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“notes that the purpose of the fiscal framework is to smooth the path of the economy in the short term, to secure sustainable public finances in the medium term and to ensure that spending and taxation impact fairly between generations; recognises the success of the framework over the past decade, reversing historical under-investment in the infrastructure of public services, reducing
debt from 43 per cent. of GDP in 1997 to below 37 per cent. last year and allowing borrowing to increase this year in order to support the economy; welcomes the £4 billion of tax cuts helping families and businesses this year; further notes the turmoil in the world economy and financial markets; recognises that Government is rightly focused on the turbulence in the financial markets and helping families and businesses with the twin shocks of the credit crunch and high commodity prices; and welcomes the Government’s commitment to take whatever steps are necessary to protect the stability of the financial system.”
This is the first Opposition day debate since the House returned after the events of the summer. Given the wider economic events that we have seen, it is perhaps a surprise that the Opposition have chosen to focus on the fiscal rules rather than on the overall events in the world economy. The House will have a chance on Thursday to discuss more widely the events in the economy, and we have also had yesterday’s statement from the Chancellor.
The fiscal position is of course affected by those major world events. The Chancellor’s statement made it clear that we are continuing to see significant turbulence in the global financial markets, and there is also continuing pressure on financial institutions across the world. That pressure has been evident in Iceland today, and in other countries too.
We have already provided support across the system, such as through the special liquidity scheme and the actions of the Bank of England, and we have also taken action on individual banks that have got into trouble—for example, in the cases of Bradford & Bingley and Northern Rock. It was unfortunate that Conservative Members opposed and continue to oppose the action on Bradford & Bingley and Northern Rock. Had we not stepped in to support those two institutions and to take action, there would have been massive consequences for the financial stability of the British banking system and serious problems for the economy, for the public finances and, in particular, pressure for individual savers across the country. It was right that we should step in to support them.
As the Chancellor said yesterday, there has been considerable speculation about capital and the banking sector in recent days. In examining options for restoring stability to the banking sector, it is right that we look at every aspect—liquidity, capital and regulation—with other countries and, of course, with the financial sector itself. That process is continuing and we will update the House at the appropriate time.
Mr. Graham Stuart: Does the Chief Secretary now accept that liquidity rules were too loose in previous years, and that any changes made to those rules in future must ensure that they are not tightened at the wrong time?
Yvette Cooper:
In fact, the action being taken by the Financial Services Authority is to look at the need for regulation on liquidity and not simply on solvency. Its report in the light of the events of last summer made that clear, and it is right that it should do so. We have needed to provide considerable additional liquidity support across the system. It is probably also right to say that there were not sufficient assessments of liquidity risks internationally and between countries, as well as of the work that has been done by the FSA. Members on both sides of the House will recognise that events in the
world financial markets have the potential to make a significant impact on the world economy, not just for the next few months but in many ways for years to come.
In the circumstances, it is perhaps bizarre, and certainly irresponsible, for Opposition Members to try to pretend that the world economic events we are witnessing are simply a result of UK Government borrowing. In a recent interview, the shadow Chancellor said:
“The causes of the problem are not the financial markets.”
The hon. Member for Runnymede and Weybridge (Mr. Hammond) has just told the House that lack of fiscal discipline is the root cause of the problems we face. That is economic illiteracy. Forget sub-prime lending in the US mortgage markets; forget the collapse of Lehman Brothers or the hugely complex bundling of toxic assets from the US; and forget the volatility in the money markets or the responsibility of international bankers. According to Opposition Members, the problem in the international markets is simply the level of UK Government borrowing and debt. I have to say that that view is utterly irresponsible and if Opposition Members do not understand the problem, they cannot be trusted to take the right decisions on how we deal with it and how we solve it to go forward.
Mr. Kenneth Clarke (Rushcliffe) (Con): If the right hon. Lady looks up the last three Budget debates, she will find that I always pointed out that the level of growth we were still enjoying was sustained by a bubble of Government and household debt, and that it was unsustainable. She will see that the reply of Ministers was to treat that with total disdain. Indeed, they claimed credit for the prosperity that was flowing from the boom, which was the product of their own remarkable economic policies. They denied the need to take action against such things as 140 per cent. lending on the value of houses or six times earnings when people certified their own earnings. They took credit for the boom, but they never saw the bust coming and circumstances in the UK are as bad as they are in the United States because of the Government’s complacency.
