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Let me turn to some final points. One issue of difficulty has been the statistical base from which we have tried to shape our economic policy. The Government deserve huge support for the step that they have taken in that regard, and they should be encouraged to go further. They set up the independent Office for National Statistics, which has already started to cause a problem. That is
good and right, as we should have a robust debate about the statistics that we prepare. Arguably, as I have said, we have suffered relative poverty in that area, with some degree of complacency. We now need to resource that independent ONS better.
I noted, and was worried by, the concerns expressed by the Bank of England about the quality of the data used for its decisions about setting interest rates. I think that my honourable colleague on the Treasury Committee, the hon. Member for Gosport (Sir Peter Viggers), will also remember those concerns, and we should listen to them very closely. I do not question the professionalism of the ONS at all, but we need to make sure that judgments about economic policy are made on the basis of information that is as up to date, robust and well founded as we can make it. I think that that has not yet happened.
Another point is that I think that we probably need a mutually agreed target, although I am not sure that rules are appropriate. As I have said, rules really exist to make us ask questions about what has happened, and we should not obsess about our adherence to them. I should prefer a system that tackles the point raised by the hon. Member for Twickenham. I do not know whether he is right honourable, although he is very honourable. He said that when we spot an underlying budget deficit, we should have a degree of discipline to address it, and that that should be a political process.
It is not a technical issue, and we need to have a robust debate about why such a thing has happened. There are choices here: if I am right in saying that one of the problems behind the current difficulty was a drift in corporate tax revenues, we should debate how that should be addressed. That is a political judgment, and we as parliamentarians collectively should accept the result of that debate as a discipline for the future.
Stewart Hosie (Dundee, East) (SNP): How would that work? For example, we have seen PFI liability rise inexorably over the years to £190 billion for £60 billion of capital. We have seen the balance of trade deficit rise to £87 billion, and we have also seen a quarter to half a percent. suppression of GDP growth every year for eight years. Such matters have been highlighted and commented on by hon. Members in this House, but will he explain how we can do what he wants and consider them fully without indulging in the usual bun fight about how things are better than they were under the previous Administration?
Mr. Todd: The basic answer is that we need to act like grown-ups. Incidentally, the hon. Gentleman raises two points, to each of which I would give a different answer. I have a view about how trade deficits correct over time. We should debate in an adult way in this House an underlying budget deficit that lies relatively firmly under our control. I have no problem with the fact that there will be political disagreements about how we should tackle such a problem, but it is a subject that should at least be discussed properly so that we can attempt to agree our goal. It is not acceptable to run a budget deficit in a time of boom in the knowledge that it will not be corrected by any action taken in that time.
I was disappointed by the tone of the hon. Member for Runnymede and Weybridge. He started off the debate as a pretty familiar bun fight, and he took the
opportunity to kick the Government around, but there are plenty of past errors to be shared around. There is certainly no saintly Conservative past on which we can reflect. There is plenty of hindsight to be shared around, too. Few of us spotted the terrible events that we face. We had inklings of some of the problems, but not their scale or the direction from which some of them have come, so it ill behoves the hon. Gentleman to have been apparently so arrogant and wise on these matters.
There is much more to be done in building consensus. By and large we have protected the independence of the Bank of England and the operation of the Monetary Policy Committee as an area of relative political consensus. There are some worrying signs—here I criticise the hon. Member for Twickenham, whose opinions I share on some matters—but generally speaking there is shared consensus on the merit of the decision taken and the discipline it has imposed. I wish we could extend that to more adult discussion of these matters, which is why I looked for more from the Opposition than I received this afternoon.
5.35 pm
Mr. William Cash (Stone) (Con): When we speak about financial discipline we are also talking about the confidence of the City and those who assess the relative market performance of a country. One of the things lying at the heart of the issue of confidence is whether proper financial disciplines are in operation in the financial affairs of a given country. I certainly take the view that the proposals of my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) to achieve a financial stability framework are in principle a very good idea. In addition, I firmly endorse the fact that any such arrangements must hold the Executive to account.
