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Mr. Hands: Will the Minister give way?
Angela Eagle: The hon. Gentleman must let me get on with the rest of my speech. I should be interested to hear what his party would be doing and where they would be making the £5 billion of public expenditure cuts by April were it in Government.
On the broader economic environment, there is a serious problem with the global credit crunch that is continuing to grip countries across the world. It is a global difficulty that began with problems in the sub-prime mortgage market in America. It spread with a contagion that infected banks across the world. That is why the only way to resolve the problem is through global action.
The US and Japan are in recession, as is the euro area. Growth in India and China has slowed markedly. As the IMF said:
“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.”
According to the most recent IMF forecast, the world’s advanced economies are set for their first annual contraction in the post-war period. The UK is no exception. As the PBR set out, short and medium-term growth prospects in the UK remain subject to exceptional uncertainty. We have recognised that the UK, like the US, the euro area and others, is in recession, so we have taken the action necessary to support people now and to lay the foundations for recovery.
The problem with a lack of lending and a constraint on credit is a world-wide one, and all the important banks trade in every part of the world. The finance sources that the banks have used in the past few years have dried up, and the seizing up of the wholesale money markets has certainly taken vast amounts of liquidity out of the market. Financial markets affect everybody’s daily life. If they fail to function properly, the impact is felt right across the economy and by every one of us, so restoring and maintaining financial stability is critical. In October, we took action to stabilise and improve confidence in the banking system, and we recapitalised the banks. As a result of our action, a collapse of the banking system was avoided, and no savers in UK banks have lost money. This action was emulated around the world and resulted in some improvements in bank lending, with the rate of interest at which banks lend to each other coming down since the autumn. The three-month LIBOR rate is down from more than 6 percentage points to 2.
Mr. Hands: Is the Minister not being a bit disingenuous? The main reason why interest rates have come down has been the cuts in central bank lending rates. Credit spreads, the key indicator of how well banks are lending to each other, have completely exploded during that time, showing that, despite the bank bail-out in October, there is still a massive problem with bank lending in this country.
Angela Eagle: It is clear that there is a massive problem with bank lending throughout the world, not only in this country, and that is why we took the action that we took yesterday. We are putting money into direct support for small businesses, in particular through loan schemes to help them with short-term difficulties. As the hon. Gentleman rightly points out, however, the banks are still not lending to each other normally, and the global economic downturn has intensified, partially as a result of that, since the autumn.
We are seeing a vicious circle of weak banks damaging the economy and a weakening economy hurting the banks, so the Government have acted again to reverse that vicious circle, to get credit flowing again, to limit the extent of the downturn and to support the recovery when it comes. That is why we had the announcement from my right hon. Friend the Chancellor yesterday of a comprehensive package of measures designed to reinforce the stability of the financial system, to increase confidence in the capacity to lend, and to support the recovery of the economy.
The UK recognises that this is a global problem, too. We have to get banks lending to each other not only in Britain, but across international borders, and we can do that by working with other Governments. We hold the presidency of the G20 and will take the lead in doing all we can to prevent a recurrence of those problems. In doing so, we will work very closely with our European partners.
Owing to the economic and financial situation, tax revenues have fallen throughout the world. As companies’ profits fall, so do the proceeds from corporation tax. Receipts from the financial sector alone are expected to fall by 35 per cent. this year, and slower growth in wages means less income tax. Fewer people buying houses and falling prices mean less money from stamp duty, where the tax take is down 40 per cent., and this all means that borrowing will be significantly higher than forecast. As a result of the combined effect of lower revenues and our commitment to maintain spending and extra support to the economy, borrowing will rise from £78 billion to £118 billion, or 8 per cent. of GDP. But from 2010, as we take action to reduce borrowing when the economy begins to recover, borrowing will fall, and by 2015-16, we will once more be borrowing only to invest.
