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Budget Resolutions and Economic Situation — Amendment of the Law

Part of the debate – in the House of Commons at 4:05 pm on 22nd March 2016.

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Photo of Phil Boswell Phil Boswell Scottish National Party, Coatbridge, Chryston and Bellshill 4:05 pm, 22nd March 2016

Yes, I completely agree. With the sterling depreciation, thanks in part to the uncertainty created by the UK Government’s EU referendum, consumer inflation has started to rise. The OBR has predicted that CPI will rise from 0.7% this year to 1.6% next year. Likewise, RPI is set to rise from 1.7% this year to 3.2% in 2017. Such a spike in inflation can have a negative impact across the economy, as my hon. Friend mentioned, because it means that many households around the country that are already struggling, including in my constituency, will find that the price of necessities rise at a time when they can least afford it.

Exports, which are already weak, will likely see further decline. Total export sales fell from £521 billion in 2013 to £513 billion in 2014, yet the Chancellor has declared an export target of £1 trillion by 2020. It is no surprise, then, that he is already likely to fall short of the target by over £300 billion, as was touched on by Mr Wright, who is no longer in the Chamber.

On business investment, which was mentioned by my hon. Friend George Kerevan and the hon. Member for Hartlepool, there is more bad news with regard to productivity, and research and development. Page 12 of the OBR’s “Economic and fiscal outlook” states that business investment will grow by only 2.6% this year, which is substantially less than the 7.4% predicted just three months ago in the autumn statement. Furthermore, the level of investment in 2019 is predicted to be a staggering 10% lower than predicted in December. So far, not so good.

I move now to an area of concern to myself. Page 27 of the Red Book states that the Government expect to raise £25 billion from the sale of the Royal Bank of Scotland. Given several factors, however, including the current price of oil, I fear that this price might be exaggerated. In focusing on this issue, which I have grave concerns about, I would point out that between 2011 and 2014, RBS arranged £14.3 billion in leveraged loans to the oil and gas industry. In fact, RBS has been a leader among UK banks in arranging these high-risk loans. The falling price of oil has resulted in an increase in the default rates of these loans, however, and many of them have been repackaged into derivatives for sale to investors in the form of collateralised loan obligations—a derivative product starkly similar to the collateralised debt obligations that contributed to the 2007-08 financial crisis. How many of these risky loans RBS still has on its books remains uncertain, hence my concern for that particular £25 billion.

Let me take a minute to highlight what I view as a failure on the part of the Government to address the systemic risk inherent in the financial system and the wider economy in relation to the price of oil and leveraged investment. Alongside RBS, a number of US lenders with a large and active presence in UK markets have a high exposure on energy, due to leveraged lending in the oil and gas sector. For example, JP Morgan currently has $13.8 billion in outstanding debt relating to loans out of the roughly $100 billion in leveraged loans it issued to the oil and gas sector between 2011 and 2014. Wells Fargo arranged $98 billion in leveraged loans to the sector in that same time period, many of which are non-investment grade, and $17.4 billion of which is already outstanding. Alarm bells should be ringing somewhere.

On 15 December 2014, when the price of Brent was at $60 a barrel, the Financial Times predicted that if the price of oil were to continue to fall,

“there is a stark parallel with the US property market collapse that heralded the start of the 2008 global financial crisis—and upended banks along the way.”

Yet the systemic risk inherent to the financial system due to these high-yield loans and the “slice and dice” nature of derivative products relating to these loans that have been sold to investors were not even mentioned in the most recent Bank of England stress test result.

Finally, in the years since the 2007-08 financial maelstrom and ensuing recession, the Tory Government have demonstrated their expectation that the most vulnerable in society should pay the price for the mistakes of the financial institutions. In 2011, the Bureau of Investigative Journalism found that over 50% of Conservative funding came from the City. We know whose interests the Conservatives have at heart. The Budget clearly highlights the fact that this attitude has not changed, as evidenced in the £3.5 billion of new cuts that it introduces. This Budget is not good enough, and if the Chancellor really wants to be head boy, he should heed his report card, which should read “Must do better”.