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According to the Office for National Statistics, public sector net debt was significantly lower than the level that we inherited in 1997. In fact, I clearly remember sitting in this Chamber when my right hon. Friend the Prime Minister, as Chancellor of the Exchequer, explained that he had used the telecom spectrum receipts to repay more debt in one year than had been repaid in the previous 50 years combined. Frankly, it is not surprising
that we enter this downturn with a pretty good and sustainable debt position, which should enable us to take any action necessary.
The Government must hold their nerve, continue to be bold and take the action required in the short term, but they must also think hard about the longer term international action required to put in place a new set of global rules to try to minimise the recurrence—or the likelihood of a recurrence—of a global credit crunch. My right hon. Friend the Prime Minister, with the Chancellor, is leading on reforming the international financial system and has argued for a long time for the overhaul of credit agencies. He argues, too, that the global system should offer countries incentives to behave well, and that international macro-economic action is required to stave off a global slump. In such circumstances, the premium is on being bold and taking the action required, and I think that the official Opposition will rue the day they decided to be so timid.
5.50 pm
John Howell (Henley) (Con): The Exchequer Secretary referred earlier to the benefit of hindsight, but the benefit occurs only if we are prepared to learn the lessons. There was enough evidence to be able to spot the crisis coming. The International Monetary Fund identified 64 banking crises around the globe between 1970 and 1999. It showed—as did other studies—an overall pattern in each of the crises, starting with lax lending, preceded always by a lending boom. The lending was on risky assets, which were often politically directed for social purposes. The result was unusually exposed institutions and unusually exposed risks.
The second element in the structure of those crises was that banks and regulators were overstretched—to be charitable—by the volume of business, or regulators simply believed what the banks told them because they were not ready for the risks that were coming along. The third element was that at the time no one was interested in curtailing the level of debt, because they could not see that it was in their interests to do so. Each crisis led to a change of behaviour and of attitude, where reckless lending was described as bold and rewards for risk takers increased beyond the risk involved.
What burst the bubble was different in each case, but it is absolutely right to ask why the Government did not recognise that sequence, which had already been set out by the IMF and in a very easy to read article published in The Economist three years ago. One is tempted to answer the question by saying that the Government were so confident that they had ended boom and bust that they did not believe it would happen in the UK; they had actually started to believe the spin of their fiscal rules.
Many Members have mentioned the international situation. I have been involved in projects that helped to introduce financial institutions to the global market, and it is right to say that the global nature of the market makes the situation more difficult. It is thus absolutely right to call for the sort of international action on regulation and transparency that my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) proposed in his speech. However, despite the international
relationships of financial institutions and products, the major issue in surviving such a crisis is the strength of national economies. To see the situation as nothing more than a contagion from abroad is fundamentally to misrepresent it, and fails to distinguish the contagion of the disease from the contagion of knowledge of the disease. For example, the latest US research into the sub-prime market shows that what did for Fanny Mae and Freddie Mac was not that they had caught the sub-prime disease but that everyone thought they had caught it. That is what burst the bubble—a domestic situation and a domestic issue of confidence.
A crisis such as this needs domestic material to work with, and there is plenty in the UK. When UK financial institutions rapidly expanded from lending on the basis of short-term wholesale market borrowing, they created a mismatch that was asking for trouble. The debt boom and the Government’s role in it extend beyond the simple fact of debt. Other Members have already commented on that, so I shall say no more about it. However, it fed into a state of mind.
Three of the conclusions in the Federal Reserve Bank of New York’s study on the sub-prime issue drew out some general points that are relevant now. The problems the study identified were a convoluted loan product system that consumers did not understand, a credit rating system that did not do a good job of highlighting the risks and a lack of incentives for institutions and Government organisations to carry out research into the risks.
