Written Ministerial Statements
Monday 8 October 2007
Treasury
ECOFIN: 14-15 Septemeber 2007
The Chancellor of the Exchequer (Mr. Alistair Darling): The Informal Economic and Financial Affairs Council (ECOFIN) took place in Porto on 14 and 15 September 2007. The Informal Council discussed the modernisation of public administrations and its impact on competitiveness, the current economic and financial situation, and issues related to the IMF.
The main discussion focused on the impact of an efficient public administration on overall competitiveness. This is a stated Portuguese presidency priority; the quality of public finances is a common theme to the German, Portuguese and Slovenian presidencies.
The Informal Council also discussed the current economic situation and the volatility in global financial markets. I set out that as a global issue, this demanded a global response and made proposals to EU finance ministers that we must remain fully engaged, acting with the wider international community, in strengthening arrangements for ensuring financial stability. I will also be making proposals at the meetings of the G7 and International Monetary Fund in October. Ministers continued the long-running discussion of how to take forward EU arrangements for financial stability, and considered ongoing initiatives to improve cross-border post-trading arrangements in Europe. The Informal Council also discussed the reform of quotas and voice in the IMF.
The UK was represented by the Chancellor of the Exchequer.
ECOFIN: 9 October 2007
The Chancellor of the Exchequer (Mr. Alistair Darling): The Economic and Financial Affairs Council will be held on 9 October in Luxembourg. The items on the agenda are as follows:
Implementation of the Stability and Growth Pact
Ministers will discuss Commission recommendations to abrogate the Excessive Deficit Procedure of the United Kingdom and discuss new recommendations for the Czech Republic to take further action in order to bring the Excessive Deficit to an end.
Ministers will be invited to agree conclusions, following their discussion in July on the Commission’s annual Public Finances Report and accompanying proposals aimed at improving the effectiveness of the
preventive arm of the Stability and Growth Pact by effectively applying the revised Stability and Growth Pact.
The UK Government support a prudent interpretation of the Stability and Growth Pact, taking into account the economic cycle, the long-term sustainability of the public finances, and the important role of public investment.
Ministers will be invited to adopt conclusions on the role that the modernisation of public administration can play in enhancing competitiveness, delivering better services, achieving better value for money and ensuring the control of government expenditure. The UK welcomes the sharing of experiences between member states on this issue.
Developments on the Economic and Financial Situation
Following on from discussions at the informal ECOFIN in September, Ministers will discuss the current economic situation and disturbances in global financial markets, including the possible policy responses to the issues raised. The UK strongly supports the proposed work of the Financial Stability Forum on these issues and is committed to pursuing an effective, considered global response to these global financial market issues.
Ministers will be invited to agree on conclusions on better regulation and its role in improving EU competitiveness. The UK supports the positive efforts of the Commission and welcomes the progress made both at member states and EU level towards reducing administrative burdens in the EU.
Ministers will be invited to agree conclusions on the economic aspects of flexicurity, welcoming recent work by the Commission on developing an approach towards shared principles to develop labour market flexibility alongside support by social systems. The UK believes that fiscal sustainability is critical in the face of Europe’s changing demographics.
Dialogues with Third Countries
Ministers will hear an update from the Commission on its dialogues with third countries, including USA, Japan, China, India and Russia, with a focus on the economic, financial and regulatory aspects of those discussions.
Financial Services—Clearing and Settlement
Ministers will be invited to agree conclusions on Clearing and Settlement covering the ECB’s proposed target 2 securities project, the implementation and functioning of the code of conduct, progress on removal of the Giovannini barriers and the ESCB/CESR standards. These initiatives are intended to address deficiencies in the European clearing and settlement landscape—an area where the Council has long been pressing for change. The UK welcomes progress in addressing these deficiencies.
Financial Services—EU Arrangements for Financial Stability
Ministers will be invited to agree conclusions on the long-running discussion of how to take forward EU arrangements for financial stability. The UK strongly supports efforts to improve financial crisis management
arrangements in Europe, and improvements to the financial stability arrangements in general, including ensuring all member states have robust national crisis management arrangements, and improvements to cross border communication and co-operation in financial crises.
International Financial Market Instability
The Chancellor of the Exchequer (Mr. Alistair Darling): The House will want to discuss the events in the international financial markets this summer. To assist this debate, I am making this written statement to set out a summary of what has happened and the action taken in response. I will make an oral statement later this week.
