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Mr. Redwood:
All banking factors in the probability that some people will not be able to repay. There is not one single sub-prime business model, but lots of different business models for those making loans to people who are a bit hard up. Of course making loans to those who are hard up is more difficult than making loans to those who are rich, but there are not enough rich people, and there are not enough rich people who want to borrow, so it is necessary to lend quite a lot of money to those who are hard up. The art of banking is in deciding how much one can offer and under what conditions. If the authorities can see more of those poor people through by making sensible interest rate adjustments, I say, “Thank goodness for that”, rather
than, “Serves them right—let’s keep the interest rates high, push more of them under and put them back into the trailer park.” That is not a particularly nice thing to do.
Will the policy be inflationary? I find it difficult to understand how people can say that the American authorities are irresponsible to cut interest rates because that will cause inflation, while at the same time they say that America is already in recession—a questionable proposition—and that it will have a hard landing in a very bad recession. If America is going into a bad recession, bankruptcy, unemployment and falling prices, not inflation will be the problem. The crash in house prices will extend to other goods and assets. I am therefore in favour of lowering interest rates in the conditions that we are considering to try to save something from the mess.
Should more money be made available to the banking system? The answer is simple: of course it should. Whatever people think of bankers—I know that several hon. Members are not best friends with bankers or have various political causes on which to fight them—one cannot live in a modern, sophisticated economy without them. We need people who assess risk, make loans and so on. If they get it catastrophically wrong and we push them all under, we simply make our lives worse, too. There must be moderation in the response, and understanding that we must see enough banks and lending through the crisis so that, if we handle it properly, normal life can be resumed and reasonable economic growth can continue. Money must therefore be made available to the banking system.
That brings me to my next policy recommendation to the Government. One reason why UK authorities cannot do much to make the system more liquid is that too many of the resources of the Bank of England and the Treasury have been expended on nationalising Northern Rock. The sooner the Northern Rock position is unwound, the better because our nation and our monetary authorities cannot afford to have so much tied up in a single, medium-sized—by international or even national standards—mortgage bank. Although the sum of money is small in world financial markets, it is large to the British taxpayer and the Government, and certainly to the Bank of England.
When the Bank of England mounted its rescue of Northern Rock, the former was only 40 per cent. of the size of the latter. It was therefore impossible for the Bank of England to mount a full rescue by itself and that is why—I presume—the Treasury got involved and there had to be proper Treasury guarantees and promises. Taking on something the size of even Northern Rock—a relatively small bank by international standards—required the whole weight of the consolidated fund of the UK and the Government’s money-raising powers. The Government therefore need to accelerate the process of either running off the business or developing new business under whatever model the managers can devise so that we get the £25 billion back as quickly as possible. The Bank of England would thus have a better profile of assets and liabilities again, and more money with which to play in the markets.
In the meantime, perhaps the Government should consider the financing of the Bank of England money market operations, because I do not believe that it is
playing with enough money, and it needs to have a bigger cash reserve available to keep the banking system more liquid during the difficult times. It will not be easy. I am an optimist and I believe that we can get to the other side, but it will require a more intelligent approach by the British authorities than they employed in August and September, and more weaponry in the form of lower interest rates and cash availability in the UK, just as enormous firepower is required in the United States as it, in the eye of the storm, tries to make its way through it more quickly.
The general problem is over-indebtedness worldwide, especially in the American, British and similar economies. The good times were a period of easy credit, when the authorities on both sides of the Atlantic kept interest rates a bit lower than was sensible and either encouraged or turned a blind eye to the most massive build-up of debt under new types of debt obligation and debt structure, which we had not previously experienced. In a way, the regulators fuelled much of that. The Basel rules of capital adequacy told all sensible banks that wanted to grow quickly and increase their profits, “Do so off balance sheet.” The rules encouraged—in a way, forced—them to do that. Surprise, surprise, the banks went for massive off-balance-sheet financing.
Now, many in the Government and elsewhere have become critical and say that perhaps off balance sheet was overdone and not properly appraised and controlled. However, the Government are up to their neck in the off-balance-sheet operation because they are the biggest exponent by a mile of such financing in the UK. In the Red Book, the Government show roughly £500 billion of borrowing for the state in an economy of about £1,300 billion. The Government state that they are keeping their debt to around 40 per cent., which is the target that they set themselves.