On the first of those conclusions, the Government are complicit in convoluted loan programmes that consumers do not understand, such as shared appreciation mortgages, whereby banks recoup the cost of a mortgage—by huge percentages of capital—when the house is sold or the mortgagee dies, leaving people with insufficient equity to move on. Such mortgages were unveiled—believe it or not—as a millennium product by Lord Mandelson, in his first incarnation as Trade Secretary. The lack of incentives for institutional investors and Government to carry out their own research must lie behind the failure of the regulatory system.
I have spoken before about the lack of credibility in the fiscal rules, but their underlying weaknesses are why they are so flaky. The weakness lies in the assumptions on which the rules were measured—the variations in determining the amount of debt, what constitutes debt and the length of the cycle—and in the fact that the Government did not stick to them. The rules were too vague. What they were not was an operational rule, and it is doubtful whether they could be. They were too simplistic to guide policy and too open to be easily manipulated.
What activity do we want? We need to allow Parliament to debate and monitor more closely the Government’s fiscal performance, which is why I wholly support the creation of the office of budget responsibility that my hon. Friends on the Front Bench have suggested in several debates.
It is a great shame that much of the speculation in the papers about incentives and stimulus has concentrated on amounts rather than on quality. There has been massive financial disruption, so the priority is rightly to sort it out rather than to argue about general fiscal stimuli.
Mr. Redwood: My hon. Friend is making some important points. Has he seen the work of our hon. Friend the Member for Braintree (Mr. Newmark), who believes that true Government indebtedness, including pension liabilities, is now £1.8 trillion—120 per cent. of gross national product—which is why some of us are worried about the country’s financial position?
John Howell: I am grateful to my right hon. Friend for making that point. He is absolutely right: a number of factors have not been taken into account—the pensions element is one, and the whole business of private finance initiatives is another. That is why it is crucial, as I said, to recognise that although the rules are too vague and flaky, it is not the rules themselves that cause the problems but their underlying assumptions. We can all make nice big rules, but if the assumptions and the data behind them are not accurate, there is no point in having them.
We must look at the quality of any proposed stimulus. I was interested to hear that the hon. Member for Twickenham (Dr. Cable) has three favourite words to describe the quality of a stimulus. I have my favourites, too. The first is that the stimulus needs to be “effective”, which means that we must know what it will achieve and when. Secondly, it needs to be “temporary”—as the right hon. Member for Bolton, West (Ruth Kelly), who is no longer in the Chamber, mentioned—so that it does not worsen the structural deficit. Thirdly, it should be “efficient”, so that the outcomes yield value. However, we must be cautious about any temporary fiscal easing so that we make sure that it is capable of being swiftly and credibly reversed.
5.59 pm
Kelvin Hopkins (Luton, North) (Lab): I am pleased to have an opportunity to speak in this important debate, but I do not think that we should give the Liberal Democrats quite so much credit as some hon. Members have done. I remember not so long ago when the Liberal Democrats were signed up as hard-liners to the neo-liberal project, the same as the Front Benchers of the two major parties. I never signed up to that. Indeed, the Liberal Democrats not so long ago had an orange book putsch in their party that was a victory over the minor group of social democrats who remain from the days of the past. Just recently, they have rediscovered little bits of social democracy, but just because they are dipping their toe into the water does not mean that they have been fully converted. I, for one, remember what they used to be like and do not give them too much credence for what they are saying now.
I was complimented by the now leader of the Liberal Democrats in a debate on Europe some three years ago, when he said that I was the only hon. Member to propose a coherent alterative economic strategy. He said that it was a socialist strategy. He did not agree with it, but he said that I was at least the only one who had a coherent alternative. I like to think that I have stuck with that coherent alternative throughout my time as a Member. Indeed, when I first entered the House, I said in my maiden speech that I had come here among other things to oppose neo-liberalism. At this point, I have been proved right: neo-liberalism has led to an appalling world crisis. If we had had greater regulation, particularly of the financial sector, and retained
larger components of public ownership of the utilities, a larger state sector and more general economic controls, we would not be in this situation.
