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The Financial Secretary to the Treasury (Ruth Kelly): We have heard some excellent contributions to the debate, particularly from my hon. Friend the Member for Glasgow, Cathcart (Mr. Harris) and my hon. and learned Friend the Member for Redcar (Vera Baird). I shall respond to some of the detailed points that the Opposition have raised in a few moments; but, first, I should like to put the debate into some sort of context.
The important achievements of this Labour Government—economic stability, continued economic growth and sound public finances—all provide the best possible environment for savings and ensuring that existing levels of household debt are sustainable. Opposition Members have lectured us on the economy—that from a party that, when in government, had inflation running at 10 per cent., interest rates at 15 per cent., and 3 million people unemployed twice. It ran up a huge deficit. Some 1.5 million people were in negative equity, and there were 250,000 home repossessions. The Conservatives had to break every promise that they made on tax.
Britain has grown in every year of this Labour Government, while under the Conservatives this country had two of the worst recessions in its history. Higher savings in the early 1990s, which Opposition Members are so fond of quoting at us, were a symptom of macro-economic instability. Households had to save more to make up for the loss of the value of their savings owing to inflation and to provide a cushion in the event of becoming unemployed.
I cannot resist drawing attention to some of the analysis carried out by the Bank of England, as Opposition Members are so fond of quoting the Governor of the Bank of England, and indeed pointing to the savings ratio performance under this Government. Of course, I treat all these statistics with a measure of caution, as hon. Members will appreciate, but I refer them to an analysis of the savings ratio carried out by the Bank of England, which concluded that, when inflation is taken into account, the savings ratio since 1998 is significantly higher than the average over the previous 40 years.
If hon. Members look at the facts, they will see that, under this Government, inflation has averaged just 2.4 per cent. compared with 6 per cent. under the Tories—the peak was 21 per cent. Interest rates have been averaging 5.2 per cent., whereas they were on average 10.5 per cent. under the Tories. Mortgage rates have averaged just over 6 per cent. under Labour, while they averaged 11 per cent. under the Tories.
Conservative Members opposed each of the decisions that we took to put the economy on a sound and stable footing. The decisions that they would have made had they been in government would have put Britain into recession, instead of which Britain is growing. Indeed, when we introduced tough fiscal rules, the Conservative party opposed them. When we introduced the symmetrical inflation target, the Conservative party
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opposed it. When we made the Bank of England independent, that was opposed by the right hon. Member for West Dorset (Mr. Letwin).
Mr. Letwin: I am sorry to intervene on the hon. Lady, and I am grateful to her for giving way. Is she really trying to tell the House that she thinks that the current level of savings is satisfactorily high?
Ruth Kelly: I would not claim that for one moment. My right hon. Friend the Chief Secretary to the Treasury has pointed to the fact that 3 million people seriously under-save and that 5 million to 10 million do not save enough, but I point to the Conservative party's flawed analysis, flawed facts and inability to grasp the reality. Instead of standing up to apologise, as the right hon. Gentleman should have done, he has proposed a policy that the hon. Member for Havant (Mr. Willetts) described a few years earlier as wild, uncosted and opportunistic. I have not got much time tonight. I would love to take hon. Members through each of the right hon. Gentleman's arguments, but let me look at just some of them.
First, let us turn to the housing market. The right hon. Gentleman will know that both the Treasury and the Bank of England have consistently forecast a slow-down in consumer spending and house-price inflation as the UK and global economic recoveries gather pace, and because UK interest rates have risen from last year's historic low levels. The recent speech made by the Governor of the Bank of England in Glasgow pointed out the surveys that show early signs of a slow-down in the housing market. The right hon. Gentleman cannot obscure that fact by citing annualised rates; surely he can see the evidence. As he knows, there are important reasons to believe that household overall balance sheets will remain consistent with macroeconomic stability.
As Mervyn King said in his speech, there are good reasons to think that the long-term level of house prices relative to earnings has risen. For a start, as the Barker review shows, house prices reflect the balance between the rising demand for, and restricted supply of, housing in the UK. Additionally, the success of the new economic policy framework in delivering economic stability with low interest rates and strong labour market outcomes has made people more confident about taking on new risks, which is likely to have contributed to a rise in the equilibrium of the house price to earnings ratio.
Quite unlike during the late 1980s, the low interest rates delivered by greater macroeconomic stability have ensured that household interest payments remain low by historical standards. The ratio of interest payments to household disposable income has remained close to 7 per cent. since 2002, compared with its peak of more than 15 per cent. in 1990, when consumers were hit simultaneously by rises in interest rates that were well into double figures and rapidly rising unemployment. The result of that is that the asset side of the household balance sheet is strong, with household net wealth, despite the recent fall in equity prices, still more than 50 per cent. higher than at the beginning of 1997. The right hon. Gentleman will doubtless appreciate that when developments on both sides of the household
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balance sheet are taken together, the ratio of household debt to total wealth remains stable around its long-term average.
Instead of looking at the facts, the right hon. Gentleman tried to make a rather tortuous argument about the impact of mortgage equity release on interest rates, arguing somehow that that is fuelling an increase in consumption that will thus hit interest rates. Given that he is so keen on the Bank of England, I shall cite an analysis in a recent inflation report that examined mortgage equity release and argued that that was largely driven by demographic factors and unlikely, therefore, to have had a significant impact on consumption.
I could back up that analysis with figures from the Office for National Statistics, which suggests that most of the mortgage equity release that has been withdrawn over the past few years has been saved, not spent. Three quarters of the increase in mortgage debt since early 2000 has been matched by a build-up of money and deposits, while the savings ratio has remained broadly stable. I urge the right hon. Gentleman to undertake more cautious analysis in the future before making great claims about the effect of mortgage equity release on consumption. I agree that there are real issues to address regarding the impact of debt.
Mr. Letwin: Before the hon. Lady continues, will she admit to the House that the Treasury has no accurate figures at all on the use of mortgage equity withdrawal?
Ruth Kelly: I have cited two sources for our estimates on mortgage equity withdrawal: the Office for National Statistics, which most people would say was at the cutting edge of international statistics; and the Bank of England, which the right hon. Gentleman has cited throughout the debate.
Hon. Members on both sides of the House would agree that we must take the impact of debt on vulnerable consumers extremely seriously. We want to have well-informed consumers who are able to take sensible and appropriate decisions about their long-term finances. I remind the right hon. Gentleman that from 31 October 2004, we will regulate mortgages for the first time. The Financial Services Authority will require a key facts illustration on all mortgage agreements, which will make clear to consumers the effect that a 1 per cent. rise in rates would have on repayments. We are also considering the proposals suggested by Professor Miles in his review.
The Government's vision is of a simpler, more transparent market in long-term savings in which trusted and trustworthy providers sell simple, good-value products to informed consumers. We have been working towards that for the past six years with measures—
Mr. Peter Luff (Mid-Worcestershire) (Con) rose in his place and claimed to move, That the Question be now put.
Question, That the Question be now put, put and agreed to.
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Question put accordingly, That the original words stand part of the Question:—
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