Pre-Budget Report — Motion to Take Note

Part of the debate – in the House of Lords at 5:16 pm on 27 January 2009.

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Photo of Lord Newby Lord Newby Spokesperson for the Treasury 5:16, 27 January 2009

My Lords, I, too, thank the Minister for his explanation of the Pre-Budget Report.

The report's starting point is the overall economic outlook, which it sets out. Its prediction was that this year we would see a fall in GDP of between 0.75 and 1.25 per cent but that this would be more than offset in 2010 by an increase of between 1.5 and 2 per cent. This is clearly far too optimistic, both in the size of the fall in GDP and the speed of the turn round. It is worth reminding ourselves of the speed of the collapse of the economy last year. The first two quarters saw an average growth of 0.1 per cent; the third quarter saw a reduction in GDP of 0.6 per cent; and the fourth a reduction of 1.5 per cent. So in 2008 in total, GDP fell by 1.9 per cent. The Government believe that this year we will see a fall of 1.25 per cent, which would make in total a fall of about 3 per cent, peak to trough. Does anyone believe that we will see such a small fall peak to trough? Virtually all commentators are now talking about a fall, peak to trough, of at least 5 per cent. I suspect that 5 per cent is now a rather optimistic forecast.

The Minister was at great pains to set out, as the Government have done at every point, how important the international component of this crisis is. He has suggested, as the Prime Minister has many times, that we were almost passive victims of a crisis, of a whirlwind that somehow started internationally. Clearly the collapse of the sub-prime housing market in the United States started the crisis, but to claim that it is entirely, or even mainly, made abroad is surely wrong. It has been exacerbated in the UK to a considerable extent by the recklessness of UK banks; by the recklessness, frankly, of individuals encouraged by the banks to ratchet up levels of debt which were unsustainable; and by the collusion of the Government in the entire process, given their absolute determination to take credit for every increase in GDP as though they had personally engineered it.

It has also been exacerbated by the complete inadequacy of the regulatory authorities, particularly the FSA, which have lacked rigour, decisiveness and determination to take action to prick the bubble at its earliest stages. I do not intend to deal with many of the detailed issues on regulation today as I feel we have done them slightly to death in our debates on the Banking Bill in recent weeks.

The fall in GDP is mirrored by the fall in the robustness of the public finances. Just as the GDP forecast is now looking wildly optimistic, so too are the forecasts the Government have produced in the Pre-Budget Report. The PBR itself shows how quickly things can go south. It reports that between the Budget and the Pre-Budget Report the projected deficit in the year increased from £42.5 billion to £77.6 billion, so over that period the Government's own view of the deficit has nearly doubled. As the noble Baroness said, they now predict £118 billion in 2009-10. That is clearly a significant underestimate.

What are the consequences of that, and how worried should we be? The Conservatives are very concerned about the views and the role of the IMF; the noble Lord, Lord Ryder, has already introduced the IMF into the debate. I ask the noble Lord, Lord Howard of Rising, who will be winding up for the Conservatives, to tell us about their view of the future role of the IMF in the UK economy. According to the leader of the Conservatives, Mr Cameron, Britain is running the risk of being forced to go to the IMF cap in hand. According to the Shadow Secretary of State for the Department of Business, Enterprise and Regulatory Reform, such a suggestion is not realistic. If the Conservatives aspire to be the next Government, we ought to be told about their views and policy on the IMF's likely future role.

Having set out the financial and economic outlook, the Government then took steps in the Pre-Budget Report to deal with it. We support in principle the concept of a fiscal stimulus. We do not agree with the noble Baroness's assertion that credit is the only problem facing the UK economy. Is she really suggesting that the levels of borrowing that were being undertaken last year were sustainable? Is she saying that there was no bubble to burst? Is she saying that the banks should be lending on commercial property, on housing and on a whole raft of matters at the level that they were last year? I hardly think so, because that would hardly be responsible. I am also amazed at the assertion that the way out of the problem, other than extending credit, is expenditure savings. I thought that all the lessons of history were that during a downturn, when consumers and business are struggling, it makes sense for the Government to take up some of the slack through a fiscal stimulus.

