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17 Nov 2008 : Column 21

G20 Summit

3.32 pm

The Prime Minister (Mr. Gordon Brown): I am sure that the whole House will join me in sending our profound condolences to the family and friends of the three servicemen killed in Afghanistan in the past few days. They were Marines Neil Dunstan and Robert McKibben from the UK Landing Force Command Support Group, and Colour Sergeant Dura of the 2nd Battalion of the Royal Gurkha Rifles. We owe them and all those who have given their lives in conflict a huge debt of gratitude.

I should like to make a statement on the Washington summit on financial markets and the world economy. This was the first ever G20 leaders’ summit, which I attended this weekend with the Chancellor of the Exchequer. In just over six months, the world has seen a 40 per cent. collapse in global share values, while global financial institutions have written off losses approaching $1,000 billion and world oil prices have peaked at nearly $150 a barrel and then sunk 60 per cent. We have seen a fall in global expectations for growth in the world’s industrialised countries from 2.5 per cent. in 2007 to below zero for 2009, with all the impact that that has on families and businesses and all the worries about mortgages, jobs and family security in Britain and around the world.

What is making this a fully worldwide crisis is that in recent weeks a problem that started in America has extended to emerging markets and developing countries, some of which are facing bankruptcy. These unprecedented global events call for unprecedented global action. While the economic problems of the 1970s created the G5 and then the G7, it is right that for the first time leaders from developed, emerging and developing economies, which are responsible for 85 per cent. of global growth, met and agreed on the urgency of common and concerted, and where appropriate co-ordinated, actions to address the financial and economic crisis.

To put the long-term challenge in context, in the next 20 years it is expected that the world economy will double in size. This will mean a doubling of opportunities for British business and new opportunities for British workers and families. However, to make the transition to, and secure the benefits of, an open and inclusive globalisation, we have to deal with three other consequences that that brings. Those are, first, the need for restructuring of industries and services, not least resulting from the rise of Asia; secondly, increased competition for resources as long-term demand for oil, food and commodities from the newly emerging economies threatens to outstrip supply; and, thirdly, now that we have global flows of capital, the need to ensure a global framework for financial services as a precondition for prosperity and security.

As epitomised by the sub-prime crisis, which started in America, at the root of the banking crisis was a failure by banks to manage risk, to understand increasingly opaque and complex financial products and to make transparent a developing shadow banking system— [ Interruption. ]

Mr. Speaker: Order. I am always on the record as saying that I want Ministers, including the Prime Minister, to come to the House to make statements. That does not give hon. Members, including hon. Ladies, a licence to shout anyone down.

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The Prime Minister: Thank you, Mr. Speaker.

In Washington, we agreed first of all fundamental reform of the way the financial system is supervised around the principles that Britain has been promoting. They are greater transparency, responsibility, integrity—to avoid conflicts of interest—better banking practice and international co-operation. That includes establishing international colleges of regulators; bringing transparency to tax havens by including them within the scope of the financial system; convergence of accounting standards; reviewing executive compensation schemes that encourage excessive and irresponsible risk-taking; full disclosure of toxic assets; and reform to end conflicts of interest in credit-rating agencies. We set a clear timetable, tasking our Finance Ministers to prepare immediate measures for implementation by 31 March, and to report back on progress with the full action plan at the next meeting.

The summit also agreed that the recapitalisation of the banking system was the right course of action. The action that we have taken in the United Kingdom to buy shares in banks has now been followed in every continent of the world, and guarantees have been introduced to allow banks to raise the money needed to continue to support the real economy, as they must, through lending to businesses and families.

We agreed that, against the background of economic conditions worldwide, a broader policy response was needed immediately, based on closer macro-economic co-operation. Importantly, we made it clear that, within our commitment to fiscal sustainability, the broad and international policy response would need to encompass both monetary and fiscal policy action. Although it is for independent central banks to make their own decisions, we recognised the importance of monetary policy to the restoration of growth. Some contended that it was impossible to cut interest rates in Britain for fiscal reasons, but, in fact, the Bank has now, in two successive months, made two cuts worth in total 2 per cent. and the Government have stated clearly that there is scope for further action. A measure of the level of international co-operation that has already resulted is the extensive currency swaps put in place between central banks and the co-ordinated cut in interest rates across Europe, Asia and America a few weeks ago.

Crucially, and for the first time, our Washington statement agreed a broad and concerted international macro-economic policy response in fiscal policy, meaning measures to support families and businesses now. First, we agreed that fiscal policy has an essential role to play alongside monetary policy in sustaining demand, with quick-acting measures to encourage a rapid impact with help for households and businesses. Secondly, we agreed that the benefits of fiscal policy action will be greater for each country if all countries can act in a concerted way.

