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Let me return to the first point: the numbers, which have already been read out. The hon. Member for Tatton was correct in saying that the forecast that the Government are using to predict a recovery in 2010, with growth of 1.5 to 2 per cent., is wildly optimistic in comparison with the figures given by all the other main public bodies. The figures given by the International Monetary Fund, the European Commission and the OECD are significantly lower, as are those given by the National Institute of Economic and Social Research. Interestingly enough, the only two bodies that are forecasting the kind of growth in which the Government believe are the investment banks. They are the institutions which, for the past decade, have been gambling with
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their investors’ money in a reckless, over-optimistic manner, and they are the people on whom the Government are relying for advice.

The truth is that the growth of the economy in the next two years is almost certain to be negative or virtually negligible, and the advice of the key independent agencies is that planning must be based on that assumption.

Ms Taylor: Is the hon. Gentleman saying, as many economists and serious commentators in the press are saying, that the mess we are in today is in part, and a good part, a consequence of the actions of the City of London and incompetent bankers?

Dr. Cable: Of course it is. However, I want to move on from ascribing blame to establishing how we should deal with it. To do that, we must take stock of where we are with the public finances. What is very striking from the numbers is that the profile of public borrowing on which the Government are embarking is almost identical to that of the early 1990s. I guess that both the Conservatives and Labour are embarrassed about that and do not want to draw too much attention to it. In 1992-93 and the following year, public borrowing amounted to 7.7 per cent. of GDP, and the current Government are planning 8 per cent. and 7 per cent., which is almost identical. The problem for the Government is that, for several reasons, this is almost certainly too optimistic. Their growth forecasts are optimistic, and they are assuming massive efficiency gains that no one in Government believes in, and, crucially, they are assuming severe control of public expenditure for the foreseeable future: 1.4 per cent. annual growth in public spending. If anybody believes that, they should look at a reference, buried away on page 210 of the PBR, to public sector pension costs. I am talking about not public sector pension liabilities, which is a big issue, but actual cash spending, which is, of course, a non-discretionary item—the Government cannot do anything about it unless they legislate. The reference shows an increase in public sector pensions from £1.2 billion in 2006-07 to £3 billion this year and £4 billion next year, but three years ago the Government were estimating it at only £600 million. That is completely out of control, and it will squeeze other key elements in public service delivery.

Lord Oakeshott, my colleague in the other place, raised this in the Lords yesterday, and our colleagues in the Lords moved a motion recently to try to set up a public service pensions commission based on Lord Turner’s recommendation that this difficult issue should be properly examined. We could not understand why not only the Government but the Conservatives voted against the proposition. They want to keep this in the long grass, but it is a crucial issue that must be addressed.

Michael Jabez Foster (Hastings and Rye) (Lab): Is the hon. Gentleman therefore saying that public sector pensions are unaffordable and that he would want to renegotiate them?

Dr. Cable: In terms of contributions and commitments, the costs are simply unsustainable on the current basis. Although Members are, of course, beneficiaries, we will have to look at this issue, because otherwise elements of public spending will be drastically squeezed to pay for it.

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Mr. Gordon Prentice (Pendle) (Lab): Does not the new top rate of tax cover the commitment entirely?

Dr. Cable: I will come to that later, but according to the IFS the new top rate of tax will yield zero revenue.

Mr. Redwood: On fiscal judgment, if the fiscal deficit were as low as the Government and the hon. Gentleman suggest, I could see the case for this, but is he not aware that we are in fact down to borrow £157 billion this year, before the deep recession hits, which is more than 10 per cent. of national income? That is why some of us think that this is too risky.

Dr. Cable: Let me take that last phrase; is it therefore too risky to embark upon a fiscal stimulus? That is the key issue, and I wish to move on to it. The Conservatives have clearly taken the view that it is too risky; they believe that it is either too dangerous to have a fiscal expansion, or that that will be ineffective. I fundamentally disagree, because it is one of the fundamental duties of Government in times of war and slump to sustain the economy. The Government inevitably are, and have to be, the investor of last resort to keep economies going and ultimately to reduce the level of borrowing, which rises if economies get into a downward spiral. That is a fundamental duty.

The Chancellor had a very good line in his response on Monday, which we all laughed at. It was about past Labour Chancellors, but if he knew a little more about Labour history, he would remember that the really tragic case was not Denis Healey, James Callaghan or Sir Stafford Cripps, but it was a man called Philip Snowden, and his boss, Ramsay MacDonald. They came into office, rather as the Conservatives now hope to do, in a slump situation with the hopes of the nation behind them, and they looked at the public accounts and said, “This is awful. We have to cut back and balance the Budget.” Millions of people suffered as a consequence. That is, I think, the course that the right hon. Member for Wokingham (Mr. Redwood) and his colleagues want us to embark upon.

