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Susan Kramer:
But does the hon. Gentleman remember that my hon. Friend the Member for Twickenham (Dr. Cable) said that it is in the Government’s gift to set the inflation target and that looking at the current reality of the economy it was entirely appropriate to change, suspend or defer that target so that the Bank could concentrate on rescuing the economy? May I also remind the hon. Gentleman that although the shadow Chancellor, in response to an intervention from me, said that he did not comment on interest rates—I cannot read a quote during an intervention, but the hon. Gentleman will be able to find the exact words in Hansard—within two weeks, he was writing in T he Daily Telegraph that there
was plenty of scope to stimulate demand with lower interest rates? That contradicts exactly what the hon. Gentleman has just said.
Mr. Hammond: The hon. Lady needs to think about that. It is one thing to observe that there is a considerable gap between the level of UK and US interest rates, which was precisely the point that my hon. Friend the shadow Chancellor was making, but quite another thing to call for a reduction after having just told one’s party conference that the Government must not compromise the independence of the Bank of England by telling it to slash interest rates.
I want to be a little more consensual, however, and to return to the point where we agree with the Liberal Democrat motion—at least to some extent. Of course, this is not just a US-made problem, and the sooner the Government can take that on board and accept that this is a problem for which the UK regulatory and policy regime is partly responsible—
Mr. George Mudie (Leeds, East) (Lab): Partly.
Mr. Hammond: Of course, it is partly responsible. The sooner the Government do so, the sooner that we can start making the interventions that will solve the problem and ensure that we do not repeat the mistakes in the next cycle. Unsustainable debt, the asset price bubble, UK households borrowing £1.4 trillion—the highest indebtedness relative to gross domestic product of any country in the world—and the Government operating a pro-cyclical deficit funding policy are at the root of the domestic component of the problems that we are facing.
It is too late to do anything about avoiding this recession, but we must at least learn the lessons for the next set of challenges that we face. How do we tackle these problems? Clearly, international co-operation, including a revisiting of the pro-cyclical effect of the Basel II capital adequacy rules, will be part of the solution.
Mr. Mudie: Does the hon. Gentleman not think that it is a bit harsh to say that we have a recession and that there is nothing that we can do about it? [ Interruption. ] Well, that is exactly what he said. There is plenty that we can do about it, but it is, of course, politically better to get off on abstract arguments. We could do things with mortgages to keep people in their homes, and we could do things with small businesses to keep them in business and employing people. So, for saying that we can do nothing about the recession, the hon. Gentleman should apologise to the British people.
Mr. Hammond: The hon. Gentleman will read Hansard in the morning and see that I said that it is too late to address the unsustainable debts, the asset price bubble, the over-borrowing by households and the pro-cyclical Government deficit funding policy. It is too late to do anything about them to address the recession, but he is absolutely right to suggest that we can do plenty of things to alleviate the immediate impact of the recession, and I shall run through some of them in a moment.
I was talking about how we tackle the challenges. International co-operation is one way. We need to tackle areas of domestic regulation—for example, ensuring that bonuses do not compound the problem by creating perverse incentives that lead banks into the kind of
areas that have delivered the problem that we now face. Is there a case for including asset prices in the targeted inflation measure? We have looked at that, and many academic economists around the world have asked themselves that question. Our conclusion is that that is not the right way to proceed, but we need to address asset price inflation.
We have proposed specifically a debt responsibility mechanism by which the Bank of England would take on the role of measuring aggregate credit debt in our economy and transmitting its concerns to the Financial Services Authority, which would then use those concerns in managing the capital adequacy ratios of individual British lending institutions—an effective domestic solution to the regulation of the credit cycle. I should be interested to hear from the Economic Secretary when he replies whether the Government have something to say about that proposal and, of course, fiscal discipline—not a Liberal Democrat unique selling point. We need in place a framework that has the confidence of the markets and that effectively constrains Government action, not just when the going gets difficult but throughout the cycle—not a set of rules that crumbles as soon as the Government run into the first hurdle.
