People will be concerned about the turmoil in the world’s financial markets and what it means for economies here and across the globe. I want to update the House on what we are doing to protect Britain from the storm and to help lead a more effective international response to the fundamental causes of this instability.
As of this morning, after heavy losses yesterday, markets in Asia and Europe are a little calmer, although some are still down. Over the past month, the Dow Jones index has fallen by more than 14%, the French market by 23% and the Nikkei by 11%, and it is striking that the German market has fallen by 24%. Even Chinese equities have fallen by 20% since November. Bank shares in all countries have been hit particularly hard. Many sovereign bond markets have also been exceptionally volatile, with market rates for Italian and Spanish debts soaring before falling back in the past three days.
Sadly, Britain is not immune to these market movements. In the past month, the FTSE 100 has fallen by 16% and British bank shares have been hit hard. However, while our stock market has fallen like others, there has been one striking difference from many of our European neighbours: the market for our Government bonds has benefited from the global flight to safety. UK gilt yields have come down to about 2.5%—the lowest interest rates in more than 100 years. Earlier this week, the UK’s credit default swap spread, or the price of insuring against a sovereign default, was lower than Germany’s. That is a huge vote of confidence in the credibility of British Government debt and a major source of stability for the British economy at a time of exceptional instability. It is a reminder of the reckless folly of those who said that we were going too far, too fast. We can all now see that their approach would have been too little, too late, with disastrous consequences for Britain.
It is not hard to identify the recent events that have triggered the latest market falls. There have been weak economic data from the US, including revisions to GDP figures, and the historic downgrade of that country’s credit rating. The crisis of confidence in the ability of eurozone countries to pay their debts has spread, as many feared, from the periphery to major economies such as Italy and Spain. Those events did not come out of the blue and they all have the same root cause—debt. In particular, there is a massive overhang of debt from a decade-long boom, when economic growth was based on unsustainable household borrowing, unrealistic house prices, dangerously high banking leverage and a failure of Governments to put their public finances in order. Unfortunately, the UK was perhaps the most eager participant in that boom, with the most indebted households, the biggest housing bubble, the most over-leveraged banks and the largest budget deficit of them all.
History teaches us that recoveries from such debt-driven, balance-sheet recessions will always be choppy and difficult, and we warned that that would be the case. The whole world now realises that the huge overhang of debt means that the recovery will take longer and be harder than had been hoped. Markets are waking up to that fact. That is what makes this the most dangerous time for the global economy since 2008. We should be realistic about that and set our expectations accordingly. As the Governor of the Bank of England said yesterday and as the head of the Office for Budget Responsibility has noted, the British economy is expected to continue to grow this year. Some 500,000 new private sector jobs have been created in the past 12 months. That is the second highest rate of net job creation in the G7. However, instability across the world and in our main export markets means that, in common with many countries, the expectations for this year’s growth have fallen.
This is what our response must be. First, we must continue to put our own house in order. I spoke again to Mervyn King yesterday and I confirm that the assessment of the Bank, the Financial Services Authority and the Treasury is that British banks are sufficiently well capitalised and are holding enough liquidity to cope with the current market turbulence. We have in place well developed and well rehearsed contingency plans. We must also continue to implement the fiscal consolidation plans that have brought stability to our bond markets.
I believe that the events around the world completely vindicate the decision of this coalition Government from the day we took office to get ahead of the curve and deal with this country’s record deficit. While other countries wrestled with paralysed political systems, our coalition Government united behind the swift and decisive action of in-year cuts and the emergency Budget. While other countries struggled to command confidence in their fiscal forecasts, we created the internationally admired and respected independent Office for Budget Responsibility. Those bold steps have made Britain a safe haven in this sovereign debt storm. Our market interest rates have fallen while those of other countries have soared. The very same rating agency that downgraded the United States has taken Britain off the negative watch that we inherited and reaffirmed our triple A status. That market credibility is not some abstract concept; it saves jobs and keeps families in their homes. Families are benefiting from the lowest ever mortgage rates and companies are able to borrow and refinance at historically low rates thanks to the decisions that we have taken.
Let me make it clear not only to the House of Commons but to the whole world that ours is an absolutely unwavering commitment to fiscal responsibility and deficit reduction. Abandoning that commitment would plunge Britain into the financial whirlpool of a sovereign debt crisis and cost many thousands of jobs. We will not make that mistake.
Secondly, we need to continue to lead the international response in Europe and beyond. In the G7 statement agreed between Finance Ministers and central bank governors this week, we said that we would
“take all necessary measures to support financial stability and growth”.
In the eurozone, there is a growing acceptance of what the UK Government have been saying, first in private and now in public, for the last year—it too needs to get ahead of the curve. Individual countries must deal with their deficits, make their economies more competitive and strengthen their banking systems. Existing eurozone institutions need to do whatever is necessary to maintain stability. We welcome the interventions of the European Central Bank this week through its securities markets programme to do just that.
However, that can only ever be a bridge to a permanent solution. I have said many times before that the eurozone countries need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration. Many people made exactly that argument more than a decade ago as a reason for Britain staying out of the single currency, and thank God we did. Solutions such as eurobonds and other forms of guarantees now require serious consideration. That must be matched by much more effective economic governance in the eurozone to ensure fiscal responsibility is hard-wired into the system.
The break-up of the euro would be economically disastrous, including for Britain, so we should accept the need for greater fiscal integration in the eurozone, while ensuring we are not part of it and that our national interests are protected. That is the message the Prime Minister has communicated clearly in his calls with Chancellor Merkel, President Sarkozy and others this week. I have done likewise with individual Finance Ministers, in ECOFIN and in the G7 call at the weekend, and will do so again at the September ECOFIN and G7 meetings.
This is a global as well as a European crisis. At this autumn’s meetings of the IMF and the G20 we need far greater progress on global imbalances. We need an international framework that allows creditor countries such as China to increase demand and debtor countries to make the difficult adjustments necessary to repay them. Everyone knows what needs to be done, but progress so far has been frustratingly slow, with lengthy disagreements on technical definitions, let alone any concrete actions. The barriers are political not economic, so it is up to the world’s politicians to overcome them. There are no excuses left.
