I inform the House that, in both debates, I have selected the amendments in the name of the Prime Minister.
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I beg to move,
That this House
is concerned at the increasing difficulties caused by the current economic crisis to many British citizens in maintaining their homes, paying their bills and providing for themselves and their families;
believes that these problems originated not just in the global financial system but in unsustainable levels of personal borrowing and house prices which were overlooked by Government policy;
is alarmed at the steep rise in mortgage arrears and repossession orders;
regrets that, despite receiving £500 billion of taxpayers' money, the banking industry has failed to respond adequately to the needs of its customers or modify sufficiently its behaviour in respect of mortgage interest rates, new lending to struggling small businesses and its bonus culture;
notes that the Bank of England has implemented the 2 per cent. cut in interest rates which the Liberal Democrats called for and urges it to make further cuts if the economy deteriorates further;
and calls on the Government to introduce an immediate substantial cut in income tax to benefit low income and standard rate taxpayers, paid for by wealthy individuals who profited disproportionately from the economic boom and who do not pay their fair share of tax.
Having checked that I have switched off my mobile phone, it is a pleasure to introduce an Opposition day motion that stands in my name and in those of my colleagues. Our purpose in bringing it to the House is to give Members an opportunity to review the rapidly deteriorating economic situation and to air some ideas and options about how it might be dealt with in the run-up to the pre-Budget report.
We have noticed a pattern developing in the past few weeks whereby we come up with ideas and, whether they are on housing repossessions, interest rates or tax cuts, within a few days or even weeks, they are rapidly followed by the Conservatives, the Government, or both. We might almost say that the road to Damascus is becoming severely congested as they queue up to adopt our policies in different respects. Unfortunately, some Government Front Benchers do not convert quickly enough, and as a result, they leave themselves feeling somewhat embarrassed.
I am glad that the Exchequer Secretary has been brave enough to come back to the House after the previous such Opposition day debate, because she may already realise that her comments on that occasion have become the stuff of radio and television comedy shows. I shall quote one of her more memorable observations during that debate:
"The Liberal Democrat motion has been much commented on, possibly because it reads like the storyboard for "Apocalypse Now", or perhaps even "Bleak House". According to the motion, we are facing...the 'risk of recession'...Fortunately for all of us, however, that colourful and lurid fiction has no real bearing on the macro-economic reality."
It is only fair that we do not isolate the Exchequer Secretary too much, however, because Labour Back Benchers faithfully echoed everything that she said. I do not want to criticise a gentleman in his absence, but I am sure that he will not mind my quoting what he said. He is one of the more distinguished— [ Interruption. ] Indeed, he is here now. Mr. Mudie, who is a very distinguished and respected member of the Select Committee on the Treasury, said on that occasion:
"I do not see how anyone can table a motion that suggests that we are nearing a recession".—[ Hansard, 2 April 2008; Vol. 474, c. 824-5, 810.]
Well, things do change in a six-month period.
It is not just Government Members, however; the habit has spread. The Conservative shadow Chancellor is not present, but I remember that when I last spoke about economic matters, he intervened to rebuke me for irresponsible behaviour in respect of interest rates. On
"By the way, I do not think that it is particularly sensible either for politicians speaking from the Front Bench to call on the Bank to cut or increase interest rates. Indeed, I make it a practice not to comment on them."—[ Hansard, 14 October 2008; Vol. 480, c. 708.]
Well, I followed the hon. Gentleman last week around the television studios, where he claimed credit for having anticipated the cut in interest rates. Indeed, there was some mysterious process of intellectual osmosis by which the idea had communicated itself to the Monetary Policy Committee of the Bank of England, and for which he wanted to claim full credit.
Without indulging too much in anecdote, however, I think that it would be useful to record some of the facts of the current economic situation. Those of us who talk to local business groups know that the position is really dire and will feed through to statistics in the coming months, but let us stick initially to the facts. The Government's own figures recorded a decline in output in the third quarter, and that represents a fall over the year. The International Monetary Fund predicts a stagnation of growth this year and a decline of 1.3 per cent. next year, which it believes is the deepest cut in any major western country.
We talked at length about the housing market in our last Opposition day debate. The main market indicator suggests that there has been a 15 per cent. fall from the peak at the end of October last year and that house prices at auctions have now fallen by 30 per cent. since last year. It is worth contrasting that with what the former Financial Secretary to the Treasury told us when we debated this subject a few months ago:
"House price inflation is declining, but it is doing so relatively gradually, and house prices remain higher than they were a year ago."—[ Hansard, 2 April 2008; Vol. 474, c. 803.]
The Government told us that repossessions were not a problem, but they have doubled since the first quarter of 2007; at the end of October this year, they were 71 per cent. up on the year before. The latest figures suggest that there were more than 4,000 insolvencies in the third quarter of 2008—a 26 per cent. increase on the corresponding quarter the previous year. The unemployment rate is, mercifully, much lower than during the last recession, but at 5.7 per cent. on the international measure it is up worryingly, although we hope that it will not reach those alarming levels of the early 1990s.
Those are the facts, although we will no doubt argue endlessly about the causes. A reasonably fair-minded view is that the problems and the depth of the recession that we now face are partly due to domestic policy failures and partly due to international factors beyond our control. As far as domestic policy failures are concerned, it is reasonable to point out the growing consensus that there was an excessive build-up of personal household credit linked to the boom in the housing market. We warned about that for the first time back in October 2003. Others, including the IMF and the Governor of the Bank of England, also issued warnings; even Conservative Front Benchers eventually spotted that there was a problem—the shadow Chancellor referred to it for the first time in January 2007. Clearly, there is now an acceptance that that major UK problem was domestically generated.
There has also been an international banking crisis, for which obviously the Government are not responsible, at least directly. We should not be too complacent about that, however, because much of the shadow banking industry that originally grew up on the back of sub-prime lending activity originated or developed in the City. Until very recently, there was extraordinary hubris and complacency about the workings of financial markets in the City. A few months ago, the Minister's predecessors were talking to us in loving terms about how the City operated, a bit like little boys who had just discovered an unexploded bomb and thought that it was a shiny new toy. The Minister's predecessors now realise that many of the activities that were taking place were dangerous.
It is a great pleasure to intervene on a Member who will single-handedly save so many seats for the Liberal Democrats. Is not the issue about seeing the solutions rather than trying to place blame for what happened in the past? The hon. Gentleman has detailed the damage done to the banks. Does he agree that, following the rescue of the banks, one of the solutions is to repair them, take the bad debts off their balance sheets and create a bad bank solution, as has been done successfully in Sweden, and is now also being attempted in Switzerland?
That is a helpful prompt; I was about to move on to the positive suggestions, and the hon. Gentleman is right to say that we should spend our time and energy on them. He has anticipated one of the points that I was going to make: the British bank rescue plan—the recapitalisation—was right, necessary and appropriate, but it is only one half of the solution, and there is the other half to deal with.
In talking about where we move from here, we should start with the bank rescue proposal, as the hon. Gentleman suggested. We supported that; it was right and timely. However, we now know a little more about what is going on and can ask more critical questions about how the process is developing.
One of the key questions concerns the nature of the commitments that were entered into between the Treasury and the banks when the recapitalisation programme and insurance of inter-bank lending were entered into. On one of the key commitments, we have debated several times the precise meaning of the statement that
"the Government has agreed with the banks" on
"maintaining...the availability and active market of competitively priced lending to homeowners and small business at 2007 levels".
It becomes more important that we establish exactly what that commitment meant and what was understood about what would happen.
Let me put a series of specific questions to the Government. Are they or anybody else actually monitoring the amount of business lending, in particular, that is taking place? Are they monitoring on a weekly or monthly basis how much credit is going from each individual bank into the business sector? I hear anecdotes—I cannot prove this—that several of the banks have instructed their managers to cut credit and are incentivising them to do so. One way of proving or disproving that point would be to have evidence, and I hope that the Government are monitoring it very carefully. Do they have any mechanism for telling us what is happening as regards the flow of funds?
What instructions have been given to the Government directors? Do we know who they are? What were their letters of appointment? What have they been told to do? They appear to have a very simple mandate, which is not to interfere, but that is clearly creating a problem in itself.
Does the hon. Gentleman accept that the Government are saying two contradictory things to the banks? Through their regulator they are saying that the banks have to improve their ratios, which means cutting their loans as well as increasing their capital, and through their guidance they are saying that the banks need to increase their loans, which would worsen their ratios?
The instructions are indeed contradictory, and we need more clarity. In fact, they are not the only instructions that the banks are being given. As of the other day, we understand that the Government have now told the banks to pass on interest rate cuts—a third objective. Again, we need to understand the implications. The banks tell us that they are making a loss by doing that; I do not know whether that is true, but we need to understand precisely what the banks are being instructed to do and in what circumstances.
I have checked on the internet with several banks today, and rate cuts are certainly being passed on to savers. For example, a product that was available with 6.9 per cent. interest two weeks ago is now down to 5.7 per cent., which seems to be the best deal available. Does he agree that that does not seem to be matched by the offers being made to mortgage holders?
Indeed. The banks are simply widening their spread. That is their objective, as Mr. Redwood suggested. The Government appear not to have thought through the implications of the agreement that they reached.
What precisely was the understanding on bonus arrangements, which have been criticised in all parts of the House? Quite lavish bonus arrangements have been proposed by Lloyds TSB, which is one of the beneficiaries of the process. Mr. Hornby, who on any conceivable measure could be described as a business failure, is now being very lavishly rewarded by his new employer, Lloyds TSB. How is it possible that the Government reached a very specific agreement with the banks on bonuses only to have them completely disregard it?
Let me make various suggestions on the banking programme before we move on. First, it is clear, as we have heard in the previous two interventions, that merely telling the banks that the Government are going to operate on an arm's length basis is causing confusion. The rational response of the banks is to build up their reserves to get the Government off their backs as quickly as possible so that they can pay dividends and bonuses. The Government's ambition appears largely to be limited to getting the taxpayers' money back as quickly as possible. While those objectives seem rational in themselves, pursued in isolation they potentially have devastatingly negative consequences. If the economy goes into a downward spiral and business credit is cut off, that further increases bad loans, which increase the amount of the recapitalisation that will have to take place. Can the Government be absolutely clear about whether they are going to intervene to give the banks more specific instructions?
Secondly, can the Government tell us why they are now proceeding, in terms of their approvals, with the Lloyds TSB-HBOS merger? There may well be good commercial and public policy reasons for that, but I think that they are assuming that because it made sense six weeks ago in order to rescue HBOS from collapse, it still makes sense today. There are growing numbers of authoritative people in the banking system who say that it does not make sense. They want to have the options re-examined and they want alternative bids to be looked at properly. Along with Tavish Scott MSP, I have written seeking an appointment with Mr. Hornby and Lord Stevenson to explain why they are not willing to reopen matters on the part of HBOS. There is also a question for the Government, however. Will Ministers explain why they are allowing matters to proceed? The deal may well be beneficial to Lloyds TSB, but why is it in the national interest?
Finally on the banking system, what the Government did in broad terms made sense in the context in which they introduced it, but a whole set of other problems are now coming over the horizon that have not yet been discussed. When will the Government discuss them? One of them was raised from the Back Benches a few moments ago: we have had half the policy. The Swedish model had a combination of elements, one of which was recapitalisation, and another concerned the "bad bank"—the Paulson-type plan, and the Americans have had the other half of the programme, but are the Government going to bring both halves together, and how will they do so? Are they thinking ahead to how the new banking system will operate?
We are discussing at the moment a Banking Bill that is valid in many respects, but is limited in what it covers. It does not explain how the banking system, once it has emerged from its massive heart attack, will lead a different kind of lifestyle. One thing that cannot continue is the ambiguous relationship in which banks have what Cruickshank called eight years ago "regulatory privileges"—they depend on being bailed out, in other words—while they continue to operate on the maximisation of shareholder value. That contradiction cannot continue, and the Government need at an early stage to give ideas as to how they will deal with that problem.
My second point about forward-looking policy concerns housing, which is the sector that has been most damaged. We encouraged the Government to pursue an idea that they had some months ago of buying up empty property and land, which is now available at heavily discounted prices, so that registered social landlords can increase the availability of social housing, thereby providing an injection into the building industry. Although the Government are talking the right language, the feedback that I have received suggests that absolutely nothing is happening. It appears that approval was given for £8 billion of investment in social housing, but that the money is not reaching the social landlords. There are problems with the Treasury funding arrangements and the rental arrangements that operate under Treasury rules, which are preventing progress from being made with the programme. Will the Government tell us how much of the social housing package has reached the social landlords, and how many houses they propose to proceed with in the context of the emergency to which we are told that they are reacting?
On repossessions, 10 days ago, at Prime Minister's questions, the Prime Minister told us that the Government have proceeded with fresh instructions to the courts on how to handle repossession cases. We had been urging that, and we welcomed it at the time. The feedback I have received suggests that no instructions have yet been given, or if they have been, they are very discreet. No one is aware of any change in practice being communicated to the courts that process such matters. Moreover, there is an extremely alarming story in the Financial Times today, which says that banks and building societies whose clients are in arrears for a few weeks can proceed to repossession without going to the courts; they simply issue an instruction to the bailiffs to repossess after a few months' arrears. The Government need to tell us how, through legislative or other action, they will prevent a cascade of repossessions from proceeding through the winter, as growing numbers of people find that they are on short-time working hours, losing overtime or losing their jobs, and simply cannot afford their payments.
Thirdly, we had a debate on small business a week or so ago, which my hon. Friend John Thurso introduced. I do not want to go into further detail on the measures involved, but how will the Government develop the helpful ideas they have already set out for accelerating payments to small businesses that are involved in Government contracts? Will that extend to the vast numbers of quangos that operate under Government scrutiny? Will it be used for companies that are subject to Government procurement? The 10-day payment—the accelerated payment—is a good principle, but how far will the Government spread it? How far has the programme already gone?
Will the hon. Gentleman extend his advice to the Government by asking them to ask Her Majesty's Revenue and Customs to take a more sympathetic and reasonable attitude to those who owe the Government money in back taxes, and to agree more achievable repayment systems and schemes?
Indeed, the Government could take a variety of steps, and the hon. Gentleman suggests one. The small Government loan guarantee scheme has not been updated to take account of current realities. Given the strength of the Government's balance sheet relative to the private sector, the Government could do a variety of things to help. They have made several helpful gestures, but they could go much further.
Let me consider the issue of the day—tax cuts. I approach the matter with caution, given that the Conservatives and the Government seem desperately anxious to run on to the ground that we staked out. Our approach was that there should be tax cuts for people on middle and low incomes, for which people who are relatively wealthy would pay. We argued that primarily on the ground of fairness. At the time, there was no major economic crisis, but the proposal now happens to be appropriate to the context in which we operate.
Clearly, people on low incomes have a higher propensity to spend than those on high incomes, who are very wealthy. Our proposal, which the new President elect of the United States echoed at least generally, seems highly relevant. We have advocated a programme whereby income tax should be cut for people on low incomes, either by raising thresholds or cutting the basic rate by the equivalent of 4p in the pound. We are therefore considering an amount of approximately £1,000 for a £30,000 income tax payer. The proposal would be funded in a variety of ways, which we have set out, one of which involves tackling potential tax avoidance and the existing concessionary rates that people pay on capital gains tax. We were impressed with the sensible way in which Lady Thatcher and Lord Lawson devised the capital gains tax rules, and we would like to revert to that, with potentially major Revenue implications.