That does not mean that we agree with the detailed stimulus that the Government have introduced. In our view, the VAT reduction, costing £12.5 billion, is an ineffective way of stimulating the economy, not least because nearly all of that, and nearly all the other measures that the Government took, relate to current, rather than capital, spending. We believe that a fiscal stimulus should be concentrated on the capital side. The Government's own admission is that of the 1.1 per cent of GDP that the measures in the Pre-Budget Report inject into the economy, only 0.2 per cent of GDP relates to capital spending. That is inadequate.

The size of the VAT cut is almost irrelevant now, because it pales into insignificance next to the other measures with regard to the banking sector that the Government either had already taken at the time of the Pre-Budget Report or have taken since. Paragraph 2.67 on page 32 of the report sets out how the Government had already made commitments of £66 billion to the banks between the Budget and the Pre-Budget Report over that period. There is a £37 billion recapitalisation, which is the headline figure, but then there is £21 billion for refinancing the Financial Services Compensation Scheme, £5.7 billion working capital to Bradford & Bingley and a payment of over £5 billion for retail depositors in Bradford & Bingley and the Icelandic banks. That is a huge amount. It dwarfs the VAT figure by a factor of well over five to one. Therefore, the VAT cut, whatever its merits, is only one small part of the picture.

Since the Budget, we have had the Mandelson announcement of several weeks ago, the Chancellor's announcement of last week and the second Mandelson announcement this afternoon. We share the concern which the Treasury's Select Committee has expressed that a raft of measures with huge public expenditure commitments is being dribbled out daily and that we, if not the Government, will lose track of quite where we are. The Treasury Select Committee suggested that the Government should follow business practice and produce a quarterly statement of their expenditure, particularly in these areas. That seems to be an extremely sensible proposal. I hope that the Minister will say something about the Government's response to the Treasury Select Committee report today. The table in the Pre-Budget Report to which I referred is a good a model of how that kind of reporting to Parliament could be undertaken in future.

I do not intend to trawl in detail through the announcements of recent days and since the Pre-Budget Report, but perhaps I might press the Minister in respect of the bank lending agreements, which were reported last week. I asked him then whether all the banks had agreed to participate in the bank lending agreements. Perhaps I might ask him also about the scale of the Government's intervention in seeking to influence the scope of bank lending. We are faced with a potential collapse of the social housing market. A number of housing associations whose loans come up for renegotiation are in danger of being faced with a fivefold increase in the interest rate spread that they are expected to bear. There is a suggestion that some of them will find that very difficult. Do the Government's lending agreements with the banks in their view enable them to go into the banks and suggest that, for this kind of lending, the increase in interest rates which they might otherwise charge be moderated? Or is it the Government's view that the cost of lending is entirely up to the banks? This is an area where potentially considerable grief is coming around the corner and where the Government could use their influence with the banks to have a major impact during the short period ahead, when many of the loans are due to be renegotiated.

We support the concept of a fiscal stimulus but are critical of the nature of the stimulus that the Government have adopted. We looked at what one could do with £12.5 billion, which in our view could have been better spent on investment and contributing to meeting the carbon reduction targets which the Government have set. For £12.5 billion, you could, for example, fund a five-year programme to insulate every school; you could fund insulation and energy efficiency for 1 million homes, with a £1,000 subsidy for 1 million more; you could build 40,000 extra zero-carbon social houses; you could buy 700 new train carriages; you could reopen old railway lines and stations; you could electrify the Great Western and Midland main lines and begin the Liverpool light rail network; and you could install energy and money-saving smart meters in every home. That seems to be the kind of fiscal stimulus which really makes sense and has a long-term benefit for the country.

I think that we can all agree that we are in the middle of a financial and economic blizzard not seen in our lifetimes. This Pre-Budget Report already has the feel of a historic document. We now await the Budget to see how much further the Government's finances have deteriorated since the autumn and what further steps they plan to take to recognise the scale of the current economic crisis.