The UK, like the rest of the developed world, needs a new model of growth. Surely we have learned now that growth cannot come from yet more debt and more Government spending. Those who spent the whole of the past year telling us to follow the American example, with yet more fiscal stimulus, need to answer this simple question: why has the US economy grown more slowly than the UK economy so far this year? More spending now, paid for by more Government borrowing and higher debt, would lead directly to rising interest rates and falling international confidence, which would kill off the recovery, not support it.
Instead we must work hard to have a private sector that competes, invests and exports. In today’s world, that is the only route to high-quality jobs and lasting prosperity. In the developed countries, especially in Europe, that means making the difficult structural reforms needed to restore competitiveness and improve the underlying performance of our economies. The EU should cut red tape, not add to it. Internationally, we have the greatest stimulus of all on the table in the form of the Doha round—a renewed commitment to free trade across the world, which should be taken up now.
Here in Britain, the Plan for Growth that we announced in the Budget set out an ambitious path—23 measures have already been implemented and another 80 are being implemented now. On controversial issues, such as planning reform, we will overcome the opposition that stands in the way of prosperity. On tax, we have already cut our corporation tax by 2p, with three more cuts to come in the next three years. We will continue to pursue a radical agenda in welfare and education reform.
However, there is much more we can and must do if we are to create a new model of sustainable growth. All of us in the House must rise to that challenge in the months ahead and confront the vested interests—the forces of stagnation that stand in the way of growth.
In these turbulent times for world markets, we will continue to lead the international response. We will redouble our efforts to remove the obstacles to growth and stick to our plan, which has made Britain a safe haven in the global debt storm. I commend the statement to the House.
The shocking and inexcusable events of recent days in our cities are today rightly the Government’s first and immediate priority. However, looking ahead, the global economic events of recent days are an equal and perhaps even graver threat to our stability and cohesion, putting small businesses, jobs and mortgages at risk throughout our country. It is therefore right that the Chancellor is today updating the House and the country on the parlous state of the global economy and, I am afraid to say, the parlous state of the British economy.
In the same spirit of bipartisan co-operation that we have just seen from the Prime Minister and the Leader of the Opposition, let me set out where Opposition Members agree with the Chancellor of the Exchequer as well as where we have grave concerns. First, the Chancellor is right: we made the right decision not to join the single currency in 2003. We agree with him that the crisis in the eurozone requires more decisive and radical action than we have seen so far. I welcome the fact that he is now, at last, involving himself in those discussions, and preparing contingency plans if British banks come under threat.
Tough fiscal decisions in Europe are vital, but is it not clear that the approach of European leaders so far—demanding ever more austerity from smaller countries—is not working because it does nothing to get those economies growing? Without that, countries find it harder and harder to convince the markets that they can repay their debts. Should not the Chancellor finally take a lead in brokering a plan in Europe for growth, alongside European-wide guarantees to reduce debt service costs, and stop the contagion?
I also agree with the Chancellor that months of political wrangling and uncertainty in the US about the pace of deficit reduction have depressed confidence and US growth. However, does the Chancellor agree with those wise heads who favour a balanced and sensible approach to deficit reduction, and fear that rapid US retrenchment could drive the world back into recession? Or does he agree with his friends—we know he has many in the Republican party and in the Tea party movement—who have urged deeper and faster cuts, and hailed the recent budget deal as delivering 98% of their demands? Is the Chancellor on the side of the Federal Reserve, former Treasury Secretaries and Nobel prize winners, or on that of, in the words of the Business Secretary, “right wing nutters”?
It is also right that G7 finance Ministers are finally discussing a co-ordinated response to a global crisis. However, listening to the Chancellor’s analysis, one would think that Britain was a bystander, watching public debt crises unfold in the eurozone and America that are best solved by individual countries taking their own actions to get debt down—on his analysis, the faster, the better. But the growth crisis is now global.
Does the Chancellor agree that the coming together of powerful negative forces in every continent, and including in Britain—continued deleveraging by banks and the private sector, drastic tightening of consumer spending and fiscal retrenchment from Governments—now means that some commentators warn that the crisis could become as grave as that of the early 1930s, when Governments around the world ignored their collective responsibility to promote growth, ploughed on with austerity and retrenchment and ushered in a decade of depression, unemployment, protectionism and political instability? Here in Britain, families and businesses, deeply worried about their jobs and mortgages, will hear the Chancellor’s talk of safe havens and conclude that he is either deeply complacent or in complete denial about what is happening in our country.
Since the Chancellor’s economic policies have started to kick in, well before the latest bout of financial market instability, confidence has collapsed and our economy has flatlined for nine months, growing slower than that of the US and the eurozone. On the latest OBR figures, before growth forecasts—which the Chancellor today confirmed—were to be downgraded yet again, the borrowing forecast was £46 billion higher than the Chancellor planned.
We need a tough, medium-term plan to get our deficit down, but it is the Chancellor’s reckless—[Interruption.]
Order. The House must come to order. I repeat what I have said many times: if Members shout their heads off, then expect to be called, they are suffering from an element of self-delusion.
The Chancellor’s reckless policies—too far, too fast—have ripped out the house’s foundation and left our economy deeply exposed to the brewing global hurricane. Yet, despite all the evidence and with our stock market falling 10% or more this week, the Chancellor still claims that his policies are working and that we are a safe haven. Despite the evidence of the past two years from credit default swaps and the fact that, in the past week, long-term interest rates have fallen in Britain and in the US, he still claims that falling UK long-term bond yields are a sign of enhanced credibility and not of stagnant growth in our economy. Does he not remember that the Japanese Ministry of Finance briefly took some comfort from low and falling bond yields in the early 1990s, at the beginning of a lost decade of no growth and stagnation? However many times he says that his plan is working, that does not make it true. However, many times he claims that he has restored confidence or delivered on deficit reduction, that does not make it true.
We know that the Chancellor has spent the past fortnight in Hollywood, but he cannot just write the script and watch it come to life. That is not how things work in the real world. If he will not take it from me, perhaps he should hear the words of Paul Krugman, the Nobel prize winner, who said:
“Britain’s experiment in austerity is going really, really badly. But the Chancellor of the Exchequer is finding solace in… fantasy… the wolf is at the door and Osborne thinks it’s the confidence fairy.”
The Chancellor finds the state of the British economy reassuring; we find it deeply worrying. He rejects our call for action now, including a temporary VAT cut, and vows to plough on regardless. We say that this approach is deeply incautious and reckless. The eurozone is in crisis. America is in political paralysis. The British economy is flatlining. Global markets are in turmoil. The world desperately needs strong and united leadership. Here in Britain, we need our Chancellor to get out of his complacent denial and get back to reality before it is too late.