International Financial Markets—Recent Developments
Over recent years, the world economy and global financial markets saw an unprecedented period of stability and prosperity. This has been accompanied by: lower average long-term interest rates in advanced economies than at any time over the previous three decades; low default rates on borrowing; investors seeking higher returns; and lower premiums for riskier lending.
Since late July, global financial markets have suffered disruption and turbulence, triggered initially by problems in the US sub-prime mortgage market. Uncertainty over institutional exposure to potential losses on sub-prime mortgages caused reductions in liquidity across a range of financial markets. This uncertainty has been exacerbated by the fact that assets and liabilities have increasingly been managed off-balance sheet in complex structured investment vehicles and conduits.
In these circumstances, a range of asset-backed securities could no longer be sold or traded. These problems spread to money markets and funding costs increased for banks, with inter-bank lending spreads rising by up to 100 basis points in major financial centres and terms of lending shortened significantly. Bond, equity, commodity and foreign exchange markets around the world were affected as investors lost confidence and a re-pricing of risk began that is still continuing. In this way, even institutions with no direct exposure to sub-prime mortgages have been affected.
These developments have affected economies and institutions across the world. Many banks and funds have suffered losses due to direct exposure to sub-prime mortgages and associated securities. For example, in the US a number of sub-prime mortgage lenders have had severe difficulties and funds holding large quantities of mortgage debt instruments were also affected. In Germany, two banks had to be helped after suffering from similar exposures. Banks elsewhere in Europe suspended the activities of funds after exposure to sub-prime products left them unable to value them appropriately. Funds in other countries, including Australia and Canada, have also been affected.
Impact on the Financial Sector
The UK entered the recent period of turbulence in the global financial markets in a strong position. The UK economy has seen 60 quarters of growth—the
longest and most stable period of growth since records began—and is expected to continue to grow.
Moreover, the banking sector in the UK has benefited from a period of strong growth which helped it build up healthy balance sheets and capital positions. Most major UK banks reported good profit results for the 2006 financial year and continued to report increases in pre-tax profits in their interim results for the first half of 2007. Throughout this period of growth and stability, the Financial Services Authority (FSA) continued to set capital requirements for all banks above the minima required by EU law and international standards.
Direct exposures in the UK to losses from sub-prime mortgages have been less significant than in some other countries. However, because of the broader impact of the turbulence on global markets, some financial institutions have found themselves under funding pressure due to the seizing up of asset-backed commercial paper markets and the drying up of liquidity in the inter-bank markets.
Northern Rock Plc faced specific difficulties in these circumstances. Its recent problems were not caused by direct exposure to sub-prime mortgages in the US or the UK: indeed, it has a good quality loan book. Rather, its problems have been associated with wider conditions in the wholesale funding markets. The market for new securitisations had largely closed as investors’ demand for such assets fell across the world. Furthermore, the market conditions in August and September resulted in liquidity in the wholesale money markets drying up, with a shortening of duration of funding and an increase in its cost. The combination of these factors contributed to serious liquidity problems for Northern Rock Plc.
Following advice from the Governor of the Bank of England and the chairman of the FSA that the position of Northern Rock Plc, given market conditions at that time, constituted a genuine threat to the stability of the financial system, I concluded that it was appropriate and necessary for the Bank of England to provide liquidity support to Northern Rock Plc. Northern Rock Plc issued a profit warning on 14 September. At the same time, the authorities issued a statement about the provision of a special liquidity facility to Northern Rock Plc.
On 17 September, to put the matter of security of deposits beyond doubt, I announced that, should it be necessary, the Government, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock Plc during the current instability in the financial markets.
Throughout this period the Treasury, the FSA and the Bank of England have worked together, and, as appropriate, with Northern Rock Plc, in line with their respective responsibilities, and continue to do so.
Global issues demand global responses, so the Government are working closely with their partners in the EU and internationally to ensure a coordinated international approach to financial market developments over the last two months. I made proposals to EU finance ministers that we must remain fully engaged, acting with the wider international community, in strengthening arrangements for ensuring financial stability.
I will also be making proposals at the meetings of the G7 and International Monetary Fund next week on the international response.