We believe that people who contribute to large pension pots should be incentivised, but that larger incentives should not be given to people who make small savings—we believe in closing that loophole. We also believe in a much tougher approach to tax havens. Again, the President elect of the United States wanted to go down that road. Specific measures, such as dealing with leading corporations' evasion of stamp duty, which the Government should have tackled long ago, are blatantly obvious. A series of measures could, if implemented, enable us to make a substantial cut in income tax for people on low and middle incomes.
Does the hon. Gentleman agree that, when the proposal was made, it was not intended to be a fiscal stimulus? Indeed, it would not be a fiscal stimulus, because he is describing how revenue would be raised to pay for it. Given that there may be a case for some temporary fiscal stimulus in the not-too-distant future, does not it make more sense to consider a temporary reduction in value added tax, which would relate directly to consumer demand? It seems likely that we will need to stimulate consumer demand in the new year.
The measures that I have described would be stimulating for the reasons that I gave: people on low incomes are more likely to spend. The right hon. and learned Gentleman's proposal could have the same effect, but it depends on how it is funded. That gets to the heart of what I am sure that Conservative Members will tell us in the next day or so. As I understand it, the Conservative party proposes funding the VAT cut through parallel cuts in Government spending. Although there may be a case for cutting Government spending generally, in the context that we are considering, the proposal would simply offset a stimulus with a reduction in spending. The right hon. and learned Gentleman must deal with the same problem that the Government have and that we have tried to tackle.
If there is to be a tax cut, it should operate under three simple principles. First, it must be substantial; a nominal cut has no effect in such circumstances. The package that I have described would cost something in the order of £16 billion. That is a large sum, but as a share of GDP it is not enormous and is certainly affordable within the parameters that I have described. The second principle is that a cut should be fair and equitable, which was where we started from. The third principle is that a cut should be funded. There are dangers in doing what I believe the Government propose, which is to have an unfunded tax cut, which I understand would be financed by Government borrowing. However, Government borrowing ultimately has to be paid for—it is deferred taxation or inflation, and that is not a satisfactory way forward either.
We need a stimulus that will be funded and is seen to be fair, but which also makes sense in the context of the need to inject demand from people on low incomes, whose income standards are being squeezed. With that, Mr. Speaker, I thank you for the opportunity to introduce the motion and look forward to hearing the reactions to it.
I beg to move, To leave out from "House" to the end of the Question, and to add instead thereof:
"notes that the Government's actions mean that the economy is entering a period of global downturn with unemployment, inflation and interest rates all much lower than in previous slowdowns, and with debt reduced from 43 per cent. of gross domestic product in 1997 to below 36 per cent. last year;
welcomes the extra investment in public services and public servants that this has enabled to compensate for historical underinvestment both in infrastructure and services in every region;
supports the Government's global leadership and action to tackle both the causes and effects of the financial and economic turmoil on an international level;
welcomes the Government's timely support to protect financial stability and consequently depositors, business and the wider economy;
further notes that as a condition of this support the Government has demanded support in turn for homeowners and small and medium size businesses;
further notes the action that has been taken in the court system and through mortgage interest support to enable people to stay in their homes, and the provision of £360 million to help small and medium size businesses under the Train to Gain initiative;
and further notes that Government action to support families, individuals and businesses across the UK through the tougher times ahead includes extra tax credits, cutting income tax, freezing fuel duty, further winter fuel payments and increases in Child Benefit."
Let me start by saying that the Government share the concerns of the whole House about the effects of the global economic crisis on British families and business. Over the past few months, newspaper headlines have been dominated by the dramatic events in the international banking sector. However, all of us know only too well that behind every headline there are real people facing worries about staying in their jobs or homes, keeping their businesses afloat or paying their bills every month. The Government have already shown that they are determined to be on their side in the tough times ahead and we are determined to do more to help as the situation unfolds.
Although the recessions that we endured in the '80s and '90s were essentially domestic in origin, this one is fundamentally different. It is undoubtedly caused by global events originating outside our borders. This recession began in the sub-prime mortgage market in America and spread across the world, mostly because of irresponsible behaviour by banks. The twin shocks of the credit crunch and the surge in energy and food prices have hit every country in the world. As one of the most open trading economies in the world, the UK has not been immune to the effects of those shocks. Although the crisis is global in origin, we recognise that its effects are local.
The credit crunch presents us with a once-in-a-generation economic challenge. To meet that challenge, we must first stabilise the global banking system to deal with the legacy of bad debt, which has meant that banks have lost confidence in each other and that global credit markets have seized up.
Given that the credit crunch first became apparent in August 2007, could the Exchequer Secretary explain why Treasury Ministers were so slow to understand the implications that she is now spelling out?
I do not think that that is a fair accusation, given that everybody watching the events unfolding has said that the credit crunch is an unprecedented, once-in-a-generation occurrence. Policymakers the world over, including those in business, are scrambling to catch up with circumstances as they change and with the changed world that events have left us with, so I think that the hon. Gentleman is being rather churlish in his analysis. Hindsight is a wonderful thing after sudden changes in realities that have been so stable. It is easy to look at the new realities as they are being created as if, prior to those events, we all had crystal balls and everybody knew what was going to happen. We did not. In such unprecedented circumstances, it is important that policymakers and political leaders such as my right hon. Friend the Prime Minister respond flexibly and quickly, and that is what he has done.
The Minister is absolutely right that one must not look back. The Government acted decisively in rescuing the banks. However, does she think there is merit in dealing with the damage that she has detailed by taking those bad debts off the balance sheets to repair the banks and in using the "bad bank" solution?
We believe that the package of recapitalisation, special liquidity and the guarantee of inter-bank lending is a comprehensive package that should deal with the problem. However, we will continue to watch carefully what is going on in the international financial markets, as well as what is going on nationally in our own banks. It is important that we respond appropriately if other facts come to light. At the moment, we believe that we have a comprehensive answer.
As of the weekend, the important three-month LIBOR rate had come down from a peak of 6.4 per cent. to 4.4 per cent., which represents good progress. We will continue to monitor those numbers, but that has been a cause of significant relief throughout the financial system.
The updated economic forecast will be available when the pre-Budget report is presented; it is not my role to start anticipating it today. The hon. Gentleman will get those figures in full at the appropriate time. The Labour Government inherited a debt of 43 per cent. of gross domestic product, which is higher than the present level. It is important to note that point.
As the Government prepare to take on liabilities of £3 trillion from the three big banks in which they are buying shares, will the Minister assure the House that they have checked out the assets and liabilities, and that there will not need to be major write-downs on the loan books after they have bought the shares?
It is significant that all national Governments in developed countries have taken action similar to that outlined by my right hon. Friend the Prime Minister when he announced the recapitalisation scheme. That was a result of the unprecedented situation in which the global financial system found itself. I wonder whether the right hon. Gentleman would have done the work that he mentioned while the financial system melted around us, given that that could have caused circumstances as bad as, or worse than, those of the great depression in the 1930s. The people of this country demonstrated through their support that they appreciated my right hon. Friend the Prime Minister's swift and effective action.
The hon. Gentleman will see the fiscal and monetary figures when the pre-Budget report is produced, and people will be able to make their own decisions at that time.
Quite a number of statements have suggested that this economic crisis was a thunderbolt out of the blue. The Minister will remember, however, as a member of the Treasury Select Committee, that I visited the United States in January 2006. I cannot remember whether she was on that trip, but others from her party certainly were. Investment bankers made it clear to us that, while all was well that day, there would be a major crisis in the sub-prime housing market 18 months down the road, and that there were black clouds on the horizon. We attempted to pass those messages on to the Treasury, formally and informally—so there were warning signs.
It was not my pleasure to be on that trip. I made rather a bad habit of missing the foreign trips taken by the Treasury Committee when I was a member of it, owing to other work pressures. However, I think that one of the lessons to be drawn from the circumstances of an interconnected and globalised world is that the weakest link in the regulatory chain can affect all economies, as the circumstances of the credit crunch have demonstrated in quite a sobering way. That new reality will have to be taken into account as we rebuild and reform international structures.
Before taking a series of interventions, I was saying that the credit crunch presented us with a once-in-a-generation economic challenge, to which we are rising by stabilising the global banking system. However, we must also re-engineer the global economic system to cope with 21st-century realities, and the reality that Susan Kramer spotted in the sub-prime mortgage market during her trip to America is clearly one of the new realities with which we must deal.
May I return my right hon. Friend to the question of the gross national debt? Is it not the case that our gross national debt is still way below that of many other countries, that it is historically low, and that to tighten the fiscal stance at this moment would be economic madness?
My hon. Friend makes an appropriate and astute comment. People will be waiting to see which side of the Opposition's schizophrenic approach predominates.
As I was saying, we must re-engineer the global economic system to cope with 21st-century realities—
The Minister is obviously about to discuss the global measures that she considers to be the remedy. Does she think that looking at the global economic system will have any effect on the two things that went wrong here? First, an appalling fiscal problem piled up, the scale of which is being debated but which is plainly making us all very cautious about considering how we can afford a fiscal stimulus now. Secondly, a complete regulatory failure took place here. Nothing happened in the American housing market that did not happen in the British housing market. Our own national regulatory system, as designed by the present Prime Minister, completely failed to function, despite all the warnings about a credit bubble that were well in evidence long before the Government turned their mind to it.
I think that the right hon. and learned Gentleman is being rather partisan in his caricature of the circumstances. When I say that we have an important job to do in re-engineering the global economic system, that does not mean that we do not have equally important reforms to put in place nationally, or that we do not have equally important reforms to put in place at European Union and G7 level. Those jobs must be done together.
Another lesson of the new era in which we find ourselves, following the credit crunch and the way in which it is manifesting itself, must be that, given the extent of the present interconnection, our problems cannot be solved simply by examining national circumstances or national regulators. That does not mean that the Financial Services Authority has not recognised that it needs to change and reform. Indeed, a programme of work is already under way to respond to some of the shortcomings that the FSA's chief executive identified. The reforms in the Banking Bill constitute another—but only one—aspect of that. There is much work to be done across the piece, at national and at global level, and all the parts of that work must fit together.
As trying to run an economic system without credit is rather like trying to run a car engine without oil, restoring some normality to credit markets has been an obvious priority for the Government. A sound banking system is an essential precondition for the long-term health of the economy, so by definition our initial focus has had to be on the banks.
That is why on
The Prime Minister and the Chancellor are working with other global leaders and our European partners to ensure that the banks are stabilised and begin to lend again, but they are also focusing on reform of the international system to ensure that it can cope with the realities of an interconnected and increasingly interdependent global economic system.
I agree very much with my hon. Friend's comments. I wanted to make the following point to the Chancellor when he made his statement some time ago. Given that the Government have now taken big stakes in a number of banks, with some in public ownership and Government representatives on some boards, was it not also important to put in Government officials at the operational level to make sure that banks and those in banking behave appropriately in the public interest?
My right hon. Friend the Chancellor has announced the creation of UK financial investments. We are still putting together the approach for those who will sit on boards and the arrangements that will need to be made to make that work. We will, no doubt, in due course have discussions about the details, but my hon. Friend has made his pitch and I will make sure it is looked at.
May I urge my hon. Friend to resist the siren voices of the Liberal Democrats? While they have a certain track record in one sense, they focus exclusively on the short term. Short-term measures are important, but I urge my hon. Friend to continue, as the Government have, not only with short-term measures but with medium-term measures, which the Opposition are overlooking, such as the new Bretton Woods agreement that we need, increasing house building in the UK to address the problem of undersupply and therefore of over-inflation in house prices; carrying on with training for the skills we will need when the economy picks up again; and carrying on with measures such as changes to the pension system so we do not end up a basket case, which Italy will be in about 10 years' time?
I always do my best to avoid siren voices, but my hon. Friend is right to point out that, despite all the diverting and difficult things going on in the immediate term, it is important at times such as these to look through the sound and fury to the medium term, and to ensure that, in the areas my hon. Friend mentions, the Government position this country's economy so it can get through in the best possible shape.
The scale of the problem caused by the disruption we have all been experiencing in the global financial system is enormous. As the International Monetary Fund said last month, the world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. As a result of the credit crunch, we have already seen falling output in Germany, France, Italy, Ireland, Japan and Canada, and we now also hear that the USA is in recession. We are now seeing falls in output in the UK, too.
Two weeks ago, the Bank of England's financial stability report estimated sub-prime and related losses at almost $3 trillion, and it is clear that there can be no return to business as usual in these unprecedented circumstances. The interconnected nature of our financial institutions substantially increases systemic risk if any one financial institution fails. The capacity of private sector institutions to rescue each other has proved to be limited. Governments around the world have therefore acted on an unprecedented scale to support a financial system that has been shaken to its foundations.
There will be long-term implications for the relationship between Government and the financial sector at both national and international levels. The Chancellor has made it clear that we need to return to the issues of regulation and transparency, and to the design of the international financial architecture, which must be made fit for purpose in a more globally interdependent world. We also need progress on a world trade deal and the rejection of a beggar-thy-neighbour protectionism, which changed the great stock market crash of 1929 into the great depression and the global calamity of the second world war.
Unlike the Conservatives when they were last in government dealing with a recession, the Labour party in government does not believe that unemployment is a price worth paying; nor does it believe that if it is not hurting, it is not working. We believe it right to stand alongside people and use the power of the state to help them through difficult times, and we are determined to help people and businesses with targeted support. Therefore, at the last Budget we gave a tax cut worth £120 to all 22 million basic-rate taxpayers. We delayed the planned fuel duty increase, at an annual cost of £1 billion. We helped 9 million households by making additional winter fuel payments of £50 for the over-60s and of £100 for the over-80s, on top of current payments. Since the Budget, we have also announced substantial help for people to insulate their homes and reduce their energy bills.
It is inevitable that the global financial crisis should have some effect on the number of people who have difficulty repaying their mortgages, but the number of repossessions for the whole of 2007 is about a third of the levels of the early 1990s, and data from the Council of Mortgage Lenders show that the number of properties taken into possession in the first half of 2008 equates to 0.16 per cent of all mortgages—less than half the rate seen in the early 1990s. However, we are not complacent, and I recognise that each and every repossession is a tragedy for the people involved.
I am very grateful to the Minister for giving way again. As she knows, the level of repossessions took some time to build up in the crisis of the early 1990s. Is she saying that there will be no further increase in the level of repossessions? Given what happened when we debated this matter in April—my hon. Friend Dr. Cable has quoted her as saying that there was no possibility of a recession, and that there was scaremongering on the Liberal Democrat Benches—why should we take her at all seriously now, when she was so comprehensively wrong then?
I noticed the quote from the hon. Gentleman in April when talking about Dr. Cable—that he was one of those gloomy economists who always think that a glass is half empty, rather than half full. I am not going to be gloomy about the UK economy; rather, I will repeat what I was saying when Chris Huhne intervened. We are not complacent. We recognise that each and every repossession is a tragedy for the people involved. I am certainly not going to predict—the Government do not predict—the number of repossessions; the Council of Mortgage Lenders publishes its figures. However, we are determined to do what we can to ensure that we can mitigate the problems that lead people to fall into arrears and face repossession. I will deal in a minute with some of the announcements that we have made to that effect.
I thank my hon. Friend for giving way yet again; may I reinforce her point about repossessions? Before the 1997 election, my constituency had the highest level of repossessions in the country, as a result of which I had almost the largest swing to Labour during that election.
My hon. Friend is treating us to many pearls of wisdom today, and that was another one.