I did meet Mickey Mouse in California, and he seems to be writing the Labour party’s economic policy at the moment.
Let me start with the areas where we agree. We agree that it is right for Britain not to join the euro—perhaps the shadow Chancellor will change the official policy of the Labour party in that respect. On the contingency plans of the financial system, I would be very happy to offer him a briefing from the tripartite authorities on those contingency plans. Obviously, they have to remain confidential, as he will understand, but I am very happy to give him that briefing.
On what the shadow Chancellor says about European countries being forced to reduce their deficits, I would ask him this question. Who is supposed to be lending those European countries the money that he talks about, in this imaginary world where they are not taking action to reduce their deficits? He voted against the decisions that we took to increase the resources of the IMF, and now he turns round and thinks that there is some magical body or some investors out there who are going to lend money to European countries that do not have credible deficit plans. It is completely for the fairies, as he puts it.
Let me talk about the US debate, which the right hon. Gentleman mentioned. He talked about deficit reduction in America and asked where I stand on the measured pace argument. Actually, I agree with the plan that President Obama set out at George Washington university. [ Interruption. ] Perhaps the Leader of the Opposition does not know what is going on in America at the moment, but actually, the President of the United States has set out a deficit reduction plan that is at the same pace and on the same scale as the one that we are pursuing in Britain. That is what the President has set out; it is his offer in the debate. Indeed, the composition of tax increases and spending reductions that he has put forward is the same as the spending consolidation that we announced last year, and is based on some of the ideas put forward by the bipartisan Bowles-Simpson commission, which we spoke to after the event. It said that it looked to the UK for inspiration for some of its ideas.
The shadow Chancellor says that there is a global economic crisis. He is right about that, and we agree, but it is caused by an enormous debt overhang. That is what all serious economists are saying at the moment. He is also right when he says that the Labour party needs a tough deficit reduction plan. I agree with him about that. Where is this tough deficit reduction plan? We have just spent two and a half hours listening to Labour MP after Labour MP getting up and complaining about spending cuts and the deficit reduction plan—they are all nodding their heads—but where is the tough deficit reduction plan that he promised? The shadow Chancellor is now almost alone in the world in making the argument that he makes. He talks about international leadership, but if he turned up at the G7, the IMF, the G20 or ECOFIN with his plans to borrow more and increase our deficit, he would be laughed out of that meeting. He is completely irrelevant to where the international debate has gone. I am afraid that he is living proof of why the public will never again trust the Labour party with their money.
Does the Chancellor agree that the collapse in the credibility of the eurozone is a warning to any Government who flinch on dealing with the deficit? Is that not why he is quite right to stick to the commitments that he made a year ago to put the country on a course to greater stability? Does he not also agree, however, that the credibility of economic policy in the long run will depend on a fully developed strategy for improving the supply side of the economy? He talked a bit about that at the end of his statement. Can he say a bit more, and say whether he intends to publish a fully worked up improvement to the strategy for growth that he put forward at the time of the last Budget?
I completely agree with what the Chair of the Treasury Committee says about the credibility of the deficit reduction plan and how disastrous it would be in the current environment to weaken that plan. We would—within hours, I think—find ourselves sucked into the global debt whirlpool from which other countries are struggling to get out. I also agree with him that we need to do more to improve the supply side of our economy. That is hard work for Governments, and it means taking on difficult vested interests. We have seen the argument in the last few days about planning controls, where we are trying to make it easier to have economic development, and there are plenty of groups that pop up and oppose that. That is an example of some of the battles that we will have to have and win. I can confirm that we will be producing the second phase of our plan for growth at the time of the autumn forecast.
The most recent independent analysis of the British economy was done by the IMF this month. It made an assessment using lower growth forecasts, and came to the conclusion that we will hit both our fiscal mandate and our target for reducing debt, which the IMF made clear in its article IV assessment. I cannot help but note that if the right hon. Gentleman had given the leader’s speech that he had written, the Labour party would be in a much more credible place than it is today.
As the wolves circle country after country, are this coalition Government not vindicated? They were absolutely right to come together with a robust strategy to bring our public finances into balance over the lifetime of this Parliament, while the Labour party lacks credibility. If there is one area where we can ensure that that is done in a fair and equal way which puts the lower and middle-income groups in the driving seat of recovery, it is the accelerated process of increasing the tax threshold, and reducing taxes on those people is the best way to do that.
The right hon. Gentleman is absolutely right that we are taking more than 1 million low-paid people out of tax altogether, implementing the policy that the Liberal Democrats put forward at the general election. I also agree that what he describes is a vindication not just of the economic decisions we took, but of the political decisions we took. Let us reflect on the fact that a year ago we had a hung Parliament—the first time since the 1970s—and we formed a coalition Government. That was a difficult decision for both political parties involved, but given the political weakness in some other countries, which is driving a lot of the market concern about those countries, the political strength of the Government in Britain is a tribute to both those political parties, which set aside their political differences and came together in the national interest.
The important difference between the hon. Gentleman's time in the Treasury and my time in the Treasury now is that we have the independent Office for Budget Responsibility making those announcements. It is not the Chancellor who makes those announcements at the Dispatch Box, for the very simple reason that by the end of the last Government, those Treasury pronouncements were so discredited that they were believed by absolutely no one. One of the important early decisions that we took to restore credibility in British public finances was the creation of the independent OBR, which makes those announcements.
In the first two quarters of this year the UK has grown more strongly than the United States, but that is not a source of comfort for the world, because we need a strong US economy as well, and we want to help to bring about the international framework that will enable that to happen.
Is it not revealing that it took to the end of page 5 of his speech for the Chancellor even stutteringly to mention the word “growth”? Will he now reflect on the fact that it is his reckless abolition of regional development agencies and his failure to put money into the local enterprise partnerships that were supposed to solve the problem that have left the English regions stagnant in growth over the past nine months?
Both the hon. Gentleman and I represent constituencies in the north-west of England, and the striking fact about the RDAs is that during their period of existence regional disparities grew. They did not work in the way that they were supposed to work. Because local enterprise partnerships involve businesses and are on much more practical boundaries, they will help to deliver that local growth. However, if he thinks that all the world’s problems are caused by the fact that we got rid of the RDAs, he is exaggerating his case.
