Economic Crisis

Part of Opposition Day — [20th Allotted Day] – in the House of Commons at 5:20 pm on 10 November 2008.

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Photo of John Redwood John Redwood Conservative, Wokingham 5:20, 10 November 2008

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.