When I last did the sums and considered the UK in the way in which a finance director would have to examine it to stay out of jail when reporting, rather than by using the Government’s method, I concluded that the British state’s true indebtedness is £1.3 trillion—£1,300 billion or 100 per cent. of GDP. I reached that conclusion because of the huge unfunded pension liabilities and the large pension deficits in the state sector, the private finance initiative and public-private partnership obligations, publicly owned companies, such as Network Rail, whose debt should be part of the state sector, and now, of course, the full consolidated sum for Northern Rock. Just as Northern Rock consolidated the whole of Granite, so the Government, having acquired Northern Rock, should consolidate the whole of it.
There is, therefore, a large debt on the state sector books, but much of it is suppressed from the general public gaze because of the accounting conventions that the Government deploy, which are so different from those that are required of the private trading sector. The Government need to start reducing their debt burden and demonstrating that they are serious about helping to unwind the debt crisis, taking a different attitude to PFI, PPP, off balance sheet and guarantees of trading companies, into which they entered so liberally in recent years. That would send a good signal and create a bit more financial capacity, which would
help the state sector in all sorts of ways. It would help not least the money market, which would have a little more leeway if there are squalls ahead in the private banking sector, which need liquidity or financial instruments to be traded in open market operations.
The Budget was the most extraordinary non-event because it dealt with moving a few hundred millions around in a £1,300 billion economy. I am happy that the elderly will get a bit more help with their fuel bills. One would expect a Secretary of State or a Minister from the relevant Department to make such a statement. One would also expect it to be a good news item. However, Budgets are about influencing the general direction, shape and size of the British economy. If a Chancellor currently wishes to make a decisive impact, the Budget must move around £7 billion, £10 billion or £15 billion. Several billions must be involved if the Chancellor is to have any impact other than a nice warm glow and a few pence in the pockets of a target group that he may wish to woo on Budget day.
The Budget was pre-empted by the supplementary estimates that went through the House last autumn and, more recently, last Monday. From memory, the supplementaries added up to an astonishing £22,000 million of additional spending. Some of that may be good spending and a little of it may be policy change, but most is testament to the fact that the Government have lost control of their public spending. They tell us one thing on Budget day about what they will do and the balance between spending and revenue, then, towards the tail end of the year, in November and March, they set out colossal sums of money and say that, Department by Department, quango by quango, by big or little numbers, huge overruns have occurred. The figures go through automatically, without debate, yet they are far more significant—they will make an impact on the economy—than the measures mentioned in the Budget.
I therefore recommend to the Government that, to try to get the British economy through the extremely difficult period in world finance, we need proper expenditure controls, Department by Department. We also need the side of the Treasury that the Chief Secretary leads to have much more of a grip on and daily information flow about what is happening and what is going wrong in order to intercept the overspends earlier, emphasise that they are unacceptable when it is still possible to do something about them and redouble the efforts, which are stated to be part of the Government’s policy in the Budget, to root out the abundant waste, inefficiency and incompetence.
We are now at the point where over-borrowing and indebtedness in the public finances are so gross that we need a complete staff freeze at the administrative grades. That should not apply to teachers, nurses and doctors, of course; indeed, we need to continue recruiting as many as we can afford. The general civil service and the quangocracy, however, is now extremely bloated. We need a control on numbers and we need to start slimming them down by natural wastage. I do not want to fire people—that is expensive and unpleasant, and not a nice thing to have to do—but I want to start shrinking the numbers on the public payroll quickly.
We need pension reform for new people coming into the public sector at all levels, because the gap between public and private pension costs is extremely in favour
of high-cost public sector provision. Above all, public sector pensions will be difficult to afford in the years ahead and are swelling the big deficit on any accurate and honest balance sheet, if we were ever to get one from the Government.
We also need proper control over the use of management consultants and outside advisers of all kinds, which has got completely out of control. We need proper controls over the use of property. It would be a good idea to spend to save on energy, which is topical, given the theme of this debate. We just need professional management, Department by Department, which can start to flush out the excess billions of waste, incompetence and overrun, which the supplementary estimates pick up year after year, but which get so little debate or reporting.
That is a series of positive proposals for a nation battling with a world financial crisis, elements of which are made in Britain, and where parts of the British predicament make responding that much more difficult. I hope that the Government will listen seriously on the need to reform their handling of money markets before there is another disaster or mess. We cannot afford another one, and it was a very expensive rescue that had to be mounted. I hope that the Government will start to tidy up Northern Rock lending as quickly as possible, because that is money that we could not afford to have outstanding, and there are easy and simple ways of getting quite a lot of that money back more quickly.