In September, we announced a range of new measures to support thousands of vulnerable home owners. Help newly available as a result of these announcements includes a £200 million mortgage rescue scheme that will help up to 6,000 households avoid the trauma of repossession over the next two years. From
The Government believe that repossessions should be a last, not a first, resort, so we have asked mortgage lenders to review their voluntary arrangements for supporting borrowers who are facing difficulties. The Council of Mortgage Lenders has produced its guidelines, and the Finance and Leasing Association is preparing best practice guidance for lenders, which will be published later this year.
The recent cut in the Bank of England base rate has been widely welcomed. The UK now has its lowest interest rates since 1954, which will provide some welcome relief to home owners who are struggling with mortgage repayments. In the context of responsible lending, we want customers to benefit from the rate cut, and where banks are benefiting from cheaper borrowing, we want that to be passed on to their customers, too.
There are serious shortages of affordable housing, and fewer houses are being built at the moment. Government policy instructs local councils to reduce the leasing of private properties in order to house people in housing need, on the basis that that is a temporary solution. Right now, a temporary solution of that sort would help to meet not only the housing needs of a large number of people, but the need to cover mortgage costs of those who have these properties and would like to let them out. There might be a solution that meets the needs of two groups: those facing the loss of their property, and the many who are in housing need.
We will be looking to build further on our announcements of help to home owners as the situation progresses, and we will bear the hon. Gentleman's suggestions in mind.
Although the world economic climate is uniquely challenging, pessimism about our prospects is neither sensible nor reasonable. We need to be not only realistic about the difficulties we face, but confident that we can get through them. The UK is better placed to weather the global economic storm than it was in the 1970s, 1980s or the 1990s. Following last week's Bank of England actions, the UK has its lowest interest rates since 1954, and we also have low inflation. Both interest rates and inflation are well below the double-digit levels that were a feature of previous recessions.
The Minister says that we are well placed to weather the economic storm, but the huge level of over-indebtedness that many families face means that they are not well placed to do so—as the individual insolvency figures for Scotland, which were released on Friday, showed when they rose by 26 per cent. between quarter two and quarter three. Families and individuals across Scotland—and, indeed, the rest of the UK—are struggling. How are those people, who face such high levels of debt because of irresponsible lending, well placed to weather this storm?
I was talking not about individuals but about the economy as a whole when I made my points about interest rates and so on. We have to deal with individual problems as they come to our attention. Clearly, some people are struggling with their debts, which is why we made our announcements to support them. The hon. Lady must not think that I was applying what I said about interest rates and inflation levels to a particular individual in trouble in Scotland—I was not. We recognise that individuals are facing difficulties, and this Government are determined to be alongside them, helping them to cope during this downturn.
We need fiscal stimulus in the economy and the Government should borrow to provide it. Will my hon. Friend confirm that the accumulated national debt in the UK as a proportion of gross domestic product is far lower than that in any other G7 country except Canada?
Yes, that is the case. Scaremongering about our indebtedness or readiness to deal with these difficult circumstances, as the Opposition do, does not help.
It is churlish of the hon. Gentleman to say that I am frit when I have given way to him so often. Perhaps I am getting a bit fed up of giving way to him and this time I am not going to do so. Our labour market has 3 million more jobs than it did—
Our labour market has 3 million more jobs than it did when we came into government and we are determined to use the reformed Jobcentre Plus service to help anyone facing redundancy to find new work opportunities as quickly and effectively as possible. Thanks to decisions that we have made since 1997, public debt remains low. That means that we can provide targeted support to those who need it most in these difficult times and protect vital investment in our infrastructure—investment that in previous downturns the Conservative party sacrificed and that will underpin our future growth.
We have taken the long-term decisions to boost our competitiveness on energy, planning, transport, housing, science, skills and digital technology. As the International Monetary Fund recently stated:
"For over a decade, the United Kingdom has sustained low inflation and rapid economic growth—an exceptional achievement....fruit of strong policies and policy frameworks, which provide a strong foundation to weather global" challenges. [ Interruption. ] Opposition Members are saying that I am quoting the IMF—I am, and I am as aware as they are of the IMF's recent comments on our prospects for growth next year. If Opposition Members were to look at the IMF's mid-term forecast, they would see that it put us second after only Canada for growth in the 2010 to 2013 period. They should take account of all the IMF's forecasts, rather than taking tiny bits of the forecast out of context.
We are determined to demonstrate that we can help our economy weather this global financial storm and to get through it in the best possible way, so that we can take advantage of the many opportunities as economies seek to recover.
We strongly support the sentiment in the first half of the Liberal Democrat motion, which identifies the fact that the asset price bubble and the over-borrowing that has occurred in the UK are a major contributor to the problem that we face. That problem was not simply made elsewhere and inflicted on an entirely innocent bystander—the Prime Minister. We agree that one of the principal concerns of the Government and this House should now be to get help to families and businesses that are struggling with the short-term challenges of recession.
We also agree—I think that this is implicit in the Liberal Democrat motion—that the first response to the recession should be a monetary policy and that any targeted tax cuts to support families and businesses must be fully funded if we are not simply to burden future generations with the consequences of problems that we have created but do not want to shoulder. Indeed, the Exchequer Secretary came close to supporting that view when she said that we must look through the immediate challenges to the medium term. That strongly suggests to me that she is beginning to see the wisdom of resisting the temptation to borrow and spend her way out of the recession.
We part company from the Liberal Democrats, however, on their prescription, which is that old chestnut—the easy option of tax cuts for everyman, funded by amorphous wealthy individuals, or as the leader of the Liberal Democrats described them today, top earners. That is too easy. We have reached the point in this economic debate where difficult decisions have to be taken, although I know that is not something the Liberal Democrats specialise in. Who are those wealthy individuals or top earners? They are the usual victims. [Hon. Members: "You."] Hon. Members are right. According to the Liberal Democrat proposals, every one of us is one of those top earners or wealthy individuals—anybody earning £40,800 or more.
The Liberal Democrats want to increase tax on pensions for people on middle incomes by withdrawing the benefit of higher rate tax relief on pension contributions for those earning £40,800 or more. Those people are headmasters, police inspectors and senior nurses—hundreds of thousands of hard-working families across the country. The Liberal Democrats want further to discourage entrepreneurship by taxing capital gains as income. They propose another £20 billion of unidentified spending cuts to support their tax cut programme, but they cannot tell us how they will be achieved. In fact, the situation is worse than that; it is not just that they cannot tell us, they will not tell us.
Some of us will remember when the leader of the Liberal Democrats was interviewed on "Newsnight" immediately after their party conference. Once he got to £5.5 billion of the £20 billion, Jeremy Paxman asked, "Where's the rest?" His answer was:
"well, I'm simply not going to tell you the rest."
The Lib Dems bring a whole new dimension to the concept of political transparency.
The Liberal Democrats are all over the place on tax. They are also all over the place on the Bank of England. Dr. Cable claims guru status for having called for a 2 per cent. base rate cut by the Bank of England, but on
"The Government must not compromise the independence of the Bank of England by telling it to slash interest rates."
Then he got on the train back to London and spent the next three weeks going around the television studios calling precisely for a cut in interest rates— [ Interruption. ] That is the point: while those of us who belong to parties that are either in government or aspire to be in government studiously try to respect the independence of the Bank of England, the hon. Gentleman apparently regards himself as free to indulge in wildly populist and contradictory demands on our television screens.
But does the hon. Gentleman remember that my hon. Friend Dr. Cable said that it is in the Government's gift to set the inflation target and that looking at the current reality of the economy it was entirely appropriate to change, suspend or defer that target so that the Bank could concentrate on rescuing the economy? May I also remind the hon. Gentleman that although the shadow Chancellor, in response to an intervention from me, said that he did not comment on interest rates—I cannot read a quote during an intervention, but the hon. Gentleman will be able to find the exact words in Hansard—within two weeks, he was writing in T he Daily Telegraph that there was plenty of scope to stimulate demand with lower interest rates? That contradicts exactly what the hon. Gentleman has just said.
The hon. Lady needs to think about that. It is one thing to observe that there is a considerable gap between the level of UK and US interest rates, which was precisely the point that my hon. Friend the shadow Chancellor was making, but quite another thing to call for a reduction after having just told one's party conference that the Government must not compromise the independence of the Bank of England by telling it to slash interest rates.
I want to be a little more consensual, however, and to return to the point where we agree with the Liberal Democrat motion—at least to some extent. Of course, this is not just a US-made problem, and the sooner the Government can take that on board and accept that this is a problem for which the UK regulatory and policy regime is partly responsible—
Of course, it is partly responsible. The sooner the Government do so, the sooner that we can start making the interventions that will solve the problem and ensure that we do not repeat the mistakes in the next cycle. Unsustainable debt, the asset price bubble, UK households borrowing £1.4 trillion—the highest indebtedness relative to gross domestic product of any country in the world—and the Government operating a pro-cyclical deficit funding policy are at the root of the domestic component of the problems that we are facing.
It is too late to do anything about avoiding this recession, but we must at least learn the lessons for the next set of challenges that we face. How do we tackle these problems? Clearly, international co-operation, including a revisiting of the pro-cyclical effect of the Basel II capital adequacy rules, will be part of the solution.
Does the hon. Gentleman not think that it is a bit harsh to say that we have a recession and that there is nothing that we can do about it? [ Interruption. ] Well, that is exactly what he said. There is plenty that we can do about it, but it is, of course, politically better to get off on abstract arguments. We could do things with mortgages to keep people in their homes, and we could do things with small businesses to keep them in business and employing people. So, for saying that we can do nothing about the recession, the hon. Gentleman should apologise to the British people.
The hon. Gentleman will read Hansard in the morning and see that I said that it is too late to address the unsustainable debts, the asset price bubble, the over-borrowing by households and the pro-cyclical Government deficit funding policy. It is too late to do anything about them to address the recession, but he is absolutely right to suggest that we can do plenty of things to alleviate the immediate impact of the recession, and I shall run through some of them in a moment.
I was talking about how we tackle the challenges. International co-operation is one way. We need to tackle areas of domestic regulation—for example, ensuring that bonuses do not compound the problem by creating perverse incentives that lead banks into the kind of areas that have delivered the problem that we now face. Is there a case for including asset prices in the targeted inflation measure? We have looked at that, and many academic economists around the world have asked themselves that question. Our conclusion is that that is not the right way to proceed, but we need to address asset price inflation.
We have proposed specifically a debt responsibility mechanism by which the Bank of England would take on the role of measuring aggregate credit debt in our economy and transmitting its concerns to the Financial Services Authority, which would then use those concerns in managing the capital adequacy ratios of individual British lending institutions—an effective domestic solution to the regulation of the credit cycle. I should be interested to hear from the Economic Secretary when he replies whether the Government have something to say about that proposal and, of course, fiscal discipline—not a Liberal Democrat unique selling point. We need in place a framework that has the confidence of the markets and that effectively constrains Government action, not just when the going gets difficult but throughout the cycle—not a set of rules that crumbles as soon as the Government run into the first hurdle.
Does the hon. Gentleman agree with me about bonuses? I opened an account at Barclays a few weeks ago. On the news that it was seeking funding to avoid Government intervention, possibly involving not paying bonuses, I contacted the bank to say that I did not want to go ahead with my account, and it was very worried by that, having asked me the reason why. I wonder whether there is anything in people power—perhaps by having to print directors salaries and bonuses on bank statements. Does he think that that might give the public some sense of where they want to keep their money?
If the hon. Lady wishes to exercise her people power, I point out that it is a statutory requirement for directors' salaries and bonuses to be published in banks' annual report and accounts.
The second issue that I want to address is the Bank of England's monetary response in the past few weeks. I agree with the hon. Member for Twickenham that it has been most welcome, but our concern must be that it has not been fully effective. Rhetorical attacks on banks in general, or banks in which the public now have a stake, will not solve the problem. Of course the rescue of the banking sector was undertaken not simply to save the banks, but to save the real economy from meltdown. Presumably, now that we, collectively, are investors to the tune of £37 billion in banks, we want to make sure that we get our money back. With the greatest respect to Kelvin Hopkins, I do not think that that cause will be advanced by putting him in charge of lending policy. Politician-dictated lending policies will not be the answer.
No, of course not. The two objectives with regard to the public-sector investment in the banking system must be, first, to save the banking system so that we can protect the real economy, and secondly to get every penny of the £37 billion back, preferably with a substantial gain for the taxpayer over time. Those must be our objectives. Let us not forget that we have a big stake in the banks in question.
Will my hon. Friend acknowledge that £18 billion of cash is going to Abbey/Santander for Bradford & Bingley, that there was £3 billion of equity investment in Northern Rock, and that unfortunately our first 100 per cent. investment, Northern Rock, made us a loss of £580 million in the first half of the year? Is there not therefore a lot of work to do to make a profit?
My right hon. Friend is right, but he is perhaps rather generous to describe the £3 billion as an equity investment in Northern Rock; I think that it was a write-off of debt, about which the Government had little choice. [Interruption.] I know that it is counted as an equity investment, but I do not think that it was made out of choice.
Surely the solution is to mend the mechanism that, until last year, always linked Bank of England base rates with the banks' costs of funding. We can of course urge the banks to pass on changes in the official rate, but we also need Government action to secure the reopening of the money markets, so that banks' borrowing costs follow the base rate down. We will then be in a far stronger moral and practical position to urge the banks to pass on the Bank of England's monetary policy response to consumers and businesses.
The motion in the name of the hon. Member for Twickenham refers to
"£500 billion of taxpayers' money" having gone into the banking system. I think that that is made up of £200 billion in the special liquidity scheme, £37 billion-odd of capital, and £250 billion in money market guarantees. The latter was the largest component of the package announced by the Prime Minister and the Chancellor a few weeks ago, together with the recapitalisation. As far as I can tell, that bit of the package is not working. I do not know whether the Economic Secretary can, in his winding-up speech, give us any figures on what take-up there has been of that £250 billion. The information is difficult to come by, but my inquiries in the City suggest that there has been minimal take-up. That may have to do with the conditions attached or the pricing. That is a critical matter that the Government must look into, because the whole package depends on our being able to reopen and restore confidence in the money markets, so that in future, the Bank of England's base rate cuts are automatically followed by cuts in the cost of funding to the banks, and thus automatically followed by cuts to mortgage rates, small business overdraft rates, and lending rates to families.
The hon. Gentleman makes an interesting point about use of the guarantee. Of course, it was a very innovative proposition at the time. Does he not agree that the most effective guarantee, were it to work brilliantly, would not be taken up at all?
Ultimately, once confidence has been completely restored to the markets, I guess the right hon. Lady is right, but sadly that is not the position that we are in. I hope that when the Chancellor and the Prime Minister announced the £250 billion guarantee facility—a very big, eye-catching, headline-grabbing number—they did not announce it with the expectation and intention that virtually none of it would be taken up. I hope that they announced it in the expectation that it would have the desired effect. It has not, however, because if it had, LIBOR rates would have fallen by 1.5 percentage points last Friday. That is where we need to get to. We must restore the link, because that is what is broken, and that is what needs urgent attention if we are to fix the credit famine that is affecting families and small businesses throughout the country. No amount of rhetoric or exhortation will deliver sustainable relief if we do not fix that mechanism.
