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The purpose of that was to try to do something to stimulate the creation of jobs in the private sector.
I am concerned about the level of gilt sales that we are indulging in. Over the next four years, according to the Red Book, the deficit will be about £570 billion. Maturities are running at about £40 billion a year. For the last year, all the gilts that the Government issued were sold to the Bank of England, so that will have to be undone over the next three or four years. On the Government's own figures, we are looking at selling £920 billion of gilts over the next four to five years. That is not possible without a major increase in interest rates, a major fall in the currency, or both.
Another reason why it is important to eliminate the deficit a lot faster is that the private sector cannot recover with these levels of borrowing and taxation, as well as inefficiencies in the use of people in the public sector. That will lead to a lower pound, higher interest rates, and, perhaps, inflation. We have been running an incredibly loose monetary policy alongside the fiscal policy, although that is partly to do with the problems in the banks.
I got interested in politics in the 1970s because I thought we were getting into terrible trouble on the Government's finances. I came into this place when a Conservative Government were trying to grapple with an inherited deficit of 9 per cent. of gross domestic product, and it looks as though the next Government are going to have to start from a much worse position than that. I fundamentally believe in sound public finance and sound monetary policy. We all know, from our personal life or our business life, that if one is getting into debt and things are not getting any better, the sooner one faces up to the problem and straightens it out, the sooner one's life can get back to normal. Every business man knows this, and we all know it from our own lives. I am sure that we have all had periods when we have taken on debts that we cannot really afford and interest starts to catch up with us, which begins to mean that we cannot spend money on things we want to spend it on. The sooner one grapples with that problem and resolves it, the sooner one gets back to normal.
Part of the adjustment to this process will fall on the public sector work force, and I am afraid that it will be a very painful time. However, the Government have increased the public sector work force from 5.2 million to 6.1 million during their period in office. The pay bill is a quarter of public spending, and last year it went up by 3.8 per cent. A lot of those people are not productively employed. Let me take just three examples. In 1997, the Arts Council employed 200 people and its overhead was 5 per cent. of its budget. It now employs 765 people, and its overhead is 11 per cent. of its budget. Giving away other people's money has always seemed to me to be one of the easiest things to be tasked with in life, let alone public life. Why the Arts Council needs four times as many people to do the job as it did in 1997 beggars belief.
In the national health service, most of the increase in numbers has been in health professionals. Of 290,000 employees, 172,000 have been health professionals, but 120,000-40 per cent.-have been management and support staff. The Office for National Statistics has just reported that productivity is falling in the NHS. That is not surprising, because one cannot throw at it the amounts of money that the Government have and get value for money from it. The NHS can make massive efficiency and productivity savings over the next few years on the basis of the very generous settlements that the Government have given it. As for schools, there have been 41,000 more teachers but 90,000 more support staff. There is a huge increase in bureaucracy from which we can make savings. These people will move into the private sector as it starts to recover when the Government get out of the mess that they are in.
That will require a little bit of boosting on the supply side. I should like to make a couple of suggestions about how the unemployment that will inevitably be created gets picked up in the private sector more quickly than it might otherwise be. If I were Chancellor, I would have, for two years, 100 per cent. capital allowances and zero capital gains tax on business investment made during that period to try to bring forward business investment that will create jobs. That would mean a very significant tax incentive. The Government have gone a little way towards it, because they have reduced capital gains tax rates a lot over the past few years, but a temporary measure like that would do what is needed.
My other plea is that when public spending is cut, as it inevitably will be, we try to protect a couple of areas of the capital budget. The Government make two contributions to the productivity of the nation: in transport and in education. Although there has been a lot of investment in some aspects of transport, the investment in roads has been appalling under this Government. Many business men say that what they would like is not all the Government's programmes but a better road to the docks from wherever their factory happens to be. On higher and further education, raising the skills of people in the work force makes them more employable and more productive, and I would like that aspect to be protected. Other areas of capital spending will inevitably come under pressure, but they are always the easiest things to cut.