Mr. Kenneth Clarke (Rushcliffe) (Con): Surely the hon. Gentleman is not asserting that there is no risk in borrowing on this scale against the background of the accumulated debt that is having to be tackled? Does he not accept that if we find it impossible to fund this debt, we will be in appalling trouble? The chances are that interest rates will be driven up by the Government’s need to raise them in order to pass on their bonds, and we will face a serious risk to the value of sterling with further problems arising from that. Surely he is not saying there is not a very considerable risk. There must be a balanced judgment at least. The idea that we have to spend this money is utterly reckless, which is rather out of character for the hon. Gentleman.

Dr. Cable: Of course, the former Chancellor, whose views are always respected here, is making the correct point that there is a balance to be struck and there is risk, and the cost of Government borrowing in the gilts market is a key consideration. However, the fact is that in emergency situations, Governments have a responsibility. That is most obviously the case in war. Nobody expected that Mr. Churchill would stand up and say, “Sorry, we can’t keep on fighting on the beaches because there is
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growing worry in the gilts market about the rising cost of ammunition.” In emergency situations, Governments have to act, and although this is not war, it is an economic emergency and it requires drastic action.

Mr. Graham Stuart: What we have from the Chancellor is a proposal to spend more than the total cost of funding the second world war and rebuilding Britain afterwards, and that, it seems, is still delivering an inadequate—to borrow the hon. Gentleman’s word—fiscal stimulus. Is he therefore suggesting that we should throw caution to the wind and borrow a lot more than the Chancellor proposes to deliver the kind of stimulus he says the country needs?

Dr. Cable: I am not throwing caution to the wind. Indeed, our proposals for tax cuts for the lower paid were fully funded, and in that sense—

Mr. Peter Lilley (Hitchin and Harpenden) (Con): Will the hon. Gentleman give way?

Dr. Cable: Can I just press on?

In that sense, our proposals underline what the Conservative party has acknowledged on funding. The first thing that has to happen, which I do not think the Conservatives are recommending, is that public investment must be maintained, or preferably increased. What is so worrying about the IFS analysis that came out yesterday is that the Government are proposing a cut of 16 per cent. in public investment over the next three years. How on earth is this supposed to stimulate the economy and maintain infrastructure so that it can handle the increased demand when the economy recovers? That makes absolutely no sense.

Let me just take a couple of examples of how this is working through. Housing is the obvious area. The Government make a great deal of the fact that they propose to bring forward £800 million of expenditure on social housing. We want to see more expenditure on housing; it is highly appropriate in this context, and that kind of money would buy about 6,000 houses in the current economic environment. However, the Government said two years ago that they had a plan for social housing costing £8 billion. What happened to it? Where did it go? The truth is that it is stuck, as many of the housing associations are on the brink of bankruptcy because they entered into strange deals with developers at the peak of the market to build shared housing and they cannot progress on that, and the Treasury is quibbling with the housing associations about the funding formula, so nothing is happening. There is, therefore, a wholly inadequate response in terms of public investment. What the Government can and should be doing by way of stimulus is making sure that this public investment does happen.

Mr. Heald: Can I take the hon. Gentleman back to the issue of pension costs? It is true that pension costs in the public sector will go up a good deal because they are index-linked and this year the retail prices index is high. However, is he seriously saying he would want to review or change that, because when all is said and done, these pensioners have earned their pensions and they are entitled to the increase?

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Dr. Cable: I am now beginning to understand why Conservative Members are so scared of the issue, but it has to be faced, both in terms of contributions and entitlements; otherwise, it is fundamentally unsustainable. It is no good Members bouncing up and down here in the Chamber to talk about the long-term pension liabilities of the public sector unless they are willing to address the issue.

Let me move on in my discussion of what the fiscal stimulus actually means. One of the key elements of stimulus is public investment and the other is taxation. The Government have announced this VAT cut. The Liberal Democrats have made it clear that we regard this as not the best way of cutting taxation. There is an interesting little note in the impact assessment suggesting that business will have to pay £50 million to adjust to the change in prices, and then have to pay another £50 million when they change back again in 18 months.

Malcolm Bruce (Gordon) (LD): Is my hon. Friend getting the same reports that I am getting from the construction industry? It expects to lay off hundreds, if not thousands, of people early in the new year when the current house building programme comes to an end. Does he agree that this is an opportunity to use a recession to create infrastructure at a more affordable price than would be the case if we were to wait until the economy started to recover?

Dr. Cable: If the Government were really serious about VAT reform, they would be considering the VAT on home improvements, which is one of the obvious areas that could change the picture.

The Liberal Democrats believe that there should be a significant, but permanent tax cut for low-paid workers; we have suggested the equivalent of £16 billion to £18 billion, which is in the ballpark of the Government’s tax proposals. We propose that that should be paid for by people higher up the income scale. Of course, the Government have put forward what they regard as a redistributive element—the new top rate of tax, which will be 45p in the pound. I have taken an intervention that suggested that that will raise a lot of money, so I shall repeat that the Institute for Fiscal Studies says it will raise no revenue. We should know that, because for many years when we had a similar proposal, the Government told us that it would raise no money. They are now putting this forward, apparently aware of the consequences of their own arguments. It will raise no money for the following reason: why would people with a high income pay a 45 per cent. marginal rate of tax on it when they could convert it into capital and pay 18 per cent., as any tax accountant would tell them to do? Why would they not persuade their employer to give them relief from higher income tax and put it into a pension pot that, again, will accrue relief from the higher rate tax of 45 per cent? Those are the obvious measures that any Government who are serious about income distribution need to address.