The Government have already announced the £250 billion package, which the right hon. Gentleman will remember we supported, but the Government now need to consider the pricing and the conditionality that are attached to the package. The Economic Secretary may tell us later that I am misinformed and that hundreds of billions of pounds of the guarantee facility have been taken up, but if that is not true and it was a critical part of the package, the Government need urgently to examine how that part of the mechanism works. This is not a party political point; we supported the package.
My question was not meant as a party political point either; it was meant for all our elucidation. I shall say something later about inter-bank lending, which is right at the heart of the matter, but the hon. Gentleman said quite clearly that the mechanism is not working, so, if he believes that it is not, what does he think would?
I suspect that the mechanism is not working, and I suspect that the reasons why are partly the pricing, partly the conditionality and partly, perhaps, the toxic assets that remain in the system. We heard a suggestion earlier about the creation of a "bad bank". I should like to hear from the Exchequer Secretary not that she has a magic wand but that the Government at least recognise that the extent to which that part of the package has not been taken up demonstrates that the package as a whole is not delivering the intended results, which it clearly is not. That is a problem for all of us, and one that we, collectively, have to address.
The third point on which we agree with the Liberal Democrats—at least I think we do—is that spending and borrowing our way out of a recession, over and above the levels that are implied by the automatic stabilisers and the Government's commitment to continue some support for those who lost out in the 10p tax fiasco, will not work and is not sustainable. Future generations would be burdened with even higher debts and the recovery might be threatened by the prospect of large tax rises. We would simply be sowing the seeds of the next crisis, but, as we heard earlier, carefully targeted and fully funded tax cuts, and other specific support measures, would bring relief to families and businesses.
We do not agree with the Liberal Democrat approach in seeking to raise taxes on middle-income earners to pay for cuts, and we do not believe it credible to claim to fund cuts on the back of unidentified spending cuts. Fiscal prudence and a concern for the future does not mean, however, being unable to help, although others who have behaved more prudently in the past have greater scope for action now: the Australians recently enjoyed the luxury of making a decision to spend half their public sector surplus on stimulating demand from families and businesses. We have set out a number of suggestions and already announced the following proposals: a council tax freeze, funded by cuts in Government consultancy and the Government's advertising budget; the abolition of stamp duty for 90 per cent. of first-time buyers; the use of the Post Office card account to give access to direct debits—thus cutting the fuel bills of the most vulnerable householders—while the Government appear set on privatising it; cuts in the small companies corporation tax rate, funded by scrapping the annual investment allowances; a temporary cut of 1p in the pound in employers' national insurance contributions for the smallest employers for six months to stimulate employment; the deferment of small-to-medium enterprises' VAT bills for six months at commercial rates of interest to help businesses with their cash flow; and, changes in the law to provide breathing space for businesses facing insolvency and households facing repossession for amounts that were incurred as unsecured debts. We continue to identify opportunities for targeted, fully funded interventions that will bring much-needed relief to families and businesses.
I turn briefly to the Government amendment, which has the now-familiar focus on the global dimension—the subtext broadly being, "Not our problem, guv. The problems were made somewhere else and we are innocent victims." The Exchequer Secretary used the words "global" or "globally" 21 times in her speech, and I heard no acknowledgement in it of the policy and regulatory failures in the UK. The Lib Dem motion sets those failures out and we have repeatedly drawn attention to them.
The fact is that the claim to have abolished boom and bust heralded in the UK the age of irresponsibility against which the Prime Minister now rails. There was five-times-income mortgage lending and there were 125 per cent. mortgage loans: the Government not only failed to curb household borrowing, but through the years of economic growth ran the biggest deficit of any developed economy. The Exchequer Secretary claims that Government debt has been reduced since 1997, but she and almost everybody else in the House knows that the Office for National Statistics figures show that, in fact, Government debt is up a little on the 1997 level. After 10 years of continuous economic growth, our national debt position has not improved but slightly worsened.
There is no sense in the Government amendment of the scale of the challenge. The Exchequer Secretary likes to draw comparisons with statistics relating to the end of the last economic recession, but the appropriate comparison for where we are now is with its beginning. In the last full year before that recession, there was a budget surplus of 0.2 per cent. of GDP; this time, we are entering recession with a budget deficit of 2.6 per cent. of GDP, as a result of having borrowed through the boom.
May I take the hon. Gentleman back a little to the issue of household debt? One of the difficulties has been that for more than 30 years there has been a shortage of housing supply in the UK, and that has led to ridiculously high property prices. On the back of that, equity release, based on optimism that house price rises would continue, has gone on apace. The Government—and, I hope, the Opposition—are stretching towards what we need to do, which is to build a lot more housing so that there is no boom and bust in the housing market.
Furthermore, one of the drivers of the current situation has been the Conservative policy, in the mid-1980s, of removing the ban on equity release from mortgages. Like me, the hon. Gentleman is old enough to remember when people could not get money from a building society or bank on a house unless it was to buy or improve the property—the money could not be for buying a car, more furniture or whatever. We need to look at getting back to that position.
I urge the hon. Gentleman to be a little cautious with that analysis. I suggest to him that although house prices are now falling rapidly—and, according to the hon. Member for Twickenham, will fall significantly further—the housing shortage has not gone away. The housing-asset price bubble has been driven by the growth of credit and the invention, for it was an invention, of clever new ways of creating credit, mainly through securitisation. That led to more money being available in the system and manifested itself as an inflation in asset prices.
I acknowledge, of course, that the housing shortage is an underlying problem, but a lot of people with no borrowing power—short of their houses—do not in themselves drive up house prices. House prices get driven up when the people who want to live in the houses can borrow effectively unlimited amounts of money to bid up the prices. That is what we have seen in the past few years.
The Prime Minister has repeatedly claimed, and did so again as recently as last week, that Britain is well prepared to weather the economic storm. In fact, back in January Alan Greenspan described us as being particularly vulnerable. The EU reports, and the IMF report that we saw last week, have confirmed that Britain is ill prepared for the recession, that we go into it with a bigger deficit than any other country and that because of our economy's narrow base, we are struggling to find the locomotive that will pull us out. That is because we have been so heavily dependent on financial services, rising public spending and the housing market during most of the economic growth of the past decade.
The Minister used the term "schizophrenia" towards the end of her speech. However, I have to say to her—perhaps the Economic Secretary will clear this up later—that the Government's position is far from clear on the question of an overall significant further fiscal loosening. We have heard lots of rhetoric and been given lots of briefings that are then not matched by the words that come out of the Prime Minister's or the Chancellor's mouth. Having heard the hon. Lady's speech, we are none the wiser as to whether the Government are proposing a massive fiscal loosening or merely considering targeted tax measures—along the lines that the Liberal Democrats propose and we have discussed—that are fully funded by changes elsewhere.
The immediate imperative must be to help those caught in the fall-out of this rapid economic decline—families facing repossession, sound businesses caught in a short-term cash crunch, employers who are having to face the agonising decision over letting valued staff go because their orders have dried up—and to fix the broken transmission mechanism in our monetary system. However, we must not lose sight of the lessons of the past few years as regards how we got to this point. A recession caused by excessive borrowing cannot be solved by borrowing and spending our way out of it. That will not work, and anyone who doubts it should ask the Japanese.
A responsible approach combines immediate, fully funded help for families and businesses to weather the recession; action domestically and internationally to restore confidence and thus liquidity to financial markets; a rejection of the superficially easy route of a massive increase in borrowing to pay for an unfunded spending splurge; a careful and considered response to the weaknesses that have been exposed in the regulation of our financial system; a proper, sustainable medium-term fiscal framework to restore market confidence that does not crumble at the first hurdle and will get the public finances back into a position where Governments will be able to help families and businesses in future downturns; and a focus on fixing the underlying weaknesses in our economy—the productivity gap, the skills gap, the unreformed welfare system, and the negative productivity growth in significant parts of the public services—all of which must be resolved if Britain is to maintain its prosperity and resume a sustainable growth path long after this immediate crisis has passed. That is the approach that Her Majesty's Opposition will continue to pursue.
Order. Before I call the next hon. Member to speak, may I remind the House that a 15-minute limit on all Back-Bench speeches will apply from now on?
I should like to start with several welcomes. First, I welcome the fact that we are having this debate, because given the enormity of the challenge we face, the more time that we spend discussing it and seeking solutions and responses, the better. Secondly, I welcome the steps that are already being taken by our Government. I hope that that is widely recognised. Whatever other areas of disagreement might exist in this House, the Prime Minister, the Chancellor and the Government should be congratulated on the courage, decisiveness and leadership that they have shown not only in this country but internationally. It would be churlish for anyone in the Chamber not to recognise what has been recognised in so many other countries. Thirdly, I welcome the fact that the Government, and indeed many Opposition Members, recognise the requirement to address these complex issues in a multi-layered way: at the international, global level; at the level of central banks; at the sovereign, national level; at the level of inter-bank relationships; and at the level of individuals.
I understand that this evening, according to news reports, the Prime Minister will again urge a restructuring and reformation of the international monetary regulatory system. I do not know why that makes news; he has been doing so for years. Indeed, not only has the current leader of the Labour party been doing so, but the one before that, and the one before that. I have been here long enough to remember the one before that, Lord Kinnock, calling for a revision of Bretton Woods in the early 1980s. It just shows that if we stay around long enough, common sense—born out of a crisis—afflicts everyone.
I certainly think so, but there has been a shift in economic predominance from the west to the east, and we cannot merely ask other countries to inject liquidity into the international monetary system or the IMF without having regard to the fact that they may want something in return. That is an element of the international rearrangement of the mechanisms set up in the late 1940s, and since the 1970s it has been obvious that those mechanisms are inadequate in some respects.
I welcome many of the measures that have at least been hinted at regarding the protection of individuals, particularly those who need the most protection, through targeted cuts in taxation and so on. I do not know whether the Government are considering such measures. If so, I feel that they are to be welcomed. Of course, such measures need to be responsible and prudent, and there are automatic stabilisers in the system anyway, which entail an increasing dependence on Government finances because of the reduction of incoming income, and the increase in outgoing expenditure to protect the poorest.
Will the right hon. Gentleman clarify whether he is advocating to his colleagues on the Front Bench unfunded tax cuts that create a fiscal stimulus, or the sort of funded tax cuts that both Opposition parties have talked about?
Ultimately, all tax cuts have to be funded from some quarter. I agree entirely with the Prime Minister and my Front-Bench team that a recession is not the time to cut back on public expenditure. Some of the increase in borrowing is automatic through the stabilisers, some of it comes through capital programmes, and some of it could be the result of targeted taxation cuts that result in borrowing. The overall limit to indulging in such borrowing has to be set at a responsible level. The point has been made that we are in a stronger position to do that than many other countries because of the stewardship of the economy during the past 10 years.
In the limited time that I have, I want to address a point that I raised with Mr. Hammond, not for partisan reasons but because I am genuinely interested in the solution to what I regard as the central problem, which is that of inter-bank lending. My hon. Friend the Exchequer Secretary said that that was the primary task. It is relatively easy to envisage how we would address the reconstruction of the International Money Fund and associated bodies, and to see how we would address the problems of an individual bank through recapitalisation. It is a controversial matter, but it is relatively easy to see how we would help an individual.
It is not relatively easy, however, to see how we might get long-term, sustainable acceptance and confidence among banks that resurrect inter-bank lending, and I would like to deal with that point today. In doing so, I want to make it plain that what I have to say is a result of my involvement in very unusual parliamentary practices in the recent past—effectively, staying silent, listening and thinking. I apologise, and I include that because the ideas that I refer to are not my original ideas but those of some of the people I have been speaking to.
We all know that the global banking system has been under severe stress for more than a year, largely owing to a lack of trust between banks. Lack of confidence has resulted in banks largely, although not exclusively, being prepared to lend to each other only at accentuated rates on an overnight basis. That makes it impossible for the banks to provide the necessary funds to industry or the public—both need funds for a much longer time.
However, if a bank is not fully confident that it can get money in future, it cannot take the risk of lending the money that it has to customers. That problem is easily described. In dealing with the difficulties in the inter-bank markets and in trying to make funds available for industry and the public, several Governments have guaranteed the inter-bank markets. I contend that that can be only a temporary solution and that none of us can be confident that the crisis would not happen again if the Government withdrew the guarantees. That gets to the nub of a thorny problem. Indeed, in the absence of change, a crisis is likely to recur. Once confidence has been lost in the working of the banking system, it becomes far more fragile because everyone knows that it has broken down once and that, therefore, it can happen again. That clearly points to the need for a new structure.
The right hon. Gentleman is talking about an incredibly important matter, which, as he says, has been neglected. Does he realise that in the United States, several states—for example, California—are initiating major efforts to try to identify whether fraud lies at the bottom of many of the problem loans on banks' books? There is concern that fraud and extreme mis-selling, which has not been unravelled in the UK and other markets, is holding up reinvigoration.
I do not intend to deal with fraud today—the issue of confidence is difficult enough to tackle.
The essence of the banking system is intermediating between the essentially short-term nature of deposits and the longer-term nature of loans. In addition, the banking system intermediates between areas where there are surplus funds and those where there is excess demand for them. The inter-bank market has evolved to deal with that intermediation. The problem is that the market has evolved largely on a self-regulating, principal-to-principal basis. The market is also extremely opaque, with participants having only limited, historic information about their intended partners, whether borrowers or lenders.
The problems that have arisen require a new structure for the inter-bank market, one which instils confidence, is transparent to the regulators at the very least, and is fully controlled. Regulation must be enhanced to focus on all exposures rather than operating in a world where exposures can be made to disappear by being taken off balance sheet.
There is no doubt that the problem is huge. I make a modest suggestion, which may catch the Government's attention and that of other hon. Members as a possible solution. In summary, it would entail the world's central banks establishing an international monetary exchange, through which all future inter-bank transactions would go—let us call it "IMX". It would operate like any normal exchange, with the central banks fully and unconditionally guaranteeing the exchange counterparty performance, so that no bank would have a reason not to supply funds to the exchange. All central banks would be fully responsible for the liabilities to the exchange of the banks for which they were the primary regulator. The central banks would own and run the IMX.
In the time available, let us consider the mechanism carefully. The IMX would operate like any other exchange, with the critical benefit that exchange participants could deal freely with the exchange without having to inquire about other participating members' credit status. Exchange technology is already well established and is available from many vendors. In my view, and that of those with whom I have discussed the matter, an exchange could be established in a matter of months by adopting the proven technologies from established exchanges.
There should be an exchange for each major currency, with the initial establishment of a global euro exchange, a global dollar exchange, a global yen exchange and a global sterling exchange, which would be owned and run by the respective central banks for each currency. Each central bank would guarantee the performance of its relevant currency exchange and set rules for the institutions that would be eligible to borrow from the exchange.
It is possible to identify some key features of such a system, even in the limited time available. First, anyone could offer liquidity to the exchange at a set price, including the central banks. Secondly, all inter-bank lending of participating institutions must be transacted through the exchange. Thirdly, borrowing from the exchange would be at the same price irrespective of the borrower, that price being set by the providers of liquidity to the exchange at any point in time. Fourthly, each central bank would set limits on local institutions and charge them for use of the guarantee.
It is also possible to identify the major benefits that might flow from such a system if established. Such a system would restore the necessary trust and confidence to inter-bank lending, allow for an innovative and free market to operate, and provide regulators and Governments with consolidated real-time information on global liquidity flows and counterparty exposures, thereby helping to prevent excesses before they occur. One of the problems that we have experienced in the past is the lack of forewarning, just as the asset valuation of lenders and borrowers was opaque. Such a system would reduce redundancy through inter-bank netting at the exchange level and significantly reduce counterparty management and friction costs. I therefore put my proposal forward as one worthy of consideration.
