The Economy

Part of Council Tax Rebate – in the House of Commons at 7:25 pm on 31st March 2009.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury) 7:25 pm, 31st March 2009

It is a pleasure to follow Mr. Meacher. Of all the tasks that the Government must get right, one would imagine that handling the economy, including taking steps to measure and mitigate risk, would come top of the list. That means that they should have put laws on the statute book in good time to deal with failing banks. Instead, we have had emergency measures, and we have only just got the Banking Act 2009.

The Government should be transparent about their actions, especially when it comes to spending or committing vast sums of public money. There should have been transparency about PFI liabilities, and the various schemes they have announced—many of which I support—should have been fully worked up, costed and ready to go before the press releases were issued. People remain disappointed that they cannot get proper access to some of the funds, not least the enterprise finance guarantee, if they do not offer a further guarantee to the banks. That has made the whole thing almost worthless, an issue to which I shall return.

I welcome most of the schemes that the Government have announced. They are important because, as others have said, the real economy has gone into recession. The national debt amounted to half a trillion pounds even before the banking crisis began to bite, and that left nothing in the tank to stimulate the economy when the downturn came. As a result, every action that the Government have taken has effectively been predicated on increasing the national debt to £1.2 trillion in a few years.

Even that may not be enough, if the recent forecasts that the Government are out by £100 billion this year alone are correct. To put that in context, that is a debt equivalent of £50,000 per UK household, but if all the contingent liability for the banking bail-outs and the off-balance sheet PFI stuff is included, we may well be talking about a national debt somewhere north of £2 trillion.

The Government oversaw the creation of a house price bubble, allowed too much credit into the system in the early part of the cycle and had nothing in the tank to stimulate the economy when the recession came. All we had were their foolish claims to have ended boom and bust, but the real economy went into a hideous recession, with output down, capacity lost and unemployment at 2 million. We have suffered the largest ever single rise in unemployment, and many of our constituents are in a pretty miserable place, but the difficulties in the banking sector almost overshadow those faced by real people in the recession in the real economy.

I want to speak briefly about what might be called the public genesis of the recession in the UK—the Northern Rock crisis. On 14 August 2007, the Bank of England was made aware of the difficulties in Northern Rock. Shortly afterwards, the European Central Bank, followed by the US Fed, Japan and Canada, pumped huge amounts of money and liquidity into the banking system. On 12 September 2007, the Bank of England rejected that approach. The run on Northern Rock began on 13 September, and it was five months before the company was finally nationalised on 17 February 2008.

The lack of capital was such a problem—although it was not recognised at the time—that we have recapitalised the banks. We have had the facilitated takeover of Bradford & Bingley, whose mortgage book has been taken on by the taxpayer, and we have pumped hundreds of billions of pounds, in one form or another, into the banking system, but the Banking Act has only just been passed. However, we do not have legislative proposals yet for new banking regulation, even though many recognise that weakness in that regard was a significant part of the problem.

I welcome the asset protection scheme, even though it amounts to open-ended insurance on the banks' excess bad debts, because it will insulate the toxic debt, remove the fear of default and give banks back the confidence to lend to each other. However, the Government have placed untold billions of pounds of liability on the public books even before the new banking regulations are place.

Let me bring the banking story up to date with the sale at the weekend of Dunfermline building society to Nationwide. I have no problem with Nationwide—it is a good building society—but the story has parallels with those of Northern Rock and HBOS. The Financial Services Authority ought last October to have concluded a deal to recapitalise Dunfermline building society, at a cost at that point, it is reported, of some £20 million. Apparently, the FSA did not have the people needed to conclude the deal. We ended up yesterday with the announcement of the transfer to Nationwide, including £1.6 billion in net financing to cover the value of the deposits transferred, plus the liability of the bad debts, mainly the commercial loan book, being taken on by the taxpayer. That five-month delay was unnecessary.

In addition, as happened with HBOS, when the Government panicked and did the deal, they excluded other potential bidders: in the Dunfermline's case, as we found out yesterday, Scottish Friendly had put in a serious bid to solve the problem, but was ignored by the Government. The Lloyds-HBOS deal was forced through in much the same way.

Of course the banking fixes are expensive, but as important to fixing the real economy are many of the Government's other actions, including the fiscal stimulus package, which I support, although I shall discuss the detail in a minute. However, as I have said before, I would like to see recognition of the fact that in February, April, October and November 2008, the United States, Spain, France, Japan, Germany and others announced stimulus packages—well in advance of the UK.

On the stimulus package, in particular the VAT cut, although I think we need fiscal stimulus, I do not think that monetary policy will be enough. We found a week after the VAT cut was announced that the same sum directed to direct capital investment would have preserved or protected more than twice as many jobs. That would have been a far better route to go down.

The health or otherwise of the economy generally and the success or failure—or even the commencement of delivery—of the Government's initiatives are of equal, if not greater, importance to helping business craft a recovery from the recession. One of the key features of policy is the enterprise finance guarantee scheme, but of the £1.3 billion promised, only 5 per cent. has been allocated since January. As for the other schemes—and in no particular order—only £100 billion has so far been drawn down from the £250 billion announced to support interbank lending; the consultation on the house sale and rent back scheme will not report until May; and the home owner mortgage support scheme, which is even more complicated, fiendishly so, is not properly up and running. According to answers I received from the Treasury four weeks ago, not all the re-profiled money brought forward to be spent in the next financial year has yet been allocated to specific projects. All those schemes are essential. Why were many of them not properly worked out and ready to go before the press release was issued?

We can also clearly measure the impact of the recession on business, not simply through the rise in unemployment but in other ways. I was struck by the purchasing managers index scoring for January, which is well below any indication of an upturn in the economy. The spokesman for the Chartered Institute of Purchasing and Supply said that the sector reported an "anaemic opening to 2009", with record falls in employment in factory jobs. I understand that 30,000 factory jobs are being lost every month. He went on:

"While the weaker sterling exchange rate acted as a crutch to prop up export orders, benefits were offset by the downturn in global demand."

However, the weaker exchange rate is also acting to exaggerate inflationary figures for essential imports, as we saw only last week in the contradictory messages given by the consumer prices index and the retail prices index. Even with sterling down 15 per cent. against the euro and 27 per cent. down against the dollar, the balance of trade figure for the whole of 2008—a £46.1 billion deficit—is barely changed from the £46.5 billion deficit of the previous year.

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Ian Hamilton
Posted on 1 Apr 2009 8:11 pm (Report this annotation)

I have watched Stewart Hosie's career with interest. I have only the very slightest personal acquaintance with him but remember many years ago marking him out as a coming young man

He is now one of the major people in the Westminster Parliament. Anything he has to say is of interest and I am always on the look out for it. He is one of several SNP MPs who show what can be done from the back benches. Agus Brendan MacNeil is another.

The best people with political ambitions are now choosing the SNP.

Ian Hamilton