Economic Affairs and Work and Pensions

Part of Speaker's Statement – in the House of Commons at 5:08 pm on 8th June 2010.

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Photo of Frank Dobson Frank Dobson Labour, Holborn and St Pancras 5:08 pm, 8th June 2010

At the recent general election, the Tories gleefully asserted that under the Labour Government, inequality had increased. That was true, and it was a major embarrassment to Labour candidates and supporters, but in fact, the gap widened despite the Government's introduction of the national minimum wage and tax credits, and their targeting of health, education and pre-school resources on the most deprived areas and families. The gap widened not because the Labour Government ignored the plight of the worst-off, but because the best-off kept paying themselves more and more.

The Prime Minister has said that his Government's proposals will change our way of life, but they are very unlikely to reduce inequality. His Tory-Lib Dem Government are positively drooling at the prospect of slashing public services, when we all know that the living standards of the poorest in society are, as they always will be, the most dependent on public funds and public services. Cutting pay and pensions and slashing public services will not narrow the inequality gap, but widen it.

As we all know, increasing the share of national wealth going to the worst-off is not of itself sufficient to narrow the inequality gap. We must at the same time reduce the share going to the wealthy. The principal target for such a reduction must be the bloated finance sector, which has been taking an ever greater share of the nation's wealth while devoting a great deal of talented effort on tax avoidance to benefit the people who work in it. Indeed, in the recent banking crisis, far from being a wealth creator, the financial sector proved to be a wealth destroyer. Its record was deplorable. Today, KPMG has given us the benefit of its wisdom on how to improve efficiency in the public sector. I do not know why we give any credence to KPMG, however; after all, it was the auditor of HBOS and Bradford & Bingley and it did not spot that anything was going wrong when those outfits were going bust, even though that was its primary task.

Banks are supposed to act as a conduit between savers and borrowers, providing capital for individuals and firms who want to produce useful goods and services for the rest of us. Over the years, that function has increasingly taken a back seat to speculation that is referred to, in deferential terms, as "the market". These markets, both national and international, often have nothing to do with supply and demand, however. Fluctuations in the price of oil are a good example. In July 2008, the price of Brent crude reached $146 a barrel; by December that year, just five months later, the price had fallen to $36 a barrel, almost exactly a quarter of its top price. That was not the product of changes in supply and demand; it was the product of speculation.

The price of rice shot up from about $280 a tonne to $1,015 a tonne in April 2008. Apologists for "the market" denied that that was the product of speculation. They said it was because the Chinese were eating more rice. If so, the Chinese must have started eating something else since then, because the price of rice has halved to $500 a tonne today. Such speculation always hurts the worst-off and lines the pockets of the people who are already rich. The G20 should be taking concerted action to tackle such speculation, because while it does not do so everybody else in the world will be vulnerable.

Of course, the main sources of wealth for the finance industry are the costs it imposes on the rest of us for its services-its handling charges and transaction costs, or what would be referred to in any decent above-board casino as the "croupier's rake-off". All large financial transactions involve a host of advisers, consultants, lawyers, fund managers and the like, all pocketing a percentage. Let us consider the recent abortive effort by the Prudential to buy part of AIG at an original estimated value of £25 billion. If the scheme had gone through, the transaction costs had been expected to total about £1 billion, or about 4% of the value. Although the proposal has fallen through, it has still cost the Pru approaching £500 million, including a lot of fees for expensive City advice-presumably bad advice.

The current proposal to sell off the channel tunnel rail link and St Pancras station illustrates how the finance industry failed in its self-proclaimed task of providing private capital yet is now creaming off some of the value. No City institutions were prepared to invest in the channel tunnel link, so the taxpayer had to step in and take the risk. Now that it is operating successfully however, the private sector is sniffing a profit, and it is to be sold off. Citigroup and UBS are involved. They did not design the link, transform St Pancras or manage the building project, and they certainly did not take any of the risk, but they are now advising on the sale and will pocket substantial fees for that advice. One can only hope, on behalf of taxpayers whose assets are being sold off, that those two firms will do a better job than they did in the banking crash, when Citigroup lost $55 billion and UBS lost $44 billion. We need to ensure that the drain of finance and of talented graduates into the City is stopped, so that the money can be devoted, and those people can devote their lives, to doing something a lot more useful and promoting British industry. That is what we all want to see.