This imperative is shared internationally. In recent days China, South Korea, Australia and Germany have joined other European countries, including Spain and France, in considering new fiscal stimulus packages. The European Union has already said that the flexibility in the stability and growth pact to recognise exceptional and temporary conditions will be used. President-elect Obama has already stated that a new fiscal stimulus package in the United States is both necessary and urgent. Most previously published forecasts have assumed
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the absence of co-ordinated fiscal action, but the downturn can be shorter and less deep if Britain takes action, and if that action is matched elsewhere.

It is for individual countries to make their own announcements, as we will do in due course, but the more co-ordinated the action, the greater the benefit to each country will be. I believe that the emerging consensus across the world—from the International Monetary Fund itself, from Governments of left and right, and from political parties, with only a few exceptions, in developed and developing countries—is that we should take rapid, co-ordinated and concerted action through the use of budgetary measures.

Over the past year, the central problem facing the global economy and the UK economy was inflation, driven by a sharp rise in international commodity prices and allied to a credit crunch, which left fewer options for Governments. This year, the reality is the sharp falls in commodity prices that are now taking place, while the credit crunch is leading to contractions in bank lending. The risk in this new environment is not stagflation but the impact on the economy of close-to-zero inflation at the time of a downturn, so it makes sense for Governments to support interest rate cuts with fiscal action. That is giving real help to families and businesses now, and I believe that, in addition to the announcements already made, we will see in the next few weeks many countries following with expansionary measures founded on that agreed international position.

The third central message of the summit is that in taking action, we must resist all forms of protectionism. These threaten to slow down and eventually to stall world trade, thus denying us the benefits of one of the great engines of new growth. So, uniquely, all nations signed an agreement that over the next 12 months they will resist pressure and refrain from raising new barriers to investment and trade. The key to confidence in open trade is, of course, the signing of the world trade agreement, on which talks have stalled since the summer. We cannot allow that impasse to continue, and I welcome today’s new agreement—following Saturday’s summit—to work towards a ministerial meeting in December. To ensure that the trade round is truly a development round that benefits the poorest countries, it will be accompanied by an agreed $4 billion aid-for-trade programme for infrastructure in developing countries. In discussing the issues facing poorer countries, the summit reaffirmed the importance of meeting the millennium development goals—an importance of applying the same common purpose to the challenge of alleviating poverty.

Some have argued that as long as the trade talks remain deadlocked on specific issues, no deal can be agreed, but the G20 was explicit about the action that we have to take: for the first time we have instructed our Trade Ministers to agree, by the end of the year, the outlines needed for a successful conclusion to the Doha agreement.

Finally, the G20 leaders have also agreed that the next summit will allow us to review, and to make decisions on, the wholesale reform of the international economic architecture—built in 1945 but no longer adequate for the challenges of 2008. In agreeing on the need for reform, we also set down the agreed changes that we believe are already essential: a greater voice and
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representation for emerging and developing countries; an urgent expansion, with broader membership, of the Financial Stability Forum; and, better identification of vulnerabilities and anticipation of potential stresses, with swifter action in crisis response.

The International Monetary Fund’s ability to assist countries facing problems as a result of the current shock depends on its reserves of $250 billion. We welcome the announcement from Japan to lend up to $100 billion, but that may not be enough, and we agreed to review the IMF’s facilities to ensure that it has the flexibility to give countries the help that they need. The World Bank agreed that it would make new commitments of up to $100 billion over the next three years to protect the newest, the poorest and most vulnerable countries, and $30 billion-worth of new facilities specifically to help address the problems faced by the private sector, including recapitalising banks and providing trade finance.

At this unique moment in our economic history, we are seeing the world come together to find global solutions to what are the global problems that we face. Over the next few weeks and following consultation, Britain, as the incoming chair of the G20, will lead the preparations for the next summit, working alongside past and future chairs. We will set out the schedule of events, meetings and papers that will take us to the next conference, the date and venue of which will be announced next week. In the run-up to the conference, we will monitor, following the recapitalisation of banks, the barriers to the resumption of funding, because this summit and the meetings that will follow are about the real challenges of everyday life: the need for people to have confidence in the banks that hold their savings and their mortgages; and the need to know that everything possible is being done to help them in their jobs. We pledge that with national and international action together—real help in difficult times—we will take people fairly through this downturn. I commend this statement to the House.

Mr. David Cameron (Witney) (Con): I join the Prime Minister in paying tribute to Colour Sergeant Dura and to Marines Neil Dunstan and Robert McKibben, who were all killed in Afghanistan. As the Prime Minister said, they were serving our country, and we honour their memory.