The UK has a system of depositor protection based on the Financial Services Compensation Scheme (FSCS). Under the previous scheme only the first £2,000 of people’s savings and 90 per cent. of the next £33,000 were guaranteed. As a first step in improving the level of protection for depositors, the FSA has decided that, with effect from 1 October, the FSCS will cover 100 per cent of deposits up to £35,000.
We must learn the lessons from recent events and reinforce our systems appropriately to meet our objectives of maintaining financial stability, competitiveness and confidence. I will therefore make a statement later this week bringing forward proposals on further reforms to give consumers confidence that their savings and deposits are accessible, safe and secure, and to handle banks facing difficulties.
We will balance any need to make improvements as quickly as we reasonably can with the need to consult as fully as possible. Financial sector regulation will remain effective, proportionate and risk-based, protecting investors and consumers appropriately and ensuring market integrity whilst encouraging innovation and keeping pace with market developments.
CHILDREN, SCHOOLS AND FAMILIES
Capital Investment in Schools, 2008-11
The Minister for Schools and Learners (Jim Knight): I am making a preliminary announcement of how £21.7 billion capital will be invested in schools between 2008 and 2011. This is investment for buildings and ICT allocated to the Department for Children, Schools and Families as part of the Comprehensive Spending Review 2007.
Good facilities where young people can learn and grow are a vital foundation for a good education. The report “Better Buildings, Better Design, Better Education” (DfES, 2007) showed that the Government’s investment programme has already made a difference for pupils around the country. Since1997, over 1,100 schools have been built new or rebuilt, 27,000 classrooms built or improved, and thousands more schools have had real improvements to science laboratories, sports facilities and other building and ICT projects. In 2007-08, around 180 schools will be built new or rebuilt, including the first through “Building Schools for the Future”.
The programmes for 2008-11 will drive our modernisation programme still further and faster. Investment will be £6,669 million in 2008-09, £7,024 million in 2009-10 and £8,035 million in 2010-11. Investment by 2010-11 will be seven times higher in real terms than in 1996-97. We are continuing the successful balance of programmes, established in 2004. These are: devolved programmes for every school and local authority; our long-term strategic programmes for primary and secondary education; and targeted programmes for key national investment priorities. I will make a further statement next week to set out the detailed allocations against each of these programmes.
Information and Communication Technology Funding
Most capital programmes can be used to invest in technology equipment. However, given its importance, there will be £837 million over three years specifically for ICT. Within this figure, I am introducing a new harnessing technology grant worth £603 million over three years. This grant replaces the previous disparate grants for technology. It allows schools, and local authorities on their behalf, to invest to meet local priorities in line with the objectives of the Department’s e-strategy. There will be further announcements on the remaining ICT funding.
Business, Enterprise and Regulatory Reform
Enterprise Week 2007
The Minister for Competitiveness (Mr. Stephen Timms): This year, enterprise week runs from 12 to18 November. It is the annual focal point of the “Make Your Mark” campaign—which aims to inspire young people (aged 14-30 years) to be enterprising in the broadest sense, developing a creative, can-do attitude with the skills to spot opportunities and the confidence to pursue them. This is crucial for the future aspirations of millions of young people as well as the economic future of the UK—encouraging business start-ups, social enterprises and development of an enterprising workforce. Wednesday 14 November will be Women’s Enterprise Day and Thursday 15 November will be Social Enterprise Day.
This is not simply about encouraging business start-ups and entrepreneurship. The campaign also encourages organisations across the UK to take the opportunity of Enterprise Week to celebrate and recognise the wealth of talent that is evident in every business and to encourage their employees to start thinking about ideas that have a very clear and tangible business benefit.
“Make Your Mark” is funded by the Department for Business, Enterprise and Regulatory Reform and is led by Enterprise Insight—a campaign coalition founded by the UK’s leading business organisations (CBI, British Chambers of Commerce, Institute of Directors, and the Federation of Small Businesses) in partnership with the main enterprise development organisations and working closely with Government Departments, education bodies, Regional Development Agencies and others.
Last year, Enterprise Week generated very large community interest in entrepreneurship. 448,000 people attended the 3,184 events run by 1,410 organisations. Over 20,000 people in 3,704 teams from schools, colleges and workplaces competed simultaneously around the UK in the Make Your Mark Challenge—the week’s largest single event. Over 15 per cent. of events were in colleges and universities and social enterprise had a particularly high profile, featuring in over 10 per cent. of all events and media coverage.
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