I hope that the Government will realise that every penny in those supplementary estimates will be borrowed, because nobody came to the House and said, “We’ve had £22 billion of supplementary estimates, so we need £22 billion of extra taxation.” We should at least be thankful for that, but there should not have been £22 billion of extra spending. We need to get to grips with that and start rolling back unnecessary spending, so that we can have the Government under some control again.
Above all, we need the Government to understand that although there is too much borrowing and some of it has to be squeezed, that means doing something at home, in the Government account, as well as just blaming private sector banks in America. It is partly the Government, by going along with the over-borrowing, the off-balance-sheet routes and the clever financing, who have helped to fuel the very crisis that they now say we can ride out more successfully.
7.3 pm
Keith Vaz (Leicester, East) (Lab): I am delighted to take part in this debate on the Budget resolutions. I am pleased, too, to follow the right hon. Member for Wokingham (Mr. Redwood), who entered the House when I did, in 1987. We have both aged gracefully together and we have both acquired spectacles, although he has kept some of his hair. I am afraid that mine has disappeared. Perhaps he spent a little longer in government than me, and perhaps that is why he was able to survive.
I want to praise the Chancellor, because I thought that the Budget was excellent. I am not one of those who feel that he ought to be more of a fun character. There was some press speculation after the Budget asking why he is so careful, and some people even
suggested that he may be boring. However, I would much rather have a Chancellor like that than one who walks around with his face painted and a balloon attached to his lapel, ruining the Government.
The Chancellor gave us the right Budget for the right time. This is a time of great instability, as the right hon. Gentleman correctly said. Goodness knows what is happening to the global markets or the economies of other countries. It is right that we should have a carefully measured Budget to deal with the situation that we face.
The Chancellor was right to take the stance that he did in protecting and preserving Northern Rock. The right hon. Members for Wokingham and for Ross, Skye and Lochaber (Mr. Kennedy) will remember the closure of the Bank of Credit and Commerce International, the sixth largest private bank in the world, on 1 July 1991. The then Chancellor of the Exchequer, Governor of the Bank of England and Prime Minister—I am not sure whether the right hon. Member for Wokingham was in the Cabinet at that stage—made the decision to close BCCI.
The bank is still in liquidation, 17 years later. People lost a great deal of money, because in the aftermath of BCCI’s closure, the then Prime Minister, John Major, told everybody that it was completely bankrupt and that there was no money left. However, 87 per cent. of the money has been found and the depositors have been paid back most of what they had, although many have suffered greatly because it took so long to pay them back. The bankers—the employees—have found it difficult to find employment. A repetition of the catastrophe that was the closure of BCCI was avoided by the Government. The Chancellor was right to do what he did on Northern Rock, and I am glad that he took that action.
Kelvin Hopkins: May I strongly reinforce what my right hon. Friend is saying? I have a constituent who was an employee of BCCI who lost not only his job and his income, but his home, because he had a mortgage with the bank. He had a terrible time with ill health after that and the whole family suffered because a rescue was not put in place. Had he been even partially recompensed, he would have had a much better life.
Keith Vaz: My hon. Friend is absolutely right. In fact, he wrote to me about the case and I suggested that he write to the then Secretary of State for Trade and Industry, because the Insolvency Service was part of the old Department. In raising BCCI, I simply point out that the Government adopted the right approach this time. Of course it has cost the taxpayer a lot of money, but the alternative would have been catastrophic.
Mr. Cox: Surely the right hon. Gentleman is not comparing BCCI to Northern Rock. BCCI was riven with fraud from top to bottom, but Northern Rock is not in that situation at all. There was no option but to close BCCI, but there should have been swifter action to deal with Northern Rock.
Keith Vaz:
The hon. and learned Gentleman is new in coming to the House and is therefore unaware of the campaigns that were prosecuted for two decades. BCCI
was not full of fraud. If it had been full of fraud, the money would have disappeared. If he would listen to me, I just said that 87 per cent. of the money was in the bank. If he recalls the time—he is younger than I am, so he was probably at school—
Mr. Cox: I defended some of the people who were responsible.
