Indeed, the Government could take a variety of steps, and the hon. Gentleman suggests one. The small Government loan guarantee scheme has not
been updated to take account of current realities. Given the strength of the Governments balance sheet relative to the private sector, the Government could do a variety of things to help. They have made several helpful gestures, but they could go much further.
Let me consider the issue of the daytax cuts. I approach the matter with caution, given that the Conservatives and the Government seem desperately anxious to run on to the ground that we staked out. Our approach was that there should be tax cuts for people on middle and low incomes, for which people who are relatively wealthy would pay. We argued that primarily on the ground of fairness. At the time, there was no major economic crisis, but the proposal now happens to be appropriate to the context in which we operate.
Clearly, people on low incomes have a higher propensity to spend than those on high incomes, who are very wealthy. Our proposal, which the new President elect of the United States echoed at least generally, seems highly relevant. We have advocated a programme whereby income tax should be cut for people on low incomes, either by raising thresholds or cutting the basic rate by the equivalent of 4p in the pound. We are therefore considering an amount of approximately £1,000 for a £30,000 income tax payer. The proposal would be funded in a variety of ways, which we have set out, one of which involves tackling potential tax avoidance and the existing concessionary rates that people pay on capital gains tax. We were impressed with the sensible way in which Lady Thatcher and Lord Lawson devised the capital gains tax rules, and we would like to revert to that, with potentially major Revenue implications.
We believe that people who contribute to large pension pots should be incentivised, but that larger incentives should not be given to people who make small savingswe believe in closing that loophole. We also believe in a much tougher approach to tax havens. Again, the President elect of the United States wanted to go down that road. Specific measures, such as dealing with leading corporations evasion of stamp duty, which the Government should have tackled long ago, are blatantly obvious. A series of measures could, if implemented, enable us to make a substantial cut in income tax for people on low and middle incomes.
Mr. Kenneth Clarke (Rushcliffe) (Con): Does the hon. Gentleman agree that, when the proposal was made, it was not intended to be a fiscal stimulus? Indeed, it would not be a fiscal stimulus, because he is describing how revenue would be raised to pay for it. Given that there may be a case for some temporary fiscal stimulus in the not-too-distant future, does not it make more sense to consider a temporary reduction in value added tax, which would relate directly to consumer demand? It seems likely that we will need to stimulate consumer demand in the new year.
The measures that I have described would be stimulating for the reasons that I gave: people on low incomes are more likely to spend. The right hon. and learned Gentlemans proposal could have the same effect, but it depends on how it is funded. That gets to the heart of what I am sure that Conservative Members will tell us in the next day or so. As I understand it, the Conservative party proposes funding the VAT cut through parallel cuts in Government spending. Although there may be a case for cutting Government spending generally,
in the context that we are considering, the proposal would simply offset a stimulus with a reduction in spending. The right hon. and learned Gentleman must deal with the same problem that the Government have and that we have tried to tackle.
If there is to be a tax cut, it should operate under three simple principles. First, it must be substantial; a nominal cut has no effect in such circumstances. The package that I have described would cost something in the order of £16 billion. That is a large sum, but as a share of GDP it is not enormous and is certainly affordable within the parameters that I have described. The second principle is that a cut should be fair and equitable, which was where we started from. The third principle is that a cut should be funded. There are dangers in doing what I believe the Government propose, which is to have an unfunded tax cut, which I understand would be financed by Government borrowing. However, Government borrowing ultimately has to be paid forit is deferred taxation or inflation, and that is not a satisfactory way forward either.
We need a stimulus that will be funded and is seen to be fair, but which also makes sense in the context of the need to inject demand from people on low incomes, whose income standards are being squeezed. With that, Mr. Speaker, I thank you for the opportunity to introduce the motion and look forward to hearing the reactions to it.
notes that the Governments actions mean that the economy is entering a period of global downturn with unemployment, inflation and interest rates all much lower than in previous slowdowns, and with debt reduced from 43 per cent. of gross domestic product in 1997 to below 36 per cent. last year; welcomes the extra investment in public services and public servants that this has enabled to compensate for historical underinvestment both in infrastructure and services in every region; supports the Governments global leadership and action to tackle both the causes and effects of the financial and economic turmoil on an international level; welcomes the Governments timely support to protect financial stability and consequently depositors, business and the wider economy; further notes that as a condition of this support the Government has demanded support in turn for homeowners and small and medium size businesses; further notes the action that has been taken in the court system and through mortgage interest support to enable people to stay in their homes, and the provision of £360 million to help small and medium size businesses under the Train to Gain initiative; and further notes that Government action to support families, individuals and businesses across the UK through the tougher times ahead includes extra tax credits, cutting income tax, freezing fuel duty, further winter fuel payments and increases in Child Benefit.