The Chancellor will know that our trade balance between 2002 and 2009-10 with the other 26 member states has gone up from minus £14 billion to minus £53 billion in one year? Does he not agree that even Edward Heath would have repudiated and vetoed a fiscal union with a hard-core Europe with such an incredible trade deficit against us? The coalition agreement, according to the latest answer I got from the Prime Minister, determines our relationship with the European Union. Does the Chancellor disagree with the Deputy Prime Minister, because we must have radical renegotiation of the treaties and the repatriation of powers so that we can achieve growth for all our businesses?
I enjoy listening to the hon. Gentleman’s words so much that it is in my interest, Parliament’s interest and the national interest that they should be suitably rationed.
My hon. Friend and I will have to agree to disagree on this issue. The remorseless logic of monetary union leads towards fiscal union, and that was one of the reasons that I opposed joining the single currency. However, it is now in our interests to allow that to happen more in the eurozone, because it is in our absolute national economic interest that the eurozone is more stable. It is clear that that means that they need to have more fiscal powers to reduce instability. That means, of course, that Britain must fight hard to ensure that its interests are represented and that we are not part of this fiscal integration. Important decisions, such as on financial services, must continue to be taken at the level of 27. He talks about treaty changes and so on, but the prospect of a major treaty change to bring about eurozone fiscal integration is not imminent, although I imagine that there will be a lively debate if and when it comes about.
The number of people claiming jobseeker’s allowance in my constituency has gone up massively, with hard-working people with good work records unable to find jobs. Why will not the Chancellor look seriously at areas such as mine, do more and take some measures—such as reducing VAT—to put money into the hands of ordinary people?
We have announced an enterprise zone for Sheffield and we will have further announcements to make on enterprise zones in the coming weeks. The evidence of the past 10 years is that in important regions of our country—I have in mind the statistics for the west midlands, rather than the hon. Lady’s constituency —private sector employment fell over the decade before the financial crash. That shows that that model of growth we pursued, based on the biggest housing boom of any country—with the possible exception of Ireland—the most over-leveraged banks and the highest budget deficit, ultimately led to ruin. We need a different model of growth in which we grow the private sector in areas such as Sheffield and get real, lasting jobs, rather than assuming that we can just use Government spending to create them.
As someone who believes that we need to get the deficit down and do more to assist growth to help that, will the Chancellor look at the dreadful losses at RBS and the big hit on capital values on its shares, and see what more can be done to manage that colossal pool of assets in the interests of economic growth and the taxpayer?
We of course continue to monitor the situation at RBS and all the British banks very closely. There is a concern in the financial markets about the capitalisation and liquidity provisions of banks in many countries. I have to say that those concerns have not been expressed at the moment about the UK. We passed the stress tests well and we have a strong liquidity provision in place for the banks, including RBS, and the markets can therefore have confidence in British banks.
Is it not clear that the Chancellor’s whole strategy is failing, as it is now almost entirely dependent on achieving growth? As the economy has been flatlining for nine months, export markets are stymied, quantitative easing has already been tried with little or no effect and interest rates are already flat on the ground. Where exactly does he expect the growth to come from to get us out of prolonged stagnation?
As I have said, the British economy is growing and it is the assessment of the Bank of England and the Office for Budget Responsibility that it will continue to grow. The growth in the last six months has actually been stronger than in the United States, and half a million jobs have been created in the private sector in the last year—
In the past 12 months. So that is all good news. Where does Mr Meacher expect the money to come from for additional Government borrowing? Who in the world would lend to a country that abandoned its deficit reduction plan at a time like this, especially a country such as Britain which, unfortunately, has the highest budget deficit in the G20?
Given that we are all still hearing that the banks are not making sufficient funds available to small and medium private enterprises in our constituencies and that that is the fulcrum on which the Government’s strategy has been based to make up the deficit from the loss of jobs in the public sector as a result of the strategy being pursued, and that we now have a downward estimate for growth, what did the Business Secretary mean when he said that we would have to find more imaginative ways of getting the money through? What did he mean by that and does the Chancellor agree?
The challenge that we and many developed countries face is that banks are shrinking their balance sheets, because they got too big and they lent too much money. They are also hoarding capital because of the current market turbulence. What we are trying to do as a Government is to ensure that, in that process, lending to small and medium businesses is protected and indeed increased. We signed the Merlin agreement with the banks at the beginning of the year to see an increase of 15% in small business lending. The Bank of England will publish the figures tomorrow, so I cannot give them today, but the banks have already indicated that they are on track to meet that 15% increase in small business lending over this year and I am confident that the figures tomorrow will show that that is the case.
The June 2010 Budget described the deficit reduction plan as adding £8 billion of tax rises a year from 2014-15 and £32 billion of cuts from 2014-15 every year on top of the £73 billion or so fiscal consolidation that Labour had in mind. It also forecast growth from this year of 2.3%, 2.8%, 2.9%, 2.7% and 2.7%. Those growth figures are now shredded. What will the Chancellor do? Will he increase taxes or cut public spending further, or did he mean by saying that we had to adjust our expectations accordingly that he would change his deficit reduction target?
We are not proposing for a second to change our deficit reduction target. The target is a structural budget deficit target and was deliberately set as such. The reason we set out those plans in the emergency Budget and went beyond the previous Government’s mantra of halving the budget deficit in four years—not that they had actually written in the proposals to do that—was because on the day we came into office our country’s credit rating was on a negative outlook for a downgrade. Our market interest rates were tracking Spain’s and everyone from the Governor of the Bank of England to the IMF and the CBI was saying that the previous Government’s budget deficit plan was not credible. If we had stuck with that plan and even filled in the blank spaces, we would now be part of the sovereign debt crisis whirlwind that is engulfing other countries.
Before there is any further attempt to rewrite history, can the Chancellor confirm again that until last year’s emergency Budget and spending plan this country’s triple A rating was on negative outlook and was only restored to stable through the measures he took last year? Is not the real lesson of the United States that any country that goes off its fiscal deficit reduction plan can suffer a downgrade, with all the damage to jobs and prosperity that that entails?
My hon. Friend is absolutely right. In January last year the largest bond investor in the world said that UK gilts
“are resting on a bed of nitroglycerine.”
