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14 Apr 2003 : Column 706—continued
Mr. Deputy Speaker: Order. I call Dr. Vincent Cable.
9.10 pm
Dr. Vincent Cable (Twickenham): I understand that I have five minutes, so I shall confine myself to two very brief points, the first of which relates to what is probably the Government's strong point: their record of economic stability and the so-called ending of boom and bust. In part, this reputation is justified. Probably the best thing that the Chancellor ever did—and ever will do—was making the Bank of England independent. We have seen some of the benefits of that, but the problem is that it has not been fully matched through fiscal policy. True, there is a fiscal policy framework and fiscal targets, but the problem in terms of stability and long-term credibility is that the Chancellor measures his own performance. That differs markedly from the Bank of England, which has a very sound structure, real transparency and real independence. No comparable organisation exists on the fiscal policy side.
Let me give one or two examples. Absolutely critical to the credibility of the Government's fiscal policy is balancing the budget over the cycle. However, who defines the cycle; who decides when it begins and ends? The answer is, the Chancellor. What is missing—in a sense, the Chancellor himself can remedy this—is some form of independent mechanism of assessment, such as the United States Council of Economic Advisers or our own National Audit Office, to create an independent base for establishing the credibility of forecasts. If such a mechanism is not established, the problem will be not merely the Government looking a little foolish in a year or two's time, but a loss of confidence in the markets.
The Government have gained enormous advantage from lower short-term interest rates than would exist without an independent monetary policy. However,
once credibility in the forecast is lost, the sacrifice in terms of fiscal policy is much higher long-term market interest rates than would otherwise exist. The effect of that will be felt in the long-term cost of capital, and in further damage to investment. So there is a real problem with the fiscal policy system's lack of independence and credibility, for which a price will ultimately be paid.The second failure relating to the abolition of boom and bust is in the housing market. In my adult life, I have lived through three major upswings in the housing market, two of which were followed by very serious crashes, and I fear that that may well happen again. We do not know exactly when the tipping point—to use the current jargon—will occur, but when the housing market does turn the consequences will be very severe for those who are heavily mortgaged. They will move, as they did during the previous two housing crashes, into negative equity. That will also be very serious for the reason that Mervyn King, the Governor-elect of the Bank of England, has warned. It will bring to a premature end the boom in consumption fuelled by equity release, which will go rapidly into reverse and have a major effect on consumption.
It is fair to say that the Chancellor's Budget did address issues associated with the housing market. Rightly, there has been an entire series of studies, although they are probably somewhat late, given that the current boom has been going on for several years. However, certain housing issues have not been addressed and I hope that the Government will address them. For example, it is fine to look at the planning system, but who is examining the size of the land banks held by many developers? Has an inventory ever been attempted? Has the Chancellor considered fiscal measures that could bring some of that surplus land into production? For example, have the Government looked at the operation of the regulatory system in the financial services sector as it affects the housing market?
A system exists, operated by the Financial Services Authority, through which the Government, for prudential reasons, examine loan-to-income ratios across the banking sector. However, they do not follow the example of Hong Kong and use that system to try to manage the housing market. Of course, the old days of special deposits and the regulation of banks are completely inappropriate and would not work. However, the Government have made no attempt whatever to examine mechanisms used in other market-friendly economies, to try to manage the housing market in such a way as to prevent the recurrence of boom and bust. I fear that within the next 12 months a serious deterioration in the housing market may well occur that will bring all the optimistic forecasts and assumptions about revenue and growth to a premature end.
9.14 pm
Mr. Michael Howard (Folkestone and Hythe): Let me start by drawing attention to my declaration in the Register of Members' Interests.
I congratulate the Chancellor on the personal good news that he announced 10 days ago. I also congratulate those who have spoken today in what I thought was a particularly interesting debate, featuring many distinguished contributions. I especially enjoyed the speech of the right hon. Member for Llanelli (Denzil
Davies). I always say that, because the right hon. Gentleman represents my home town, but this was, I think, one of the few occasions on which the House genuinely regretted the falling of the guillotine, which prevented us from hearing the end of his interesting dissertation.While I am in the business of offering congratulations, let me also congratulate the Chancellor on the timing of the Budget. It was a masterpiece of foresight. As the Chancellor delivered his speech, the television screens of the nation were dominated by attempts to topple the statue of Saddam Hussein in Baghdad. The Prime Minister was right to tell the Chancellor, "You don't need to announce the results of the euro tests to divert attention from the Budget". Events in Baghdad were doing that for him, and what a relief that must have been, for this was the Budget that he did not really want anyone to notice.
This was a bad news Budget. This was a Budget that required the Chancellor to come to the House yet again and admit that he had got all his figures wrong. This was his Micawber Budget, based on the premise that something would turn up. Economists at HSBC talk of the Chancellor's "wishful thinking". At Citigroup they say:
- "The Chancellor... has chosen to cross his fingers and hope this problem vanishes".
- "entering the realms of fantasy".
- "The Chancellor's most worrying deficit is his growing credibility gap."
The truth is that although the Chancellor was brilliantly successful in timing his Budget, his ability to get his economic forecasts right has vanished into the fantasy world that he now occupies. For the second time in barely four months, he was obliged to come to the House and tell us that he had got it all wrong. At the end of November he was forced to admit that his forecasts on growth were wrong, his forecasts on revenue were wrong, his forecasts on borrowing were wrong and his forecasts on his deficit were wrong. Last Wednesday he was back at the Dispatch Box to admit that his forecasts on growth—delivered barely four months ago—were wrong again, that his forecasts on revenue were wrong again, that his forecasts on borrowing were wrong again, and that his forecasts on his deficit were wrong again.
Of course he produced his usual litany of excuses. He blamed the Germans, he blamed the eurozone, he blamed the world. He told the Cabinet that the world economy had faced the most rapid slowdown for 30 years. That is simply not true. On the very day the Chancellor delivered his Budget, the European Commission told us that the world economy had grown by 2.9 per cent. last year and was forecast to grow by 3.2 per cent. this year. In the early 1990s the world went
through three years of growth averaging just 1 per cent. Does the Chancellor not realise how degrading it is to his office and to himself to violate the facts in this way?The Chancellor told the House that we were doing better than other countries. That will be news to the United States, Canada, Australia, New Zealand, Spain, Sweden and Ireland, all of which grew more quickly than we did last year and most of which are expected to grow more quickly than we will this year. Does the Chancellor not realise how degrading it is to his office and to himself to make such misleading claims? And does he not realise that the lie is given to all his excuses by the fact that independent forecasters—those whose forecasts he publishes in his own documents—were telling him all the time that he was getting it wrong, that he was being too optimistic, and that he was likely to have to eat humble pie?
Mr. Barry Gardiner (Brent, North): Will the right hon. and learned Gentleman enlighten the House as to why, if the Chancellor has got so much wrong, the World Bank, the International Monetary Fund and the Organisation for Economic Co-operation and Development all say that Britain's economy is the best placed to weather the economic downturn that the world is facing?
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