Yvette Cooper: I have to point out to the hon. Gentleman—[Hon. Members: “Right hon.”] —the right hon. Gentleman—[Hon. Members: “And learned”.] —the right hon. learned and hugely fantastic Gentleman. I have to point out that in the 11 and a half years since he was Chancellor of the Exchequer, a lot of things have changed in Britain. In particular, our country was bottom of the G7 when it came to national income per head of population when he left office, but it is now the second in the G7 as a result of decisions that the Government took and the investment and economic stability that we experienced. We face significant world economic problems as a result of the dodgy lending that started in the US mortgage markets, the bundling of assets round the world and back again, and a lack of understanding of where risks lay, not just in the banking sector but among credit rating agencies and regulators.
Mr. Heald: Will the Minister give way?
Yvette Cooper: I am conscious of the fact that the debate is on fiscal rules, and I am trying to get on to the subject, but I give way to the hon. Gentleman.
Mr. Heald: The Chancellor yesterday told us that a number of building societies had unsustainable business models, and now had to be bailed out. Why was that allowed to happen? Why did not the Government, or a regulator in Britain, do anything about it? Why is the OECD saying that we have over-borrowed? Surely the Government have made some mistakes. Can the Minister not point to just one mistake that they have made?
Yvette Cooper: The hon. Gentleman misunderstands the issues to do with the economy, either deliberately or otherwise. He is confusing different kinds of borrowing and different kinds of debt. I understand that he has a political interest in doing so. He simply wants to muddy the waters and pretend that the private-sector credit crunch is somehow the result of public-sector debt. That is economic illiteracy, and it is simply not the case. The problem is not simply inexperience on the part of the Opposition. I do not think that their misjudgments in the cases of Northern Rock or Bradford & Bingley are simply the result of inexperience; opportunism and ideology are also involved. They want to claim that market problems are all the result of failure on the part of the Government, but that blinds them to the fact that sometimes we need Governments to step in to deal with the failure of markets, just as this Government did in the cases of Bradford & Bingley and Northern Rock. The hon. Gentleman’s party repeatedly opposed our doing so, despite the serious risks that might have resulted for the financial system and the economy.
Mr. Bernard Jenkin (North Essex) (Con): The right hon. Lady said that the Government would take action at the appropriate time, but a growing number of people are beginning to ask, “When is the appropriate time?” Are we just waiting for events to take hold of the agenda, while asset prices carry on falling, because the banks remain incapable of resuming normal business? Is not the urgent priority to recapitalise the banks? That will not happen on its own. It will require some form of Government intervention. When is the appropriate time? When will the Government be in a position to make an announcement?
Yvette Cooper: As the Chancellor said yesterday, we are, and have been, looking at a wide range of options for support of the banking system, and we will continue to do so. We have rightly already taken action across the board with the special liquidity scheme, and are dealing with particular pressures that arise. When we think that further action is needed and further measures must be introduced, we will say so, but it is irresponsible for people to speculate on the pros and cons of particular measures. It is right that we should take measured judgments and do the right thing to support the markets, given the instability and turbulence that we have seen.
Kelvin Hopkins: My right hon. Friend is quite right to say that at times of great crisis, the Government should take a major role in the economy and in the financial sector. Does she agree that one great success has been the nationalisation of Northern Rock—so much so that people cannot make new deposits, as it has ceased to take them? People on television are saying, “I want to put my money into a publicly owned bank because it is secure.” Would it not be wise to spread nationalisation across the whole banking sector?
Yvette Cooper: Certainly, when I was first appointed to the Treasury at the beginning of the year, I did not expect that the first parliamentary Act that I would take through the House would nationalise Northern Rock. I think that it was the right decision to take. It would have led to considerable financial instability if we had not taken it, and that would have jeopardised confidence right across the banking system. It was the right thing to do. Faced with the unprecedented events that we have seen right across the globe, Governments have had to be prepared to take unprecedented action. That is the right thing to do under the circumstances.
The debate is about the fiscal framework and I shall make a few points about that. Before 1997, there was no fiscal framework in place at all. Decisions were taken from Budget to Budget according to no clear and consistent approach. To the extent that principles were set to guide fiscal policy, they tended to change from one year to another. In 1992, the objective was a balanced Budget over the medium term. In 1993, the proposal was to move back towards balance over the medium term and borrow no more than net capital spend. In 1994, as the right hon. and learned Member for Rushcliffe (Mr. Clarke) will remember, the position changed again and there was no reference to borrowing. Such change from one year to another provided fiscal instability that was bad for the markets, as well as for the approach to the public finances.