Today I could read out a whole string of comments from market participants saying that the UK has been a safe haven in this sovereign debt crisis because of the decisions that we took.
Standard & Poor’s, the rating agency that has just downgraded the United States, took the United Kingdom off “negative outlook” and reaffirmed our triple A credit rating. The practical consequence of that is much lower interest rates. If we pursued the policy proposed by the Opposition of more spending and more debt, the immediate response would be higher interest rates which would kill off any recovery. That is why such a policy is economic madness.
Given poor and worsening United Kingdom growth, at what point will the Chancellor advocate further quantitative easing? If he will not answer that question, will he tell us whether he believes that there is no chance that rapidly rising sterling will hurt our exports?
Both those matters are properly for the Bank of England. It is for the Governor to comment on the value of sterling, if he chooses to do so. As for quantitative easing, the arrangements agreed by the last Government, which I have retained, remain in place. If the Monetary Policy Committee makes a serious request, of course we will consider it seriously, but we have received no such request.
Moneyfacts reported yesterday that the low cost of borrowing in the United Kingdom means that, on average, five-year fixed-term mortgages are now £1,400 cheaper than they were two years ago. That is very welcome news for my hard-working but squeezed constituents. Will the Chancellor confirm that he will continue his policies, which will deliver the low interest rates that are so important to families and businesses across the country?
Absolutely. I think that interest rates are often the missing part of the debate in the Chamber. It is simply economically impossible at the moment for the Opposition to have more spending, more debt, and low interest rates. Those things do not square in the current global economic environment. The automatic, immediate response from the market, and quite possibly from the Monetary Policy Committee, would be an increase in interest rates if the Opposition abandoned our fiscal plans. We would have higher interest rates that would kill off any recovery.
Order. I appeal to colleagues to ask single, short supplementary questions without preamble, so that we can maximise the number of contributors.
The frightening instability of the world economy has arisen since, and as a result of, the abandoning of the post-war arrangements decided at Bretton Woods, and the liberalisation and globalisation of finance capital. Part of that arrangement was that each country had its own currency and managed its own economy within international rules. Would it not be sensible to move back in that direction by establishing national currencies within the eurozone and starting again where we left off?
We abandoned the Bretton Woods arrangements in the early 1970s, so it has been a while since we have operated under those international arrangements. Let me, however, make a few observations, because the hon. Gentleman has made a serious point about the eurozone.
I think that it would be disastrous for Britain’s economy if the eurozone were to break up, and I think that it would also be disastrous for the economies of the eurozone themselves. It would lead immediately to a balance of payments crisis in many European countries. That is why it is in our interests for the eurozone to work. Some of us questioned whether it was right to go ahead with it 15 years ago—we certainly did not want Britain to be part of it—but it exists now, and, as I have said before, “I told you so” is not an economic policy for today.
I agree with the hon. Gentleman that we need better international arrangements to monitor and deal with global imbalances. For instance, there are currently huge creditor countries such as China, and big debtor countries such as the United Kingdom and the United States. I am afraid that progress on that at the G20 and the International Monetary Fund is painfully slow. At some of the meetings, it has not even been possible to agree on the definitions. I hope that, if there is a silver lining to the present black cloud of the financial market crisis, we will see at the autumn meetings of the various institutions much more progress towards the arrangements that I think everyone accepts should be in place.
I congratulate the Chancellor on the deficit reduction programme that has secured the United Kingdom’s triple A rating, but can he tell us what analysis he has made of the rising price of gold, and how much better off the UK economy would be if the last Government had not sold off our gold in the same way?
The House will have noted that the Chancellor did not mention the fact that inflation is approaching 5%, the fact that that our borrowing is £46 billion higher than his figure, or the fact that consumer and business confidence is falling. He did mention his growth plan, but there is no growth. When will he accept the paradox that the sharper and deeper the cuts, the less growth there will be?
The question that I would ask the hon. Gentleman is this: who in the world does he expect to be lending money to countries with very high budget deficits if they do not have credible deficit reduction plans? What group of people would put their money on the line? That is precisely the problem that we have at the moment in the global financial markets.
The hon. Gentleman asked about inflation. Yesterday, at his press conference, the Governor of the Bank of England said that he expected it to hit 5% this year. Let me draw attention to another silver lining to the dark clouds. Commodity prices have fallen in the last few weeks, and the oil price has fallen somewhat from its high. One of the biggest challenges that all developed and, indeed, developing countries have faced in the last year or so has been the very big increase in the oil price.
I welcome the Chancellor’s comments about the need to cut deficits. Let me also remind him that a healthier market is important to our export performance, and that growth requires buyers and sellers to have the confidence to transact. Will he therefore, while steering the economy, remember that the need to instil demand in the British economy is very important to households and businesses? May I ask him not to lose sight of that?
Of course I agree that we need demand. I think that demand comes partly from confidence, and that confidence comes from economic stability. If we think of the difference between the statement that I have been able to make today in the House of Commons and the emergency statements and emergency budget cuts that many Finance Ministers have had to announce in the last two weeks, we have, in a nutshell, the reason why we made the right decisions last year to get ahead of the curve, and why so many other countries are now trying to catch up.
Of course we need to fill vacant properties, but we also need to allow new development. I think that we all want to protect areas of outstanding natural beauty in our country, and I have a constituency in the green belt, but planning decisions in this country are so lengthy, so bureaucratic and so costly that almost every study of the British economy that has been commissioned in the last decade has identified planning as an obstacle to further economic development. I think that we need to simplify those planning controls so that we can—yes—protect the countryside, but also secure decisions in reasonable time that allow development to take place. That is why we have introduced the presumption of sustainable development into the planning system.
What further help can the Chancellor give small businesses, 4.5 million of which employ fewer than five people? If a quarter of them employed an extra person, that would make a huge dent in the unemployment register.
Small businesses are, of course, the engine of job creation in our country. As I have said, 500,000 new jobs have been created in the private sector over the last year. That is the second highest rate of job creation in the G7. As for specific help for small businesses, we avoided the increase in small business taxation that the Labour party included in its last Budget.
The hon. Gentleman shakes his head. He obviously did not know that there was to be an increase in small business taxation. We have cut it.
We have also introduced support for the exports of small business. A central part of the strategy developed by Stephen Green as trade Minister is helping small businesses to export. I have already mentioned the Merlin lending agreements with banks, which are beginning to bring about an increase in lending to businesses that simply was not happening last year.