Such a system would do one further thing: assist in providing the basis for regulation. The current structure of the inter-bank market, coupled with the off-balance-sheet nature of many products, makes proper regulation of the financial system almost impossible. The unregulated nature of inter-bank and derivative activity, to which spokespersons in all parts of the House have referred, together with the many off-balance-sheet products, has facilitated the largely uncontrolled growth of credit and provided no early warning system to central bankers on either a global or local basis.
The introduction of an exchange would provide central banks with the complete and instantaneous information required to regulate those banks that they stand over. The inability of any institution to access the exchange without receiving the approval and meeting the requirements of the authorising central bank would provide that central bank with a formidable array of controls, information and potential regulatory levers.
We could ultimately provide an exchange that was self-funding, because institutions that would be members of the international monetary exchange should be charged for the access to funds which the scheme affords them. The unit cost of exchange participation could be set based on the stand-alone rating of the bank and the maturity of its net obligations—namely, on the degree to which it is a net borrower from the exchange.
I do not pretend that there are not many other considerations that would affect my proposal, such as the central bank limit and over-the-counter transactions, such as credit default swaps and so on, which can be moved into it. However, such a system would at least begin to tackle the central problem that we face when we consider the recession, the acute crisis that we have come through and the chronic problems that we are somewhere near the beginning of addressing. In many ways, the most intractable problem is restoring sustainable confidence in the inter-bank lending system.
I thus conclude by saying that, irrespective of the economic actions that are taken to stimulate national economies or, indeed, the global economy, it is essential that structural change should take place in the global banking market to avoid a future reccurrence of the collapse in confidence and the freezing of the banking market that we have seen. I am entirely with the Prime Minister and condone his leadership in attempting to reformulate the international monetary institutions. However, in the absence of an exchange, it is unlikely that full confidence will ever be restored in the global banking system, as today's problems can easily reccur.
The essence of banking is ensuring the efficient use of funds for the benefit of industry and society, with a fully functioning inter-bank market being the cornerstone of that intermediation. However, the current inter-bank market is not working. It is inefficient, opaque and largely unregulated. Introducing a regulated exchange would restore confidence, and it would be more efficient and transparent, as all inter-bank and even derivative-type activity could be instantaneously, centrally recorded. It would also greatly enhance the regulatory power and information of the central banks. It would not solve all the problems, but I believe it would be a major contributory factor to addressing the central problem.
John Reid has made an important speech, and his idea is worthy of longer consideration, although some of the details would need to be fleshed out in order to see whether it was practical or could work. What motivates it is a sense shared on some parts of the Labour Back Benches, and certainly on the Opposition side of the House, that the twin crises that we are living through—the financial crisis and the recession—are not yet responding to treatment as quickly as we would like, and that the Government would be well advised to listen to friends on their side of the House, and to people on my side of the House who wish them well in trying to tackle the crisis, when we offer them advice on the other things that they could do to head off some of the worst disasters that might still lie ahead.
Listening to the Exchequer Secretary, I felt that she was being very complacent. She wanted everyone to believe that this was a global, rather than a British, crisis. Let us go back to August and September 2007, however. Northern Rock was a very British bank, lending too much money to British mortgage holders to pay too much for their houses, and getting into difficulties because it and its customers were greatly over-extended. It was regulated by British regulators, and they let it down very badly. They allowed it to expand too fast, and then starved the money markets of money in August and September. The Chancellor and the Governor of the Bank of England then lectured Northern Rock on how it had to live with its own mistakes. They brought the bank down and, afterwards, decided that the taxpayer should stand treat. That was not good management, or good regulatory practice, and I hope that the Government will learn from that and not do it to another bank.
If we look at the problems that the Government now have with Northern Rock, we can see what a bad so-called solution that was. Taxpayers were put on risk for more than £100 billion, and they have lost £580 million in the first half year in owning 100 per cent. of the equity. That was the stated interim loss. The second half losses might be bigger; there will certainly be such losses. Extra capital amounting to £3 billion has had to be sunk into the bank, and I do not think that we shall see a return on that any time soon. Half the staff are being sacked, £14 billion-worth of mortgages have now been repaid, and the bank is unable to make new advances. It is crippled, higgled and gravely damaged, and the taxpayer is going to have to pay all the costs involved in winding up a lot of the business, getting rid of the staff and shrinking the thing that was once a flourishing institution.
I invite hon. Members to cast their minds back to what the directors and owners of Northern Rock were debating in the spring and summer of 2007, as recorded in their annual report, which came out just before the crunch. They were discussing their response to the regulatory signals that were being sent out. The British and global regulators, but particularly the British regulators for Northern Rock, were telling them that they had too much capital for the volume of loans that they were making, and the discussion within the Northern Rock boardroom related to how it could get its capital down, or its loans up, in order to get nearer to the ratio that the regulator said was needed.
More recently, the British regulators have said to all the banks in Britain that the ratios to which they used to manage are no longer sufficient for the current circumstances, and they are making all banks have more capital, relative to the amount of lending that they do. So in the good times, when there was too much credit, the regulator was saying, "Don't worry. Lend some more. You don't need to have a very high ratio." In the dreadful times, when there is very little credit available for anyone, the Government and the regulators have decided to send the alternative message that banks in the middle of this crisis have to raise a lot more capital, relative to their lending. That does not strike me as wise regulation on either score, but once the regulators have taken such action it becomes the new hurdle or standard, and every other organisation must do the same, not just to meet the regulatory requirements but in an effort to rebuild confidence. The Government need to understand the important point made by my hon. Friend Mr. Hammond, who observed that the £250 billion package of guarantees was not being taken up to a great extent. That is a sign that the package was not properly constructed.
I fully support the action of Government and the Bank of England in standing behind any major bank that is in trouble, and have always done so. Only a lunatic would want to see a major bank go down, and in view of the impact of Lehman's going down, I would think that even someone who was a lunatic before that event might now understand that it is better to manage institutions through crises such as this rather than precipitate a major crash on the back of a very large institution's biting the dust. That is why I supported the Government's £200 billion of extra loans; and it is why I supported all the extra money that they flushed into the money markets, and the £250 billion guarantee scheme.
I think that that guarantee scheme should be revisited. It is not the case that the lending rates in the market between the banks have fallen to the extent that they have returned to their normal relationship with the rates that the Bank of England is signalling, and it is not the case that there is now a fluid and functioning inter-bank market. The best chance that the Government have of getting that market going again is to tweak, or change, the guarantee scheme in the short term, so that more money can flow between the banks. They should be warned, however, that it will never function as well as it did before the crunch, because the regulators—perhaps for good reasons—are now requiring much more capital relative to the amount of lending. All the banks are now fighting to reduce, rather than increase, their loan books, because that is what the regulator and the Government are asking them to do. The inter-bank markets cannot be expected to be as fluid and successful as they were in June 2007, because the regulatory mood—along with the confidence mood—has changed in the banking market.
An additional problem is that the twin difficulties of the financial crunch and the banking crisis are reinforcing each other. While we have lived through some of the worst parts of the financial crunch—let us hope that we now have more stability, because there is a clear understanding in the markets that Governments around the world stand behind their banks in one way or another—we are only on the edge of the serious recession that is now being widely forecast by independent bodies as well as by most Governments. I suspect that this Government will soon be forecasting one, when they get around to revising their figures.
That factor is particularly damaging to an economy such as that of the United Kingdom. The last 10 years in particular have seen very lopsided growth in Britain. Growth rates in London, with its financial services, professional services and business services, have far outpaced those in the rest of the country. Indeed, the growth rate in London has been more than double that in the north and west of the United Kingdom, reflecting the success of those financial institutions and the impact of the credit bubble on property-related and finance-related activity emanating from the very expensive districts in the centre of London. That concentration of effort makes the British economy doubly vulnerable to the downturn now hitting it. The epicentre of the crisis is the financial services and property sector, which is going to fall further—and we have more of it to fall than more balanced economies on the continent and in the Americas.
As the recession bites, the loan experience on all the bank books will deteriorate further. To date, we have been discussing the mortgage mess. The Government would like us to believe that the only mess that we really had to face was the sub-prime market in America, and it is true that some of our banks foolishly lost some money on that market, but we know that a far bigger crisis for the British banks was the mortgage crisis in Britain, where too much mortgage advance was made on house prices that were too inflated. There are big losses coming through as a result of that, which is why it was Northern Rock and Bradford & Bingley that needed special treatment in the United Kingdom. British banks under British regulators built a British property bubble.
The next phase of the crisis, unfortunately, will be a sharp deterioration in the loan experience that constitutes lending to everyone else, not just those involved in property and finance. The economy is now falling off a cliff, and activity is falling dramatically in sectors beyond finance and property. That means that there will be many more bad loans throughout the range of business activities and the industrial and commercial services sector, from here to John o'Groats. All around the country, the same pressures will be felt as the recession bites.
That is why I repeat my advice—it is heartfelt, as I love my country and wish it to do well—that when thinking about buying banks, the Government should be extremely careful about how much equity risk they take on. If they are really going to persist in taking major shareholdings in banks the size of RBS, which has an average balance sheet over the year of £2 trillion, a sum that is bigger than the national income and five times the tax revenue of the country, they should understand that it requires only a small mistake in terms of a bank's assets and liabilities that falls on the wrong side for taxpayers for them to have very major losses on their hands.
That is why, in this period of relative tranquillity before all the deals go through, the Government should be looking again at the terms and the balance sheets that they will be taking over. They should be sending in the forensic accountants now. We all know they will stand behind the banks, so there will not be a confidence problem. There will, however, be a confidence problem in the Government, and in the amount of Government debt they will have to issue, if they do not behave sensibly by doing some basic accounting work and risk assessment on these huge banks that they are now thinking of nationalising or buying major shareholdings in. The Government should be warned by the fact that they lost £580 million in the first half on a very small bank—Northern Rock. They should remember that RBS is 20 times the size of Northern Rock, so if something goes wrong they will be playing not for a few billions of pounds, but for tens of billions. That is serious money, even for a rich country with a Government who collect as much in tax revenue as the current Government do.
If the Government press on, they must understand that where they are majority owners of a bank, they are responsible for everything. Ultimately, they are responsible for the lending policy, the bonuses and the number of highly paid staff, and for whether a loan is made to Mr. Snooks or Mrs. Smith. They will be made responsible by their electors—the people out there—who will not understand if they say, "This nationalised bank is not actually run by the Government. Yes, we the Government put in all the money on behalf of the taxpayers, but we have no control over how the money is spent."
I am following with great interest what the right hon. Gentleman is saying. He seems to be supporting my earlier contention that the Government ought to put in people to regulate the internal operation of the banks, to make sure that they act in the public interest.
There is at least one difference between us, in that I would not nationalise a bank at all, as I think that would be too dangerous for the taxpayer. The hon. Gentleman is right, however, that if the Government persist in nationalising—taking a majority stake or complete control—they cannot avoid ultimately being responsible for the financial consequences of their actions. I think that Ministers are completely responsible for Northern Rock. They own 100 per cent. of it on behalf of the taxpayer, and I quite understand why people will want to make that an issue with Ministers.
Why did the Government take this huge stake in Northern Rock? They presumably did so because they felt they could do a better job in the public interest by backing the bank than by enforcing a market solution. They did not seem to want a private sector bank to take over Northern Rock, and they did not want just to lend it some money to see whether it could then find ways of making more profit or raising capital in the normal way. I therefore think the hon. Gentleman has a point. When Ministers say they will not intervene, they do not really mean that, of course, because they have already told us they have views on bonus payments and on how much lending should be done. When Ministers try to enforce elements of those views, they will discover that they are trying to do so in respect of very complicated institutions that could lose the taxpayer a fortune if the wrong guidance is given, and which might lose them quite a lot of money even if they do not give any guidance at all. They will find this situation extremely difficult.
It is also crucial to offer people the hope that, in the process of settling the banking crisis in the way we have been debating, more will be done to try to offset the real damage being done to the rest of the economy. I welcome the new enthusiasm in all parts of the House for tax reductions. It is vital to put more spending power into people's pockets as quickly as possible. Income tax cuts for those on lower and middle incomes would be extremely welcome, as it would be the quickest way of injecting more spending power into the economy.
I would not start from where the right hon. Lady and her Government start from. I would be running a much more prudent show than they are, because I would not want to spend all this money on bank shares; I would do it by short-term loans and in the other ways that have been identified, so I would have room for a fiscal stimulus in my Budget. My Front-Bench colleagues have backed the banking package in full, which was very generous of them. However, they are absolutely right: given that amount of borrowing—the banking package as well as the rest of the borrowing—it is too risky to borrow yet more for the fiscal stimulus. They are drawing attention to the fact that Britain is not well equipped to do what it should be doing, which is to give a fiscal stimulus by cutting taxes and borrowing in the short term to pay for that tax cut. Given where the national accounts are, it would be ruinous to add yet more to the borrowing.
The Labour Government seem to believe that there is a free lunch out there. They believe that because a recession is coming, they can say that they can borrow any amount they like, and the markets will miraculously supply it. They need to be very careful. Past history in this country shows that markets can be very forgiving for quite a long time. Of course, markets are just groups of people: they are all the people in the country and overseas counterparties, and they, like Ministers, want the economy to do well and would like all these packages to work. However, if the Government start to present markets with too big a burden of borrowing—if they say that they need to borrow such colossal sums that the markets say, "But we're not sure we can find that money any more"—we will be in a far worse crisis than we are currently experiencing.
At the moment, the Government seem to think that the answer to too much borrowing and lending in the private sector is to transfer it to the public sector. That is not the answer. If the problem really is, as they described, too much borrowing and lending, we have to go through a process of reducing it. We can do that in a very sharp, quick, deep, damaging way; or we can try to manage it over a longer period, so that there is not such a sharp downturn, but a longer period of slow growth, no growth or modest reductions in activity. The Government seem to have lurched from wanting a very sharp reduction in private sector debt—that is what their regulators and the Monetary Policy Committee were saying last year, with the Chancellor saying that it would serve the private sector right—to wanting a much slower run-down. If they simply transfer it all to the Government sector and build up even more Government debt, they might have another problem on their hands: that of finding it very difficult to finance their borrowing at a sensible price.
The Government have already taken a big hit on the currency. We are about a quarter worse off against the dollar compared with a few months ago, there has been a very big slide against the yen, and against all the strong currencies of the world sterling is very weak. If the Government are not prudent enough, they could also have a further leg down on sterling, which would make us all a lot poorer and make it more difficult to raise the money that they need to carry out their tasks.
I congratulate my right hon. Friend John Reid on making a really innovative proposal today; for some time, I have not heard expressed in this House a new proposal on dealing with the issues that confront us today. It could be a way genuinely of dealing with counterparty risk, and of providing incentives for different countries across the world—surplus or deficit countries—to co-operate and abide by certain international rules of the game. His proposition certainly deserves to be explored further.
I have listened with interest to the contributions, particularly as I am a relative newcomer to this debate. The Liberal Democrats have at least been consistent in their critique of the Government. It was quite interesting to hear the sharp change in tack from the official Opposition Front Benchers. One moment they were espousing bipartisanship; now they seem to have lurched to the opposite extreme of criticising everything that the Government do. Both Opposition parties have come together in blaming the Government, and particularly my right hon. Friend the Prime Minister, for presiding over a build-up of personal and public debt during his time as Chancellor of the Exchequer. They seem to think that the credit crunch and the global issues that we face are largely the result of domestic policy errors in the United Kingdom. I argue that those accusations are fundamentally misguided. They misdiagnose the problem, and when one misdiagnoses the problem it is impossible to provide accurate solutions or to learn the lessons necessary for the future.