Lynne Featherstone (Hornsey and Wood Green) (LD): Does the hon. Gentleman agree with me about bonuses? I opened an account at Barclays a few weeks ago. On the news that it was seeking funding to avoid Government intervention, possibly involving not paying bonuses, I contacted the bank to say that I did not want to go ahead with my account, and it was very worried by that, having asked me the reason why. I wonder whether there is anything in people power—perhaps by having to print directors salaries and bonuses on bank statements. Does he think that that might give the public some sense of where they want to keep their money?
Mr. Hammond: If the hon. Lady wishes to exercise her people power, I point out that it is a statutory requirement for directors’ salaries and bonuses to be published in banks’ annual report and accounts.
The second issue that I want to address is the Bank of England’s monetary response in the past few weeks. I agree with the hon. Member for Twickenham that it has been most welcome, but our concern must be that it has not been fully effective. Rhetorical attacks on banks in general, or banks in which the public now have a stake, will not solve the problem. Of course the rescue of the banking sector was undertaken not simply to save the banks, but to save the real economy from meltdown. Presumably, now that we, collectively, are investors to the tune of £37 billion in banks, we want to make sure that we get our money back. With the greatest respect to the hon. Member for Luton, North (Kelvin Hopkins), I do not think that that cause will be advanced by putting him in charge of lending policy. Politician-dictated lending policies will not be the answer.
Kelvin Hopkins: Is the hon. Gentleman more concerned to make sure that nice, big bonuses are paid than to ensure that the public are paid back their money?
Mr. Hammond:
No, of course not. The two objectives with regard to the public-sector investment in the banking system must be, first, to save the banking system so that
we can protect the real economy, and secondly to get every penny of the £37 billion back, preferably with a substantial gain for the taxpayer over time. Those must be our objectives. Let us not forget that we have a big stake in the banks in question.
Mr. Redwood: Will my hon. Friend acknowledge that £18 billion of cash is going to Abbey/Santander for Bradford & Bingley, that there was £3 billion of equity investment in Northern Rock, and that unfortunately our first 100 per cent. investment, Northern Rock, made us a loss of £580 million in the first half of the year? Is there not therefore a lot of work to do to make a profit?
Mr. Hammond: My right hon. Friend is right, but he is perhaps rather generous to describe the £3 billion as an equity investment in Northern Rock; I think that it was a write-off of debt, about which the Government had little choice. [Interruption.] I know that it is counted as an equity investment, but I do not think that it was made out of choice.
Surely the solution is to mend the mechanism that, until last year, always linked Bank of England base rates with the banks’ costs of funding. We can of course urge the banks to pass on changes in the official rate, but we also need Government action to secure the reopening of the money markets, so that banks’ borrowing costs follow the base rate down. We will then be in a far stronger moral and practical position to urge the banks to pass on the Bank of England’s monetary policy response to consumers and businesses.
The motion in the name of the hon. Member for Twickenham refers to
“£500 billion of taxpayers’ money”
having gone into the banking system. I think that that is made up of £200 billion in the special liquidity scheme, £37 billion-odd of capital, and £250 billion in money market guarantees. The latter was the largest component of the package announced by the Prime Minister and the Chancellor a few weeks ago, together with the recapitalisation. As far as I can tell, that bit of the package is not working. I do not know whether the Economic Secretary can, in his winding-up speech, give us any figures on what take-up there has been of that £250 billion. The information is difficult to come by, but my inquiries in the City suggest that there has been minimal take-up. That may have to do with the conditions attached or the pricing. That is a critical matter that the Government must look into, because the whole package depends on our being able to reopen and restore confidence in the money markets, so that in future, the Bank of England’s base rate cuts are automatically followed by cuts in the cost of funding to the banks, and thus automatically followed by cuts to mortgage rates, small business overdraft rates, and lending rates to families.
Ruth Kelly (Bolton, West) (Lab): The hon. Gentleman makes an interesting point about use of the guarantee. Of course, it was a very innovative proposition at the time. Does he not agree that the most effective guarantee, were it to work brilliantly, would not be taken up at all?