Everyone welcomes the fact that the summit was of the full G20, involving countries such as Brazil, India and China. It discussed the immediate response to the recession and proposals for the longer term. I shall start with the longer-term reforms. On trade, after so many false dawns, does the Prime Minister believe that this time there is a real prospect of agreement on Doha? On financial reform, there are the Basel accords, which govern bank lending. For a year, we have been arguing that the rules should be made counter-cyclical, but does the Prime Minister agree with me that international action should be combined with action at home, such as the debt responsibility mechanism that we have proposed for the Bank of England to call time on debt? On international institutions such as the IMF, does the Prime Minister agree with me that genuinely sharing global leadership with countries such as India and China means giving them a larger say in how these organisations are run?

The section in the communiqué on the IMF includes talk of early warnings. Is it not also vital that countries listen to the warnings that they are given? The IMF
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warned Britain last year that household debt was rising rapidly, that our financial institutions were vulnerable and that, as a result, we faced a potentially severe impact. In future, will the Prime Minister listen to these warnings?

Next there is the failure of the regulatory system, particularly concerning credit rating agencies and complex derivatives. The G20 rightly talks about the importance of co-operation, but can the Prime Minister be clear about what is actually proposed? It does not mean detailed international regulation, but international co-operation over regulation. The G20 communiqué rightly states explicitly:

It is quite damning about national failure. It says—this is the communiqué that the Prime Minister signed up to—that

For the past 10 years, the Prime Minister was the economic policy maker in Britain, so what responsibility does he take for those failings here?

I turn to the recession, about which the Prime Minister makes two claims. The first claim is that Britain’s economic situation is all imported from abroad. He has said that it started in America so many times that it is starting to sound ridiculous. Can he answer this—[Hon. Members: “It’s true.”] If it is true, he is going to have to answer this question. If Britain is so well prepared, can he explain why the IMF believes that the British economy will shrink faster next year than any major economy in the world? Can he explain why the European Commission says that we face a deeper recession next year than anywhere in the EU except for Estonia and Latvia? Far from being well prepared, Britain faces a deep recession. Is that not why in the past few months our currency has fallen more sharply than any major currency and more sharply than ever before in our recent history?

[Interruption.] I do not know why the hon. Gentleman is pointing at me; that was not my hon. Friend the Member for Tatton (Mr. Osborne) this week, but the Prime Minister when he was shadow Chancellor. As the hon. Gentleman was talking, I shall read the quote again. It says that

[Interruption.] I am so pleased to have made the Prime Minister smile.

The Prime Minister’s second claim is that there is universal support for a fiscal stimulus paid for by additional borrowing. Yet of the 3,500 words in the G20 communiqué, just 21 were about the fiscal stimulus, and they included the condition that the stimulus should be “appropriate” and “conducive to fiscal sustainability”. The real international consensus is that only the countries that have been fiscally responsible are best placed to act now. Is that not why the OECD recommended a fiscal stimulus for those countries that had consolidated their public finances? Is that not why the European Central Bank said that if a country has borrowed more than
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3 per cent.—as we have done—it should not borrow even more? Even this weekend, what the head of the IMF actually said is that a fiscal stimulus should take place only

How can our Government claim that our debt is sustainable when our borrowing this year, before the recession has properly started, is among the highest in the developed world, and when we have just spent £40 billion on a bank rescue?

The Prime Minister keeps citing China, but China, like Spain, the Netherlands, and Australia—like half the OECD, in fact—has a budget surplus. In Britain, our Prime Minister used the good years to build up the biggest budget deficit in the industrialised world. Is that not why, in Britain, more discretionary borrowing now, without knowing where the money is coming from, is bound to mean higher taxes later? Is that not what the Employment Minister admitted last Tuesday? Is that not what the Chancellor admitted last Wednesday? Is that not what the Business Secretary, not known for admitting anything, admitted this morning, when he talked about

and a

Translated into English, does that not mean higher taxes under Labour?

Is it not the case that Labour’s borrowing bombshell will soon become a tax bombshell? Let us be absolutely clear about what this means: borrowing £30 billion now will mean an income tax bill for the average earner of nearly £1,500 later. Everyone knows the Prime Minister is planning a Christmas tax giveaway, but tax cuts should be for life, not just for Christmas. We need real tax cuts, not Labour tax cons.

Just two years ago, the Prime Minister said:

Let me remind him of what he said. He pledged solemnly:

So now that he has broken that promise—now that he is promising a borrowing bombshell—will he start his response by being straight with the British people? Will he admit that by borrowing more now, he will have to tax more later? Just for once in his life, can he give us a straight answer—do not his borrowing plans today mean higher taxes tomorrow?

The Prime Minister: Let me start with a quote from the Leader of the Opposition:

That was his position a few months ago. He has changed his position today. A week ago, he said he favoured borrowing out of the crisis. Now he is against it altogether. Even the Americans agree that the financial crisis started in America. As for the regulation of banks, mortgages and pensions, it was his financial competitiveness working party that recommended the deregulation of pensions and mortgages only some time ago.

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