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Mr. Lilley: The hon. Gentleman is right: we are forbidden, under the present laws, to reduce VAT to under 15 per cent. That is absurd, and we should have asked for a waiver from that requirement. We should not allow that to be a restriction at a time of national emergency. However, it is significant that, by the modesty of their package, the Government recognise that even these measures are at, or even above, the maximum that we can afford, and that more might have had a negative effect.
We need to consider in what circumstances a budgetary stimulus or fiscal expansion has a positive effect, and in what circumstances it has a negative effectthe Government clearly fear the latter if they do more. Helpfully, the European Central Bank and the European Commission have studied the research done on all the fiscalor so-called Keynesianmeasures undertaken by different Governments in the past few decades. They come to some striking conclusions. They say that when Governments deliberately increased their borrowing to stimulate the economy, the effect of such expansionary measures was, at best, small. On half the occasions, the effect was the reverse of the Governments aim. My right hon. and learned Friend pointed out that we know from British experience that that is often the case. In 1976, we had what the Keynesians would call a contraction. Under the influence of the IMF, we cut spending and raised taxation. The effect was immediate. As Lord Donoughue said on Monday last weekand he was a member of Callaghans Cabinetthe economy started recovering the next year, much more rapidly than expected. In 1981, 364 economists said, at what subsequently turned out to be the nadir of the downturn, that the measures that Lord Howe introduced in his Budget would accentuate the downturn because he raised taxes, cut spending and reduced borrowing. In fact, that marked the beginning of a sustained period of rapid growth.
The documents produced by the European Central Bank also show that the opposite has happened. Governments introduced what they thought would be expansionary measures, but they had a contractionary effectthey are called contractionary budget expansions. That is our worrythat the Government have done too much and it will have a contractionary effect. The studies show that such measures are most likely to have the opposite to the Keynesian effect when the Government start with a high level of borrowingprecisely the position we are in. Other countries that have managed their finances prudently and have low borrowing are in a position to take expansionary measures, and I hope that they do so and create markets for us to grow through export-led growth, but we are not in a position to do that on any scale.
The numbers suggest that the debt position is not as alarming as the right hon. Gentleman says. The current public sector net debt is 36.3 per cent. of GDP. In the last year of the Government of which he was a member, it was actually 42.5 per cent. Is he saying that circumstances today are so different from the circumstances that the right hon. and learned Member
for Rushcliffe (Mr. Clarke) inherited, with a fiscal expansion under that Government of 3 per cent. of GDP between 1990 and 1993-94?
Mr. Lilley: I was not trying to make an absurd party political point like the hon. Gentleman: I was quoting the European Central Bank and the European Commission studies of the experience of other countries. They have shown that when other countries have tried to launch a fiscal expansion on the back of a high level of borrowing or deficitand the hon. Gentleman knows the difference between a deficit and the inherited debt of previous Governmentsthere is a danger that it actually leads to contraction. Why does it do so? There are three reasons. First, it undermines confidence. People think, Gosh, the Governments finances are already pretty shot through. If they are going to borrow even more, we had better get out of here.
The second reason is the possible effect of the risk premium, even for Government borrowing. My right hon. and learned Friend made the point that the Government now have to pay more to borrow than private companies, and even French banks. The third reason, which is not often mentioned, is the fear among the general public that the additional money they receive from the Government borrowing more will have to be paid back through increased taxes. The public therefore save that money to pay the taxes in future.
I have always found the idea of Ricardo equivalencethat the general public can estimate the likely tax effects of borrowing in the distant future and predict on whom they will fallvery unlikely. But in the present circumstances, when the Government have spelled out that the short-term boost will be followed by specific and immediate increases in taxation, and when we know from what they have been trying to hide that any uncertainty is only that taxes may be even higher than so far revealed, it is all too likely that people will increase their saving to meet their future tax bills, thereby negating the effect of this attempt at expansion. Having said that, I hope that it works.
The Government are relying on an increase in taxes, and they will withdraw the personal allowance for people who earn more than £100,000or £1 for every £2 of extra income. In effect, that will restore a 60 per cent. marginal tax rate for income above £100,000. In the past, that had a negative yield. We got more money when we reduced the top tax rate than when we maintained it. The Government have learned nothing and forgotten everything, and I hope that they will give us more time in the next Session to rub their noses in what is a very dangerous and risky Budget.
