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12 Mar 2008 : Column 323

Mr. Austin Mitchell (Great Grimsby) (Lab): I find myself in the paradoxical and unusual position of agreeing with the right hon. Gentleman. Does he agree that if the Bank of England had the double-header rubric, like the Fed, to keep inflation down and to maximise employment, it would make for better and more flexible policy?

Mr. Jack: It is a pleasure to agree with the hon. Gentleman. I seem to recall that section 11 of the Bank of England Act 1998 defines clearly what the Bank’s Monetary Policy Committee is all about; it is achieving the target that the Chancellor set. It is interesting that the previous Chancellor reset the inflation target from 2.5 per cent. to 2 per cent., just as we ran into the first serious series of commodity price rises that we had experienced for a long period of time. It is interesting to speculate as to whether we conspired to have a more difficult monetary situation simply by decreasing the target for inflation by a half of 1 per cent.

Mr. Purchase: I have a slightly different point from that of my hon. Friend the Member for Great Grimsby (Mr. Mitchell) on monetary policy and the use of interest rates to calm inflation. Is it not the case that the measures announced by the Chancellor on longer-term mortgages will assist monetary policy by taking some pressure off the Bank of England when it sets interest rates, while recognising that a different market will come about with the longer-term interest rates announced today?

Mr. Jack: The hon. Gentleman raises an interesting point, but longer-term mortgages relate to the stabilisation of people’s personal finances, not the heart of the inflationary issue. Current inflation is being driven not by wage demands, although they may come, but by commodity prices and the world economic situation. With respect to the hon. Gentleman’s point, long-term mortgages are a response but not a solution to those overall inflationary factors. I say to the Treasury that the time is right to have a discussion and analysis of the current nature of inflation because our response is still geared to previous inflationary cycles in the economy.

Mr. Graham Brady (Altrincham and Sale, West) (Con): I am interested to hear my right hon. Friend’s remarks. Conversely, is it not the case that during the last couple of months, the Bank of England has decided to reduce interest rates at a time when it was clear that there were significant inflationary pressures? Does that not show a little more flexibility in its response than he suggests?

Mr. Jack: Sadly, the hon. Member for Great Grimsby (Mr. Mitchell) is no longer in his place, but my hon. Friend’s point goes back to the fact that we look to the Monetary Policy Committee to drive not only the fight against inflation, but the level of activity in the economy. Inevitably, the two are linked, but commentators ascribe to the Monetary Policy Committee the ability to influence all kinds of economic factors by virtue of its attempt to focus on the achievement of the inflation target. Although I acknowledge my hon. Friend’s point, he does not go to the heart of what is driving our present inflationary situation. I would welcome a debate on whether we have the right mechanism. Broadening the scope of the Monetary Policy Committee may be right—I do not want to come
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to a conclusion on that matter without considering it carefully—but the time is right for a reappraisal of what drives UK monetary policy.

The second area that I want to consider is that of sub-prime lending. Such lending grew in the United States in a situation where there was a lot of cheap money and people were looking for opportunities to deploy it. They suddenly alighted on the opportunity to allow mortgages to many people who probably should not have had one. The net result was that the American economy turned down and people defaulted on their mortgages—we saw what happened next. I carried out a little exercise to examine the corporate social responsibility reports of some of the banks in America that have suffered the most, in order to see what they said about their responsibility to wider society. Why did I do that? One of the clear trends in provision for, for example, old age, investment and paying mortgages is the weight that we now have to place on private sector investment vehicles. People’s security and future well-being depend on the integrity of the products that the financial system now delivers. Events in the sub-prime market have shaken people’s faith in those financial vehicles’ ability to deliver long-term future funding.

It is therefore interesting to read some of the American banks’ corporate social responsibility reports. Citibank, which lost $18.1 billion, states in its corporate social responsibility report on its website:

What a difference chasing that last margin of those sub-prime loans made. It has contributed to shaking the foundation of western capitalism. We are now considering the instability of the banking system. Central banks are pumping in hundreds of billions of dollars to stabilise the system when so much depends on its stability.

Merrill Lynch, which lost $14.1 billion, wrote under the heading “Integrity” on its website:

What, in the psyche of those banks, got them into a position whereby they put at risk not only their products but the statement of their public position and intent? I know from what the Chancellor said that a great deal is happening in international banking—through the World Bank, the IMF and so on—but if there is one issue with which it must deal, it is the integrity of those banks’ actions. They should be forced to re-examine their commercial policies, which put at risk the very security of the millions of people whom we represent.

A recent edition of The Economist conducted some analysis of how good some of the experts are who run the funds that have been so badly affected by sub-prime lending. It concluded that the costs of the so-called professional management of our money were high and the returns were not much better than they would be if people simply followed the general indices of stocks and shares. It pointed out that, in Sweden, which privatised much of its future pension provision, many people invested in a fund that had grown by 534 per cent. in the five years preceding the change in Swedish policy, only to lose 70 per cent. of its value in the next three years. People were so frightened by that that inertia set in and they did not know what to do.

