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There were two bad judgments in 1997. The first was the creation of the tripartite arrangements between the Treasury, the Financial Services Authority and the Bank of England, which were insufficiently clear and allowed the banking crisis to come upon us without sufficient recognition by the FSA. The removal of the supervisory role from the Bank of England was, in my opinion, a mistake. Through the Treasury Committee, I have urged
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that we should try to distinguish between the regulation of banks, which is the responsibility of the FSA, and the supervision of banks, which in my opinion should be the responsibility of the Bank of England, because only the Bank of England has the necessary close, hands-on ability to deal with banking problems. We are talking about the movement of the Governor of the Bank of England’s eyebrows, and the quiet persuasion that the Bank is capable of exercising.

The second bad decision taken in 1997 was the tax of a net £3 billion on pension funds imposed by the Chancellor of the Exchequer. Some of my colleagues call it a £5 billion impost, but in fact it was a £3 billion impost, and it was not the main cause of the problem in the pensions industry. In order, the causes were, first, increased longevity, which was not recognised by the actuarial profession, secondly, stock exchange weakness and, thirdly, the tax imposed by the Chancellor of the Exchequer. That led, however, to the closing of many final salary schemes, which in turn led to many people thinking that instead of saving through a pension, they could save through house values. They looked to house prices as a store of money, which, in due course, they could rely on to fund their standard of living in retirement. I am afraid that that will prove a very serious problem, because people in their 40s and 50s cannot begin to hope for the standard of living in retirement that many pensioners currently enjoy.

Those were the mistakes of 1997, but things really began to go wrong in 2000, when the Chancellor of the Exchequer gave up on prudence and loosened the spending taps. Spending was up, and much of it was financed through stealth taxes—the definition of which is that they are concealed from individuals, who are not meant to notice them—which have a distorting effect on the economy. The weakness that was building up was masked by an extraordinary world tailwind of prosperity caused by globalisation. The prosperity of the Asian tiger economies, followed by the so-called BRIC economies—Brazil, Russia, India and China—combined with the benefits of globalisation, led to the symptoms of our problems being masked, and we did not realise how bad the situation was becoming.

Even so, it became necessary for the Government to fudge the figures on the fiscal rules, which depend on the economic cycle. In July 2005, we were told that the cycle began in 1997, not 1999. In 2005, in the pre-Budget report, we were told that the cycle would end in 2008-09, not 2006. Later, in the 2006 pre-Budget report, we were told that the end date would be 2007, not 2008-09.

The fiscal rules are intended to take into account the difference between generations. In the 1999 Budget, I think, the Chancellor defined what that meant: the Government do not pass on the costs of services consumed today to the taxpayers of the future—each generation is expected to meet the current cost of the public services from which they benefit. That is a laudable intention, but it does not work, and it is distorted by two factors. First, private finance initiatives are not taken into account in expenditure, and expenditure is treated as coming from future revenue, not current capital. Secondly, public sector pensions are largely unfunded, and that huge liability is also regarded as a duty of future revenue streams. In addition, Northern Rock is not included in public debt, and personal household debt in this
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country is 177 per cent. of disposable income—the highest in the world—which shows that there are problems to come.

What do we do now? I am not an enthusiast for Government initiatives, but the situation surely needs a lead. My first principle is that this is no time for laissez-faire. My second principle is that initiatives must be on an international basis, so I welcome the international meetings taking place today. It is obvious that we cannot find our way out of this by ourselves, especially as the economy in this country is in a less good position to cope with the problems than those of many other countries. Therefore, we must have international co-operation.

My third principle derives from what happened with Lloyd’s of London, which I think is the nearest analogue to the present situation. I was very much involved in the Lloyd’s of London rescue—I was one of the four members of the Lloyd’s audit committee. What we did then was draw a line between bad and good assets, and I think that, somehow or other, the same needs to be done now. That is why I am so opposed to the Paulson plan in the United States. Henry Paulson proposed a $700 billion fund to buy toxic assets at more than their market value, thus pumping money into the banking system. I think that that is completely wrong, because it goes against the principle of moral hazard and also leads to the impression that there is a rescue fund of $700 billion.

During the discussions on the Paulson plan, we heard many Congressmen say that they wanted some of the $700 billion for people in their constituencies. That is completely the wrong attitude. There is not a fund to be shared out; rather, there is pain to be shared. We must find ways of coming together and establishing how that pain can best be shared between those who can afford to share it and those who should bear it, because my next principle is that we must respect the importance of moral hazard—those who have taken the risk must bear a proportionately higher share of the pain.

