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The question is what the British Government can do about it. This is partly an international problem, but it is also a very specifically British problem, because the City of London is probably the largest financial centre in the world and we are all affected by how its finances develop. What is happening—it has happened over the last few weeks—is that the banks are launching a major campaign to get the Bank of England to provide them with cash with minimum strings. What they would like is for the Government simply to advance cash in return for their mortgages, particularly their poor-quality
mortgages. That is happening on a very large scale in the United States, where the state is effectively nationalising the losses and risks of the banking system. The banks would dearly love our Government and our authorities to do the same here.
The Governor of the Bank of England has been taking quite a hard line on that, rather differently from his opposite numbers in the US, and I have a good deal of sympathy with him. However, he and the rest of us are confronted with a practical problem—if the banks are to continue to function and the financial system is not to seize up, there needs to be liquidity. The question then becomes under what conditions it should be provided.
We may well be getting an answer to that question, but I would like to suggest an approach that I believe the Government should support in working with the Governor. By all means let more liquidity be provided in the banking system, which has to function as a lender to businesses and households, but there should be a condition. The condition is that the banks’ shareholders should accept the losses that come with bad debt. They will have to do that by accepting what are called write-downs. They will have to do that by cutting their dividend payments, by rights issues, by sales, by forgoing acquisitions—all the sort of things that banks like doing. The are going to have to go through a period of austerity in order to get their own accounts in order. That would be the condition for the advance of liquidity. The banks will hate it; they will run campaigns in the financial newspapers, saying how terrible the Governor of the Bank of England is for being so stingy and not giving them what they want, but in those circumstances it is the job of the Government to provide political support for the Bank of England. The basic point is that our banks are too big to fail, but, equally, they are too big for the Government to bail out all their losses and bad debts. They will have to carry this themselves and they will have to be helped to do it.
My final point is about the future of regulation. As a result of this crisis, many of the assumptions that underlay the regulation of the financial system in Britain are having to be re-examined. We had a system of so-called light-touch regulation, which has in practice led to major financial institutions in the City behaving irresponsibly—behaving like casinos rather than lenders in many cases—and that has to be stopped. In the emergency circumstances of the present, we cannot rewrite all the rules, but to prevent this from happening in future, there will have to be a complete rethink of the way in which our financial institutions are regulated.
The central change that needs to be made is to recognise that markets operate in cycles. This is not some unhappy circumstance; capitalist economies always operate cyclically. They may be more efficient and may function better at certain times, but they are very cyclical, so the authorities need to ensure that the reserves that banks hold reflect the cycle; in a boom period, they should be required to hold more, and they should be required to hold less in a downturn. The whole process by which financial institutions are managed needs to be much more proactive and much more aware of the cyclical nature of the industry.
I put forward those ideas in a constructive spirit. I think that if the Government were to address them and come up with positive solutions rather than just waiting for events to happen, they might well avoid the damage that would result if they were simply to relive the experience of the great Tory recession.
Mr. Deputy Speaker: I inform the House that Mr. Speaker has chosen the amendment in the name of the Prime Minister.
2.5 pm
The Financial Secretary to the Treasury (Jane Kennedy): I beg to move, To leave out from “House” to the end of the Question end and to add instead thereof:
“acknowledges the resilience of the United Kingdom economy, which grew faster than any other major economy in 2007 and in which employment is at record levels; notes that the record of economic stability since 1997 has laid the foundation for rising home ownership, with the number of owner-occupier households rising by 1.8 million since 1997; further notes that household finances remain strong, with household assets worth over £7.5 trillion, more than five times the level of personal debt; believes that the United Kingdom is well placed to respond to the challenges arising from the continuing international financial turbulence; applauds the Government for managing the public finances within its fiscal rules; recognises that the Bank of England Monetary Policy Committee has cut interest rates twice in recent months; further acknowledges that mortgage interest rates are currently around half the level of those reached in the early 1990s and that the proportion of repossessions is less than one third of the rate in the peak year of 1991; welcomes the Council of Mortgage Lenders’ recent statement, which sets out the steps that the industry is taking to support borrowers facing repossession, including working with debt advisers, pro-actively identifying at-risk borrowers and only repossessing as a last resort; and supports the Government’s initiatives to assist home ownership, including new measures to encourage long term fixed rate borrowing and new forms of shared equity.”
It is pleasure to discuss such an important topic. The hon. Member for Twickenham (Dr. Cable) raised a number of points in opening the debate, and I should like to deal with each of them in turn. It is a routine but important courtesy to say what a pleasure it is to follow the opening speech, but it was a sore trial for me to listen quietly and respectfully to the Liberal Democrat party give a lecture on financial probity—no matter how scholarly the hon. Gentleman’s manner. [Interruption.] I will say exactly why.