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That is the problem. Unsophisticated investors, of whom I count myself one, subcontract to experts the well-being of our future position. In the light of events in sub-prime lending, those in whom I and many millions put their trust have been found wanting. A fundamental re-examination of those banks’ commercial requirements and their responsibilities to their shareholders and, more important, to wider society, is needed.

Stephen Hesford (Wirral, West) (Lab): Does the right hon. Gentleman agree that the Government were right to step in on Northern Rock to stabilise the position? Does he also agree that nationalisation was right?

Mr. Jack: The Government had to take action on Northern Rock because many innocent individuals were caught up in something that was not of their making. Unlike the position of, for example, the Bank of Credit and Commerce International, whereby people were seduced by high returns on their money, Northern Rock looked like a good, normal bet. However, the Government have been found wanting on the speed of action and the direction of travel. The institution wallowed in difficulty and the share price has been adversely affected, perhaps disproportionately, by the delay in acting. However, some action had to be taken.

The article in The Economist that I cited earlier concluded:

the banking and investment industry—

Mrs. Lait: I share my right hon. Friend’s analysis, which he presents in a sophisticated manner. He mentioned the re-examination of the products of the businesses. Does he accept that an appreciation of what risk means has been missing?

Mr. Jack: I agree because no investment can be risk-free. However, on the cost of investment, the Government tried the stakeholder pension—their only venture into that territory. Perhaps if the Financial Services Authority, the Bank of England, the Government and bankers came together to re-examine the matter, a fundamental rethink might occur of the cost of investing, the risk:reward ratio and the corporate social responsibility provisions to which many of the institutions subscribe, but which have been threatened by sub-prime.

I want to comment on a couple of things that the Chancellor did not say. I find it intriguing that the former Chancellor said, when he first came to power, that the taper tax system had to be introduced because it would help capital accumulation in the economy. The current Chancellor has not explained why moving to a flat rate of capital gains tax is now better. I suppose that the only thing that is better is the £700 million in the Treasury’s coffers. However, a little more plain speaking would be nice to explain what has changed in the fundamental operation of capital gains tax.

It is disappointing that the Chancellor has not tried to simplify inheritance tax. I suggested in my Budget speech last year that we could have a low single marginal rate of inheritance tax if we did away with the panoply of allowances, many of which are accessible
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only if one can afford the professional fees for the advice about how to use them. Again, that suggestion was ignored, and we retain an incredibly complicated, old-fashioned tax, which needs modification.

I stress to Treasury Ministers, especially the Financial Secretary, who is in her place, that I hope that, as the tax law rewrite project, with which I have been associated since its inception, nears the end of its major change to the clarity of tax law, the Treasury will not shy away from reacting to the enormous amount of work on improving the operation of the tax system. That is different from rewriting the law in a legible and understandable way. If the Treasury is to take with it the support of the accounting profession and others in the financial community to make Britain’s tax laws work properly, the Financial Secretary needs to expand and change the tax law rewrite committee’s remit to consider more carefully modifying and improving the efficiency of the tax system.

With respect to the Chancellor, changing the way in which small and medium-sized enterprises access the tax system and report their financial transactions is not the same as making the whole system work better and simplifying it. The word “simple” is often used but it is difficult to achieve. However, many lessons have been learned through the rewrite exercise and they need to be examined.

Let me consider green taxes. The Select Committee on Environment, Food and Rural Affairs, which I chair, suggested trying to encourage local investment in decentralised energy systems. We suggested to the Chancellor the introduction of a green ISA—a unique instrument for investing in green technology or local, decentralised low-carbon schemes. Sadly, that did not figure in the Chancellor’s speech this year. However, there are some remarkable examples in Germany of small communities with local networks of investors, which have now got combined heat and power schemes, which would be the envy of many communities in this country.

Sadly, there was no mention of a buy-in tariff to encourage more decentralised electricity generation or help to deal with emissions from the heat sector. We all talk about electricity and transport, but heat accounts for one third of emissions in this country, yet is the one area where revolution and change are under-encouraged.

I hope that the Treasury will look carefully at what I have said about the state and security of our financial institutions. They are so vital to the well-being of so many of the millions whom we represent. If, as a result of reacting to Northern Rock, we could address some of those issues, there might be a different way of expressing the concept of financial stability, for the long-term benefit of the millions whom we represent.