Mr. Hammond:
Ultimately, once confidence has been completely restored to the markets, I guess the right hon. Lady is right, but sadly that is not the position that
we are in. I hope that when the Chancellor and the Prime Minister announced the £250 billion guarantee facility—a very big, eye-catching, headline-grabbing number—they did not announce it with the expectation and intention that virtually none of it would be taken up. I hope that they announced it in the expectation that it would have the desired effect. It has not, however, because if it had, LIBOR rates would have fallen by 1.5 percentage points last Friday. That is where we need to get to. We must restore the link, because that is what is broken, and that is what needs urgent attention if we are to fix the credit famine that is affecting families and small businesses throughout the country. No amount of rhetoric or exhortation will deliver sustainable relief if we do not fix that mechanism.
John Reid (Airdrie and Shotts) (Lab): I have listened very carefully to the hon. Gentleman talk about fixing the mechanism, but will he tell us how he would fix it?
Mr. Hammond: The Government have already announced the £250 billion package, which the right hon. Gentleman will remember we supported, but the Government now need to consider the pricing and the conditionality that are attached to the package. The Economic Secretary may tell us later that I am misinformed and that hundreds of billions of pounds of the guarantee facility have been taken up, but if that is not true and it was a critical part of the package, the Government need urgently to examine how that part of the mechanism works. This is not a party political point; we supported the package.
John Reid: My question was not meant as a party political point either; it was meant for all our elucidation. I shall say something later about inter-bank lending, which is right at the heart of the matter, but the hon. Gentleman said quite clearly that the mechanism is not working, so, if he believes that it is not, what does he think would?
Mr. Hammond: I suspect that the mechanism is not working, and I suspect that the reasons why are partly the pricing, partly the conditionality and partly, perhaps, the toxic assets that remain in the system. We heard a suggestion earlier about the creation of a “bad bank”. I should like to hear from the Exchequer Secretary not that she has a magic wand but that the Government at least recognise that the extent to which that part of the package has not been taken up demonstrates that the package as a whole is not delivering the intended results, which it clearly is not. That is a problem for all of us, and one that we, collectively, have to address.
The third point on which we agree with the Liberal Democrats—at least I think we do—is that spending and borrowing our way out of a recession, over and above the levels that are implied by the automatic stabilisers and the Government’s commitment to continue some support for those who lost out in the 10p tax fiasco, will not work and is not sustainable. Future generations would be burdened with even higher debts and the recovery might be threatened by the prospect of large tax rises. We would simply be sowing the seeds of the next crisis, but, as we heard earlier, carefully targeted and fully funded tax cuts, and other specific support measures, would bring relief to families and businesses.
We do not agree with the Liberal Democrat approach in seeking to raise taxes on middle-income earners to pay for cuts, and we do not believe it credible to claim to fund cuts on the back of unidentified spending cuts. Fiscal prudence and a concern for the future does not mean, however, being unable to help, although others who have behaved more prudently in the past have greater scope for action now: the Australians recently enjoyed the luxury of making a decision to spend half their public sector surplus on stimulating demand from families and businesses. We have set out a number of suggestions and already announced the following proposals: a council tax freeze, funded by cuts in Government consultancy and the Government’s advertising budget; the abolition of stamp duty for 90 per cent. of first-time buyers; the use of the Post Office card account to give access to direct debits—thus cutting the fuel bills of the most vulnerable householders—while the Government appear set on privatising it; cuts in the small companies corporation tax rate, funded by scrapping the annual investment allowances; a temporary cut of 1p in the pound in employers’ national insurance contributions for the smallest employers for six months to stimulate employment; the deferment of small-to-medium enterprises’ VAT bills for six months at commercial rates of interest to help businesses with their cash flow; and, changes in the law to provide breathing space for businesses facing insolvency and households facing repossession for amounts that were incurred as unsecured debts. We continue to identify opportunities for targeted, fully funded interventions that will bring much-needed relief to families and businesses.