My fifth principle is that, as we all know, borrowing short and lending long is sustainable only if there is confidence. That confidence must be restored, and I see no reason why it should not be restored. There is much that is good in the economy—we must bear in mind that even Hitler could not stop the daffodils growing. What we must do, having cauterised the toxic elements, is move on, restore confidence and work with the good elements in the economy.

Kelvin Hopkins: I agree with much of what the hon. Gentleman is saying. There are some good elements in the economy. Is not one of our problems the fact that we have allowed the manufacturing sector to decline and now have a gigantic balance-of-trade deficit in manufactures and goods in general? We must rebuild that sector of the economy, rather than relying wholly on the financial sector, as we have for so long.

Sir Peter Viggers: I am aware of that argument, but it is actually very difficult to distinguish between the manufacturing and service sides of industry. For instance, as a result of CAD/CAM—the integration of computer-aided design and computer-aided manufacturing—much of what was manufacturing has been taken over by people sitting at desks with computers.

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I remember taking part in exactly those discussions in the Treasury when Nigel Lawson, then Chancellor of the Exchequer, did not want to know about the distinction between the manufacturing and service sides. The point was made most effectively at a CBI conference, when one of the delegates said “People talk all the time about the service sector—servicing what?” Manufacturing is, at root, the dynamo of the economy, but, given globalisation, the distinction matters less. If there are jobs that have value added greater than the manufacturing sector, it is logical that manufacturing should stay in the lower-paid parts of the economy. I do not think many people would suggest that we should try to repatriate heavy shipbuilding from Korea and China. The hon. Gentleman has made a good point; an allied point relates to our independence and our ability to remain independent without being sucked too much into global markets.

Kelvin Hopkins: I accept much of what the hon. Gentleman has said, but does he not agree that a strong comparison can be made with Germany, which has retained much of its manufacturing and a balance-of-trade surplus in manufactures, but whose economy is, in other respects, very similar to ours—it is of a similar size, for instance? Would it not have been better to go some way in the German direction and retain some of our manufacturing base, rather than letting all—or much—of it disappear?

Sir Peter Viggers: How do we retain our manufacturing base? Do we impose import duties to prevent the import of cheap products? We have been served exceptionally well by globalisation, and we have been served very well by the ability to import products from other countries that can manufacture them more cheaply than us. We have concentrated more on the financial sector than on manufacturing—and I think that the Germans would be deeply envious of our financial sector, which has also served us exceptionally well. This is part of a much broader discussion. The hon. Gentleman makes a good point, but I do not go very far along the road with him. I reiterate, however, that there is much of good in the economy.

My sixth point is a minor one, but it is significant in some circles. The Government must use their influence to ensure that the remuneration of anyone working within banking and other sectors is proportionate to their duties. They must use their influence to ensure that banks and other financial institutions set their remuneration at levels that do not affront other people, because there is a lot of anger out there among people who see that bankers have got them into this mess and now bankers are being rescued. Levels of remuneration should be set at tactful levels.

Mr. Graham Stuart: I am interested to hear my hon. Friend’s arguments, but I do not know what he means when he refers to the Government trying to influence the City. Does he not fear that if they were to intervene in such a way that the highest earning bankers and financiers in the world did not see London as a suitable place in which to base themselves, the bankers and financiers would not cease to earn astronomic sums but would simply earn them elsewhere, with a great loss to the British Exchequer?

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Sir Peter Viggers: Indeed, but bankers and others must realise that the levels of remuneration are causing offence in some areas, and they must be more tactful about the manner in which they handle their remuneration. That would be my solution.

My seventh point is a minor one, which is not to make things worse. That follows Denis Healey’s rule on holes, “When you’re in a hole, stop digging.” Yesterday, the House in its wisdom passed on Second Reading the proposals on dormant accounts. Those proposals will actually result in banks’ capitalisation being reduced, which is exactly the worst thing that we could possibly do at this particular moment. I hope that the Dormant Bank and Building Society Accounts Bill makes extremely slow progress, and if it should founder at some point, or be delayed indefinitely, that would cause me no distress.