It sounds like the shadow Chancellor wrote that question. Let me repeat what I said earlier: the proposal Barack Obama put forward in his speech at The George Washington university is for a deficit reduction in the United States of the same pace and scale as the one we are pursuing in Britain. That is because in America, too, they understand that they have to deal with their budget deficit.
Europe is making increasing demands on our pension pots and our benefit pots and, indeed, it recently made a demand on our VAT. Is it not time that we had a debate on how much we pay towards Europe? The Chancellor says it would be economically disastrous if it broke up, but there should be a debate. Some 75,000 people have signed a Daily Express petition asking for a debate on this, so surely there should be an autumn debate?
We do debate the European budget in this Parliament, and they are often quite lively debates. We are fighting hard for a real-terms freeze in the European budget not just for next year but for the coming new financial perspective from 2014, and we have enlisted a number of allies. There is now an understanding across Europe that, with very tough public expenditure decisions at home in every European country, we also need to get control of the European budget.
The momentum for growth in the UK economy has clearly now run out, and I am glad that the Chancellor will make announcements on growth in the autumn. As he plans for them, will he take account of the International Monetary Fund’s view that if there is the prospect of a lengthy period of weak growth ahead, he should be willing to consider temporary tax cuts?
Of course we bear in mind advice from the IMF and others, but it makes it clear that that is not its central view at the moment. It asked itself a specific question, and it says this:
“The weakness in growth and rise in inflation raises the question whether it is time to adjust macroeconomic policies. The answer is no…Strong fiscal consolidation is underway and remains essential”.
That is what the IMF says in its article IV report into the United Kingdom published on
Recently, the UK has been the highest per capita exporter of services in the world, and that is vital for future growth. What action are the Government taking to ensure that we can continue to compete globally in services on a level playing field, and particularly in the European Union?
First, while not all the recent economic data have been encouraging, the services index for the United Kingdom in the last couple of weeks was the strongest in Europe, which gives us some cause for optimism in that sector. I agree that we want to maintain our competitiveness, and that we want to export more to Europe. I think Europe’s agenda should be much more about completing the single market and implementing measures like the services directive, which has merely sat on the “Too Difficult to Handle” shelf for far too long. That is the agenda that we need to get the European Union focused on.
Last week I visited the Dividers Modernfold factory in my constituency. In common with many other construction products companies throughout the country, it is very worried about the prospects for immediate economic growth, particularly in light of public procurement cuts. What precisely is the Chancellor going to do in the very near future to stimulate demand and growth, so we can create and safeguard jobs in the private sector? We do not want to be fobbed off with the sorts of answers he has just given to my right hon. Friend Mr Meacher and the Chancellor’s party colleague, Mr Binley.
In the spending review, we set higher capital budgets than those set out by my predecessor, the Chancellor of the Exchequer in the last Labour Government. Therefore, capital spending budgets are higher than they would have been under the plan the hon. Lady stood on in the last election.
On getting the construction sector moving, that is precisely why we are tackling issues, such as the planning delays, that have been so difficult, and why we made a number of tax changes in the Budget to help the construction sector. The construction index was also positive in the last couple of weeks. I just say to the hon. Lady that when we are running the highest budget deficit in the G20, it is not possible to abandon our fiscal consolidation plans and to seek someone out there in the world to borrow more money from. That would lead to markedly higher interest rates—we need only look at the interest rates in Spain and Italy at present—and we know that higher interest rates do particular damage to the construction sector.
I congratulate the Chancellor on sticking to his deficit reduction plan, which has allowed us to keep our triple A rating, unlike some other countries, including the United States and possibly now France. If France were to lose its triple A rating, what would be the implications for the EU stability fund and the ability for eurozone bail-outs to continue in the future?
My hon. Friend asks a good question, which is being asked in the markets at present. I have to say that one of the causes of the instability in the last couple of weeks has been loose comments by Finance Ministers on issues such as that which he raises, so I will “take the Fifth” and not comment.
Does the Chancellor of the Exchequer have any concerns about the unaccountable power of the credit rating agencies, who, seemingly at a whim, can cause disasters to be visited on small and vulnerable economies, increase interest rates, and lead to public spending cuts and devastation to many poor people’s lives? Does he not think it is time that these rating agencies are brought under some kind of accountable control?
It might surprise the hon. Gentleman to learn that I agree with at least part of what he says: we do have concerns about how the credit rating agencies have operated. That is why we have been part of the European discussions to get some European rules on credit rating agencies put in place, and I think they are appropriate. I disagree with the hon. Gentleman, however, on blaming all of what is happening on credit rating agencies. However imperfect they might be, credit rating agencies are trying to give market investors some idea of the credit worthiness of countries and companies. The truth is that they have not led to the spending cuts. The reason why we have had to undertake spending cuts is that this country is currently spending close to 50% of GDP on public expenditure, which is far higher than the historical average under Conservative and Labour Governments. That is why we are having to act. We are doing so because we have a record budget deficit—the highest in our peacetime history and the highest in the G20.
The Chancellor referred to Merlin and the agreement with the banks, but is he aware that these banks are double-counting their lending by forcing businesses to convert overdrafts into long-term loans? A business in my constituency wants to expand. It has full order books and wants to take on more staff, but it cannot do so because not only are the banks not being helpful, but they are actually being obstructive.
The sluggish growth rate has led the Office for Budget Responsibility to now forecast even higher unemployment. More jobs are being lost in the economy than are being created. The Government’s own policies are adding to that, because they are putting new work obligations on to people who have been out of the work force for some time. While it is absolutely right that the Government help people to find jobs, not all of them will do so. It is very wrong that people who are doing all they can to find work and still have not done so will find they are facing the loss of their benefits. In light of the new growth figures, will the Chancellor speak to the Secretary of State for Work and Pensions, as the sanctions on these people should be lifted?
First, if I might correct the hon. Lady, the OBR is not forecasting rising unemployment over the Parliament; it is forecasting falling unemployment over the Parliament. I also remind her that half a million private sector jobs have been created over the last year. Let me deal directly with her point about social security. The welfare system is a poverty trap that is discouraging people from working. People on benefits face incredibly high marginal tax rates if they find work. That is why my right hon. Friend the Secretary of State for Work and Pensions is, with my full support, seeking major reform of the welfare system, so we incentivise people off benefits and into work. That is one of the most important reforms this Government are undertaking.