I turn briefly to the Government amendment, which has the now-familiar focus on the global dimension—the subtext broadly being, “Not our problem, guv. The problems were made somewhere else and we are innocent victims.” The Exchequer Secretary used the words “global” or “globally” 21 times in her speech, and I heard no acknowledgement in it of the policy and regulatory failures in the UK. The Lib Dem motion sets those failures out and we have repeatedly drawn attention to them.
The fact is that the claim to have abolished boom and bust heralded in the UK the age of irresponsibility against which the Prime Minister now rails. There was five-times-income mortgage lending and there were 125 per cent. mortgage loans: the Government not only failed to curb household borrowing, but through the years of economic growth ran the biggest deficit of any developed economy. The Exchequer Secretary claims that Government debt has been reduced since 1997, but she and almost everybody else in the House knows that the Office for National Statistics figures show that, in fact, Government debt is up a little on the 1997 level. After 10 years of continuous economic growth, our national debt position has not improved but slightly worsened.
There is no sense in the Government amendment of the scale of the challenge. The Exchequer Secretary likes to draw comparisons with statistics relating to the end of the last economic recession, but the appropriate comparison for where we are now is with its beginning. In the last full year before that recession, there was a budget surplus of 0.2 per cent. of GDP; this time, we are entering recession with a budget deficit of 2.6 per cent. of GDP, as a result of having borrowed through the boom.
Rob Marris: May I take the hon. Gentleman back a little to the issue of household debt? One of the difficulties has been that for more than 30 years there has been a shortage of housing supply in the UK, and that has led to ridiculously high property prices. On the back of that, equity release, based on optimism that house price rises would continue, has gone on apace. The Government—and, I hope, the Opposition—are stretching towards what we need to do, which is to build a lot more housing so that there is no boom and bust in the housing market.
Furthermore, one of the drivers of the current situation has been the Conservative policy, in the mid-1980s, of removing the ban on equity release from mortgages. Like me, the hon. Gentleman is old enough to remember when people could not get money from a building society or bank on a house unless it was to buy or improve the property—the money could not be for buying a car, more furniture or whatever. We need to look at getting back to that position.
Mr. Hammond: I urge the hon. Gentleman to be a little cautious with that analysis. I suggest to him that although house prices are now falling rapidly—and, according to the hon. Member for Twickenham, will fall significantly further—the housing shortage has not gone away. The housing-asset price bubble has been driven by the growth of credit and the invention, for it was an invention, of clever new ways of creating credit, mainly through securitisation. That led to more money being available in the system and manifested itself as an inflation in asset prices.
I acknowledge, of course, that the housing shortage is an underlying problem, but a lot of people with no borrowing power—short of their houses—do not in themselves drive up house prices. House prices get driven up when the people who want to live in the houses can borrow effectively unlimited amounts of money to bid up the prices. That is what we have seen in the past few years.
The Prime Minister has repeatedly claimed, and did so again as recently as last week, that Britain is well prepared to weather the economic storm. In fact, back in January Alan Greenspan described us as being particularly vulnerable. The EU reports, and the IMF report that we saw last week, have confirmed that Britain is ill prepared for the recession, that we go into it with a bigger deficit than any other country and that because of our economy’s narrow base, we are struggling to find the locomotive that will pull us out. That is because we have been so heavily dependent on financial services, rising public spending and the housing market during most of the economic growth of the past decade.
The Minister used the term “schizophrenia” towards the end of her speech. However, I have to say to her—perhaps the Economic Secretary will clear this up later—that the Government’s position is far from clear on the question of an overall significant further fiscal loosening. We have heard lots of rhetoric and been given lots of briefings that are then not matched by the words that come out of the Prime Minister’s or the Chancellor’s mouth. Having heard the hon. Lady’s speech, we are none the wiser as to whether the Government are proposing a massive fiscal loosening or merely considering targeted tax measures—along the lines that the Liberal Democrats propose and we have discussed—that are fully funded by changes elsewhere.
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