My final point is that I heartily concur with the main thrust of the comments of my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) from the Front Bench about the office for budget responsibility. The Chief Secretary sat down before I had a chance to do so, but I was going to ask her whether she had read the carefully researched and heavyweight report of the Treasury Committee entitled “Banking Reform”, because the Treasury Committee, having taken detailed evidence over a long period and given this matter considerable thought, came to the conclusion that there should be a financial stability committee, which is very similar to the Conservative proposal.

I was going to ask the Chief Secretary whether she had read the report and concurred with the Treasury Committee’s views on this point. However, the Financial Secretary has now rejoined us—he has recently rejoined the Treasury Front-Bench team, where he has served before with great distinction and a great knowledge of the subject. I would be most interested to hear from him the answer to the question that I was going to ask the Chief Secretary. Has he had a chance over the past few days to read the Treasury Committee’s report, and does he agree with the conclusion that there should be a financial stability committee? If so, why does he agree with that idea and not with the ideas of the Conservative party?

5.13 pm

Mr. Mark Todd (South Derbyshire) (Lab): My age means that I reflect back on some of these subjects with perhaps more distance than the hon. Member for Runnymede and Weybridge (Mr. Hammond), who spoke for the Opposition. I am not sure whether he is in fact younger than me; perhaps he is, but his memory certainly seems shorter.

It is worth reflecting on the original purpose of the fiscal rules when they were drawn up in 1997. They, together with the step of providing independence to the Bank of England, were intended primarily to provide reassurance to the market of the discipline of an incoming Labour Government. That was then reinforced by a variety of actions. The right hon. and learned Member for Rushcliffe (Mr. Clarke) has departed, temporarily one hopes, but he will bear out the rigid adherence to the previous Government’s spending plans—which he, I think, confessed he would never have attempted to adhere to himself. Thus, the first two years of this Government were a landmark of hairshirt discipline,
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which many Labour Members found uncomfortable to wear. That bears some relevance to the history lesson that the hon. Member for Runnymede and Weybridge gave us, because this Government started with a rigid adherence to both of the rules that we are supposedly discussing this afternoon and to the tight controls on Government spending imposed by an election pledge. That was in place for a purpose, which I believe most Labour Members bought: we needed to make clear our intentions to a wider community than just the Labour party, and I think our approach worked.

If a further message were needed about that stern discipline, it was sent in the decision to set aside the one-off benefit from the sale of mobile telephony licences to pay off a proportion of the national debt, instead of using that money—as undoubtedly the previous Government would have, given their approach to the disposal of national assets—to fund ongoing expenditure. Although the decision that that extraordinarily large sum should not be used to fund any current expenditure or infrastructure investment but instead be set aside purely to reduce ongoing debt obligations was again greeted with concern by some Labour Members, the message was clearly understood, both in this House and outside: this Government were serious in their endeavour to maintain tight control over spending and over the uses they made of any proceeds of assets sale.

That message was clearly understood by the markets at large. I do not want to be too partisan, and I shall address some of the unfortunate elements touched on in the hon. Gentleman’s speech, but it is fair to say that the approach was also intended to be a counterpoint to the virginal approach to fiscal discipline of the previous Government. I mean “virginal” in the sense that such discipline was wholly absent, not that it was guarded with some determination. The previous Government’s approach led to record borrowing in the early 1990s, which, to be fair to him, the right hon. and learned Member for Rushcliffe sought to address over his chancellorship—the Prime Minister continued the task in the early years of this Government.

That absence of a fiscal framework, or any framework that one could speak of with any authority, was of course mirrored in the previous Government’s approach to monetary policy. I cannot remember the details because they change so frequently, but quite what measurement of monetary expansion we were supposed to be following at any time appeared to vary according to the whim of the Chancellor, Prime Minister or Prime Minister’s adviser. The firm intent in 1997 was to set some of this experience behind us and to demonstrate a purpose and a clarity that had been wholly absent from the past.

However, one must then explain a subsequent period—somewhere between 2000 and 2005—when it is fair to say that there was a significant loosening of discipline. I am retiring from this House at the next election, so I can probably be fairer than others sometimes might be. I had to pop out of the Chamber towards the end of the contribution of the hon. Member for Twickenham (Dr. Cable), but I noted what he said about the structural deficit that emerged during that time, and I agree with him. I shall go on to explain why that happened, but the trend was clearly emerging during that period and was not addressed. There is no doubt that the failure to address it was partly a political choice. My right hon.
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Friend the Chief Secretary set out the priorities of the Government during that time, and I too had classrooms held up by pit props, infant children having to use outside toilets and other horrors of public provision that are, thank goodness, behind us—certainly in my constituency and, I imagine, virtually every other constituency. The imperative for change was evident, and I can well understand the pressure on the Government to deliver higher public spending, together with the public pledge that had been made to respond to relatively low levels of health service spending set against the European model.