Give our country’s debts, it is reassuring to learn that the price for Government borrowing has fallen to the lowest levels since the last Liberal Government. How much more expensive would Government borrowing be for taxpayers and public services if our interest rates had gone the same way as those in other parts of Europe?
It would of course have been ruinous, not just for individuals but for the Government. One of the largest items of Government spending I inherited, unfortunately, was debt interest. We are raising taxes in order to pay our international creditors and that interest is forecast to rise, sadly, over the Parliament, as we reduce the deficit. That is why it is so important to try to get debt falling by the end of the Parliament. Of course, any reduction in our gilts yields is good for the Government and saves us money, too.
The Chancellor rightly mentioned the issues about the Doha round and trade. Trade permeates every aspect of our Government’s growth agenda. Will the Chancellor comment on whether he believes that the G20 appreciates how crucial releasing trade and ensuring greater free trade is at this moment in the global economic cycle?
My hon. Friend is right to draw attention to the Doha round. The significance of this is that it is available for the countries of the world to seize—today, this month or next month—and implement. If one is looking around the world for something that could, in very short order, increase global demand, it is sitting there in the Doha trade round. I hope that we make progress at the G20. I suspect we will certainly be a leading advocate of making progress and we have some good allies, for example in China, but I have to say that there remain considerable obstacles, not least in the Democrat and Republican parties in the United States.
As I say, I have a simple policy not to comment, as previous Chancellors have also decided to do, on the value of sterling. I do not propose to break that commitment today.
My hon. Friend is right that there is a significant monetary stimulus in place through the very low market interest rates and of course the official rate. Both of those would go up, almost certainly in the case of the markets and probably in the case of the Monetary Policy Committee, although it is independent, and that is why all this talk of more fiscal stimulus is a debate that is happening only in the Labour party of the United Kingdom, alone in the world. It is very difficult to find an opposition anywhere in Europe arguing for less deficit reduction coming off the published plans of a Government. As I say, if the shadow Chancellor turned up at one of these meetings and put forward his proposal, he would be laughed out of the meeting.
On a bipartisan basis, may I invite the Chancellor, as a fellow Cheshire MP, to join me in sending our best wishes to the two Cheshire officers injured last evening?
On the subject of the statement, 11% coming off the stock market and massive hits to the values of British companies will have a knock-on impact on many pensioners. What is the Chancellor going to do about it?
Of course, stock market falls affect pension investments and other equity investments. Our stock market has fallen—not as much as some, but it has nevertheless fallen—
It is because of the global lack of confidence in Governments’ abilities to deal with their deficits. We have not seen turbulence in our bond markets precisely because we have in place a credible deficit reduction plan. I note that I have been answering questions for more than an hour and it has almost been an hour since the shadow Chancellor said that the Labour party needed a credible deficit reduction plan, but has a single Labour MP got up and proposed any component of that reduction plan? No, they have not.
I welcome my right hon. Friend’s statement and the fact that over the past year we have seen the private sector create four times more jobs than have been lost in the public sector. Does he agree that this is a better approach to job creation than the overreliance on the public sector, which was all too prevalent over the past decade in regions such as the north-west under the previous Administration?
My hon. Friend is absolutely right. First, I should take the opportunity that I did not take in answer to the previous question—as my hon. Friend, too, is a Cheshire MP—of praising the work of the Cheshire police, who have shown outstanding bravery over the past few days. My thoughts go out, as Andrew Miller said, to the injured officers.
My hon. Friend is absolutely right. Surely we have learned something from the past decade, which is that relying on an unsustainable housing boom, unsustainable Government spending and unsustainable bank lending is not a model of growth that this country can pursue again. We have to get off this country’s addiction to debt, not just in the Government but in banks and households. That is what we are doing and it is a difficult adjustment that many western economies are having to go through. Unfortunately for us, given that we were the most enthusiastic participants in the debt boom, that adjustment is particularly difficult here in the UK.
As the hon. Gentleman knows, we are in active discussion with all the parties in Wales and with the Welsh Assembly Government, discussing what further powers might be devolved to the Welsh Assembly, including fiscal powers that might have a role in economic development. I do not want to pre-empt that debate, but the fact that we have been prepared to engage in it shows that we are doing this in good faith.
Given the credibility that the coalition Government have won through their deficit reduction programme, securing a triple A rating and having low interest rates, does the Chancellor think that it would be appropriate to send a message to encourage the same kind of decision making—swift and strong—across the eurozone?
I think we have got ahead of the curve. As I say, I am not one of those Finance Ministers who are having to come to their Parliaments and announce emergency budget cuts because they did not get ahead of the curve. It is important for the eurozone countries, and all countries, to have fiscal credibility. There are many good examples in the eurozone of countries that have done that and we are part of that pack.
I draw the Chancellor’s attention to the unemployment rate in my constituency, where 24 people are chasing every vacancy. People in my constituency have learned lessons from previous years: we learned from Mrs Thatcher that mass unemployment is not a price worth paying. What does the Chancellor intend to do to tackle unemployment in my constituency, which seems likely to rise?
Is not the best way to help the hard-pressed families, taxpayers, jobseekers and pensioners mentioned by Members in all parts of the House—people who are not rioting, but getting on with the business of trying to make savings in their budgets and their family’s income—to ensure a stable economy, so that they can make sure that their living standards are maintained in the long term?
My hon. Friend is right. What we are able to provide in the Government debt market is the stability that is sadly lacking in other Government debt markets. All of us now need to rise to the challenge of removing the obstacles to growth; that will mean confronting some vested interests, pressure groups and, dare I say it, even, potentially, trade unions, but it is absolutely essential that this country wakes up to the competitive pressures of the modern world—the competitive pressures that countries such as China and Brazil present to us—and gets the private sector growing in a way that will create the sustainable jobs that were so lacking in the past 10 years.
Last year, Government borrowing came in some £20 billion lower than was anticipated; this year, we learn that it will be some £46 billion higher than was forecast. Can the Chancellor give us an explanation?
As I have already explained, we have an independent Office for Budget Responsibility—[Interruption.] I am pretty tempted to say that the answer is that the previous Chancellor did not want to have to downgrade his borrowing forecast four weeks before the general election, so he kitchen-sinked the borrowing forecast a year before, to make sure that he was able to show a reduction just before the general election.
