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Mr. Letwin: I shall give way to the hon. Gentleman, because I have now arrived at the first point that I made to him a moment or two ago.
Mr. Hopkins: The right hon. Gentleman seems to be suggesting that, if the Government have a fairly generous fiscal policy—with which I totally agree—the Governor of the Bank of England should intervene and introduce high interest rates to dampen the economy with monetary policy. Would that not be a dangerous intervention in politics? Would not the Government be right to say, "Hang on. Dealing with inflation is one thing, but countering Government policy is another."?
Mr. Letwin:
Oh dear, oh dear! I shall have to save the hon. Gentleman from his wit and, indeed, from those on
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the Treasury Bench. I hope that I shall be able to provide him with sufficient armour plating in case he should meet the Chancellor in the near future, because what he has suggested runs counter to the entire structure that the Government established—rightly, I may say—when they established the independence of the Bank of England. The whole point of that independence is that it acts as a check on undue extravagance or fiscal laxity on the part of the Government, and it is acting in just that way now. The Governor is not disobeying his remit; he is fulfilling it. He is doing what the Chancellor of the Exchequer asked him to do when the Bank of England was made independent and an inflation target was established.
I expect that the Chancellor has frequently congratulated the Governor on what he has done. I imagine that he has been sending messages to the Governor over the past few weeks to thank him for his advice and to let him know just how grateful he is to the Governor and his colleagues on the Monetary Policy Committee for raising interest rates to counteract the effects of fiscal laxity in the pre-election spending spree that the Government are wrongly engaging in. I imagine that the Chancellor is also thanking him for warning him in advance that interest rates might also need to rise further as a result of that.
Mr. Hopkins: The Governors of the Bank of England—two of them, now—have played a splendid game and, in my view, they have got interest rate policy right. However, there is a difference between adhering to an inflation target and deciding to counter Government fiscal policy.
Mr. Letwin: But it is perfectly clear that the Governor and the Monetary Policy Committee as a whole are, in a serious-minded way, trying to live up to the inflation target. It is not that they are trying to counteract Government policy; they are trying to counteract the effect of that policy on inflation—not only on asset price inflation but on general inflation. Indeed, it is general inflation that they are required by law to target, and they are doing so. However, asset price inflation has an effect on general inflation. Household indebtedness, when it consists of a large amount of mortgage equity withdrawal and a large increase in mortgage lending, has an effect on house prices. The Governor is quite rightly taking all those factors into consideration.
A short-term problem for the economy is being generated by a traditional, classical pre-election spending spree, which is being financed by traditional, classical deficit financing. That is not what we were told this Government were about, or what this Chancellor was about. We must thank the Lord that we have a central bank that is able to counteract the effect of that activity. We shall not see it come through in inflation, but we are seeing it come through in higher mortgage payments. To address the point raised by the hon. Members for Luton, North (Mr. Hopkins) and for Chorley (Mr. Hoyle), I would suggest that that might become a problem for the fairly large section of the population whose mortgages represent a substantial multiple of their income and which were, and probably still are, quite affordable because of low interest rates, but which will become progressively less affordable as interest rates rise.
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I am not making a partisan point here; I am reflecting the point made by the Governor of the Bank of England. He has pointed out that house prices—and hence mortgages—are at multiples of income levels that could cause difficulties to some people if they do not watch out.
Mr. Tom Harris (Glasgow, Cathcart) (Lab): Under the Conservative Government, we had relatively low levels of public spending and historically high interest rates. Now we have very high levels of public spending and historically low interest rates. Is the right hon. Gentleman saying that he prefers the former option?
Mr. Letwin: The cause of the high interest rates—
John Robertson (Glasgow, Anniesland) (Lab): Answer the question!
Mr. Letwin: Of course I am going to answer the hon. Gentleman's question. I would not have given way unless I intended to do so. I always answer questions; it has been my downfall on many occasions. I shall certainly do so now that I have the right answer.
The cause of higher interest rates is not purely due to the expenditure, but to the fact that it is being deficit-financed. The Government have gone on a spending spree through deficit financing, and there is every prospect of those deficits remaining large for some time. Indeed, there is some question as to whether the Chancellor is going to be able to obey his own fiscal rules. The Government are therefore pushing interest rates up by engaging in fiscal laxity, which is called a pre-election spending spree. There is no way the hon. Member for Glasgow, Cathcart (Mr. Harris) can get around that by saying that some other Government at some other time did something else. The fact is that the Government are doing something to the country: they are pushing up mortgage payments.
Mr. Hopkins: I thank the right hon. Gentleman for giving way yet again; he is very generous in taking interventions. Is not the basic reason why our Government have had such success with the economy that they have kept sustained demand by having a reasonable fiscal policy and relatively relaxed monetary policy as well? Is he suggesting that we should do something different?
Mr. Letwin: Oh dear. I will have to provide the hon. Gentleman with even more protection from the Chancellor, because the Chancellor has long claimed that his fiscal policy is intended not to be a demand management system, but to stick within very strict fiscal rules to ensure the long-term and medium-term sustainability of the public finances across the cycle. As a matter of fact, I agree with the Chancellor and not with the hon. Gentleman.
The problem with the Chancellor is not that he does not have the right idea, but that at present he is not following it very well. Thank goodness, the Governor and his colleagues are taking appropriate action, but the corollary of that is that there are people for whom there is an increasing instability—an increasing problem of the relationship between their mortgage payments now and their likely mortgage payments in the near future
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and their income. This is not a crisis, but it is a problem. If it becomes much bigger, it could turn into a serious problem.
Ms Sally Keeble (Northampton, North) (Lab): I would agree with the right hon. Gentleman's argument except that, under the last Conservative Government, people in my constituency who did feel the rub felt it because there were high interest rates, a crash in property prices and high unemployment. There is absolutely no sign of those last factors being remotely on show now, and interest rates are increasing only slightly.
Mr. Letwin: For the sake of the country, I profoundly hope that the hon. Lady is right and that there will not be any horrible sequel. I hope that as a householder, as a parent and as one who is concerned about the welfare of this nation. That, I am sure, is common ground across the House—but let us not be complacent.
Let us be clear about the fact that when there are very high multiples at work, when there are increases—which, although from a low base to a low number, are nevertheless in proportionate terms quite large—in people's mortgage payments of 10 or 20 per cent. in many cases, and when those may go up overall by 30 or 40 per cent., again admittedly from a low base, problems can be engendered. We should not consider that lightly. We should not ignore it; we should not be complacent about it. That is my first point.
My second point is that, for some people—I absolutely accept that this is only a restricted group who are on low incomes—there is, unfortunately, accumulating evidence of the problem of the debt spiral. For such people, this is not a minor matter and it is far from a laughing matter. It can cripple lives. It is very small so far, thank goodness. Let us hope it remains so, but around us are signs of more people who are closer to it than we can be comfortable about.
I believe that 42 per cent. of those with new babies are in arrears, as are 48 per cent. of lone parents and 52 per cent. of those who are recently separated. Those are all life circumstances that tend to give rise to considerable indebtedness, and I do not say that this is a sudden crisis, but I do say that if we asked the citizens advice bureaux and the various debt advisory bodies we would receive the same response from them all.
The problem is not currently widespread and it has not reached crisis proportions, but there is a worrying increase in the number of low-income individuals who are caught in debt spirals. That, I think, will worry everyone on both sides of the House. I hope that there will be a considerable consensus also on how to deal with it.
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