It is not what the Liberal Democrats say, but what they do in practice and in power that we should examine. Speaking as a Liverpool MP, I know how unfortunate it is for that city and its local economy to be one of the few places under Lib-Dem control and subject to their influence. Despite huge investment from the UK and the European Union, the Lib Dems have virtually bankrupted the city, which is officially classified as the worst council in the country for financial management. The burden of debt is beyond belief and former senior Liberal Democrats have characterised it as doing more damage to Liverpool than Militant. Having got that off my chest, I shall return to the points that the hon. Member for Twickenham made.
Lembit Öpik (Montgomeryshire) (LD):
I am glad to hear that the right hon. Lady will be addressing my hon. Friend’s comments, because I am extremely concerned when the Government receive what I think is
pretty sage advice, delivered in a non-partisan way, and they respond with lectures about Liberal Democrat policy, which is the last thing that the country needs to hear given that, collectively, we are on the brink of a repossession catastrophe. I hope that the Minister will confirm that she will work on a cross-party basis to try to ensure that the general public whom we serve—not the parties to which we belong—are given the support that they deserve.
Jane Kennedy: I knew it was a good idea to give way to the hon. Gentleman. I always like listening to his interventions and hearing him urge us to engage in a non-partisan way in an important debate. He is right to make that point. However, it is very difficult to do that in a constructive way with a party that is preaching such doom and gloom, talking up the prospects of a recession.
Jane Kennedy: Let me begin my comments in response to the Liberal Democrat motion and then I will happily give way to hon. Members. I do not want to spend as long on my feet as did the hon. Member for Twickenham.
Let me start with the condition of the economy, before I move on to the housing market more specifically. The world economy is clearly facing its most uncertain period for some time, which is having an effect across the world—and the UK is no exception. However, Britain is in a strong position to cope with the challenges ahead, and it is in a far stronger position than it was at the start of the last decade. Our economy is stable and it has been growing uninterruptedly for more than 15 years. It is true that growth is forecast to be slower this year than last, and slower than we had expected at the time of the pre-Budget report, but Britain’s economy is forecast to keep growing. That is not complacency. That is the forecast of not just the Treasury, but the International Monetary Fund, the OECD and the CBI. In fact, independent forecasters expect Britain to be the joint fastest growing economy in the G7 this year.
Simon Hughes: The right hon. Lady is entering a phase that concentrates on the good things that the Government have done—and there have been good things—following her petulant beginning that ignored any of the good things that my colleagues have done in Liverpool over 10 years. However, I know how anti-Liberal she is, so we understand that coming from her. Does she accept, however, that the burden of the case made by my hon. Friend the Member for Twickenham (Dr. Cable) is that whatever the history and the macro-economics, the over-commitment of British people—the over-expenditure with money that they do not have—is now at a crisis? I hope that she will give practical answers so that people outside the Chamber can see that politicians together are helping them to get out of the huge and terrifying financial holes that millions of families are in.
Jane Kennedy:
The Liberal Democrats hate it when the spotlight is shone on what they do when they are in power. I never lose any opportunity to shine that spotlight. However, I can assure the hon. Gentleman that I will shortly come to the practical steps that we
are taking in government, if he will allow me to get there. I disagree with him; in the context of the debate, we cannot set aside the macro-economic situation in which we are working. That is of central importance and why we can say with confidence that we believe that the economy in the UK is strong enough and stable enough to sustain British home owners and those who want to be home owners through the coming months.
Chris Huhne (Eastleigh) (LD): Is the right hon. Lady aware that the housing market has been the source of macro-economic disturbances for successive Chancellors of the Exchequer for certainly 30 years? Merely to brush the problems in the housing market aside as if they do not have macro-economic consequences, which is what I understand her to be doing, would be, frankly, irresponsible. My hon. Friend the Member for Twickenham (Dr. Cable) made some extremely constructive suggestions—they were not gloom-mongering, as she said—about underpinning the housing market at a point where it may do serious damage to the Government’s macro-economic strategy. I hope that we have a response from her to that point, and not silly tittle-tattle about Liverpool.
Jane Kennedy: The hon. Member for Twickenham was either running around going, “We’re doomed, we’re doomed”, or he was saying, “Don’t panic, don’t panic.” I cannot quite establish which of the two characters he was casting himself in.
We have also had relatively low and stable inflation. At 2.5 per cent., consumer prices index inflation is currently lower than in both the euro area and the USA. It is forecast to pick up in the short term, but to return to target from next year onwards. There are also more people in work in Britain than ever before.
I felt somewhat patronised by the suggestion that Ministers might not know that there was a prediction that unemployment would rise. I was Minister with responsibility for work and remember that the unemployment figures grew slightly when I was at the Department for Work and Pensions. That increase was largely due to moving people in receipt of incapacity benefit on to jobseeker’s allowance to help them into work. In case the hon. Gentleman does not know, let me advise him that we have plans to move lone parents on to jobseeker’s allowance as a precursor to helping them to find work. It is those active, labour market policies which we have implemented in government that have transformed the experience of families in the UK. It is the labour market’s continuing strength that gives us cause for encouragement going forward. He, too, should take comfort from that.