The Government should be judged on whether they understand the nature and scale of the current crisis; on whether they are putting in place the right actions to deal with it, both for now and for the future; and, lastly, on the state of the economy as we enter the forthcoming downturn—did we fix the roof as the sun was shining? On all three counts, the Government will be proved to have had the insight and the character necessary to deal with the global downturn—on all three counts, the official Opposition, at least, have failed.
Nobody disputes the severity of the current crisis. When, at the end of August, my right hon. Friend the Chancellor described the financial circumstances as "arguably the worst" for 60 years, he was widely derided, so I was interested to read the following in the Bank of England's financial stability report, which was published last week:
"In recent weeks, the global banking system has arguably undergone its biggest episode of instability since the start of the first world war".
We are talking not about 60 years but about almost a century.
We have all learned lessons during this credit crunch crisis and its implications. A natural fear of moral hazard at the emergence of the tightening of credit conditions has turned to a preoccupation with trying to fend off a global slump, as the reality of the impact that a severe credit crunch can have on the economy has dawned.
The seeds of the crisis can be traced back to the development of current account and trade imbalances over the past decade, fuelled by financial market liberalisation and abolition of capital controls in the late 1980s, one symptom of which was the unfettered access of businesses and individuals to credit. Of course, many businesses and individuals are perfectly good credit risks, and not for a moment would I suggest—I hope that few Members of this House would suggest it—that we should roll the clock back to the days when individuals and businesses were denied credit lines.
The soaring of current account surpluses in Asia led to low global real interest rates, which, combined with cheap exports, created downward pressure on inflation. The consequence was a sharp increase in borrowing in a number of countries, including the United Kingdom, partly financed by the inflows of foreign capital lending. As we all know, that was accompanied by the greater integration of capital markets, an increase in risk, a reduction in transparency and an explosion in credit derivatives as a response to the huge market in securitised assets. Credit derivatives were supposed to make securitisation less risky, but they ended up making it far riskier.
As a result of that global interdependence—between banks and between banks and other financial institutions —the global system became particularly vulnerable to any shock. The immediate shock in this case were the losses in the US sub-prime mortgage market. Those losses made credit derivative contracts prohibitively expensive, securitisation ground to a halt, and banks became fearful of lending to each other and fundamentally reassessed each other's creditworthiness. Overnight lending dried up and this systemic risk was noticed and perceived not just in one country but across boundaries.
That was the beginning of the real credit crunch—when it started to bite; the market turmoil; the halving of the capitalisation of world stock markets; the losses of $2.8 trillion, which are now being felt with dire consequences for businesses and individuals; and, of course, the risk of a global slump.
In such circumstances, I would argue that the urgent need was for bold action to get the inter-bank market moving. I apologise for not taking up the proposition of my right hon. Friend the Member for Airdrie and Shotts as an automatic conclusion, and for not dwelling at length on that issue. As has been acknowledged, he was right to concentrate on that fundamental weakness in the system, but capitalisation and the degree of capital injected into the system were key ingredients in confidence. My right hon. Friend the Prime Minister and my right hon. Friend the Chancellor were, I think, right to take bold and urgent action to re-inject capital into the banking system, to inject liquidity and, of course, to institute the guarantee of inter-bank lending. We might need to reassess whether that guarantee is working, but I certainly would not jump to the conclusion that it was not being taken up and that that was a clear sign of failure: far more important is the price of inter-bank lending, which, of course, as my hon. Friend the Exchequer Secretary said, has fallen recently.
The Bank of England is to be congratulated on its bold move to cut interest rates by 1.5 per cent, although many of us might wonder whether it did so soon enough. My right hon. Friend the Chancellor, too, should be congratulated on persuading the banks that they should pass the cut on to mortgage holders. It remains to be seen whether any further cuts in interest rates will have the same impact on personal lending rates.
What about fiscal policy? It is absolutely right that the key macro-economic question, rather than the one of inter-bank lending, is whether there should be a fiscal stimulus. It is clearly right that borrowing should be allowed to rise during a recession, because accommodating an increase in benefit bills and a reduction in tax receipts will naturally lead to an increase in borrowing. I am glad that the official Opposition have now made up their mind that it is right to allow borrowing to rise and automatic stabilisers to be used during an economic downturn.
The big debate is whether there should be a discretionary fiscal stimulus or loosening on top of the use of the automatic stabilisers. The judgment on whether there should be an additional fiscal stimulus seems to depend on whether we think that foreign investors will have confidence that we are not going to default on our debt, and, in particular, on what will happen to long-term interest rates. For any fiscal stimulus to be effective, it must be seen to be temporary. Were the Government to embark on such a venture, they would also have to plot a clear path back to a more sustainable or more balanced position.
Such a move would be much more effective if it were co-ordinated internationally, rather than it resulting from unilateral action. When I look at the figures for the deficits and the public sector net debt as a share of GDP, I find it hard to accept that the markets would not think that the UK was a pretty good bet that could tolerate the running of a pretty large fiscal deficit for a while.
I do not know how the Opposition explain the fact that public sector net debt, relative to GDP, is the lowest of any single major industrialised nation other than Canada. Of course, there is Northern Rock. Mr. Redwood shakes his head. I think that the nationalisation of Northern Rock was essential, but the question is not what the level of deficit is but what the level of public sector net debt was when the situation began.
According to the Office for National Statistics, public sector net debt was significantly lower than the level that we inherited in 1997. In fact, I clearly remember sitting in this Chamber when my right hon. Friend the Prime Minister, as Chancellor of the Exchequer, explained that he had used the telecom spectrum receipts to repay more debt in one year than had been repaid in the previous 50 years combined. Frankly, it is not surprising that we enter this downturn with a pretty good and sustainable debt position, which should enable us to take any action necessary.
The Government must hold their nerve, continue to be bold and take the action required in the short term, but they must also think hard about the longer term international action required to put in place a new set of global rules to try to minimise the recurrence—or the likelihood of a recurrence—of a global credit crunch. My right hon. Friend the Prime Minister, with the Chancellor, is leading on reforming the international financial system and has argued for a long time for the overhaul of credit agencies. He argues, too, that the global system should offer countries incentives to behave well, and that international macro-economic action is required to stave off a global slump. In such circumstances, the premium is on being bold and taking the action required, and I think that the official Opposition will rue the day they decided to be so timid.
The Exchequer Secretary referred earlier to the benefit of hindsight, but the benefit occurs only if we are prepared to learn the lessons. There was enough evidence to be able to spot the crisis coming. The International Monetary Fund identified 64 banking crises around the globe between 1970 and 1999. It showed—as did other studies—an overall pattern in each of the crises, starting with lax lending, preceded always by a lending boom. The lending was on risky assets, which were often politically directed for social purposes. The result was unusually exposed institutions and unusually exposed risks.
The second element in the structure of those crises was that banks and regulators were overstretched—to be charitable—by the volume of business, or regulators simply believed what the banks told them because they were not ready for the risks that were coming along. The third element was that at the time no one was interested in curtailing the level of debt, because they could not see that it was in their interests to do so. Each crisis led to a change of behaviour and of attitude, where reckless lending was described as bold and rewards for risk takers increased beyond the risk involved.
What burst the bubble was different in each case, but it is absolutely right to ask why the Government did not recognise that sequence, which had already been set out by the IMF and in a very easy to read article published in The Economist three years ago. One is tempted to answer the question by saying that the Government were so confident that they had ended boom and bust that they did not believe it would happen in the UK; they had actually started to believe the spin of their fiscal rules.
Many Members have mentioned the international situation. I have been involved in projects that helped to introduce financial institutions to the global market, and it is right to say that the global nature of the market makes the situation more difficult. It is thus absolutely right to call for the sort of international action on regulation and transparency that my hon. Friend Mr. Hammond proposed in his speech. However, despite the international relationships of financial institutions and products, the major issue in surviving such a crisis is the strength of national economies. To see the situation as nothing more than a contagion from abroad is fundamentally to misrepresent it, and fails to distinguish the contagion of the disease from the contagion of knowledge of the disease. For example, the latest US research into the sub-prime market shows that what did for Fanny Mae and Freddie Mac was not that they had caught the sub-prime disease but that everyone thought they had caught it. That is what burst the bubble—a domestic situation and a domestic issue of confidence.
A crisis such as this needs domestic material to work with, and there is plenty in the UK. When UK financial institutions rapidly expanded from lending on the basis of short-term wholesale market borrowing, they created a mismatch that was asking for trouble. The debt boom and the Government's role in it extend beyond the simple fact of debt. Other Members have already commented on that, so I shall say no more about it. However, it fed into a state of mind.
Three of the conclusions in the Federal Reserve Bank of New York's study on the sub-prime issue drew out some general points that are relevant now. The problems the study identified were a convoluted loan product system that consumers did not understand, a credit rating system that did not do a good job of highlighting the risks and a lack of incentives for institutions and Government organisations to carry out research into the risks.
On the first of those conclusions, the Government are complicit in convoluted loan programmes that consumers do not understand, such as shared appreciation mortgages, whereby banks recoup the cost of a mortgage—by huge percentages of capital—when the house is sold or the mortgagee dies, leaving people with insufficient equity to move on. Such mortgages were unveiled—believe it or not—as a millennium product by Lord Mandelson, in his first incarnation as Trade Secretary. The lack of incentives for institutional investors and Government to carry out their own research must lie behind the failure of the regulatory system.
I have spoken before about the lack of credibility in the fiscal rules, but their underlying weaknesses are why they are so flaky. The weakness lies in the assumptions on which the rules were measured—the variations in determining the amount of debt, what constitutes debt and the length of the cycle—and in the fact that the Government did not stick to them. The rules were too vague. What they were not was an operational rule, and it is doubtful whether they could be. They were too simplistic to guide policy and too open to be easily manipulated.
What activity do we want? We need to allow Parliament to debate and monitor more closely the Government's fiscal performance, which is why I wholly support the creation of the office of budget responsibility that my hon. Friends on the Front Bench have suggested in several debates.
It is a great shame that much of the speculation in the papers about incentives and stimulus has concentrated on amounts rather than on quality. There has been massive financial disruption, so the priority is rightly to sort it out rather than to argue about general fiscal stimuli.
My hon. Friend is making some important points. Has he seen the work of our hon. Friend Mr. Newmark, who believes that true Government indebtedness, including pension liabilities, is now £1.8 trillion—120 per cent. of gross national product—which is why some of us are worried about the country's financial position?
I am grateful to my right hon. Friend for making that point. He is absolutely right: a number of factors have not been taken into account—the pensions element is one, and the whole business of private finance initiatives is another. That is why it is crucial, as I said, to recognise that although the rules are too vague and flaky, it is not the rules themselves that cause the problems but their underlying assumptions. We can all make nice big rules, but if the assumptions and the data behind them are not accurate, there is no point in having them.
We must look at the quality of any proposed stimulus. I was interested to hear that Dr. Cable has three favourite words to describe the quality of a stimulus. I have my favourites, too. The first is that the stimulus needs to be "effective", which means that we must know what it will achieve and when. Secondly, it needs to be "temporary"—as Ruth Kelly, who is no longer in the Chamber, mentioned—so that it does not worsen the structural deficit. Thirdly, it should be "efficient", so that the outcomes yield value. However, we must be cautious about any temporary fiscal easing so that we make sure that it is capable of being swiftly and credibly reversed.
I am pleased to have an opportunity to speak in this important debate, but I do not think that we should give the Liberal Democrats quite so much credit as some hon. Members have done. I remember not so long ago when the Liberal Democrats were signed up as hard-liners to the neo-liberal project, the same as the Front Benchers of the two major parties. I never signed up to that. Indeed, the Liberal Democrats not so long ago had an orange book putsch in their party that was a victory over the minor group of social democrats who remain from the days of the past. Just recently, they have rediscovered little bits of social democracy, but just because they are dipping their toe into the water does not mean that they have been fully converted. I, for one, remember what they used to be like and do not give them too much credence for what they are saying now.
I was complimented by the now leader of the Liberal Democrats in a debate on Europe some three years ago, when he said that I was the only hon. Member to propose a coherent alterative economic strategy. He said that it was a socialist strategy. He did not agree with it, but he said that I was at least the only one who had a coherent alternative. I like to think that I have stuck with that coherent alternative throughout my time as a Member. Indeed, when I first entered the House, I said in my maiden speech that I had come here among other things to oppose neo-liberalism. At this point, I have been proved right: neo-liberalism has led to an appalling world crisis. If we had had greater regulation, particularly of the financial sector, and retained larger components of public ownership of the utilities, a larger state sector and more general economic controls, we would not be in this situation.
I share the hon. Gentleman's concerns in respect of the regulation of the financial services institutions—I declare my interest as a shareholder in some of them—but why does he think that the utilities are key in the financial crisis?
I have always felt that a significant state sector, as we had until some 30 years ago, was useful not just because it provided the public with a good deal, but because it was a component of economic management and brought a considerable amount of income into the Treasury. The mixed economy that we used to have worked very well. The instabilities have taken place since we started to dismantle that and to put everything into the private sector and the market, and I think that we will see a reversal of that. In fact, if I had said in the debate on Europe, when the now leader of the Liberal Democrats was so kind to me, that I believed that the Government should take a substantial stake in the banking sector and start to arm-twist the Bank of England to reduce interest rates, and that a Chancellor would tell the banks and building societies to reduce their lending rates and pray in aid the name of J. M. Keynes, he would have thought that I had gone mad. However, that is precisely what has been happening in the past few weeks, and I am very pleased that it has been.
As the hon. Gentleman says, the Government and the Governor of the Bank of England have been trying to persuade the banks to lower their interest rates in line with a cut in the general interest rate in the past few days. Curiously enough, the bank in which the state has one of the biggest says—the Bradford & Bingley—has stopped lending altogether. Is it not better in fact to have a properly regulated system, rather than a state-controlled system?
The two could easily go together. Indeed, the rate that is charged to existing borrowers and whether one is extending borrowing are two issues. I would want to ensure that both of them are positive in helping the economy. Nevertheless, the reduction in interest rates last Thursday will make a significant difference to the disposable income of the existing mortgagors and borrowers, of whom there are millions, who have been paying interests rates that are too high. That will put a significant stimulus into the economy. I welcome that very much indeed.
I return to the theme that I have raised many times in the House: the Government ought to retain control of the levers of economic management, which are several, but I shall mention the three main ones, the first of which is interest rates. I was an opponent of giving the Bank of England so-called independence. Interest rates should be controlled by the Government, who should be accountable to the House for their policy on interest rates. I have always thought that, and I think that it is the case now. Interest rates should not simply be geared to the inflation rate. Indeed, the Government are now saying that the Bank of England should consider the wider economic impact of changes in interest rates, not just inflation. If the Bank had been looking at inflation, which is currently and temporarily quite high, we would not have seen that reduction in interest rates last Thursday. I am glad that the Bank is now looking at the wider economy and acting appropriately.