In 1997, we introduced a new fiscal framework and legislated for the code for fiscal stability, based on the five principles of transparency, stability, responsibility, fairness and efficiency. Within it we set two fiscal rules to cover borrowing for investment and the level of debt. The consequence of that framework is that between 1997 and 2007, borrowing peaked at just 3.3 per cent. and ran at an average of only 1 per cent. Compare that to the previous 10 years, when borrowing peaked at 7.8 per cent. of GDP and averaged 3.1 per cent., and the 10 years before that, when borrowing peaked at 5.1 per cent. and averaged 3.6 per cent. Over the previous two economic cycles, average borrowing was more than three times as high as it was over the last economic cycle.
Mr. Philip Hammond: So if the fiscal rules are so effective, can the right hon. Lady confirm that they are not about to be junked?
Yvette Cooper: As I am due to say, we will set out the position on the fiscal framework at the pre-Budget report, as the my right hon. Friend the Chancellor has already said. It is worth recognising again the impact that the fiscal framework has had. The discipline imposed on the public finances by the framework has seen debt cut from 43.3 per cent. in 1996-97 to 36.6 per cent. in 2006-07. Debt in the UK is lower than in every country in the G7 bar Canada, so we are the second lowest in the G7 in terms of our public debt, and it is lower than the EU average as well. That is precisely why we can borrow more now, and why it is right to borrow more now in order to get our economy through the tougher times ahead.
Adam Price:
I am not sure whether I suffer from the economic illiteracy to which the right hon. Lady so often refers, but perhaps she could help me out. As The Times
editorial pointed out yesterday, most independent commentators are predicting for the financial year beginning 2010 borrowing between £90 billion and £100 billion. Even the Institute for Fiscal Studies is quoting a figure of £60 billion, which is twice the figure that the Treasury is still maintaining. Surely the collapse in corporate tax receipts, which is an inevitable outcome of problems in the financial services sector, should be factored in, or is there something that I do not understand.
Yvette Cooper: The hon. Gentleman is right to say that the economy has an impact on the public finances, so, for example, the reduction in receipts from stamp duty or from the financial sector will, of course, have an impact on tax revenues this year. We will set out the next forecast for borrowing and for the public finances at the pre-Budget report. As he knows, we do so twice a year as part of the Budget and as part of the pre-Budget report. That is the normal practice for reporting to the House and for ensuring that we have appropriate forecasting and fiscal stability in place.
It is worth recognising, too, that the fiscal framework has protected public investment. Under the previous Government public investment reached a low of just 0.3 per cent. of GDP in 1988. As many of us know from our constituencies, that left a legacy of decaying public services and infrastructure. I remember that on one of my first visits to a primary school in my constituency, staff showed me where they put the buckets to catch the leaks from the Victorian roof, and I remember talking to the residents of one of the council estates in Pontefract, where they showed me the metal windows that rattled and the tiles that had blown off the roof—part of the £19 billion backlog of repairs and maintenance to Britain’s council houses.
The Conservative party did not fix the school roofs, the council house roofs or the hospital roofs. Under this Government, investment has grown by more than three times the 1997 level to 2.2 per cent. of GDP this year, and that sustained investment has allowed us to invest in the council homes, new hospitals, schools and transport infrastructure that we badly need. That is not just about mending the roof in the sunshine; it is about being still up there mending the roofs through rain, wind and stormy weather as well.
Mr. Graham Stuart: Will the Chief Secretary tell the House whether borrowing today is lower or higher than the borrowing level that she inherited when the Government came to power in 1997?
Yvette Cooper: It is important that we should increase borrowing this year as a result of the need to support the economy in difficult times, and it is right to do that. Opposition Members who call for cuts in borrowing when the economy is under such pressure from international problems frankly misunderstand the nature of the economic pressures that we face and the serious problems that it would cause for the hon. Gentleman’s constituents if we were to cut borrowing at such a time in the way that he seems to be advocating.
We have said clearly and repeatedly that the fiscal rules should be reviewed at the end of the economic cycle. Most commentators believe that the cycle ended in 2006, and we will provide detailed analysis of the fiscal position in the pre-Budget report. But as I have
made clear, it is right to increase borrowing this year and next to respond to the economic shocks that we have faced. These are unparalleled in scope and scale because we have had the commodity price shock and the credit crunch at the same time. Who would have thought that the US Government would need to step in and end up backing half the mortgage assets in America through Fannie Mae and Freddie Mac. That alone is the equivalent to the national income of France and Italy put together.
