The Economy and Business, Innovation and Skills

Part of Corporation Tax Bill – in the House of Commons at 1:48 pm on 26th November 2009.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer 1:48 pm, 26th November 2009

My party's approach to the Queen's Speech is summarised in the amendment put forward by my party leader and my colleagues. Essentially, it is that the limited time that remains in this Parliament should be used for some modest political reforms and that devoting it to the range of legislation proposed in the Queen's Speech is not justified. However, two economic Bills-on fiscal policy and on banking-have been announced and it seems appropriate that we take the opportunity to discuss them.

I shall start with the question raised by the Conservative spokesman concerning Britain's place in the current economic crisis. It seems a good place to start: why is Britain in the worrying position of having suffered a recession that is deeper and longer than that faced by other developed countries?

Essentially, there are two reasons. One is that the consumer boom, which was based on inflated asset prices-particularly for housing-and consumer debt, was allowed to get out of control. There was a great deal of complacency about that.

The bigger reason, which the Chancellor has just given from the Dispatch Box, is that Britain is unusually dependent on the banking sector. We had a major international banking crisis; British banks' balance sheets account for roughly 4 to 5 per cent. of our gross domestic product-far in excess of the United States or most European countries. It was inevitable in those circumstances that a major banking crisis would inflict great damage on the British economy. In that sense, the Chancellor was absolutely right in his analysis. It is unfortunate that his predecessor, now the Prime Minister, went around claiming that we would get out of this recession much sooner than everyone else, because the underlying structural problems were so obvious, and the Chancellor has correctly identified them.

Let me proceed to two specific issues, one of which is the fiscal responsibility Bill. We have all had our fun with it. The Conservative spokesman had a bit of fun today, with jokes about the Chancellor being hauled off to the Tower of London, and about unenforceable legislation. I shall try to approach it in a different way, to try to understand what the Government are trying to do.

Is there a role for declaratory legislation, which sets an objective that is not intended to be enforced or cannot be enforced? Does such legislation actually have a role? The point that has been made to me, and has also been made from the Back Benches, is that such legislation has been introduced in other contexts; for example, climate change. I think all parties have signed up to targets in that context. That is a serious point.

There are two differences, however. First, setting quantitative targets that have a major impact on long-term business planning is different from setting financial targets in a rapidly moving economic world. There is a fundamental difference. The climate change targets are important, too, because they link directly to treaty obligations, so there is an argument for embedding them in law. I accept that. It is an interesting precedent for the law being used to set good objectives that cannot be enforced. Let us apply it to the present case. Is it sensible or helpful for the Government's fiscal objectives, which I think are to halve their estimate of the structural deficit within a Parliament, to be embodied in law?

The Government have created a dilemma for themselves. If there is a rapid economic recovery, which I know the Government hope for and some of their projections suggest will happen, the objectives are far too modest, because if there is rapid growth it will be possible to reduce the fiscal deficit more rapidly. On the other hand if, as I fear may be the case, the British economy does not recover rapidly, we shall have all kinds of impediments. The banking system will not be working properly. The monetary policy stimulus will have to be terminated within the next year or so, in all probability, so we shall not have growth. In those circumstances, the Government's modest objectives may be much more realistic. However, we do not know which of those two futures will evolve.

There is a particular difficulty with the position that the Conservative shadow Chancellor has taken. He assumes that the next Government, or this one, can somehow create rapid economic growth. Going back to the early days when the Prime Minister was in his ascendancy and the Secretary of State for Children, Schools and Families was at his side, they claimed that they had in some way changed the fundamentals of British economic growth. The rather mundane truth is that the underlying rate of economic growth in Britain has been pretty much unchanged since the Napoleonic wars. Different Governments claim that they have found a magic formula-Mrs. Thatcher did, as did the present Prime Minister-but of course they do not fundamentally change anything. Underlying growth is likely to be quite modest, in which case there will be a significant effect on what it is possible to do in terms of fiscal policy.

If we enter a period of rapid growth, the Government's aims will be too modest. There is a real danger that we shall get stuck in a slowly growing, recession-hit economy for a significant period, with high levels of unemployment. If that were the case, it would be disastrous to embark on rapid deep cuts in public spending in the short run. It would be completely inappropriate. Because we do not know what conditions will be, it seems foolish to set targets in stone in legislative form.

Does that mean that the legislation is completely pointless? No, there is a role for legislation to strengthen the fiscal framework. I am probably not too far from the Conservative spokesman in his belief that we need an additional independent element in fiscal policy, as we have in monetary policy with the Bank of England. However, my party's approach would be more modest. There is probably an argument for giving the National Audit Office a stronger role in auditing what the Government have done-not just their forecasts as at present. The NAO could make an assessment about whether the Government have delivered on their targets.

We have already had some strengthening of the legislation regarding the independence of the statistics office. That was a step forward and there is an argument for an independent audit role-an Ofsted-on fiscal policy. I agree with that, although I should not create quite such an elaborate institution as the Conservative spokesman proposes. None the less, there is a role for strengthening the institutional backbone of fiscal policy.

I switch to the other, much bigger subject: what is happening in the banking system. Over the past couple of days, we have been reminded in several ways that major problems are still unresolved. There was yesterday's Supreme Court ruling on banks imposing what many people regard as unfair charges. There were also the revelations about the so-called secret loans. Today, we have seen the pathetic report from a City insider-the Walker report, which is an absolute disgrace. Before I came to the Chamber today, I was in a television studio with Lord Myners, whose eyes were rolling in embarrassment as he tried to explain away the fact that the Government are committed to that rather pathetic and limited document.

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