David Taylor (North-West Leicestershire) (Lab/Co-op): The hon. Gentleman is making an excellent speech. Does he agree that the IFS has got it wrong when it says that the 45 per cent. rate will raise next to nothing? It argues that the rate will lead to a greater number of people leaving the country and/or using avoidance schemes.
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Those arguments were precisely the ones used in relation to non-domiciles, but there has not been a queue of people leaving the country, and there has been no apparent, substantial increase in the use of avoidance schemes. Is the IFS not making a misleading point?

Dr. Cable: Back Benchers are getting a bit desperate over this. The truth is that even if there were no behavioural effects, the Government would raise £600 million, which is a 20th of what they need to make from their tax cut. This measure is pure tokenism and has no economic significance.

Julia Goldsworthy (Falmouth and Camborne) (LD): My hon. Friend is making a clear case to show that, at the top end of the scale, those on high incomes are able to get around tax changes, whereas for those at the bottom end, council tax and the like are increasing by more than inflation. The pre-Budget report has made an assumption that council tax will increase by 4.5 per cent., but these people probably are not even claiming their council tax benefit and this money comes out of their net income. Do not changes need to be made to help those on the lowest incomes?

Dr. Cable: Absolutely. I am hoping that the right hon. Member for Birkenhead (Mr. Field) will have an opportunity to make his point, because I know that the fact that the Government have not yet fully committed themselves to permanent compensation for those very lowest earners is something that concerns him.

Mr. Angus MacNeil (Na h-Eileanan an Iar) (SNP) rose—

Dr. Cable: I wish to make progress and deal with the bigger question, in quantitative terms, about what is happening in the banking system. The Chair of the Treasury Committee, the right hon. Member for West Dunbartonshire (John McFall), made a very effective intervention in Prime Minister’s questions, reminding us of what the Governor of the Bank of England said yesterday. The Governor said that in relation to the funds that the banks already have—he was not talking about long-term commitments—they are acting in a way that, individually, makes perfect sense. The banks are conserving capital, they are hanging on and they are keeping the Government out of their affairs. They are preparing for the days when they can go back to paying dividends and bonuses. From their own self-interested, short-term point of view, their approach is entirely rational, but collectively it is suicidal. The Governor made that point very clear.

Of course, there are many ways in which we can move on the flow of bank lending—we broadly support the proposal made by the Conservative shadow spokesman, and we have advocated it from these Benches—but before we talk about new institutions, why not focus on the money that is already there? That is the money that the Government have committed, much of which has not yet been taken up, and the guarantees that the Government have offered, which also have not been fully taken up. The Government cannot just walk away from this pathetic decision not to put their own representatives on the boards of the companies that are semi-nationalised. They should be on those boards and they should be setting the strategy of the banks.

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Mr. Darling: I am listening with great interest to what the hon. Gentleman has to say, but he is wrong on this point. One of the conditions of the recapitalisation of the Royal Bank of Scotland Group is that the Government would nominate three directors. If the merger of HBOS and Lloyds goes ahead, we will have two directors there as well. His point on that has been met.

Dr. Cable: In that case, I apologise for getting it wrong. I hope that the Government will do what they did with Northern Rock: publish the terms of reference of these directors to tell them the strategy that they will be required to follow. That is essential to getting the economy going.

A year or so ago, I made myself rather notorious in this place by pointing out that within a few weeks the Government had descended from order to chaos. Within the past few days, a similar transformation has taken place, from hope to despair and anger in the country. Unless we get a more effective response to this crisis, from both major parties, that anger and despair will continue.

Several hon. Members rose

Mr. Deputy Speaker (Sir Michael Lord): Order. Before I call the next speaker, may I remind the House that Mr. Speaker has placed a 10-minute limit on all Back-Bench speeches? That starts from now.

2.46 pm

Ruth Kelly (Bolton, West) (Lab): It is a pleasure to address the House this afternoon, and I for one welcome the opportunity to debate the pre-Budget report. It is an incredibly significant economic and financial statement not only in its own terms, but because it has redrawn the financial and economic dividing lines between the two major political parties, perhaps for years to come.

This afternoon, the Conservative spokesman made an interesting proposal on setting up a new state institution. I intend to discuss in due course how we deal with the resumption of inter-bank lending, but on the fiscal stimulus, the Conservatives have made an historic mistake. I say that because since the middle of September the terms of the debate have changed fundamentally, with the collapse of Lehman Brothers and the systemic risk to the banking system. Not only is the recession potentially severe, but the outlook has deteriorated very sharply, so we must contemplate using all the economic and financial levers at our disposal. That includes using monetary policy to its full effect, wherever possible; using financial policy where that is possible; and using a fiscal stimulus. That is necessary to stave off not only what is now an inevitable recession, but the prospect of a global slump.

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