Mr. William Cash (Stone) (Con): The Chief Secretary has just referred to debt and mentioned the figure for 2006-07 as being 36 per cent. In fact, on 30 September, the Office for National Statistics, which is now independent, issued its own assessment, and it says that the amount in question is a minimum of 43 per cent. and that if Northern Rock is included, which is about to be rerouted under new rules, at the end of 2007, it would be 46 per cent. Is not the right hon. Lady’s estimate not out by something of the order of 10 per cent.?
Yvette Cooper: As I have made clear, it is right that we should take unprecedented action to support the financial stability of the economy. We have done so with Northern Rock, and the ONS has made it clear that it is right to look at public sector borrowing and public sector debt, including Northern Rock, but also separately from Northern Rock. All sensible economic commentators have done exactly the same. The position of a temporary nationalised bank, which will be returned to the private sector with the assets that it has to back that lending, is clearly very different from the kind of current expenditure that we deal with in public services on a day-to-day basis. If the hon. Gentleman is arguing that that should be treated differently, again, he misunderstands the economic consequences.
The hon. Member for Runnymede and Weybridge took some time to present to us what he said would be his alternative framework, and he claimed that it would be the most credible and responsible in the entire world. That is simply not true. The Opposition’s proposals are far from clear. They have proposed an office for budget responsibility to apply a mandate. The trouble is that they have not been clear about what that mandate would be. It is not clear whether this is about a fixed end-of-forecast period or a rolling end-of-forecast period, and that makes a huge difference. It is not clear whether this means borrowing goes up or down or that debt goes up or down. The mandate that they have set out could mean any of those things. Either the office for budget responsibility will have an awful lot of power to decide what in practice fiscal policy should be, or it will be extremely confused. I suspect that the answer might be the latter, because it is hard to understand what Conservative Members are calling for. They have said that they want to share the proceeds of growth, but also that that means simply sticking to the Government’s spending plans, which their leader has repeatedly called “very tough”. They say that they want to rein in borrowing—they used the phrase repeatedly last week—yet at the same time they say that they want to cut taxes and increase spending.
If we consider the Conservatives’ pronouncements of even the past seven days, we see that they have been arguing for a discretionary fiscal loosening to the tune
of tens of billions of pounds, which would come in addition to the consequences of the current economic circumstances on the public finances. Only last week, the shadow Chancellor published a document that included tax cuts for millionaires’ estates, which would cost £2 billion; ending the so-called couple penalty, which would cost £3 billion; measures on stamp duty that would cost £400 million; a council tax proposal, which would cost a further £1 billion; high-speed rail links, which would cost £1 billion a year; 4,000 extra health visitors; and 1,000 new academies. However, the number of identified ways in which the Tories would cut spending or cut borrowing was zero.
Within 24 hours of proposing an office of budget responsibility, the party of the hon. Member for Runnymede and Weybridge had spent, we reckon, an extra £200 million an hour in increased borrowing on top of what is happening at the moment. So much for budget responsibility. The Leader of the Opposition and the shadow Chancellor have been keen to tell us all about their undergraduate education in economics. However, even with that education they cannot see that their sums just do not add up. Such fiscal irresponsibility would be bad for the economy and the markets.
Kelvin Hopkins: I agree with the tenor of what my right hon. Friend is saying. If there comes a choice between a serious rise in unemployment and a rigid, formulaic approach to the fiscal stance, will she make sure that unemployment—and not the fiscal stance—are her priority?
Yvette Cooper: We are clear about the need to support jobs in the economy and it is important to do so. It is also important that we run sound public finances, and that is what we have done and will continue to do. That includes being able to increase borrowing this year, exactly because we have cut debt in the past 10 years as a result of the decisions that we have made. It is because we have one of the lowest levels of public sector debt in the G7 that we are able to increase borrowing this year, and that is the right thing to do to support the economy.
I say to Conservative Members that to cut borrowing this year and next, as the hon. Member for Runnymede and Weybridge seemed to suggest, would simply be irresponsible. While private sector borrowing is under such pressure, it is right that the public sector take some of the strain to support the economy through the difficult period.
Mr. Philip Hammond: I just want to nail that one. If the Minister checks Hansard tomorrow, she will see that I specifically said that no sensible set of fiscal rules would suggest reducing borrowing at this point of the cycle.
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