Nigel Griffiths (Edinburgh, South) (Lab):
The right hon. and learned Member for Rushcliffe (Mr. Clarke) was right to identify a prime source of the crisis that so
many economies are suffering as the banks and banking malpractices. As a Member for Edinburgh, which is of course a major banking centre, I am acutely aware not only of the role of the banks, but of the consequences on jobs, general lending and peoples lives.
As a former Minister for construction, I welcome the proposals of my right hon. Friend the Chancellor to draw down spending and ensure that construction projects are started and continued. That will give some relief to what is clearly a hard-pressed sector of our economy.
I am afraid, however, that I cannot take lessons on housing policy from the right hon. Member for Hitchin and Harpenden (Mr. Lilley). He will remember that, under the regime of which he was a very strong part, 2.5 million houses were hit by negative equity, and that 76,000 were repossessed in 1991. Last year, the repossession total was 18,000, and the present estimate for this year is almost half the Conservative figure. That answers the right hon. Member directly.
The right hon. and learned Member for Rushcliffe was willing to face up to the source of the crisis. It may be unpalatable to his Front-Bench team, but he is wise enough to know that the crisis started in America, and is having a global impact
Nigel Griffiths: Well, he is shaking his head, but he does not seem to want me to give way. His Front-Bench team believes that his account detracts from attacks on the Government for being the source of crisis. That is patently ridiculous
Mr. Clarke: My view is that nothing happened in America that did not happen here, and that nothing happened here that did not happen in America. Our worst mistakes were a failure of regulation and our bad public finances. They are the particular features of the crisis here, but should not the hon. Gentleman be cautious about putting forward figures for repossessions and the rest of it? Has it not occurred to him that we might be in this recessions early days, and that 2009 might be very much worse? Does he really believe the Governments reassuring message that we will resume economic growth in the later half of 2009? All their forecasts are based on that projection, but I know of no living person outside the Government who believes that that is credible for one moment.
Nigel Griffiths: And nor do I believe that the right hon. and learned Gentleman can compare in any way the scale of what has happened in Britain or elsewhere to what has happened with Fannie Mae or Bear Stearns, or to the collapse of Lehmans or the present crisis at Citibank. Those institutions power and financial clout are bigger than major economies such as the UKs.
The Conservatives seem reluctant to face up to the fact that in 1997 the UKs GDP per head was the lowest in the G7. People in Britain were poorer and had less to spend than people in America, Japan, Germany, Italy, Canada or France. Now, of course, our GDP per head is the second highest, after the US. In the past decade, the UK has been the only G7 country to escape recession, and in that 10 years it has been the only major industrial
economy to increasefrom 7.5 per cent. to 8.25 per cent.its share of global services. While Government borrowing peaked at 7.8 per cent. under the Conservatives, we brought it down to 1.2 per cent., and Labours highest borrowing in the past decade was in fact lower than the average Conservative borrowing of 3.4 per cent.
Stewart Hosie (Dundee, East) (SNP): The hon. Gentleman makes a point about the growth in our service economy and in our exports of services, but I am sure that, for the sake of balance, he will also concede that there is a deficit of £87 billion in our trade in goods. On his Governments watchand he used to be an unpaid part of that Government1 million manufacturing jobs were lost, which led to the suppression of GDP growth by about 0.5 per cent. a year over the past five or six years.
Nigel Griffiths: Manufacturing output has of course increased dramatically in the past decade, as we have gone from being a relatively inefficient manufacturing country to a highly efficient one. There has been a marked cut in the numbers of jobs in every major industrial country, but this Government have done more to obviate that than any other Government would, or could, have done.
I turn now to the national debt. Again, at 42.5 per cent., it was higher under the Conservatives, as was pointed out in the earlier helpful intervention. Now, at 37.7 per cent., it is lower than the figure for the US, Japan or the euro area. In the 1990s, two thirds of all public spending went on servicing debt and the costs of unemployment. This Government have freed up £23 billion to invest in public services that used to go on servicing the debt and paying for unemployment. That sum is equivalent to half the schools budget.
Nigel Griffiths: That has obviously been made clear in the account: we had the statement and we are having this debate because we recognise the severity of the problem, but we are not going to take lessons from a party that plunged us into two recessions, caused 76,000 people to lose their homes and oversaw a crisis in manufacturing the like of which this country had not seen in history.
On business competitiveness, the Government have taken positive steps to ensure that our economy is strong. At 28 per cent., our corporation tax is the lowest in the G7it was 33 per cent. under the Conservativesand that has helped to create 750,000 more businesses, 90 per cent. of which paid 10 per cent. tax, which is one of the lowest rates in the world.