Our economy is strong and stable. We have seen increasing resilience over the past decade in the face of a number of shocks. Britain used to be the first into recessions and the last out, but at the start of this decade we proved more resilient than any other major economy after, first, the bursting of the dotcom bubble and then the 9/11 attacks on the World Trade Centre. Britain was the only G7 country not to experience at least one quarter of negative growth in the years that followed.
I think that Britain is in a stronger position to deal with the challenges presented by the recent disruption
to the world economy than the hon. Gentleman suggested. We are in a far stronger position than we were in the early 1990s. Back then, unemployment topped 10 per cent., inflation hit nearly 11 per cent., and interest rates rose to almost 15 per cent. That was a hugely different position from the one that we see today after nearly 11 years of continuous growth under this Government and the largest rise in income per head of any G7 country. The differences between today and the early ’90s are just as clear when we consider average mortgage rates. Today, the average rate on mortgages is 5.9 per cent. In 1990, it peaked at over 15 per cent.
Britain is in a far better economic position today than it was in the early ’90s, and that is the main reason why I do not agree with the suggestion that the housing market is about to repeat the pattern that it followed then.
Julia Goldsworthy: I am listening carefully to the Minister. Does she therefore discount the evidence from Citizens Advice that the number of people coming to it expressing concerns about their ability to repay their mortgage is up a third on this time last year?
Jane Kennedy: Not at all. It is precisely because we acknowledge that anxiety that we are putting in place the steps that I shall come to shortly.
Chris Huhne: Will the Minister give way?
Jane Kennedy: I have already given way to the hon. Gentleman. Perhaps he will allow me to make a little progress on the housing market and repossessions, because he urged me to describe what the Government are doing.
After increasing by more than 10 per cent. in the year to August 2007, the signs are that house price inflation is declining relatively gradually, and prices are still higher than they were a year ago. We should remember that because of the economic stability over the past 11 years there are 1.8 million more home owners in the UK today than there were in 1997. Household wealth is also far higher than it was 10 years ago and total household assets are now worth more than £7.5 trillion—more than five times higher than the level of personal debt, which is growing at its lowest rate for around seven years.
Chris Huhne: Is the right hon. Lady not, however, concerned that the key indicator for an asset market such as housing is debt service? Is she not concerned that the personal debt service of households in this country—not merely capital repayments, but capital payments plus interest payments—is now at the same level that it was at the beginning of the 1990 to 1992 downturn? When she says that so far the fall in prices has been relatively modest, that was also the case at that point then. Will she confirm that fact?
Jane Kennedy:
I shall come to individual financial capability, but first I want to address one point in the Liberal Democrat motion. It reads like a “Focus” leaflet—or, rather, like a Victorian penny thriller. It is full of hyperbole with few facts. It maximises the fear
factor and does not let the truth get in the way of a good story. I shall give an example. The motion
“notes with concern that repossession orders are now at the same level as in 1990”.
If we look at the number of repossessions that are actually taking place, we see that that is not true.
Chris Huhne: Will the Minister give way?
Jane Kennedy: No, I have given way to the hon. Gentleman a number of times and I want to make some progress. Many other hon. Members want to speak in the debate.
The number of repossessions in Britain remains relatively small. There were just over 27,000 repossessions in 2007 compared with 75,000 in 1991, despite there being almost 2 million more mortgages today than there were then. Last year, the number of properties taken into possession was just 0.23 per cent. of all mortgages, which is about a third of the rate in the early ’90s.
Jane Kennedy: I can see that the hon. Member for North Southwark and Bermondsey (Simon Hughes) does not agree. I shall give way one last time and then make significant progress.
Chris Huhne: The key point is that we are talking about a leading indicator. Orders are a leading indicator of what will happen. The Minister insists on talking about actual repossessions, which are merely a backward indicator. I hope that Ministers can distinguish between leading and lagging indicators when they are attempting to manage the economy; it would be very worrying if they could not.
Jane Kennedy: What the hon. Gentleman has said about orders returns me to the point made by the hon. Member for North-East Bedfordshire (Alistair Burt), who rightly spoke of the impact of a change in the way in which the state supported people who faced mortgage and repayment problems. It meant that mortgage lenders had to be far more interactive in their dealings with people. That is exactly what happens. A court order does not necessarily mean that individuals lose their homes, and banks and building societies now try much harder to use repossessions as a last resort when dealing with people in financial difficulties. Indeed, the regulatory regime requires them to do so.
As I have said, both interest rates and mortgage rates are far lower today than they were at the start of the last decade, and have increased more gradually than they did then. I do not think it reasonable to compare the present position of the United Kingdom housing market with the position in the early 1990s. I also do not agree with the comparisons drawn by the hon. Member for Twickenham with the United States, where house prices are experiencing significant falls. In fact, there are three reasons to believe that the UK market is better placed than that in the United States.
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