I support the Government’s plans for cutting the deficit, leading to lower interest rates and increased international confidence in the UK economy, but the Chancellor is well aware that our economy is still fragile, so if tax revenues are higher than expected, or if there are receipts from asset sales, will the Chancellor reinvest that in capital infrastructure projects and skills development, to give a boost to our economy and create jobs, rather than being seduced by the voodoo economics of giving tax cuts to the rich?
There are quite a lot of American references in this debate. We have used the receipts of some of the asset sales that we have proposed—and indeed undertaken—to invest in new infrastructure, or in a particular industry. Of course, we have to do that on a case-by-case basis, but the spending review set out how we were going to use the proceeds of some of the asset sales for future investment.
I reconcile it by quoting the Governor of the Bank of England, given that the hon. Lady mentions the Bank. [Interruption.] Labour appointed the Governor of the Bank of England; in fact, I suspect that the shadow Chancellor made the appointment. The Governor of the Bank of England said yesterday that
“the UK has done what it can”,
in terms of putting the major conditions in place to ensure a rebalancing and a recovery. He went on:
“We have a credible medium-term fiscal plan, which many countries do not”.
A multibillion-pound increase in our deficit would undermine market confidence in the UK, and would lead to an immediate increase in our market interest rates, probably within minutes. That would effectively mean higher mortgage and interest rates for businesses and families, and it would be one of the things that would choke off the recovery.
I was pleased to visit TAG Energy Solutions in my constituency on Tuesday—a company that has just invested £20 million in a new rolling mill to make monopiles and transition pieces for the offshore wind industry. It is still to land its first order, and it is frustrated at the disadvantage that it has in comparison with Germany and other European countries, which buy at home. When will the Chancellor really do something to help British industry, ensure British wind farm developers buy British, help TAG create hundreds of jobs in Teesside, and get our economy moving again?
We are seeking to develop a domestic green energy industry; the company that the hon. Gentleman speaks of sounds like a good example of that. I hope that people buy British products, such as wind turbines, because they are the best in the world. To help that company make the best products in the world, we have to create a very competitive business environment, because the competition from the likes of Germany is so strong. Some of the decisions that have been taken on our energy policy have provided some stability, which allows investment in renewable energy technology.
The Humber is one of the regions that, over the past 10 years, lost private sector jobs, and instead relied on the public sector. Our way back is through manufacturing, so may I urge the Chancellor to look very closely at measures such as carbon floor pricing, and to look at clipping the wings of organisations such as Natural England, which are frustrating the planning process locally? Perhaps more parochially, will he look seriously at the submission from the Humber Bridge Board to buy the Humber bridge and cut tolls by next year?
I completely agree with my hon. Friend about the need to make progress on our planning reforms for the reasons that he gives. That means making some difficult decisions, and taking on some pressure groups, but I think that is absolutely right. Our planning reforms take into account the need to preserve our natural environment.
Believe it or not, I am very familiar with the subject of Humber bridge tolls because my hon. Friend Mr Stuart is a tireless campaigner on them. The Treasury is conducting an economic study of the effects of the tolls, and that will report at some point in this Parliament.
I congratulate the Chancellor on recognising, although somewhat belatedly, that there is a link between what happens in the global economy and what happens in the UK economy. In the light of that, what action does he intend to take to ensure that the problems with the US economy and the eurozone do not lead to further downward pressure on UK economic growth?
Unfortunately, I cannot make the UK invulnerable to events elsewhere in the world. Of course there is a global connection. I would draw this distinction between what I am saying and what the previous Prime Minister, Mr Brown, says. I am not saying that Britain has been blameless in the way it has handled its economy in the past decade or so. I am saying that we were the most enthusiastic participant in a global debt boom, and as a result we have one of the more difficult adjustments. That is, I am afraid, a statement of fact.
Recent reports have shown that the rural economy has the capacity to grow quickly if it has the right conditions. Will the Chancellor confirm in his autumn update on the plan for growth that those conditions will be met so that the rural economy can play its part in improving the national finances?
We recognise the specific needs of the rural economy. Meeting them is one of the specific work strands in the second phase of the growth review. I know something of the hon. Gentleman’s constituency. One of the absolute keys to rural economic development is getting the infrastructure right, especially rural broadband, which will open up all sorts of business opportunities in what would previously have been regarded as quite remote places. That is why we are right to be investing in rural broadband in Wales and across the UK.
The hon. Gentleman misunderstands two things. First, the OBR is independent. If it is going to work as a permanent institution, it will need the support of the official Opposition. I hope that that is forthcoming, not just in the letter but in the spirit. There should not be a constant demand for the Chancellor of the day to provide their own fiscal forecasts. Secondly, as I say, we have put in place a credible deficit reduction plan. We heard from the shadow Chancellor that Labour needed a credible deficit reduction plan as well. Not a single Labour Member, including him, has proposed a single pound of spending cuts. Until the Labour party gets that credible plan, it will not really be able to participate in a sensible debate.
Has my right hon. Friend seen the latest data which show not only that the private sector has created four times more jobs than the public sector has lost but that Britain is now second in the G20 league of net job creation? Does that not show that the deficit strategy is working, and that the shadow Chancellor is wholly out of touch and has not learned the golden rule that you cannot borrow your way out of a debt crisis?
The shadow Chancellor has a bit of a history on his golden rules, and they do not usually turn out to work, but my hon. Friend is right that we are seeing net job creation. We are not remotely complacent about that. We are working extremely hard at improving the competitiveness of British industry, making sure that it is able to export and invest. That is the model of growth that this country now has to pursue.
As the Chancellor knows, growth figures over the past nine months have been 0.2% and in the preceding nine months they were 2.1%. Many of the suggestions from the Opposition are about growth and economic regeneration. If we continue to see growth figures of that nature, either flatlining or negative, will the Chancellor reconsider his position and look at policies that stimulate growth?
The only thing I have heard from the Opposition—who by the way presided over the deepest recession since the 1930s—is a complaint every time there is a proposal to cut public expenditure. We heard that earlier today. I have not heard about any growth policies—as the hon. Lady puts it—from the Labour party; I have just heard opportunistic opposition to everything the Government are doing to have a credible deficit reduction plan. The shadow Chancellor has set himself his own test; he says he will produce a credible medium-term fiscal deficit plan. Let’s hear it.