The danger indeed is not inflation, but deflation, which is much harder to deal with than inflation. If prices start to fall, which happened in Japan, arresting a fall in prices is very difficult indeed. People anticipate falls in prices and therefore abstain from spending until prices have fallen further, which generates a vortex of deflation and a downward spiral into slump. We must avoid that, and anyone who looks at the situation now and urges caution in Government spending or the fiscal stance is gravely mistaken. We are still in a very difficult situation, and I want to ensure that unemployment does not rise and that living standards do not fall, as is possible if we were to move in that direction.
Another lever that the Government have wisely kept control of—to an extent at least—is the exchange rate. I applauded the Prime Minister when he decided as Chancellor not to enter the exchange rate mechanism. He kept control of our own currency, as a lever of economic management, and rightly so. Of course, the problem was that, after 1997, sterling appreciated substantially. That was a big mistake. I was one of those who supported the ideas of Gerald Holtham, who had been the director of the Institute for Public Policy Research and who said that we ought to intervene in the international money markets to bring down the value of the pound, because sterling was overvalued. If hon. Members want evidence of how overvalued it was, they should look at our structural trade deficit over the past many years.
We should have intervened to reduce the value of our currency relative to other currencies and avoided the situation that we are now in, with record trade deficits. Okay, that will have an effect on what we buy from abroad. I like a good bottle of French wine, for example, and I might have to pay more for it. What a terrible shame. It is appropriate that we ensure that our currency value is correct and suits our internal economic needs. If the pound depreciates, it deflects demand to home products and home producers, and it keeps the demand in our domestic economy high. That is what we should be doing now. I welcome the fact that the pound has been depreciated significantly in the past year, and I hope that it stays down and is managed to stay down for some time to come.
Of course the third lever is spending and taxation. Perhaps we have not taxed enough. I would not say that we have not spent enough—we should have spent more—but we certainly have not raised enough in taxation while we have been spending over the past few years. I have said in the Chamber on a number of occasions that we should have raised taxes, particularly on the rich. I have also suggested that the Government should make greater efforts to collect all those taxes that are avoided—£33 billion-worth, according to the TUC's recent booklet. We should do more to avoid tax fraud. Tobacco smuggling and VAT fraud account for another £14 billion. There is money to be had, and the Government could rake in at least some of it if they made greater efforts. Even if they raked in 30 per cent. of it, it would make a significant contribution to the Exchequer and enable us to sustain public spending where it needs to be maintained.
We should not be trying to restrict the fiscal balance; we should be worried above all to ensure that there is enough spending power in the economy to sustain employment in this very difficult time and to avoid above all going into a slump. That is a serious danger now. There has been talk about why the banks are still nervous. They are still nervous because there is still a lot of toxic debt around and they do not quite know where it is. The banks are nervous about lending to one another, because they do not quite know how much toxic debt each one has got.
We have to make sure that the Government sustain the banking sector, and that we get through this difficult period. There is still the problem of toxic debt, and many hidden problems in the banking and international finance sector; we have to find our way through that, even if it means having a bigger state sector and more regulation. I must say that I applaud what my right hon. Friend John Reid said about international regulatory machinery. We are going back to something like the Bretton Woods agreement; we are starting to talk seriously about regulating the international finance sector, instead of leaving regulation to the financial markets and people who gamble with our lives—our money—for their own benefit. It is interesting that Nick Leeson, who went to prison for gambling with Barings bank's money to the extend that it went bankrupt, complains that people who do the same sort of thing now are just bailed out. We ought to look at that. We should make sure that those people do not get hold of our economies and our lives again. If we have to extend the public-sector part of the banking and financial institutions sector, so be it.
I urge my Front-Bench colleagues to use all the levers of macro-economic power to make sure that, above all, we avoid a slump and build our way out of the obviously difficult recession approaching us. I have been unapologetic about my support for traditional Keynesian policies, for a degree of intervention in the economy, and for having a substantial public sector as part of an economy that can be managed by the Government. I am against leaving everything to the market.
Keynes and others said that the market, when left to itself, tends to redistribute income from the poor to the rich. That is inherently deflationary, because rich people save more of their money, and poor people tend to spend it. If one wants to keep an economy buoyant, one has to make sure that poor people have enough money in their pockets to keep it going. If one gives it all to rich people, they put it in banks, save it, or put it in offshore accounts, and they deflate the economy. Redistribution and intervening actually help to keep economies buoyant, maintain employment, ensure a decent life for working people and bring about a high level of social justice, which is what most Labour Members have spent their lives fighting for. Obviously, I will vote with the Government tonight against the Liberal Democrats, but I hope that, in their new-found enthusiasm for social democracy, the Liberal Democrats continue to move further to the left, and eventually become socialists.
In view of the hon. Gentleman's speech, surely he should vote with us, because our motion calls for a reduction in taxes for people on low and middle incomes, and refers to plugging the tax loopholes used by the rich. Surely that is redistributive, so I am disappointed that the hon. Gentleman is not voting with us.
I did say at the beginning of my speech that I was not convinced by the Liberal Democrats' recent conversion to a little bit of social democracy. My tax changes would go a lot further than those suggested by the Liberal Democrats. I suspect that the motion is a little bit about courting the electorate before the next election, and is not to be taken too seriously.
It is always an honour to follow Kelvin Hopkins. We are getting a blend of the 18th and 21st centuries in speeches tonight, and that is always a pleasure. I want to pick up some of the issues that have been raised and perhaps to take them a little further. I was very interested in the speech made by John Reid about the inter-bank market. He proposed that the central banks create an exchange that takes account of party risk for banks on either side of the inter-bank market. I just want to point out possible fundamental flaws in that approach. That is not to say that we should not explore it; however, it might not be the palliative that it appears to be at first glance.
As hon. Members will know, there are already exchanges within financial markets—an example is the futures market—that take different kinds of counterparty risk. However, they do it by having margin pools. In other words, they require parties to pay ahead of their due dates, if that is the easiest way to describe it, in order to limit their exposure to the counterparties on either side. If an exchange takes the full credit risk of the counterparty for the banks on both sides of a transaction, the encouragement given to banks to make an irresponsible decision is quite extraordinary, because the transaction is protected by the exchange that stands in the middle. That is almost like saying that the package put together by the British and other Governments to come to the rescue of banks should not only be placed on a permanent footing but should be of a size and proportion that would, in effect, cover the whole banking market. That is a degree of exposure that we cannot possibly underwrite and undertake.
For all of us, there is a sense of great failure in the fact that banking institutions have failed to assess the risk of the transactions with which they have been involved. Rather than relieve them of responsibility of ever having to assess that risk, we ought to require them to assess it. That is the direction in which we have to go; we should not basically say that central banks, and essentially Governments, will stand in the middle and take that counterparty risk.
I share my hon. Friend's concern about the proposals made by John Reid. Does she agree that if we tried to establish a central body to take on the counterparty risk, the danger is that it would take on the counterparty risk for entities regulated in other European economic area countries? As a consequence, we would be taking on risks for places far beyond the UK—for Iceland, Estonia and so on.
My hon. Friend is right, and it strikes me as impossible for an international body to have sufficient grip on and be sufficiently responsive to the sort of transactions and changes made by individual banks all over the globe. Such an arrangement would also remove responsibility from banks—a responsibility that no Government or central bank should take.
Mr. Redwood talked about the imbalance in the UK economy. That has been a concern of mine for a long time. There was a general feeling that it was following the direction of the future, and not taking a risk, to allow developments in financial services and the various spin-off industries and businesses to become overwhelmingly dominant within the UK economy. However, there has always been a risk involved. For example, nobody in this Chamber, when considering their pension, would put all their eggs in one basket or all their money in one sector of the economy. However, we in this country have largely allowed ourselves to invest heavily in one sector of the economy, largely on the assumption that it would be immune from the cyclical patterns that we know exist in manufacturing and what we might consider to be the more traditional industries. We have discovered that financial services are no more immune than other sectors to inevitable cycles; they follow the patterns that have developed in other industries and sectors. We have put ourselves into the terribly difficult position of having only one major arrow to our quiver. We must avoid going in that direction in future.
This seems an ideal opportunity for the Government to focus on developing the green industries that we need if we are to tackle climate change. Often, when I hear people talk about the economic recession—we are at the beginning of it—I find that they tend to feel we should abandon environmental targets and our work to tackle climate change because we have to give priority to getting the economy back into shape. They have always seen the two as being in conflict with each other. I have never believed that they are in conflict. This is surely an opportunity for the Government to use every mechanism possible to encourage those industries, for example by encouraging the development of new technologies that will reduce our use of carbon and new forms of energy. Work needs to be done on infrastructure, too. There is a whole range of activities that the Government could begin to develop and underpin. We have before us a great opportunity to channel investment into the future; we know that that is required if our children are to have a reasonable environment in which to live. I want to encourage the Government and to hear whether they intend to take advantage of those issues.
We are all concerned about how the regulators behaved throughout the period leading up to our financial crisis. The notion that regulators behaved perfectly and the crisis developed despite them strikes me as extraordinary and naive, and work must be done to create a much more rigorous regulatory system.
I very much agree. There is suddenly demand for a lot of new regulation, but wise regulation might be better than simply stacking up layers of additional regulation. We must work out what needs to be regulated and how it would be most effectively done, so may I suggest one step in that direction? Members will be aware that the Parliamentary Ombudsman recently reached a verdict of maladministration against three of our most significant regulators in the case of Equitable Life, but the Government have not acted on that verdict. What better lesson could the markets, more broadly, and the regulators in particular, be taught than to live up to the terms that the ombudsman laid down, with an apology from every regulator to all those who lost out by taking pensions through Equitable Life, and the payment to them of the full compensation that the regulator called for?
My hon. Friend makes a very good point about the ombudsman's report on Equitable Life. It is disappointing that the Government have still not reached the point of saying sorry. Even then, they could develop the details for implementing the practical recompense. The Government have often prayed in aid the fact that it was a big report, but they had draft copies and knew where it was going. It should not have taken them so long to recognise that they needed to say sorry to the people who invested in Equitable Life.
I very much agree. The ombudsman was very clear and, so that it was not too complex and difficult for the Government to grasp, made only two recommendations: one was the apology, and the other was a swift process for implementing compensation in full. When it comes to compensation for those who invested in Equitable Life, what once might have seemed like an extraordinarily large amount is lost to the right of a decimal point in the commitment of funds to resolve the broader banking crisis.
Small businesses are very important in my constituency, and Member after Member has talked about the problems that small businesses in their constituencies have had obtaining credit, despite the Government's belief that they have from the various participants in their banking recovery plan the commitment to keep lending to small businesses at 2007 levels. One particular group in my constituency has been suffering, and its situation indicates the depth of the problem. This group, traditionally, has not needed credit lines and therefore has no credit history. Today, however, the companies need credit because their customer base is starting to pay late, but because they have no credit history, the banks are closed to them. Tied to that is the issue of suppliers. I know that the Government have said that they will try to pay people in 10 days, but my hon. Friend Dr. Cable asked for much more detail about exactly what that means, how it will play out, and whether it will apply to quangos and related Government institutions, because the private sector is doing almost the opposite.
We all commend the Government's approach, and the 10-day period should be passed on. Indeed, in my constituency we are trying to persuade the local authority to adopt the same approach, but does my hon. Friend agree that when the Government pay within 10 days, it is very often to larger suppliers that are not necessarily in the same financial difficulty as small suppliers at the bottom of the supply chain? Does she agree also that the Government should make their 10-day payment conditional on the same payment going down the supply chain—the same conditions, right the way through—to small suppliers, too?
I very much agree. There is a fundamental flaw in many Government contracts, because they are designed so that only the large entity can bid on them; they are not examined to try to find ways they might be bid on by relatively small businesses to stimulate new enterprise. In that context, several private companies—Tesco is the name that comes to mind—are going not from 30 days to 10 days but in the other direction, and, I understand, adding another 30 days to the payment period. Very powerful entities, such as the major supermarkets, need to feel some heat from the Government to join them in their approach.
Suppliers to another company, Boots plc, can actually wait more than 100 days before it is required by its own changed rules to pay up. My hon. Friend talked about regulators. Does she agree that we should ask the Government to task regulators to ensure that such big plcs fulfil their reporting requirements, because they are required to name in their annual accounts their terms of conditions? It is time, I believe—
Order. I know that these are exchanges between colleagues, but I ought to say to the hon. Lady that they are very long interventions that are eating into her colleague's limited time.
I thank my hon. Friend for giving way as we move towards 6.30pm. Does she think that the Government should review the insolvency laws and examine the chapter 11 experience in America because of the difficulty that companies could face in a tight credit situation, whereby, owing to payment delays, they face legal action to be wound up? Perhaps chapter 11 is something that we in the UK might consider.
My hon. Friend makes a pertinent comment and an important recommendation. Having worked in the United States for 18 years, I am conscious that chapter 11 often allows companies to continue and to be restored to health. We have not followed that mechanism in the UK, and I find that surprising, so the situation under discussion is, as my hon. Friend says, a good opportunity to make that change.
Finally, I am particularly disturbed by the banks' dismissal of the Government's recommendations on the current bonus culture and of the public's outrage at its continuation. Members often feel that the reason why there is a problem with the bonus culture is that the sums of money are so utterly outrageous. At a time when the Government are coming to the rescue, the numbers seem almost immoral, but there is a deeper problem with the bonus culture in our institutions.
The Government know that many bankers at a variety of grades are paid exactly the same salary and that most of their income is from bonuses, which have always been tied to short-term performance. The problem is that when somebody makes a sensible decision, recognises risk and refuses to take it, they lose out on bonuses and rewards, whereas the person at the desk next to them who takes that extraordinary risk gets the great bonus. When that persists year on year, we end up with a culture in which not only do we reward risk-taking but we penalise people who make the appropriate decision and identify and begin to recognise both risk and systemic risk. We must turn the whole picture upside down if we are to have a healthy banking economy.
Thank you, Mr. Deputy Speaker, for calling me to conclude the debate. My hon. Friend Dr. Cable kicked off the debate in a typically thoughtful and insightful way, and no doubt his speech was of interest to all who heard it. My hon. Friend Susan Kramer later made a similarly insightful and interesting contribution.
As my hon. Friends have dwelt in such depth and detail on a lot of the salient points at issue, I will concentrate slightly more on the political response to what in recent months has indeed been an unfolding economic crisis, as the title of the debate suggests. This debate is extremely timely because the economy is shrinking, unemployment is rising and tax revenue is falling. The backdrop to the debate is the issue of how that happened. Two arguments have been advanced by the two main parties. The Prime Minister's essential take on the current situation is that it is all the fault of sub-prime mortgages in America which have contaminated our domestic economy—an economy that in other circumstances would have been just fine. As has been reiterated by John Howell and others in this debate, the Conservatives' take is different: they say that the problems are the Prime Minister's fault as he grew a bubble of personal and public debt in Britain.
In a spirit of generosity, let me say that both sides are half right; they have identified the twin causes of a grave situation. As my hon. Friend the Member for Twickenham said, there have been international factors beyond our immediate control, but in many ways they have been made worse by how the Government have prepared the country for this situation.
The right hon. Gentleman can be assured that they would pay less. Let me get to the party political dimension, because I know how much he enjoys that aspect of things.
The Labour Government have not prepared us well for the current situation. As the right hon. Gentleman said earlier, the Government allowed private debt and house prices to soar to unsustainable levels, failed to make prudent assumptions when setting budgets for the public finances and were painfully slow to respond to rapidly changing economic circumstances earlier this year. As the Minister said, it is easy to make such observations in hindsight; it is much harder to make them in advance. That is why my hon. Friend the Member for Twickenham deserves such credit and admiration, because he did precisely that. The Minister spoke for half an hour, but at no point did she address the salient point made about her response in the House to the economic crisis earlier this year. She was completely dismissive and high-handed about the warnings that my party was offering, free of charge, to the Government. If they had listened at that point, they might have been better equipped to deal with the current situation than they have been so far.
