The Economy

Part of Council Tax Rebate – in the House of Commons at 4:59 pm on 31st March 2009.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury) 4:59 pm, 31st March 2009

I welcome the debate. I know that the Chancellor has to leave for another meeting, but his participation was welcome. I specifically welcome the one proposal he made, which was in relation to business rates and the smoothing out of the increase. It has been called for by the Federation of Small Businesses and the CBI and it is absolutely right. I hope he will follow it up with the suggestion made by my hon. Friend Mr. Heath. We know from surveys that half of all small businesses are not even aware that they are entitled to business relief; it is very much dependent on the activism of local councils to bring it to their attention. If this could be done automatically, it would save a great deal of grief among small companies.

Listening to the contributions that we have heard from both sides, one gets the impression that the dominant issue in economic management is the size of the fiscal stimulus, which is a very odd perspective, regardless of whether one is in favour of it or against it. The International Monetary Fund has just published a very interesting analysis of what is happening in the British economy and where the stimulus is coming from, and it puts things into an interesting perspective. The IMF calculates that the value of the Government's fiscal stimulus over a three-year period is about £20 billion and contrasts that with some £90 billion of stimulus that is coming from interest rate cuts and monetary easing and with the stimulus that dare not speak its name—devaluation—which is providing an extra £40 billion. Although the Government do not acknowledge it, and nor do the Conservatives, for their own reasons, what is actually happening is that the Government are very carefully following the doctrines of Milton Friedman and we have, in essence, a monetary response to the crisis, which is absolutely right, provided it is effective and gets money into the economy. The argument about the fiscal stimulus, although it may be amusing and politically interesting, is fundamentally a sideshow.

While we are discussing the sideshow, I just wish to reiterate the view that Liberal Democrats have been expressing, which has been reinforced by experience and by the conviction of a growing number of Labour Members. It is that although the VAT cut may have seemed a bright idea, as the Government needed to do something in a hurry, it was not the best way of using £12 billion of taxpayers' money. There is a strong argument for simply stopping it and using the money instead for a much more carefully targeted programme of public investment aimed at social housing, insulating people's homes, and public transport, so that at the end of it there will be assets, many of which will produce an income, which will directly stimulate employment and also do something for the environment.

An interesting survey has just been produced by HSBC on the environmental impact of the Government's fiscal stimulus, small though it was. It estimates that about 70 per cent. of that package contributed to environmental improvement, as opposed to figures of 15 per cent. internationally and 80 per cent. in countries such as South Korea. The Government have covered themselves in this mantle of the green new deal, but their policies are nothing of the kind and are completely bereft of any environmental value.

Before I leave the fiscal stimulus, I should note that it was interesting that the Chancellor threw out a challenge to the Conservatives when he said that they were proposing a cut—a negative fiscal stimulus—of about £5 billion. That is probably correct, but what he did not mention was that the Government, according to their own figures, are proposing a negative fiscal stimulus in the next financial year, because, of course, public investment has been brought forward and will be cancelled next year. If unemployment is astronomically high next March, as many of us expect it to be—it could be 3.5 million or 3 million; it will certainly be very high—and we are still in a recession, this Government, who seem to attach so much importance to fiscal stimulus, will be proposing that we have a negative one. I do not know whether that was intended or whether it was just the way the arithmetic came out, but the Government will have to solve this problem of how to sustain their commitment to the economy should this recession continue and not be a temporary blip, as they initially thought it would be.

I turn now to the quantitatively much bigger issue of the banking system. The following question was asked by Members from several parties yesterday: how much are we now exposed to the banks as a result of the various takeovers and the commitments that have been made? The total balance sheet of the British banks is about £8 trillion—about five times Britain's gross domestic product—and we are now liable for most of it. A lot of that is the gross value of derivatives and if we take them out, the figure becomes quite a bit less; but none the less we are talking about commitments that are several times bigger than the British economy.

The IMF has, again, produced some helpful estimates, although they are very speculative. It estimates that when this banking crisis has finally resolved itself, total losses of about £200 billion will have to be absorbed by the British economy and, in effect, by the British taxpayer. Now, it is not quite as bad as that, because—as Dr. Ladyman intervened to point out—there may be a gain from selling the banks, if they are run properly. That might happen in 10 years' time, so the net cost may be a good deal less, but the taxpayer's commitment is substantial, even if it is phased over some years.

The question that the Liberal Democrats would ask is whether we are getting value for our money. We profoundly disagree with the way the Government are pursuing their involvement in the banking system, because we have the worst of all possible worlds, with large-scale public investment in the equity of the banks, but without effective public control and without the banks being run in the national interest. I thought that it was pathetic when the Chancellor waved a bit of paper and said that he had an agreement of some sort from RBS and Lloyds bank to lend a bit more money. Well, he told us that in October. We have no idea what the banks are doing, and whether they are lending more or less. What we do know is that the banks are doing what they think they have to do, which is to be obsessed with their tier 1 capital.

Nobody on the board of the banks, in UKFI or in the Treasury is asking how we can maximise taxpayer value. That is the question that should be asked, and it is not being asked because the Government are desperately trying to maintain an arm's length relationship with the banks. As a result, there is no pressure on the banks to ensure that they lend to solvent British companies with a liquidity problem. We know that there are many of those because the companies in our constituencies all tell us the same story—whenever they try to raise money, even if they have a good business or a full order book, they cannot get money from the banks; or if they do, it is on punitive terms with large arrangement fees and demands for massive amounts of security. The Government should intervene to stop that.

I am told that in France the Chancellor's opposite number, Christine Lagarde, has a daily conference call with the chief executives of every leading bank and insurance company in France to ensure that taxpayer value is aggressively pursued, with the Government working actively with the banks. People may not like the French model, and in normal times I do not think that we would advocate such a dirigiste approach to the banking system. However, the idea that the Government have to grasp the nettle and treat the state-supported banks as nationalised industries is shared across the political spectrum. Those who have advocated that approach include John McCain, the defeated Republican candidate for the US presidency, and Alan Greenspan, so this is not an ideological point. It is a recognition of the reality that if vast amounts of taxpayers' money go into the banking system, it should be run in the national interest.

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