The economic crisis and action by Governments throughout the world will inevitably mean sharp increases in national debt relative to GDP and, again, the UK is no exception. In the previous economic cycle, however, we paid down debt from 42.5 per cent. in 1996-97 to 36 per cent. 10 years later, and, according to the Organisation for Economic Co-operation and Development, we had the lowest net debt in the G7, excepting Canada, before the global economic shocks hit us. So, we can allow borrowing to rise to take counter-cyclical action and make the recession that we face shorter and shallower than it would otherwise have been without that action. Our economy cannot insulate itself from the global financial turmoil, but credible medium-term objectives and mechanisms for short-term flexibility mean that the Bank of England and the Government can deliver the necessary support to the economy without compromising their respective commitments to low inflation and sound public finances. Again, as has been said, in responding to the global financial crisis, the Bank of England has reduced interest rates by 350 basis points since September to an all-time low of 1.5 per cent. We have been clear that we expect that to be passed on to mortgage holders and lenders.
As most people recognise, monetary policy and interest rates on their own are not enough to stimulate the economy. There is a widespread international consensus that a fiscal stimulus to help the economy is the right thing to do. To do nothing—to walk on by as people struggle to keep their jobs and homes, and to let the recession run deeper and longer—would be a massive mistake. The US, France, Germany, Italy, Japan, India, China, South Korea and Australia have all announced fiscal stimulus packages in recent months, and more are expected to follow.
That approach has been agreed by the European Council and the leaders of the G20. It is backed by parties of both left and right on every continent, international institutions, such as the IMF and OECD, and business groups, such as the CBI, the Bank of England and many more. The Conservative party alone does not back it. Instead, it wishes to slash public spending by £5 billion this April. We believe that we need immediate action to boost economic activity to help us emerge quicker and stronger from these difficult times and to face the future with confidence. If we do not act now, it will cost more to the economy and public finances and much graver difficulties will result for society. That is why the pre-Budget report represented a package of substantial fiscal action to help the economy now with a £20 billion fiscal stimulus between now and April 2010—about 1 per cent of gross domestic product.
We are doing everything in our power to give real help to home owners and businesses. We have cut VAT and are introducing £3 billion of capital projects on housing repairs and insulation, school extensions, general practitioner refurbishments and transport improvements in order to provide jobs now—when the economy is under the most pressure. We are increasing support for, and making payments to, pensioners and families with children, as well as all taxpayers on modest to middle incomes, who will receive a tax cut of £145 in April. Through the new home owner mortgage support scheme, we are helping home owners to stay in their homes if they experience a redundancy. Also, we will continue to invest in public services, as we have done during the past 10 years. Investing in schools or hospitals, and modernising infrastructure and transport links, is not just an effective way of stimulating the economy, safeguarding jobs and protecting incomes, but vital for the future strength and health of our country.
We have seen the long-term damage that cutting public investment does to the essential fabric of the country and the support that people need. Since 1997, we have doubled the NHS budget, which has helped to cut hospital waiting lists. Spending on education is 60 per cent. higher, which has helped to improve schools and exam results. Transport spending is up by 70 per cent., with more than 130 major road schemes and record numbers travelling by rail.
As the pre-Budget report set out, over the medium term, the Government’s financial policy objective remains to ensure the sustainability of the public finances in order to protect economic stability and long-term growth. It set out plans, therefore, to deliver a sustained fiscal consolidation from 2010-11 onwards, when the economy is expected to be recovering and able to support a reduction in borrowing. Our objectives for fiscal policy in the face of these shocks remain unchanged. It is right that in the pre-Budget report the Government did all that they could to support the economy in these difficult times, taking immediate action to support the economy and setting out a path for ensuring fiscal sustainability.
The Government’s objectives of smoothing the path of the economy in the short term while ensuring sound public finances over the medium term are consistent with the October European Council conclusions, which confirmed that the stability and growth pact should be applied in a manner that reflects current exceptional economic circumstances. The objectives are also consistent with the European economic recovery plan agreed by the December European Council, which calls for an EU-wide fiscal stimulus of about 1.5 per cent. of EU GDP, and recognises that a temporary deepening of the deficits is justified, given the scale of the economic challenges facing us. Furthermore, to ensure sustainability of public finances, it calls for consolidation with economic recovery.