3.10 pm

Mr. Ken Purchase (Wolverhampton, North-East) (Lab/Co-op): It is a great pleasure to follow the right hon. Member for Fylde (Mr. Jack) and to listen to his words of wisdom about our financial institutions. He agrees with the hon. Member for Beckenham (Mrs. Lait), who also made an excellent speech, about the problems resulting from, if I may say so, the misuse of financial instruments—the bundling up and selling off, the derivatives and futures, and the hedging. All are
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useful tools in the world of finance, but when misused, they have created enormous danger. The right hon. Gentleman made that extremely clear.

Interestingly, I recall the Leader of the Opposition suggesting not so long ago that the City was falling out of love with Labour. On the back of the remarks that we have heard from the right hon. Member for Fylde and the hon. Member for Beckenham, it would seem that the City has not yet found a new suitor in the Conservative party, with those attacks on the behaviour of the very institutions that, formally and traditionally, were its major supporters. The Conservative party’s whole approach has to find a new pathway, so perhaps the right hon. Gentleman and the hon. Lady should communicate that to their leader.

Mr. Jack: I would not like my remarks to be construed as an attack; it is more a question of saying, “Watch out!” The expertise of those institutions is vital, and there is no substitute for long-term investment carried out responsibly by the City of London and other financial markets—but on this occasion they got things wrong.

Mr. Purchase: I am pleased to hear the right hon. Gentleman moving back towards the middle path that I was suggesting, which is to have a use for those instruments, but not a misuse. We can now take that as read.

I want to concentrate my remarks on what I regard as the heart of the economy—the manufacturing capacity in this country. I want to focus particularly on the auto and aerospace industries, and to consider them as part of the export effort that we must continue to make. If a Budget is about the gathering and distribution of taxation, there must be real wealth before anything of note can happen. That is why I choose to speak about the manufacturing industries in our country.

Export is everything, as far as Britain is concerned. Whether in manufacturing or services, we must recognise that for an island economy, the choice is trade or die. Therefore, we have to make friends worldwide. The right approach to world peace is to have mutually advantageous trade. I wholeheartedly support the efforts of our exporting community to call for assistance wherever it is required, in their main effort of ensuring that Britain pays its way. I shall speak in a moment about the conditions of work in which we are operating, and the effect that those have on the balance of payments.

The overall thrust of our economic policy has not been particularly helpful to our manufacturing industries. If manufacturing is at the heart of what we do, and most else is peripheral to it, we have for many years not taken care of it as we should have done. Our current balance of payments deficit is some £51 billion—considerably different from what it was just 10 or 15 years ago. That figure is accounted for by a monthly deficit in manufacturing of £7 billion to £8 billion, which is offset only by a services surplus of some £3 billion.

Given that situation, it is right to recognise that manufacturing has continued to increase its output, although its share of GDP has fallen. In 1995, the output of manufacturing and allied services was overtaken,
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in terms of growth in GDP, by the services sector. The services sector now accounts for some 75 per cent. of total output. Again, that illustrates the fall from grace of manufacturing in our country.

At the same time, I should like to pay tribute to those in the manufacturing industries, by recognising that their productivity gain has been startling—startlingly good, it is nice to report. Indeed, in 2004-05, it reached the giddy heights of 8 per cent. per annum. The figure has moderated a little since then, but it is still well ahead of the productivity gains seen in the services sector. Although more should have been done to assist in the manufacturing endeavour, those increases in productivity illustrate that manufacturers have, in the vernacular, been playing a blinder.

Mr. Evans: I share the hon. Gentleman’s interest in the manufacturing industry in the UK. We are all aware of the balance of payments deficits overall, in manufacturing and services put together. However, does he agree that the Government ought to be doing more to support small and medium-sized businesses in particular, by holding more exhibitions and trade missions abroad and by giving those businesses more assistance to participate in them?

Mr. Purchase: The hon. Gentleman shares my views on such matters. Of course I agree with that, but it is worth reflecting on the fact that although we have some seriously good manufacturers—world champions in many respects—we have an enormous tale of underperforming small and medium-sized businesses, which tend to cause a drag on the entire system. The measures announced today to encourage small and medium-sized businesses are helpful—probably not sufficient, but the direction is helpful. I want to say a little about trade exhibitions and the export effort in a moment.

Mr. David Kidney (Stafford) (Lab): Although we could say that this Labour Government were slow to support manufacturing, would my hon. Friend give credit for the manufacturing strategy, its refresh, the manufacturing advisory services and the introduction of R and D tax credits? Does he think that such supports might explain why this year’s survey of manufacturers by the EEF—formerly the Engineering Employers Association—says:

Mr. Purchase: I think that I read the same paper. That is absolutely true, and the Government have taken a number of measures. I am merely saying that they are insufficient. Everything is helpful, and I am a fan of the manufacturing advisory services in particular. Hon. Members may be familiar with their work in different regions, especially in assisting small firms—in efficiency and lean manufacturing, for instance—which has been extremely helpful and well supported by the regional development agencies. In that sense, I readily concede that the Government whom I support have been taking measures to help small companies.

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