Let me start by saying that the Government share the concerns of the whole House about the effects of the global economic crisis on British families and business. Over the past few months, newspaper headlines have been dominated by the dramatic events in the international banking sector. However, all of us know only too well that behind every headline there are real people facing worries about staying in their jobs or homes, keeping their businesses afloat or paying their bills every month. The Government have already shown that they are determined to be on their side in the tough times ahead and we are determined to do more to help as the situation unfolds.
Although the recessions that we endured in the 80s and 90s were essentially domestic in origin, this one is fundamentally different. It is undoubtedly caused by global events originating outside our borders. This recession began in the sub-prime mortgage market in America and spread across the world, mostly because of irresponsible behaviour by banks. The twin shocks of the credit crunch and the surge in energy and food prices have hit every country in the world. As one of the most open trading economies in the world, the UK has not been immune to the effects of those shocks. Although the crisis is global in origin, we recognise that its effects are local.
The credit crunch presents us with a once-in-a-generation economic challenge. To meet that challenge, we must first stabilise the global banking system to deal with the legacy of bad debt, which has meant that banks have lost confidence in each other and that global credit markets have seized up.
Chris Huhne (Eastleigh) (LD): Given that the credit crunch first became apparent in August 2007, could the Exchequer Secretary explain why Treasury Ministers were so slow to understand the implications that she is now spelling out?
Angela Eagle: I do not think that that is a fair accusation, given that everybody watching the events unfolding has said that the credit crunch is an unprecedented, once-in-a-generation occurrence. Policymakers the world over, including those in business, are scrambling to catch up with circumstances as they change and with the changed world that events have left us with, so I think that the hon. Gentleman is being rather churlish in his analysis. Hindsight is a wonderful thing after sudden changes in realities that have been so stable. It is easy to look at the new realities as they are being created as if, prior to those events, we all had crystal balls and everybody knew what was going to happen. We did not. In such unprecedented circumstances, it is important that policymakers and political leaders such as my right hon. Friend the Prime Minister respond flexibly and quickly, and that is what he has done.
Mr. Pelling: The Minister is absolutely right that one must not look back. The Government acted decisively in rescuing the banks. However, does she think there is merit in dealing with the damage that she has detailed by taking those bad debts off the balance sheets to repair the banks and in using the bad bank solution?
Angela Eagle: We believe that the package of recapitalisation, special liquidity and the guarantee of inter-bank lending is a comprehensive package that should deal with the problem. However, we will continue to watch carefully what is going on in the international financial markets, as well as what is going on nationally in our own banks. It is important that we respond appropriately if other facts come to light. At the moment, we believe that we have a comprehensive answer.
Matthew Taylor (Truro and St. Austell) (LD): Will the Minister confirm that the inter-bank lending guarantee has failed to deliver the intended solutionto bring down LIBOR to the rate that existed before the banking crisis?
Angela Eagle: As of the weekend, the important three-month LIBOR rate had come down from a peak of 6.4 per cent. to 4.4 per cent., which represents good progress. We will continue to monitor those numbers, but that has been a cause of significant relief throughout the financial system.
Bob Spink: Earlier, the Minister mentioned the level of personal debt, but what was the level of national debt, as a proportion of gross domestic product, as we started to enter this negative cycle? What peak does she expect it to reach during the cycle?
Angela Eagle: The updated economic forecast will be available when the pre-Budget report is presented; it is not my role to start anticipating it today. The hon. Gentleman will get those figures in full at the appropriate time. The Labour Government inherited a debt of 43 per cent. of gross domestic product, which is higher than the present level. It is important to note that point.
Mr. Redwood: As the Government prepare to take on liabilities of £3 trillion from the three big banks in which they are buying shares, will the Minister assure the House that they have checked out the assets and liabilities, and that there will not need to be major write-downs on the loan books after they have bought the shares?
Angela Eagle: It is significant that all national Governments in developed countries have taken action similar to that outlined by my right hon. Friend the Prime Minister when he announced the recapitalisation scheme. That was a result of the unprecedented situation in which the global financial system found itself. I wonder whether the right hon. Gentleman would have done the work that he mentioned while the financial system melted around us, given that that could have caused circumstances as bad as, or worse than, those of the great depression in the 1930s. The people of this country demonstrated through their support that they appreciated my right hon. Friend the Prime Ministers swift and effective action.
Mr. Philip Hammond (Runnymede and Weybridge) (Con): Will the hon. Lady confirm that, whatever she might think, the Office for National Statistics says that the current deficit is 43.3 per cent. of GDP?
