to my hon. Friends and others for their support—one or two Opposition Members have made some kind remarks, for which I am grateful. I did not see anything before I returned to the Treasury. Indeed, I did not see the hon. Gentleman's article, so it was interesting to hear his comments. One can only wish that he had a greater degree of influence over Conservative Front Benchers when they reflect on these matters.
We thought it important to safeguard the interests of taxpayers. The directors, who will appointed by the Government, will be qualified and independent, and they will not be civil servants. I see no reason why, for example, they should not sit on remuneration committees, which picks up a specific point raised in the debate. There will be no cash bonuses for directors this year, which is right.
There has been a little bit of misunderstanding around the point that we do not want to return to the 2007 volume of lending. Lending has completely stopped to important parts of the economy, and we want it to resume. We want it to be available as it was in 2007, and we want to see marketing and competitively priced products.
I am grateful to the Financial Secretary for remaining in the House for the whole of the debate. Having heard what he has said, the documents must be changed, because they clearly require lending to return to the 2007 level or more for three years. I do not know whether he has given an undertaking to change the offer document.
The hon. Gentleman is right about three years. We want to see lending start up again, because it has completely ground to a halt. Last year, there was lending to small businesses and home owners, and we want that to be in place again. As he has rightly said, we have required it for three years.
The hon. Member for South-West Hertfordshire asked about the details of the £600 million. It is probably true that those have been given on the Floor of the House for the first time in this debate. However, earlier this week my right hon. Friend the Chancellor set out the details in a written statement. We made a payment to ING Direct for amounts in the Icelandic banks not covered by the Financial Services Compensation Scheme; that is how the £600 million figure arose.
The hon. Gentleman asked about the increase in repossessions by Northern Rock. Northern Rock is managed at arm's length from the Government on a commercial basis; its repossession policy is a matter for the bank itself. In passing, however, I should point out that, at 1.18 per cent., Northern Rock's residential arrears level is below the average among UK members of the Council of Mortgage Lenders.
We are setting up an arm's-length company to manage these taxpayer investments. Investment decisions will be made on a wholly commercial basis; there will be no ministerial interference of any kind. The company will be managed transparently and it will report regularly to Parliament. The Government-appointed directors to the banks will be independent and non-executive.
Dr. Cable made a characteristically thoughtful contribution to the debate. I want to pick up on a specific point that he made. In due course, the Government will lay an order relating to compensation for shareholders and others whose rights may have been affected by the transfer of Bradford & Bingley into public ownership. I did not hear the debate that the hon. Gentleman had on the radio this morning, but we will bring that measure forward.
Sir Peter Viggers made some interesting points; he has made a number of interesting interventions in the debates of the past couple of weeks. It is very difficult to value illiquid assets in the context that we are talking about. The hon. Gentleman referred to his experience at Lloyd's. There is a real problem with asymmetries of information. If the taxpayer proceeded on that basis, they would be almost bound to lose out. However, the different arrangements that we have announced and that have been widely supported—and copied elsewhere—allow taxpayers to benefit from the upside.
It being three hours after the commencement of proceedings on the motion, Mr. Deputy Speaker put the Question , pursuant to Order [
That, for the year ending with 31st March 2009, for expenditure by HM Treasury—
(1) further resources, not exceeding £1,000, be authorised for use as set out in HC1061, and
(2) a further sum, not exceeding £42,200,000,000, be granted to Her Majesty out of the Consolidated Fund, to meet the costs as so set out.
That a Bill be brought in on the foregoing resolutions: And that the Chairman of Ways and Means, Mr. Chancellor of the Exchequer, Yvette Cooper, Stephen Timms, Angela Eagle, and Ian Pearson do prepare and bring it in.