The right hon. Gentleman's Front-Bench colleagues are arguing that the only thing we need to do in this recession is to try to get our national banks, and international banks based in London, lending more to people who want to borrow for mortgages and businesses here. I see he is distancing himself from their remarks. I think there is a danger there, too, as I said in an intervention on the hon. Member for Twickenham.
One of the key differences between the 1930s financial crisis and the current one is the extraordinary degree of interdependence that has developed between our complex major international institutions, so that the failure of one part of the system reverberates around the globe. Indeed the Deputy Governor of the Bank of England, Paul Tucker, put it like this in answer to the Treasury Select Committee about the Government's new toxic asset scheme:
"We cannot cut ourselves off from the international nature of this crisis."
To go back to the Turner report, Adair Turner says:
"The origins of the crash lay in the US housing market".
[Hon. Members: "Read the rest of it."] The rest of the quote is,
"with growing evidence that excessive credit extension and weak credit standards had resulted in rapidly rising credit losses, with implications for the price of many asset- backed securities", the point being that asset-backed securities are held by institutions right across the world and have been affected by the sub-prime mortgage issue in the United States.
If the Conservatives cannot understand the nature of the credit crisis, how on earth can they be expected to be the ones entrusted to solve it? Indeed many of their policy prescriptions seem to stem from that flawed analysis; putting forward a prescription based on fiscal rectitude; promoting saving and living within our means; and reining in public debt at a time when liquidity and demand both need to be supported to prevent this recession from turning, indeed, into a great depression.
I am glad that the Conservatives seem to have rowed back from immediate cuts in inheritance tax, now to be implemented, I think, within the first term of Conservative Government, rather than on day one. However, they still seem to be recommending £5 billion of public spending cuts in this financial year—the same prescription that was made in the Thatcher recession of the early 1980s, which led to the massive unemployment that became entrenched for a generation.
It may suit the Conservatives as a matter of political strategy to pin the downturn on the British Government, but that is plain wrong. Not only is it wrong, but the argument is further confused by obscuring the situation on debts and deficit. The facts of the matter are that we entered the recession with public debt low by international standards. Even after the recession, after any fiscal boost, according to the OECD, we are likely to come out of the recession with public debt, although significantly higher, still likely to be one of the lowest in the developed world.
I accept that we have run and will run very large fiscal deficits in years to come. We are likely to do so largely because as tax receipts fall and benefits rise—we have to accept the fact that automatic stabilisers are much stronger in this country than in other countries—we naturally support our economy through any downturn. How much will the VAT cut, the fiscal boost that we have already seen, contribute to the deficit?
The Institute for Fiscal Studies has said that the VAT cut and the fiscal stimulus package more broadly will make little difference to the scale of the deterioration in the UK's public finances over the next five years. The stimulus package contributes only one fifteenth of the increase in public sector net debt that the Treasury expects by 2013-14. In fact, providing a strong economic stimulus, both fiscal and monetary, to support spending during the downturn is precisely what the British economy and the global economy need.
As the IMF said in a note this month:
"Some countries entered the crisis with greater fiscal space to expand, including more favourable levels of deficits, public debt, contingent liabilities and interest rates", referring to Canada, China, France, Germany, the UK and the US. It is a travesty to misdiagnose a problem that is clearly international as a domestic regulatory failure in order to pin blame on the Government.
I accept that there was a collective failure around the world to see the downturn coming. In retrospect, the huge global economic imbalances that emerged between China and the west were never going to be sustainable. As those surpluses searched for yield across the globe, that gave a huge impetus to global financial institutions developing more complex financial instruments.
The G20 comes at a critical moment. The first priority must be preventing the recession from turning into a depression. Secondly, we must craft principles to reform the international financial system. Thirdly, we must protect the world's poor, rejecting trade protectionism in any form.
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