John Hemming (Birmingham, Yardley) (LD): I share the hon. Gentleman’s concerns in respect of the regulation of the financial services institutions—I declare my interest as a shareholder in some of them—but why does he think that the utilities are key in the financial crisis?
Kelvin Hopkins: I have always felt that a significant state sector, as we had until some 30 years ago, was useful not just because it provided the public with a good deal, but because it was a component of economic management and brought a considerable amount of income into the Treasury. The mixed economy that we used to have worked very well. The instabilities have taken place since we started to dismantle that and to put everything into the private sector and the market, and I think that we will see a reversal of that. In fact, if I had said in the debate on Europe, when the now leader of the Liberal Democrats was so kind to me, that I believed that the Government should take a substantial stake in the banking sector and start to arm-twist the Bank of England to reduce interest rates, and that a Chancellor would tell the banks and building societies to reduce their lending rates and pray in aid the name of J. M. Keynes, he would have thought that I had gone mad. However, that is precisely what has been happening in the past few weeks, and I am very pleased that it has been.
Mr. John Horam (Orpington) (Con): As the hon. Gentleman says, the Government and the Governor of the Bank of England have been trying to persuade the banks to lower their interest rates in line with a cut in the general interest rate in the past few days. Curiously enough, the bank in which the state has one of the biggest says—the Bradford & Bingley—has stopped lending altogether. Is it not better in fact to have a properly regulated system, rather than a state-controlled system?
Kelvin Hopkins: The two could easily go together. Indeed, the rate that is charged to existing borrowers and whether one is extending borrowing are two issues. I would want to ensure that both of them are positive in helping the economy. Nevertheless, the reduction in interest rates last Thursday will make a significant difference to the disposable income of the existing mortgagors and borrowers, of whom there are millions, who have been paying interests rates that are too high. That will put a significant stimulus into the economy. I welcome that very much indeed.
I return to the theme that I have raised many times in the House: the Government ought to retain control of the levers of economic management, which are several, but I shall mention the three main ones, the first of which is interest rates. I was an opponent of giving the Bank of England so-called independence. Interest rates should be controlled by the Government, who should be accountable to the House for their policy on interest rates. I have always thought that, and I think that it is the case now. Interest rates should not simply be geared to the inflation rate. Indeed, the Government are now saying that the Bank of England should consider the wider economic impact of changes in interest rates, not
just inflation. If the Bank had been looking at inflation, which is currently and temporarily quite high, we would not have seen that reduction in interest rates last Thursday. I am glad that the Bank is now looking at the wider economy and acting appropriately.
The danger indeed is not inflation, but deflation, which is much harder to deal with than inflation. If prices start to fall, which happened in Japan, arresting a fall in prices is very difficult indeed. People anticipate falls in prices and therefore abstain from spending until prices have fallen further, which generates a vortex of deflation and a downward spiral into slump. We must avoid that, and anyone who looks at the situation now and urges caution in Government spending or the fiscal stance is gravely mistaken. We are still in a very difficult situation, and I want to ensure that unemployment does not rise and that living standards do not fall, as is possible if we were to move in that direction.
Another lever that the Government have wisely kept control of—to an extent at least—is the exchange rate. I applauded the Prime Minister when he decided as Chancellor not to enter the exchange rate mechanism. He kept control of our own currency, as a lever of economic management, and rightly so. Of course, the problem was that, after 1997, sterling appreciated substantially. That was a big mistake. I was one of those who supported the ideas of Gerald Holtham, who had been the director of the Institute for Public Policy Research and who said that we ought to intervene in the international money markets to bring down the value of the pound, because sterling was overvalued. If hon. Members want evidence of how overvalued it was, they should look at our structural trade deficit over the past many years.
We should have intervened to reduce the value of our currency relative to other currencies and avoided the situation that we are now in, with record trade deficits. Okay, that will have an effect on what we buy from abroad. I like a good bottle of French wine, for example, and I might have to pay more for it. What a terrible shame. It is appropriate that we ensure that our currency value is correct and suits our internal economic needs. If the pound depreciates, it deflects demand to home products and home producers, and it keeps the demand in our domestic economy high. That is what we should be doing now. I welcome the fact that the pound has been depreciated significantly in the past year, and I hope that it stays down and is managed to stay down for some time to come.