When we are talking about sound money, however, we have to look at what has led us into our current situation. One of the features that intrigues me greatly, which was alluded to by the hon. Member for Twickenham (Dr. Cable) and which I followed up in an exchange with the Chief Secretary when she was in the Chamber, is the extent to which we are being sensible in relation to our indebtedness—general Government gross consolidated debt—and its relationship to gross domestic product. I referred to the Office for National Statistics figures released on 30 September and pointed out that the figure of 36 per cent. given by the Chief Secretary—I am happy to be corrected by the Financial Secretary if I am wrong—was in fact 42 per cent. at the end of March 2007, according to the independent analysis of the ONS. The ONS suggests in its report that in line with rules imposed on it from above—by which I mean EUROSTAT—Bank of England lending to Northern Rock should be re-routed through Government as from 9 October 2007:
“If the loan were re-routed via government then the debt to GDP ratio would be 46.1 per cent. at end-2007.”
That does not take into account any implications in respect of Bradford & Bingley, nor does it take into account what is in the pipeline.
One of the curious things that has not, as far as I can judge, been discussed at all in the debate is what is going on in Luxembourg at the moment between the Finance Ministers in ECOFIN and how they are addressing all these questions.
The idea of a European bail-out of the banking system was pure grandstanding by the President of France, who is currently president of the Union. It was a nonsensical notion. There is absolutely no way in which the amount of money required could possibly be provided by the taxpayers of Europe. Some of the countries of Europe would be devastated by the idea that they should contribute to a bail-out for one country. That is why Germany took a position in relation to its own vital national interests. The same applies to Ireland.
I feel strongly that one of the reasons there are jitters, deep anxiety and a sense of disturbance in the economic markets in the City is that people there witness decisions being taken that have an impact on financial discipline in individual countries. We have seen what happened to Iceland. The real question for the countries concerned is whether the system within which they operate is sensible enough for anyone to have any confidence in it.
I shall not go into the issue of derivatives, financial instruments and the rest of it, although, in a sense, that is one of the causes of the problems that have accumulated, along with a lack of moral discipline among the people running the financial companies, as I said in a letter to The Times recently. The real problem is a lack of prudence and discipline, but that has not been generated over a very short period. In fact, it is implicit in what went wrong in the arrangements developed under the Maastricht treaty, a matter that was raised by the hon. Member for Twickenham.
I do not need to go into every detail of the reasons I took such a strong position against the Maastricht treaty, but we are still living with its consequences; when we measure financial discipline, using the Office for National Statistics paper on Government deficit and debt, we see that its headline is “Government deficit and debt under the Maastricht Treaty”. That seems to have been overlooked.
I have not heard much comment today about the stability and growth pact. We really should examine how the mechanisms actually work, and the extent to which the City of London, or indeed economists internationally, can have confidence in the system used by any particular Government. Here, we are speaking of the United Kingdom, but we might also have regard to the eurozone and Europe as a whole. From the outset, it seemed to me that the stability and growth pact, rather like subsidiarity, was a con trick. It set out rules that were never going to work. When the European Union stability pact was proposed, the then Chancellor of the Exchequer wrote a letter, dated 22 November 1996, to all Members of Parliament—he obviously regarded the matter as important—setting out in detail why it was such a good idea.
The relevance of that point to the debate is that, through the whole of Europe, the question that is or ought to be on the radar screen is whether the Governments of Europe and the Government of the United Kingdom—which, because it is outside the eurozone, merely has to endeavour to comply with the rules of the stability and growth pact, whereas all the other countries are subject to the full panoply of rules—have been left dealing with funny money. There is no way that I can see for anybody to properly assess the true levels of borrowing of the member states.
I shall go through the figures, which are of some interest, though they are rather a mouthful. I shall be slightly selective as I cannot read them all out. There are eight member states with Government debt ratios higher than 60 per cent. of GDP in 2007. They include Italy, whose level currently runs at 104 per cent., and Greece, at 94.5 per cent.—and we saw what happened to Greece the other day. Belgium is running at 84.9 per cent., Hungary at 66 per cent., Germany at 65 per cent., France at 64 per cent., Portugal at 63 per cent. and Malta at 62 per cent.