Quite a number of statements have suggested that this economic crisis was a thunderbolt out of the blue. The Minister will remember, however, as a member of the Treasury Select Committee, that I visited the United States in January 2006. I cannot remember whether she was on that trip, but others from her party certainly were. Investment bankers made it clear to us that, while all was well that day, there would be a major crisis in the sub-prime housing market
18 months down the road, and that there were black clouds on the horizon. We attempted to pass those messages on to the Treasury, formally and informallyso there were warning signs.
Angela Eagle: It was not my pleasure to be on that trip. I made rather a bad habit of missing the foreign trips taken by the Treasury Committee when I was a member of it, owing to other work pressures. However, I think that one of the lessons to be drawn from the circumstances of an interconnected and globalised world is that the weakest link in the regulatory chain can affect all economies, as the circumstances of the credit crunch have demonstrated in quite a sobering way. That new reality will have to be taken into account as we rebuild and reform international structures.
Before taking a series of interventions, I was saying that the credit crunch presented us with a once-in-a-generation economic challenge, to which we are rising by stabilising the global banking system. However, we must also re-engineer the global economic system to cope with 21st-century realities, and the reality that the hon. Member for Richmond Park (Susan Kramer) spotted in the sub-prime mortgage market during her trip to America is clearly one of the new realities with which we must deal.
Kelvin Hopkins (Luton, North) (Lab): May I return my right hon. Friend to the question of the gross national debt? Is it not the case that our gross national debt is still way below that of many other countries, that it is historically low, and that to tighten the fiscal stance at this moment would be economic madness?
Mr. Kenneth Clarke: The Minister is obviously about to discuss the global measures that she considers to be the remedy. Does she think that looking at the global economic system will have any effect on the two things that went wrong here? First, an appalling fiscal problem piled up, the scale of which is being debated but which is plainly making us all very cautious about considering how we can afford a fiscal stimulus now. Secondly, a complete regulatory failure took place here. Nothing happened in the American housing market that did not happen in the British housing market. Our own national regulatory system, as designed by the present Prime Minister, completely failed to function, despite all the warnings about a credit bubble that were well in evidence long before the Government turned their mind to it.
Angela Eagle: I think that the right hon. and learned Gentleman is being rather partisan in his caricature of the circumstances. When I say that we have an important job to do in re-engineering the global economic system, that does not mean that we do not have equally important reforms to put in place nationally, or that we do not have equally important reforms to put in place at European Union and G7 level. Those jobs must be done together.
Another lesson of the new era in which we find ourselves, following the credit crunch and the way in which it is manifesting itself, must be that, given the extent of the present interconnection, our problems cannot be solved simply by examining national circumstances or national regulators. That does not mean that the Financial Services Authority has not recognised that it needs to change and reform. Indeed, a programme of work is already under way to respond to some of the shortcomings that the FSAs chief executive identified. The reforms in the Banking Bill constitute anotherbut only oneaspect of that. There is much work to be done across the piece, at national and at global level, and all the parts of that work must fit together.
As trying to run an economic system without credit is rather like trying to run a car engine without oil, restoring some normality to credit markets has been an obvious priority for the Government. A sound banking system is an essential precondition for the long-term health of the economy, so by definition our initial focus has had to be on the banks.
That is why on 8 October, in consultation with the tripartite authorities, the Government announced comprehensive measures to ensure stability in the financial system. By recapitalising banks, guaranteeing inter-bank lending and extending the special liquidity scheme, the Government are demonstrating their commitment to do whatever is necessary to maintain stability. The fact that this comprehensive plan was followed by similar action around the world shows both the global nature of the challenge confronting us and the leadership given by the UK in responding to it.
The Prime Minister and the Chancellor are working with other global leaders and our European partners to ensure that the banks are stabilised and begin to lend again, but they are also focusing on reform of the international system to ensure that it can cope with the realities of an interconnected and increasingly interdependent global economic system.
Kelvin Hopkins: I agree very much with my hon. Friends comments. I wanted to make the following point to the Chancellor when he made his statement some time ago. Given that the Government have now taken big stakes in a number of banks, with some in public ownership and Government representatives on some boards, was it not also important to put in Government officials at the operational level to make sure that banks and those in banking behave appropriately in the public interest?
Angela Eagle: My right hon. Friend the Chancellor has announced the creation of UK financial investments. We are still putting together the approach for those who will sit on boards and the arrangements that will need to be made to make that work. We will, no doubt, in due course have discussions about the details, but my hon. Friend has made his pitch and I will make sure it is looked at.