Keith Vaz: Yes, there were some people involved, but that applies to any bank. However, the bank as a whole was not full of fraud, because 87 per cent. of the money has been found. The rest of the money found its way into the pockets of liquidators, who still proceed to liquidate the bank. That was the right approach. Whether there was some element of unsavoury activity—the hon. and learned Gentleman had clients at BCCI whom he defended—the fact remains that if Northern Rock had been closed, the consequences for those employed and those with mortgages would have terrible, and we would be hearing about what was happening to them year after year. Indeed, if Northern Rock was called “Southern Rock”, the attitude of right hon. and hon. Members on the Conservative Benches would have been quite different.
I am pleased that the Chancellor put 4p on a pint of beer, 3p on a pint of cider, 14p on a bottle of wine and 55p on a bottle of spirits. That is partly because I do not drink alcohol, so the increases do not have a direct effect on me, but also because that was the right approach to take if we are to be serious about the health of the nation, as was the decision to put up tax on cigarettes and cigars. As the House knows, 50 per cent. of crimes in this country are alcohol-related. The Select Committee on Home Affairs has just begun an inquiry into the number of crimes committed by those under the influence of alcohol. What has shocked us in the evidence that we have received so far is the universal wish of the victims of such crimes for the Government to do more to tackle the availability of alcohol.
Kelvin Hopkins: I strongly agree with my right hon. Friend. Would he like to see an even stricter regime, perhaps involving a minimum retail price for alcohol based on its alcoholic content, and stricter measures to control the flood of cheap alcohol coming in from the continent of Europe?
Keith Vaz: My hon. Friend again anticipates me; he is absolutely right. I shall talk in a few moments about supermarkets and about what happens on the other side of the channel.
Alcohol consumption has been rising steadily for the past 15 years. Figures suggest that one third of men and one fifth of women drink more than the recommended level each week, and alcohol-related deaths have more than doubled since 1991 to over 8,700 a year. The British Medical Association has stated that a 10 per cent. rise in price could cut such deaths by up to 30 per cent. Evidence from Finland suggests that that could be right. A 33 per cent. cut in excise duty there in 2004, introduced to deal with cheap imports, led to a 17 per cent. rise in alcohol-related mortality. We therefore welcome the Chancellor’s decision not to reduce the price of alcohol.
Martin Horwood: Would the right hon. Gentleman have liked the Chancellor to differentiate more between beer—on which it is quite difficult to get drunk very fast—and spirits such as vodka and rum, which are used in the mixer drinks that seem to be causing a lot of the problems? I suspect that the same would have been true in Finland.
Keith Vaz: As I have said, I am not an expert on beer drinking, but I have seen many people get very drunk on beer. People can get drunk on beer, although I have never had the pleasure—perhaps I should not call it a pleasure—of being in that position. I understand the hon. Gentleman’s point. The Chancellor has not differentiated in that way, however; he has put the price up on all of them.
One of the witnesses to appear before our Committee will be Helen Newlove, whose husband was murdered in an horrific attack by youths who had been drinking heavily. Only last week, while launching a campaign called “Mothers in Arms” in The Sun, she urged the Government to do more to stop people drinking to excess. The British crime survey of 2006-07 revealed that 46 per cent.—nearly half—of all violent crimes were believed to have been committed under the influence of alcohol. That figure rose to 58 per cent. in cases of attacks by people unknown to the victim. In more than 1 million violent attacks, the aggressors were believed to be drunk. I therefore very much welcome what the Chancellor has done.
There is, however, an area in which the Chancellor could do more. I am pleased to see my hon. Friend the Member for Wallasey (Angela Eagle) on the Front Bench. I believe that her title is Economic Secretary to the Treasury.
The Exchequer Secretary to the Treasury (Angela Eagle): Exchequer.
Keith Vaz: The Economic Secretary to the Exchequer?
Angela Eagle: No, I am the Exchequer Secretary to the Treasury.
Keith Vaz: Great! I am glad that I have now caught up with the recent changes to the Government’s lists.
The Government should do more in respect of what my hon. Friend the Member for Luton, North (Kelvin Hopkins), as well as the chief executives of Tesco and Asda, have said. I am not normally in agreement with the chief executive of Tesco, bearing in mind the huge Tesco store that was created on the north-west side of my constituency and the fact that it does not always collect its trolleys on a Friday. However, he, and the chief executive of Asda, were right to say that the availability of cheap alcohol—which is virtually given away in supermarkets, although it is not entirely free—means that young people can either go in and buy it, or get other people to go in and buy it for them. I am afraid that the number of prosecutions of people involved in such activity has been very small. It is not just a question of putting up the tax on alcoholic beverages; we must also look at the role of supermarkets and other retailers.
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