Economy, Pensions and Welfare

Part of Debate on the Address – in the House of Commons at 6:15 pm on 15th December 2008.

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Photo of John McFall John McFall Chair, Treasury Committee, Chair, Treasury Committee 6:15 pm, 15th December 2008

That is my hon. Friend's viewpoint. If we can get the system working, and do not rush to judgment, that is fine, but I want the system to work. We do not want the banks to lend recklessly. In the long term, we recognise that bank lending will need to come back into line with savings. We will need to close the £700 billion funding gap. I am talking about the difference between the level of savings and lending in the banking system; that gap has opened up since 2001, when savings and lending were in equilibrium. Seven or eight years later, there is a £700 billion gap. We will all have to address that in the medium or longer term. We need the banks to lend constructively in the short term. At present, viable businesses are not getting the money that they need, and if the economy is to recover as the Government forecast, the banks must begin to lend. The pre-Budget report highlights that lack of lending as a risk to the Government's forecasts, and certainly the Treasury Committee will scrutinise that problem regularly. We will conduct a banking crisis inquiry in the new year, when it will still be a big feature.

May I discuss the fiscal stimulus to the public finances which, as Dr. Cable eloquently said, is absolutely necessary if we want to avoid a longer, deeper recession? The fiscal stimulus—excluding weakening tax revenues and a rising benefits bill; the so-called automatic stabilisers, which have been accepted by the official Opposition—has cost £20 billion so far. It is not a question of whether we can afford that but of whether we can afford not to have a fiscal stimulus. The answer to that is a resounding no.

Economic growth in 2009 is forecast to be about half a percentage point higher than it would have been in the absence of a fiscal stimulus. The 2005 figures from research undertaken by the House of Commons library show that the Exchequer cost for each additional unemployed person was about £10,000 per year in benefits and lost national insurance contributions. Those figures take no account of indirect costs, such as reduced output and corporation taxation, increases in bad debts, and the social costs of unemployment, which result in higher demands on the NHS and social services agencies. They do not take account, either, of direct local authority costs through housing and council tax benefits and free school meals. Action at this stage can therefore prevent catastrophe at a later stage for individuals and families.

We cannot allow the recession simply to take its course, and wait for the resulting redundancies and repossessions to materialise. Not only would that be completely unfair on thousands of hard-working families and undo a decade of the work Labour has done to combat poverty and promote social and financial inclusion. But as I have said it would be expensive in the long run. We cannot rule out the possibility that we may need to go further and invest more to guide the economy through the downturn. The Government should consider putting money into the pockets of those with the lowest incomes—they are the people who need the most support during these tough times, as they are most likely to spend rather than save any extra money given to them—as that would provide a kick-start to the economy.

I have looked at the blogs of certain right hon. and hon. Members, including Mr. Redwood, who said on 10 December:

"Any tax reductions this year should be Income Tax reductions helping the lower paid."

That is a very good start to the fiscal stimulus—someone is coming on to our side on that issue. There are a number of inconsistencies in the argument made by the official Opposition. They have said quite clearly that they would do nothing to protect the homes and jobs of families across the UK during the recession, and the Leader of the Opposition said on the "Today" programme last week that he would let the "automatic stabilisers" operate—he would allow tax receipts to fall and unemployment costs to rise, as is normal during a recession.

However, as I said in an intervention, Treasury figures show that most of the Government's borrowing is down to those automatic stabilisers, which the Conservatives support. Next year, when the Government's fiscal deficit reaches 8 per cent. of GDP, only about 1 per cent. of that will be due to the Government's fiscal stimulus measures, with the other 7 per cent. made up of increases in borrowing relating to the automatic stabilisers. Indeed, figures from the Institute for Fiscal Studies, which the official Opposition love to quote, show that over a five-year period until 2013, due to automatic factors alone, projections of Government borrowing have increased by more than £310 billion compared with the outlook at the time of the March Budget. That is far above the Government's discretionary measures, and the Conservatives have committed themselves to it. The Conservatives are therefore committed to increasing public debt, and they should be honest, clear and transparent about the issue.

The Conservatives have spoken, too, of a tax grab after 2010. Again, according to the IFS, the measures in the PBR will increase the tax take by only 0.6 per cent. by 2013. It is economic growth that will be the major factor in paying off the extra debt, not higher taxes. When the economy returns to growth, the automatic stabilisers will therefore reverse. The official Opposition need to be reminded that between 1997 and 2002, the Labour Government decreased public sector net debt from the 43 per cent. of GDP that they inherited to 29 per cent. That was not the result of higher taxes, but of economic growth and careful financial management. When the deputy governor of the Bank of England, Sir John Gieve, appeared before the Treasury Committee and was asked about that extra borrowing, he said that if we went back to the position in the early 1990s with GDP debt at 8 per cent., that could be cleared up over a 10-year period. We must therefore have faith in the fiscal stimulus, and in the longer term ensure that the budget is balanced. If we could do it from the '90s to 2000, we can do it now.

Roger Bootle said in The Daily Telegraph:

"Extra borrowing by the Government, if it encourages more output, can be self-financing."

The debts can be paid off when the economy returns to growth. The official Opposition, however, would cut spending now, at the worst possible time for the economy. Cuts in public spending mean cuts in benefits and public services, and public sector job losses. At a time of recession, that is economic madness. The Government plan to reduce spending when the time is right, to allow our debts to be paid off when the economy returns to growth, and they are absolutely correct to do so.

The official Opposition say that under the Government's policies public debt is too high. Again, the Leader of the Opposition said on the "Today" programme:

"We are going to have the public finances of Italy".

What absolute nonsense. What sort of statement is that? The Leader of the Opposition should know that the public sector net debt in the UK will peak at 57 per cent. of GDP in 2014, which is lower than today's public sector net debt figures for France, Germany, and the USA and, indeed, Italy, which has double that figure at over 100 per cent. The debts of other countries will increase, too.

The Conservatives have found themselves on the wrong side of the argument on the international stage, as the G20 have agreed with the Government. They have found themselves on the wrong side of the argument with respected economists such as Sam Brittan, who said:

"Maxims about debt that might be prudent for families can be the height of folly for governments."

They have found themselves on the wrong side of the argument with the former Conservative Cabinet Minister, Michael Portillo, who wrote in The Sunday Times yesterday that

"the opposition is... doomed to replay its bad dream."

He said that the Leader of the Opposition would find himself on the same ground as two previous leaders of his party, Mr. Hague and Mr. Howard, and would be asked repeatedly at the next election where the cuts would come from. We should not allow the British public to face the chill winds of the economic recession over the next few months alone. We must do everything to assist and help them, so that the recession is more palatable for them, we can come out the other side, they can spend and we can end up with a balanced budget.

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