Of course the third lever is spending and taxation. Perhaps we have not taxed enough. I would not say that we have not spent enough—we should have spent more—but we certainly have not raised enough in taxation while we have been spending over the past few years. I have said in the Chamber on a number of occasions that we should have raised taxes, particularly on the rich. I have also suggested that the Government should make greater efforts to collect all those taxes that are avoided—£33 billion-worth, according to the TUC’s recent booklet. We should do more to avoid tax fraud. Tobacco smuggling and VAT fraud account for another £14 billion. There is money to be had, and the Government could rake in at least some of it if they made greater efforts. Even if they raked in 30 per cent. of it, it would
make a significant contribution to the Exchequer and enable us to sustain public spending where it needs to be maintained.
We should not be trying to restrict the fiscal balance; we should be worried above all to ensure that there is enough spending power in the economy to sustain employment in this very difficult time and to avoid above all going into a slump. That is a serious danger now. There has been talk about why the banks are still nervous. They are still nervous because there is still a lot of toxic debt around and they do not quite know where it is. The banks are nervous about lending to one another, because they do not quite know how much toxic debt each one has got.
We have to make sure that the Government sustain the banking sector, and that we get through this difficult period. There is still the problem of toxic debt, and many hidden problems in the banking and international finance sector; we have to find our way through that, even if it means having a bigger state sector and more regulation. I must say that I applaud what my right hon. Friend the Member for Airdrie and Shotts (John Reid) said about international regulatory machinery. We are going back to something like the Bretton Woods agreement; we are starting to talk seriously about regulating the international finance sector, instead of leaving regulation to the financial markets and people who gamble with our lives—our money—for their own benefit. It is interesting that Nick Leeson, who went to prison for gambling with Barings bank’s money to the extend that it went bankrupt, complains that people who do the same sort of thing now are just bailed out. We ought to look at that. We should make sure that those people do not get hold of our economies and our lives again. If we have to extend the public-sector part of the banking and financial institutions sector, so be it.
I urge my Front-Bench colleagues to use all the levers of macro-economic power to make sure that, above all, we avoid a slump and build our way out of the obviously difficult recession approaching us. I have been unapologetic about my support for traditional Keynesian policies, for a degree of intervention in the economy, and for having a substantial public sector as part of an economy that can be managed by the Government. I am against leaving everything to the market.
Keynes and others said that the market, when left to itself, tends to redistribute income from the poor to the rich. That is inherently deflationary, because rich people save more of their money, and poor people tend to spend it. If one wants to keep an economy buoyant, one has to make sure that poor people have enough money in their pockets to keep it going. If one gives it all to rich people, they put it in banks, save it, or put it in offshore accounts, and they deflate the economy. Redistribution and intervening actually help to keep economies buoyant, maintain employment, ensure a decent life for working people and bring about a high level of social justice, which is what most Labour Members have spent their lives fighting for. Obviously, I will vote with the Government tonight against the Liberal Democrats, but I hope that, in their new-found enthusiasm for social democracy, the Liberal Democrats continue to move further to the left, and eventually become socialists.
Mr. Alan Reid (Argyll and Bute) (LD):
In view of the hon. Gentleman’s speech, surely he should vote with us, because our motion calls for a reduction in taxes for
people on low and middle incomes, and refers to plugging the tax loopholes used by the rich. Surely that is redistributive, so I am disappointed that the hon. Gentleman is not voting with us.
Kelvin Hopkins: I did say at the beginning of my speech that I was not convinced by the Liberal Democrats’ recent conversion to a little bit of social democracy. My tax changes would go a lot further than those suggested by the Liberal Democrats. I suspect that the motion is a little bit about courting the electorate before the next election, and is not to be taken too seriously.
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