Budget Resolutions and Economic Situation — Amendment of the law

Part of Oral Answers to Questions — Prime Minister – in the House of Commons at 1:46 pm on 22nd April 2009.

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Photo of John McFall John McFall Chair, Treasury Committee, Chair, Treasury Committee 1:46 pm, 22nd April 2009

The £100 million is over and above the money that local authorities are already receiving, and is intended to support energy efficiency measures. I welcome that £100 million from the Government, but is there still a long way to go? Of course there is. Some years ago the Government commissioned a report from Kate Barker, who was a member of the Monetary Policy Committee at the time. According to her, between 120,000 and 140,000 houses needed to be built each year. That is an ambitious target, but we are moving along the path towards it. However, we also need to prepare the economy for the future.

The Chancellor mentioned the banking and financial sector. That sector will not contribute the same amount to the economy as it has in the past. It will shrink: everyone has acknowledged that, not least the Governor of the Bank of England when he appeared before our Committee. We need to rebalance the economy, and ensure that it functions in all the regions.

The banking practices mentioned by the Chancellor generated the highest yields, but they also generated a massive amount of risk, which ultimately led to a global banking crisis and which we are no longer prepared to accept. In the future, our economic growth should not be driven by risky banking practices. At this stage, it is important for us to take a long-term view and to invest in areas that will be drivers for growth, including high-value manufacturing. Our infrastructure will also need investment to support a post-recession economy which, as I pointed out earlier, will be less centred on the City of London. The Treasury Committee is conducting an inquiry into the banking crisis, and we hope to publish our first report in the next week or so. We intend to produce another report on corporate governance, followed by reports on consumer issues and international regulation and co-operation.

I suggest to the Chancellor that any financier whom he meets—and any whom I meet—should be told that it will not be business as usual in the future. Some people in the City have their heads down, thinking that the storm will pass and that in a couple of years they will be able to renew the old practices and the old ways of doing things. The old practices and the old ways of doing things should be consigned to the dustbin of history, and new ways, involving putting customers at the forefront of banks and financial services' interests, should be promoted.

Corporate governance should mean good management of companies. As the Chancellor knows, it was a shocking lack of corporate governance that led to the demise of the Royal Bank of Scotland and HBOS. In the case of the Royal Bank of Scotland, the problem was the acquisition of ABN AMRO. The then chairman of RBS, Tom McKillop, told the Committee that the bank had bought ABN AMRO at three times the market value price. It bought the company on 15 October 2007, a month after the crash. That was a mistake that brought the bank down. The chairman of HBOS, Lord Stevenson, acknowledged that there had been mad, risky lending and no oversight of the risk assessment, and that that had brought the bank to its knees.

On the boards of those banks were people whom we would term the great and the good—very influential people with a track record in the financial services industry—but they did not make a squeak, because profits were coming through the door. They turned their faces in the other direction. We must have a corporate governance system that ensures that risk is assessed. At the end of the day, the long-term interest of the company rather than the short-term interests of the executives should prevail. Sadly, it is the latter that we have seen in the banking crisis to date.

Mention has been made of the public debt and whether we can afford it. I would turn the question around, and ask whether we cannot afford it. Opposition parties will argue that we need to cut public spending dramatically, but cutting public spending dramatically is the wrong way to go about things at present. It would appear from the comments of the Leader of the Opposition that if the Conservatives were in power the cost would be even higher, because they would fail to take action to protect jobs and homes.

Last year, the public debt was estimated at 8 per cent. of GDP. Seven per cent. of that debt was a result of the automatic stabilisers; only 1 per cent. was a result of the fiscal stimulus. The Conservatives have said that they are signed up to the Government's proposals on the automatic stabilisers. All that we are talking about here is a 1 per cent. fiscal stimulus, and we need to ensure that we help people with it. I suggest to the Leader of the Opposition that he is on the wrong track in that respect.

A fairly wide debate is taking place on the fiscal stimulus and its affordability. Only this week the National Institute of Economic and Social Research, one of the country's leading economic think-tanks, said that the United Kingdom could still afford a fiscal stimulus, and suggested that the Budget should contain a stimulus amounting to 2 per cent. of GDP—£30 billion.

On the subject of the public finances, let me again quote Martin Wolf of the Financial Times. On 18 March, he wrote that:

"it makes no sense to avoid action that would greatly lower the real economic costs of the crisis now, to eliminate a hypothetical and avoidable fiscal crisis later on. This would be like committing suicide in order to stop worrying about death."

Given the Government's commitment to helping people and to making this a Budget with a human face, I welcome the initiatives announced today, but are they enough? I fear not. Will the Treasury Committee be scrutinising the Government on their public debts and their commitments to assist the most vulnerable people in society? We certainly will. We look forward to renewing our engagement with the Government next week, when the Chancellor will come before us.