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Government Capital Expenditure

Part of Opposition Day — [3rd Allotted Day] – in the House of Commons at 4:20 pm on 2nd February 2009.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury) 4:20 pm, 2nd February 2009

Unlike Treasury Ministers, the Scottish nationalists are not here to answer for themselves, but we shall take it that my hon. Friend's point is entirely correct.

My final point on the way in which existing programmes are not working relates to the developing PFI crisis. In the past six months, only one PFI project—as it happens, the M80 motorway in Scotland—has been able to proceed. All others have ground to a halt, as I understand it. The Financial Secretary shakes his head; if he can encourage us with some good news, I would be delighted to hear it. The PFI process is in considerable difficulty because commercial partners will not come forward, and the number of banks willing to participate has drastically contracted, mainly because of the credit crunch. It was always a rather questionable financial mechanism, and it is now in the deepest difficulty.

I have made several points about the difficulty that the Government are having in making capital investment take place. The problem is that the context is one of a crisis that is far worse than we knew it to be even three months ago. One of last week's revelations was the fairly clear indication from independent outside bodies, such as the International Monetary Fund, that the crisis in the UK is significantly worse than that of almost any other developed country. It is worth reflecting briefly on why that is the case.

There are two major reasons why the British recession is likely to be much worse than in other developed countries. The first is that the bubble in the housing market and the growth of personal debt were more extreme than they were in almost any other developed country, except for Ireland and possibly Spain. The blame for that is quite widely distributed, but it is partly down to a failure of regulation: the deregulations of the 1980s and the liberation of the building societies that allowed them to become banks. It is partly due to failures by the Financial Services Authority, and partly due to a failure of monetary policy. Much of the responsibility for the failure to spot the bubble in the housing market lies with the Government, but also with irresponsible lending by the banking system. That was exceptional in the UK.

The second reason, and the full significance of this point is only now becoming fully apparent, is that Britain will suffer severely because we are host to some of the world's largest banks. Of the largest five, three are in the UK, and they are ultimately the responsibility of the British taxpayer—not counting Lloyds HBOS, which is not far behind them. The City of London hosts those enormous, universal banks that are now in extreme difficulty, and the effects are rippling through our economy. That is happening because banks are rapidly—to use an ugly phrase—deleveraging, which is showing up in a contraction of credit to British companies, and because of the loss of revenue from the City on which the Government hitherto relied. A factor that has not yet come through, but which could be of enormous magnitude, is the big losses that the banks will accrue, much of which will end up with the Treasury. We do not know how much, but the amount will be large.

The context of the debate is one in which we understand that the recession in Britain could be much worse than it is everywhere else. Therefore, Government action, including fiscal stimulus, is all the more important.