Although I thought the Minister got her figures slightly wrong, according to the ONS figures, it is true to say that the United Kingdom is at only 46 per cent. I begin to get slightly nervous about the outpourings from Government sources or briefings off-side suggesting that we have room for manoeuvre to increase our level of deficit to meet some of the gravely excessive deficits of other countries. If we increased ours by 20 per cent., we would match the levels of deficit of Germany and France, but that would not be good policy and it would certainly not be in line with sensible financial discipline.
The reason why I am so concerned is that I believe that confidence in the entire system has been undermined by countries that have been running unbelievable deficits, particularly the United States. I do not have the figures at my disposal, but I know that they are unbelievably high. That is the problem.
Just as in the case of high street banking, the question arises whether individuals have over-borrowed and have been allowed or encouraged to borrow in excess of their income. In some cases borrowing has been up to 110 per cent. of income. In relation to confidence in the markets and to Governments and the European Union, a monumental amount of excessive debt has been accumulated which cannot be explained in terms of the intrinsic value of their currencies and the amount of money that they are generating by manufacturing products that are tangible and explicable. The question is whether we are effectively running on funny money.
I am worried that the enormous sums of money—again, this is a matter of financial discipline—that are being talked about will be funded only by sovereign wealth funds, over which we would have no control, or by printing money, which would make the position that much worse.
Mr. Austin Mitchell (Great Grimsby) (Lab): I was most interested in what the hon. Gentleman said about the historic borrowing levels, because it illustrates how the requirements for entering the euro were fiddled, particularly in favour of Italy. He is on weaker ground, however, when it comes to arguing that over-borrowing by Government is to blame for the present financial crisis. What is to blame for the present financial crisis is over-lending by banks and the financial sector.
Mr. Cash:
I am not in any way disagreeing with the hon. Gentleman’s last point, but the accumulated lack of confidence in how individual countries internationally are running their affairs has a great deal to do with the anxiety in the markets. If the Governments are to nationalise, they will simply increase their indebtedness by buying out those banks that have gone broke or are in severe danger, and that simply increases what I would see as the dangers of a lack of confidence in how
countries are running their affairs. There are dangers in both the over-borrowing by the countries concerned and in the over-lending by the banks. News items and commentaries now refer on a daily basis to billions, and that is now more or less regarded as the language that we are used to. Until a few months ago, we talked about millions. Now we talk about billions as if this is an enormous casino of the universe.
Kelvin Hopkins: I sympathise a great deal with the hon. Gentleman on European matters, but with regard to Britain, surely when banks are nationalised people become more confident about them than about the private banks, for good reason, and if Governments are taking counter-recessionary measures through additional spending or interest rates, that will make the economy stronger and raise confidence in the British economy relative to other economies in particular. Is it not sensible to nationalise banks and to borrow and spend where necessary?
Mr. Cash: I should put it on the record that I am not a great advocate of nationalisation. At present there is a severe crisis, but I am somewhat concerned that in all the BBC commentaries the argument tends to gravitate to the high street, banking and city element, all of which requires a great deal of intensive discussion, but not enough attention is given to the question of the way in which individual countries are running their own affairs. That is why I thought that the reference by my hon. Friend the Member for Runnymede and Weybridge to attempting to achieve a new financial stability framework is at least ensuring that we are moving in the right direction, even if one has some reservations about certain aspects.
I listened with interest to what the hon. Member for Twickenham said with regard to the NAO. The NAO, with all its expertise, must be given a specific role in relation to all this. The hon. Gentleman also referred to the inflexibility in how the Maastricht rules have been devised, and we still live with them. They were passed in 1993 and the stability and growth pact came along in 1996. That was an unmitigated disaster, and I said so at the time. A short time after the original proposals for the stability and growth pact were issued—the Chancellor of the Exchequer had written to all Members of Parliament to explain the matter because it was obviously important—I wrote to all Conservative Members saying:
“If the stability pact comes into force member states would be forced to restrict their levels of borrowing. This would impose a fiscal inflexibility which, combined with a loss of monetary control and exchange rates, would severely diminish member states room for manoeuvre.”