The banks have been one of the causes of the problems we have been experiencing, but, remarkably, they seem to fail completely to appreciate how unpopular they are, the problems they have caused or the need for any adjustment in how they are regulated and how they behave. They have gone back, remarkably quickly, to what seem to me to be their bad old ways. It is absolutely right for the Government, as the guarantor of retail deposits and the lender of last resort in terms of system risk, to say, "We're never going to have this happen again." I think Members in all parts of the House are agreed about that. We have heard all sorts of ideas: Adair Turner has talked about micro-regulation by the Financial Services Authority; David Walker has talked about the reform of bank boards and moving regulation into the Bank of England, which is probably a good idea. We have heard about counter-cyclical capital ratios, micro-prudential regulation, and watching liquidity. I am sure that all those ideas have something to contribute. However, if the new regulatory framework is to work, it will have to involve some international co-ordination; otherwise, people will just go into regulatory arbitrage, as they did before.
I would like to suggest something much more simple. The net assets and liabilities of the banking sector mirror the net assets and liabilities of the non-financial part of the economy. If bank balance sheets are growing at 10 per cent. a year but the economy is clearly not growing that fast, that tells us that there is a problem. That is mirrored, in turn, by the money supply. Throughout most of the previous decade, the economy was growing at about 3 per cent. a year and the money supply was growing at 10 per cent. That was a big red flag showing that there was a problem. One would not need to be a super-clever regulator to realise that banks were expanding their lending too fast and probably lending a lot of money to people who could not pay it back.
Ultimately, in all such banking crises, there is one problem-the banks made bad loans, and they will not get that money back. In this case, they got it so badly wrong that the taxpayer had to step in to help them out. The industry is too big-it is worth four and a half times our gross domestic product. By that I mean that the banks' balance sheets are too big, not that the financial services industry is too big. We must remember that for every fat cat banker with a £10 million bonus, there are probably 50,000 people working in fairly ordinary jobs in call centres or offices, processing transactions, in sales and marketing, or whatever. A very large number of people are employed in an industry that is a very important one for us internationally.
I should like to make a couple of suggestions of my own. The Americans have suggested bringing back the Glass-Steagall division between investment banking and commercial banking-the casino and the utility. I find that a pretty attractive idea, although I worry, on the other side, that big companies need banks that can do a lot of things for them. If we are not to go the whole hog, I do not see why we cannot put banks into silos. The bank could run its mergers and acquisitions and corporate finance business in one silo, with a certain amount of capital committed to it but not putting deposits at risk. If it wanted to run a proprietary trading operation-frankly, I do not believe it should, because it would basically be betting against its customers-that should be in a separate silo. The only thing that the Government should guarantee is the retail deposits in a separate subsidiary of the banking group, and we should regulate very tightly what it did with that money. If a bank wanted to run its own internal hedge fund and lost money on that, it would lose a certain amount of capital, but it would not put the rest of the business at risk, as Lehman Brothers did.
We have to stop people gambling. In insurance, one cannot have a reinsurance contract without having an insurance contract in the first place-one cannot insure something in which one does not have an interest. It ought to be the same with credit default swaps and associated derivatives. There are trillions of them floating on a tiny amount of real transactions, and they ought to be restricted to the amount of the real transactions.
The big point that I wish to make is that the ethics and morality of the banking business need to change. When the closed shop of English gentlemen who ran the City for a couple of hundred years was broken up 30 years ago, we got an eat-what-you-kill philosophy from the Americans instead. It is pernicious, because it encourages an individual to take a very short-term view of what he or she does, in the interests of maximising his or her own bonus. Nobody is looking after the firm or much concerned about the customer. Bankers need to start thinking about the purpose of what they do, and they need to reintroduce strong ethics to it. They need to deal with conflicts of interest over proprietary trading, and they must put the good of the customer and the organisation that they work for much higher up their agenda.
I believe that the idea of a transaction tax on banks is terrible, as it would just get passed on to customers. However, the idea of taxing the banks' profits a bit more might be good. The reason why they are making so much money at the moment is that they can borrow it from the Bank of England for next to nothing. The argument for a windfall tax on the banks is pretty overwhelming, and if my party is in charge of these affairs in a couple of months' time, as I hope it will be, I hope that it will take that on board.
I came into this place when a Conservative Government were trying to sort out the terrible fiscal and monetary mess that a Labour Government had led us into, and I fear that I am leaving when the same thing is about to happen. In between, there was a period of pretty sound finance both under our party and under the current Government for their first five, six or seven years. I fundamentally and fervently believe that it is the job of the Government to run their finances soundly; otherwise, they are mortgaging the future of our children and grandchildren, which is at worst immoral and at best not very intelligent.
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