I stand to be corrected, but it is my opinion that the difficulty that occurred in that period was more due to over-optimistic projection of revenue than to poor controls on public spending. The Treasury Committee has noted on several occasions that revenues, and especially tax streams, tended to be overestimated consistently, without anyone analysing properly why. I do not have an immediate explanation, although oil revenues tended to show huge variances. People said that they could be explained by this or that happening out in the North sea. I shall not venture into that territory, as I am ignorant about it, but one area that deserves further scrutiny is income from corporation tax. I suspect that this country faced increased competition in corporate taxation over a long period.

Both under the previous Conservative Government—to some extent—and certainly in the first years of the Labour Government, this country had significant advantages in the taxation of corporate bodies. We have not lost those advantages, but the balance has shifted over time and some of those subject to corporation taxation—depending on the business model adopted—suited other environments better. We have not studied carefully enough how that has happened and the effect that it has had on the underlying revenue streams on which we must rely.

That underlying deficit was perhaps made more acceptable by its occurring during a period of above-trend economic growth, but it was not acceptable to say that because the economy was growing strongly—as it certainly was at that time—we would just live with the unexplained deficit. In one of the many good reports it produces every year, the Treasury Committee gives tables that show the steadily changing forecasts for each revenue year over a long period, and the consistent trend is that the figures deteriorate. The reality does not come anywhere near the projection: it is almost uniformly worse. That should have rung alarm bells. It did so in the Committee, but perhaps we did not set the alarm bells ringing loudly enough. It is certainly true that the Government received regular reminders of the emerging picture of poor performance against projections in public sector discipline.

We have also had—this has been debated pretty extensively already—a situation in which the two published fiscal rules have been increasingly forced around the realities before us. I would not say that the rules have been bent, but we have certainly taken the evidence that is sitting in front of us and said, “Well, if you look at it this way, that way and then the other way it looks as if we are still just about there.” To some extent, there was
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a desire to fool ourselves, rather than using what the fiscal rules provide, and I shall come back to the value of those rules.

The fiscal rules are more of a prompt for scrutiny of the underlying issues in the economy than anything else. I personally do not think a 0.5 per cent. variation in one of the rules makes any material difference in economic terms, and obsession with a precise 40 per cent. figure does not help us a great deal. However, the rules should prompt people to ask questions about what the trends are and in what direction we are travelling. I do not think that those questions were asked robustly enough during this period. The difficulty with this tweaking approach and of tying the rules to economic cycles is that one relies incredibly on data that are provided to us on economic performance.

The other consistent message I have seen throughout this period is that quite sharp changes in data are frequent—for example, changes in the projection of what happened in terms of economic growth are not at all uncommon through this period. Those are often changes not merely of the odd 0.1 per cent. but of quite material amounts. That is true in other areas of data related to the targets.

Let me turn to the picture presented by the Opposition, because I have possibly earned a few hits by being fairly candid about what I think some of the problems have been. I honestly cannot see the merit—I confined my interventions to two rather narrow technical issues, because I was not going to question the politics—of the “wise men” proposal as it has so far been set out by the Opposition. Without any idea of the mandate that those people will have, the approach is of little value. One of the other critical points is how the body will interface with the parliamentary systems of scrutiny and with the role of the Office for National Statistics, which, as I sought to remind the hon. Member for Runnymede and Weybridge, makes objective judgments about the placing of investments on or outside the balance sheet of our nation. There was little development of that idea from which one could hope to make a reasoned judgment about whether it would be a valuable initiative.

I am uncomfortable with the idea—even though I am leaving this place, and so by implication might agree with it—that the thrust of the proposal appeared to be that politicians are not of a great deal of value in the process and are not to be trusted, and that we should place economic policy very firmly in the hands of some supposed experts. If we will have to learn one thing from what has happened in the past six to nine months, it is that experts have their faults too. Forecasting the future is a pretty chancey activity and even understanding the present is pretty tough. I am an historian, and that is why I choose to look at the past. It is hard to see what those people would bring that well-informed and well-resourced support for a parliamentary system of scrutiny might not do better. I would encourage some thought in that direction.

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