That is where we are now. I went on:
“The options for a country in recession would be extremely limited. It is not in the interests of the economic stability of the Community for member states to be helpless in the face of recession. Neither is it in the interests of political stability, for there would certainly be public unrest if a government found itself unable to respond to its peoples’ calls for economic action.”
The UK has only the necessity to endeavour to subscribe to those rules, but the rest of Europe has to obey them. The plain fact is that they are not obeying them. There is no financial discipline. I have already given the levels of indebtedness and it is quite clear that the European Union is not working and that the rules that are supposed to be applied are not being applied. I happened also to point out in the letter that I thought
that it was crazy to impose massive fines on countries that have got themselves into a situation of complete financial instability and have exceeded their budget deficit arrangements.
Kelvin Hopkins: I thank the hon. Gentleman for giving way yet again. Is it not the madness of the eurozone that countries such as Italy cannot change their interest rates—Trichet seems bent on keeping them too high—and they cannot devalue, so the only flexibility that they have is with spending? There are rules governing spending, but inevitably, if they want to avoid social unrest they will have to spend more money and run into debt, because the other two levers of macro-economic power are taken away from them.
Mr. Cash: The situation becomes more difficult, and that is what concerns me. The level of indebtedness is not just a question for the banks; this debate is about fiscal rules with respect to Britain and, by implication, the rest of Europe, because we are affected by what goes on out there. Because of the legal framework that has been created, that does not work. It is completely absurd that we are in the situation that we are in, and it has to be renegotiated. It is interesting that the member states in question, in an attempt to try to extract themselves from the impossibilities, have now gone off in a range of divergent ways precisely because they are completely different economies with different circumstances. The one-size-fits-all policy no more applies to the single currency than it does to the question of borrowing. It is completely absurd that we are in this situation. That puts an enormous amount of uncertainty into the markets and is having an impact on our own economic situation as well.
I agree that we need to have much more in the way of transparency—again, I agree with the hon. Member for Twickenham in that regard—but if there is to be transparency, one must be honest and straightforward, just as companies are supposed to be in the way in which they arrange their accounts. I cannot believe that the amount of money that appears to be hidden in relation to our economic affairs and in relation to how our accounts are presented can possibly leave off-balance sheet vast sums of money which when added in would change the picture as substantially as I believe they would. It is utterly irresponsible for us to conduct our affairs in such an imprudent manner, and I would strongly recommend that we engage in a policy of sound money, balance the books and have sensible accounting principles.
I quite understand that at present we have severe difficulties and we must try to make as good a job of this as we can for the time being, but more European rescue loan arrangements on the scale that Nicolas Sarkozy put forward in his grandstanding arrangements are entirely the wrong way to go. In my experience, the more Europe gets involved, as with the exchange rate mechanism and, as I have said, the stability and growth pact, and in relation to all these other matters where Europe will inevitably find itself, as it has always found itself, in suggesting more regulation and more of a European framework, the more the problems will multiply, so that when the reckoning comes there will be monumental implosion because it will have created a compression chamber with vast levels of debt that it cannot sustain because most of the manufacturing goes on in places such as China and not in our country or in Europe.
The net result is that we are running a policy of funny money—printing money, borrowing from abroad and engaging in an undisciplined process that is undermining confidence in the countries and therefore also in their democracies. Those decisions will not be sustainable indefinitely. The net result will be that people revolt against them, because they will produce high levels of unemployment and there will be no way of retrieving the situation. I urge my hon. Friends to look at not only an office of budget responsibility, but—and very carefully—at how we can guarantee as far as possible that our own economic affairs are run in a sensible manner and that we are not letting down the British people.
Whatever goes on in other countries, we have to look to this House of Parliament as the basis for the decisions taken on behalf of those who elect us. That is what worries me a bit about transferring responsibility to other people. As long as the responsibility remains in this House, I will remain happy. The idea of the monetary committee in relation to interest rates has worked, and it would be a good idea for us to apply a similar principle. However, above all else, we have to ensure that the buck stops here—and not only that; we should realise that we cannot buck the market. There has been far too much borrowing, and far too little to support it.
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