Nigel Griffiths: No, I am not giving way again. No one is in any doubt about the scale of the economic problems. Just a few short months ago, when my right hon. Friend the Chancellor warned that the UK economy faced problems not seen for 50 years, the shadow Chancellor got to the TV studios as quick as he could to denounce that. Now we know that my right hon. Friend was looking ahead to the problems that we now face, and so was in a better position to measure them up and take the steps that he announced on Monday.
The House will not have forgotten that in 1997, our poorest senior citizens had just £69 a week to live onmore than £50 a week less than they do now. With that £50, the Government have lifted 1.9 million senior citizens out of poverty. The country has not forgotten that in 1997, spending per pupil was less than £3,000. It is now £5,430. Investment in school buildings, including roofs, more than doubled, and we now have 40,000 more teachers in our schools. In our NHS, we have 130,000 more nurses, doctors and consultants, and Labours investment in our health service means that 240,000 people are alive today, recovering from cancer and heart disease, who would simply have died had Tory levels of investment continued.
There has been a decade of growth, a decade of cutting public debt, a decade of lowering taxes, a decade of creating 3 million more jobs, and a decade of investing in public services. The hon. Member for Twickenham (Dr. Cable) made a number of telling points about the decades of failure under previous Governments, but today, the shadow Chancellor showed that, having trawled the record for lessons that the Conservatives could learn, he has found none. As for solutions, he proposes none. He now proposes to do virtually nothing, and that is not an option.
Mr. Michael Jack (Fylde) (Con): If there was a prize for political irrelevance, the speech of the hon. Member for Edinburgh, South (Nigel Griffiths) would get the accolade of the year. Significantly, his All Our Yesterdays way of looking at the economy managed to ignore one trend of the past few years: the build-up of debt that has left this country in a singularly difficult position when it comes to coping with the current economic downturn. If he wants to be honest about figures, he should not be so selective in those that he uses to make his case.
Mr. Heald: I do not know whether my right hon. Friend agrees, but I am sure that the speech that the hon. Member for Edinburgh, South (Nigel Griffiths) gave used to end with the line, And we have ended boom and bust!
Mr. Jack: My hon. Friend makes a point that I missed out in my peroration. I totally agree with him. I wanted to start with the words of the Prime Minister on 17 November. When he came back triumphant from Washington, he told us that those members of the G20 who were at the conference had agreed to do certain things. He referred in the House of Commons to the
full disclosure of toxic assets[ Official Report, 17 November 2008; Vol. 483, c. 22.]
The idea was that that disclosure would be planned for, and revealed, by 31 March next year, but that is too late; it is too long a period. My right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), a former Chancellor, made the point that we need to have some idea of where we are with the toxic debt in our banking community, but that has not been addressed properly, either on this side of the Atlantic or in north America. However we choose to clean up the mess of toxic debt in banking, clear it up we must if we are to get proper banking relations to prevail.
If LIBOR and the bank rate are to come into touch with each other and money is to become more affordable, that problem must be addressed. I have not heard anything from the Government to suggest that they are seriously addressing that issue. All that we hear is that the bankers have been called inthe Government are talking to them and trying to persuade thembut nothing happens in the real world to help small businesses desperate for money that they can afford, or to assist medium-sized businesses with their cash flow or, indeed, to help large businesses so that they can carry on the job of raising working capital at an affordable price.
Mr. Redwood: One problem is that the Government themselves do not even follow transparency. In the pre-Budget report, which is a large document, there are no proper figures on Northern Rock or RBS. I cannot get the accounts on those banks from the Vote OfficeI have to get them elsewherebecause the Government have no intention whatsoever of revealing their own transactions to the House.
Mr. Dunne: Further to the point made by my right hon. Friend the Member for Wokingham (Mr. Redwood), there has not been a single reference to the fact that, only last week, Northern Rock decided to allow its principal securitisation vehicle, Granite, to go under and go into default asset recovery. As a consequence, the Government have sold a share in their own bank worth £3.3 billion, which is much less likely to be recovered, and it will take many years to do so. Where is the transparency on that toxic asset?
Mr. Jack: My right hon. Friend the Member for Wokingham (Mr. Redwood) and my hon. Friend the Member for Ludlow (Mr. Dunne) both make the point that we need a great deal more transparency, and that action is required to address the question of banks balance sheets. Unless banks have the confidence to lend to one another, normal monetary policy will not be resumed.
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