I am afraid that the Conservative party has gone through a terribly difficult period; the past few months have been a painful humiliation and a case study in hubris for what was once a great party. It is hard not to wince when recalling the cluelessness, opportunism and inconsistency that has come from those on the Conservative Front Bench. Earlier, the shadow Chief Secretary to the Treasury, who is no longer in his place, made a partisan speech, but he was the one who got his party's uncertain start under way when he made his now infamous observations on borrowing. In one interview, the hon. Gentleman said both this:
"Increasing borrowing is not a strategy for dealing with the recession", and this:
"To increase borrowing to deal with an economic downturn—that's a perfectly sensible thing to do."
That was not an auspicious start, but to be fair the hon. Gentleman is only doing the bidding of his political master, Mr. Osborne.
Unlike many of his own Back Benchers, I do not wish the shadow Chancellor any misfortune. I have followed the career of the Conservative child prodigy with a benevolent interest, and it gives me great sadness to say that at every single juncture of this economic crisis he has been found wanting. Let me illustrate the point. My hon. Friend the Member for Twickenham has led the debate on interest rate policy. We have already heard what the shadow Chancellor said in the House about interest rates in response to my hon. Friend the Member for Richmond Park less than a month ago:
"I do not think that it is particularly sensible...for politicians speaking from the Front Bench to call on the Bank to cut or increase interest rates. Indeed, I make it a practice not to comment on them."—[ Hansard, 14 October 2008; Vol. 480, c. 708.]
I am going to chronicle the terrible unravelling of the shadow Chancellor's credibility on the issue by referring throughout to that reliable journal, The Daily Telegraph. Initially, there was a false start, because just two weeks after the shadow Chancellor made his comment in the House, the headline that confronted me as I opened the newspaper was "Osborne admits his mistake". I thought that progress had been made, but soon found out that the headline referred to a completely separate catastrophic error of judgment by the hon. Gentleman. However, I had to wait only a further 24 hours for the Telegraph headline: "George Osborne: Slash interest rates to drag Britain out of economic nosedive". [Interruption.] Mr. Gauke says that the shadow Chancellor did not say that. However, I took the trouble of reading the article, which contained quotations attributed to the shadow Chancellor—they may have been written by him or by one of the teenagers in his office. One of the quotations stated that
"there is plenty of scope to stimulate demand with lower rates".
That is what the shadow Chancellor said, having told the House that it was his practice not to comment on interest rate policy. He is struggling to keep up; he is a follower, not a leader.
Hon. Members do not need to take my word for that, as it is the judgment of the shadow Chancellor's own admirers. Only a week after the article that I mentioned appeared, on
Order. The hon. Gentleman is in danger of breaching the custom of the House to refer to right hon. and hon. Members not by name but by constituency, or so to paraphrase remarks so that actual names are not used.
"the Conservative Party chairman who has been sidelined over allegations she paid for her children's nanny from parliamentary funds, has a worse rating than Mr Osborne"— the hon. Member for Tatton, I should say. The clincher came when the article went on to say that
That confirms the wisdom of the immortal Mark Twain quotation:
"It is better to stay silent and look a fool, rather than speak and remove all doubt."
It has been a sad period for the Conservative party, which has rarely looked more foolish.
We have to remember that the Conservatives' flagship economic policy, which enabled them to look both ways and tell completely different audiences that they were on their side, was to share the proceeds of growth. It was launched against a backdrop of sunlit trees by a leader who told us, from the beneficial standpoint of lifelong security in terms of his own finances, that GWB—general well-being—was more important than GDP. How much the rhetoric of Conservative Front Benchers has changed since then.
I counsel caution when speaking in this Chamber. I once said that economics could not have been on the curriculum of the minor public school that the shadow Chancellor attended, and within minutes I had received a flurry of abusive e-mails. Will the hon. Gentleman have time to reach the worst quote of all from the shadow Chancellor—that the function of financial markets is for people to make loads of money out of the misery of others?
The hon. Gentleman sets me a very difficult challenge, which is to chronicle in 15 minutes absolutely every inappropriate remark made by the hon. Member for Tatton. I am concentrating on some of the particular lowlights. It is a depressing experience for all of us who want to see a young man do well in politics. He is very enthusiastic, and his reputation was extremely good, but we are now witnessing a very difficult period for him. However, that is how the Conservatives have positioned themselves. They wanted to share the proceeds of growth, seeming never to have considered that there may not be any growth to share the proceeds of. One can only infer that the logical conclusion is that they now want to cut spending and increase taxes, which would be the flipside of that—in other words, sharing the pain of negative growth.
The other policy that the Conservatives have been giving us a cast-iron promise to put in place is to match Labour's tax and spending commitments. We are now in an unhappy position whereby Labour's tax and spending commitments are not quite as impressive as the heir to Blair—the leader of the Conservative party—clearly originally thought that they were. Only yesterday, there was an unseemly clamour in the Sunday newspapers for Labour and the Conservatives to position themselves much closer to the commitments made by my hon. Friend the Member for Twickenham and the Liberal Democrats.
The suspense is too great for me to wait to see whether my hon. Friend is going to come to another example: when fuel prices were rocketing, the shadow Chancellor promised to cut fuel duty to keep things fair. Does he agree that the logic of the Tory position is that we should now be jacking up fuel duty to keep things fair?
That is another extremely well-informed intervention. What the Conservatives did—I suppose that it is only fair given the lack of experience on their Front Bench—was rush into panic mode when they thought that there would be an opportunity for a quick hit when prices for unleaded petrol were going up to 110p or 112p a litre. My party had a reasonably detailed conversation about the Conservative proposal, concluded that it was completely potty, and therefore decided not to support it. We were well advised in that, because now the Conservatives, keen to tell everybody their policies, will be putting out leaflets, inappropriately called "In Touch", in every constituency saying, "Vote Conservative—we'll put your petrol up by 5p a litre." [ Interruption . ] It is 5p this week, and it could get a lot worse. The Conservative proposition is, "Vote for the same taxes as under Labour apart from more on petrol." That is not a particularly impressive piece of positioning.
My message to Conservative Members who long instead for decisive and coherent leadership is this: "You do not have to remain trapped in the high-tax, wasteful spending box into which your shadow Chancellor has locked you. You can support this Liberal Democrat motion and show your constituents that you too believe in the values put forward by my party—effective public spending that offers real value for money, low interest rates to help struggling families and small businesses, and real tax cuts now for low and middle-income households, who need our help." Those are the right policies for Britain; they are Liberal Democrat policies, and they need to happen now.
Earlier this month, the International Monetary Fund reported:
"The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s".
The Bank of England's recent financial stability report concluded that in recent weeks the global banking system had undoubtedly undergone its biggest episode of instability since the start of world war one. Even the dogs in the street know that the origins of the current financial and economic turmoil lie in the problems of the US sub-prime market and a record surge in oil and food prices. It does not wash with the British people to suggest that the problems we are facing are wholly or mainly the result of domestic policies, and the official Opposition have no credibility in attempting to suggest that.
I am not pretending that there are no lessons to be learned—we have done so. That is why the Financial Services Authority is introducing its enhanced supervisory regime and why we have asked Lord Adair Turner, its relatively new chairman, to advise us on further reforms that might be necessary. However, the general public will find it difficult to take seriously the judgment of the official Opposition, who were against our actions on Northern Rock, who opposed the Banking (Special Provisions) Bill, and who would not have safeguarded Bradford & Bingley but who, in effect, would have let it go to the wall.
I think that British people have welcomed our decisive action in leading and co-ordinating the efforts of Governments across the world to support the global economy through these very difficult times. At home, we have taken unprecedented steps to shore up the UK's domestic financial system, providing £37 billion of public money to some of our high street banks so that they can improve their capital positions. Through the Bank of England, we have made available more than £200 billion of Treasury bills to provide liquidity to the banking sector, and we have introduced a £250 billion credit guarantee facility to restore confidence and breathe new life into inter-bank lending. This support is crucial, because banks lie at the heart of our economy. We will do whatever it takes, despite the fact that the official Opposition do not support us, to ensure financial stability—to ensure that small businesses have access to credit and that home owners are able to re-mortgage when they have to do so.
I will answer the right hon. Gentleman's question in a moment.
We recognise that it is tough out there, and getting tougher, for hard-working families and small businesses, so we are targeting support at those who need it most. We are supporting households that are facing higher food and fuel bills by raising the income tax personal allowance for 2008-09 by £600, which is worth £120 to the basic rate taxpayer. All basic rate taxpayers will have seen that in their take-home pay from September. We have delayed the fuel duty increase from April this year to April 2009, saving businesses and families nearly £100 million every month, as opposed to the Tories' bungled policy, which would mean that people would now be facing a fuel duty escalator. We are making additional payments to the over-60s and over-80s of £50 and £100 respectively alongside the winter fuel payment, to the benefit of some 9 million households. We have announced a £1 billion package of energy efficiency measures, which means that all households will be able to save at least 50 per cent. on a range of practical energy-saving devices, for which 11 million of the most vulnerable households will qualify free of charge. We are offering financial support through the winter fuel payment, the Warm Front scheme and the expanded carbon emissions reduction target.
Despite the global credit crunch, we need to ensure that the small firms that are vital to our economy have access to the loans and capital they need to let their businesses grow and develop. An announcement from the Chancellor at the end of last month means that Britain's small and medium-sized enterprises stand to benefit from up to £4 billion in loans from the European Investment Bank over the next four years. Based on the UK's shareholding in the EIB, British small businesses should be able to benefit substantially between 2008 and 2011. As a first step, UK banks have already signalled their interest in securing around £1 billion a year from the EIB.
It is always the task of the official Opposition to raise points that deflect us from the key issue. We are acting to help small businesses and to promote inter-bank lending. There were issues, as the hon. Gentleman well knows, relating to the way in which individuals set themselves up in business because of relative tax positions. That was one of the reasons we took the action we did, and we have debated the matter on many occasions. Moreover, the availability and active marketing of competitively priced lending to small businesses and to home owners is part of the conditionality agreements under the recapitalisation scheme.
I shall deal with some of the key issues raised. I say to my right hon. Friend Ruth Kelly that we will continue to hold our nerve, and stay on the side of the British people during this difficult time. We in this country will work with others to help to reform the international financial system.
My right hon. Friend John Reid raised an important issue. He is right that guarantees on inter-bank lending are only a temporary solution—they are specifically designed as such in response to the current crisis. He suggested that we ought to have an inter-bank market exchange, which would be a long-term solution to enable inter-bank lending in future. I would be happy to meet him and those advising him on these matters, along with my officials, because inter-bank lending is of fundamental importance—a point raised by a number of hon. Members.
I thank my hon. Friend for that generous offer, which I will take up. I would like to make it absolutely plain that what I suggested was meant to supplement the measures taken by the Government. I congratulate the Government and I fully support everything they have done. Given the magnitude of the crisis, all of us in this House should be acting—as far as we can—to bring together our efforts to address it. I thank my hon. Friend for the spirit in which he accepted what I said, and I shall respond likewise.
I appreciate the constructive way in which my right hon. Friend set out his proposal.
The Government's policy on credit guarantees is an important part of the overall financial package announced on
On the reintroduction of 150 basis points in the minimum lending rate, LIBOR went down by only 120 points. Does that not demonstrate the failure of some aspects of the Government's policies?
I would like to think that the hon. Gentleman supported our action on credit guarantees and welcomed the Bank of England's cut in interest rates. Some of these things will take time to work through the system, but the credit guarantees, the measures taken through the special liquidity scheme and the bank recapitalisation comprise a sophisticated package that has been copied by other countries around the world. We believe that it will have a hugely positive impact. We will, of course, keep all the policies under review, as we always do with such matters.
A number of other points were raised, and I would like to address in particular the Liberal Democrats' tax proposal, which, as expressed by their leader on television this morning, was a sustainable cut of 4p, to make the rate 16p in the pound. I have not seen any real explanation of how the Liberal Democrats would pay for that. It would cost £19.2 billion per annum. If the Liberal Democrats propose to pay for the cuts by raising the higher rate of tax, it would have to go up to 52p in the pound. If they were to say, as they often like to, that the top earners on more than £100,000 should pay, a 26 per cent. increase in the top rate of tax would be required, taking it to 66 per cent. I am told by officials that that estimate does not take behavioural impacts into account. I am not sure how many high earners would remain in the country if they had to pay a 66 per cent. marginal rate of tax on income over £100,000. I am afraid that Liberal Democrat tax policies simply do not add up.
The Government cannot and should not try to prop up house prices, but we recognise that volatility in the housing market can be a cause of great concern. That is why we announced a significant package of measures on
On the contention that we did not fix the roof when the sun was shining, I remember the dog days of the Labour Government of 1974 to 1979. We were investing in fixing roofs even during those very difficult economic times. When we came to power in 1997, capital spending was less than half what we spent during that hugely difficult economic period. Since 1997, we have been able to more than triple in real terms capital spending in this country. We have not only fixed many roofs, but we have built new schools and hospitals, and improved the UK's transport infrastructure.
We must not let the official Opposition con the British public into thinking that we have not fixed the roof—we have, and we have taken decisive action. What is more, we were prudent and sensible in running the UK economy. Since 1997, inflation has averaged 3 per cent., compared with more than 8 per cent. in the previous three decades. Long-term interest rates have averaged about 5 per cent., compared with roughly double that previously. That is how the Government have managed to triple public investment while cutting debt. It was not always easy, and we have had to make tough choices—for example, the decision to spend the £23 billion that we secured from the spectrum auctions not on public services but on reducing Government debt. That has put us in a strong position as we face difficult economic times. The Government want to show in our pre-Budget report the further steps that we will take on the side of hard-working people and small businesses in this country.
Question put, That the original words stand part of the Question:—
Order. I do not know where the delay is greater, but it is too great, given that there is another debate to follow. I therefore ask the Serjeant at Arms to investigate the delay in the No Lobby, and then, if necessary, that in the Aye Lobby.
Question accordingly negatived.
Question, That the proposed words be there added, put forthwith , pursuant to
The House divided: Ayes 289, Noes 216.
Question accordingly agreed to.
Mr. Deputy Speaker forthwith declared the main Question, as amended, to be agreed to.
That this House notes that the Government's actions mean that the economy is entering a period of global downturn with unemployment, inflation and interest rates all much lower than in previous slowdowns, and with debt reduced from 43 per cent. of gross domestic product in 1997 to below 36 per cent. last year; welcomes the extra investment in public services and public servants that this has enabled to compensate for historical underinvestment both in infrastructure and services in every region; supports the Government's global leadership and action to tackle both the causes and effects of the financial and economic turmoil on an international level; welcomes the Government's timely support to protect financial stability and consequently depositors, business and the wider economy; further notes that as a condition of this support the Government has demanded support in turn for homeowners and small and medium size businesses; further notes the action that has been taken in the court system and through mortgage interest support to enable people to stay in their homes, and the provision of £360 million to help small and medium size businesses under the Train to Gain initiative; and further notes that Government action to support families, individuals and businesses across the UK through the tougher times ahead includes extra tax credits, cutting income tax, freezing fuel duty, further winter fuel payments and increases in Child Benefit.