Economy, Pensions and Welfare

Part of Debate on the Address – in the House of Commons at 8:58 pm on 15th December 2008.

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Photo of Philip Dunne Philip Dunne Opposition Whip (Commons) 8:58 pm, 15th December 2008

It is a great pleasure to follow Mr. Bailey, who is a worthy champion of the motor manufacturing industry. Many of the small manufacturing companies in my constituency supply some of the major motor manufacturers in his, and we work together on those issues.

I should like to start by injecting a note of blame. Some other hon. Members have chosen not to blame the current economic crisis on the Government, and that surprises me. Today, we heard the Chancellor delivering a speech while presiding over what is, as one Minister admitted today, the worst recession. The Chancellor is presiding over a currency in free-fall and a public sector debt that is to double in the next five years. Yet despite the Government's having been in power for more than 10 years, Labour Members say that that is not the Government's fault. I find that extraordinary.

It is particularly extraordinary to claim that this is all down to global causes and that other economies are suffering alongside the UK, because none is suffering as badly as ours. Sterling has fallen further and faster than any other major currency this year. Why is that, and why has it happened particularly in the past few weeks? It is because currency markets increasingly lack confidence that this Government will be able to borrow what they need to borrow, by their own admission, over the years to come. That is why the currency is collapsing.

The Chancellor was not prepared to admit, when challenged today, that he is doubling the public sector debt under his watch. If the gilt markets are not prepared to fund the Government's borrowing, two things could happen: interest rates will rise to the point whereby that funding becomes available or the Bank of England will print money to enable the Government funding to be established. Either way, we are heading for significant deflation or stagflation, neither of which Labour Members should feel any comfort about. Commentators are now asking themselves whether the UK will have to follow the path of the Seychelles or Ecuador by defaulting, or they are starting to talk about returning to international agencies to bail the economy out of a prolonged period of Labour Government, as has happened before.

I should like to talk briefly about the banking crisis. Government measures have led to a succession of errors helping to compound the problem, in our economy in particular. We have heard much talk about the regulatory problems being not of our making. I remind Labour Members that the new banking regulatory system, which was put in place 10 years ago by the then Chancellor, now Prime Minister, and the then Chief Secretary, now Chancellor, was found wanting a year ago when the Northern Rock crisis took place and the Financial Services Authority itself admitted that it had not regulated properly.

When Conservative Members argued in favour of the independence of the Bank of England, we were not arguing in favour of the FSA taking over banking regulation—that was not how we saw it then or see it today. When Northern Rock got into difficulty last year, the Government were unable to take the swift decisions necessary in order to deal with the crisis as it arose. Despite ministerial denials ever since, they dithered and shilly-shallied and did not take the opportunity to place Northern Rock into the safe hands that were on offer.

The bank recapitalisations of this autumn have also been poorly executed. As other Members have said, they have been funded by an extraordinary series of preference share issues which have provided terms that would prevent anybody else from participating, so should those banks require funding in future there will be no sources of capital other than the Government available for them to dip into. The recapitalisation has created a structure in which, by definition, only money from the Bank of England or the Treasury will be able to continue any sort of bail-out. It is not helping the real economy, because the banks have been faced with conflicting signals. On one hand, the excessive borrowings of the past decade widened their capital adequacy ratios dramatically—accentuated in some cases, as Mr. Plaskitt said, by the Basel II regulations, the classic example being Northern Rock. The expansion of the loan books had been so significant that, whereas in the 1970s the gross assets to common equity ratio was in the order of 15 times, in recent years it has been in the order of 90 times, on the narrow definition of common equity.

There has been a dramatic expansion of risk in bank balance sheets, which is why many of the assets that banks invested in require recapitalisation when they turn sour, either out of profits, which banks find extremely difficult to generate in the current environment of falling interest rates, or capital, which will not be forthcoming other than from the banks. The banks are being encouraged to lend by the Government but at the same time they are trying to generate capital to cope with the asset write-offs that they can see coming, and that circle cannot be completed.

Time is running out, and I shall allow other hon. Members to speak.

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