These are exceptional times that require immediate action to help people and to build a stable economy. We have made our choices—to help businesses and homeowners, to help people into work, and to boost incomes now. That is possible only because the Government have taken the deliberate decision to support people and businesses through these difficult times. That is the programme set out in the 2008 pre-Budget report and that, with the approval of the House, is the basis on which we will send updated information to the European Commission. I welcome the opportunity to debate it this afternoon.
5.1 pm
Mr. Hands: I welcome you to the Chair, again, Mr. Amess, and I thank the Minister for her explanation of the documentation before us. Much of her information ended up being incorrect and extraneous to our debate, but it was nevertheless helpful to have it on the record.
As the Minister has mentioned, this is my first speech from the Front Bench. Initially, when I saw the Maastricht treaty in front of me, I thought that a few Members of the House would probably be jealous of the opportunity to make their Front-Bench debut talking about the Maastricht treaty, but I shall not be drawn down that route, tempting though it may be.
We are here to consider the statutory obligation on us to consider the UK’s economic and budgetary position as a result of the treaty, and what we have to report to the Commission. The timing is incredible, with our public finances being in such a disastrous state. So, this is an annual assessment of what is described in the Maastricht treaty as Britain’s
“medium term economic and budgetary position in relation to public investment expenditure”.
In other words, the Government are attempting to persuade the Commission that spending and borrowing are under control, so this debate could hardly come at a more opportune time.
I am, as you might know, Mr. Amess, a member of the European Scrutiny Committee, and it is not entirely clear to me whether this annual document goes through that Committee. I do not recall having seen it. It would be helpful to hear from the Minister whether it is subject to the usual scrutiny processes of EU documentation in the Commons and the Lords.
The figures in the pre-Budget report have been completely blown out of the water. In the debate on this matter last year, which I have mentioned, the same thing happened, mainly due to the time lag between the PBR in early October and the consideration in early December of the convergence programme. As it happened, a lot changed in 2007 to challenge those assumptions considerably, and the same is true this year.
That last debate was in December 2007, which was before Northern Rock had been nationalised. At that time, the credit crunch was very much with us, but its effect was not properly perceived, certainly not by the Government. In that debate, my hon. Friend the Member for South-West Hertfordshire said:
“This is a period in which we should be running a comfortable surplus. These are the good years in an economic cycle, but we should prepare ourselves for the slowdown that we may be about to enter. However, we enter more difficult times at a time when the Government have little flexibility as far as the public finances are concerned. They are running a deficit and borrowing far more than they planned to or should do. We have the worst structural deficit of any major western economy, which is not something to be proud of.”—[Official Report, Fifth Delegated Legislation Committee, 6 December 2007; c. 9.]
Thirteen months later, we can see that those were ominous words, but who could have predicted just how difficult the situation would be as we consider the new report today?
As it happens, we will not need to wait for the Commission’s response to the UK’s submission, as it effectively made it yesterday in the document that I have already mentioned—the interim economic forecast for the whole of Europe. The Times today says that the Commission’s assessment of the UK economy will leave the Chancellor “red-faced” at today’s ECOFIN meeting. Indeed, the Commission projects a decline in GDP of a massive 2.8 per cent. this year in the UK, compared with the 1.25 per cent. decline that was projected in the PBR. That is more than twice as bad, and that situation has changed in just two months. The Commission’s view is even more pessimistic than the most recent independent forecast of a decline of about 2.5 per cent. or more this year.
On the 2010 numbers, the Commission has blown the Government’s numbers out of the water. The Chancellor has forecast an expansion, in 2010, of 1.5 per cent., but the Commission claims that it will hardly register, at barely one quarter of 1 per cent. The Commission expects unemployment to grow by 900,000 people in the next 12 months, putting the UK total up to 2.55 million by the end of the year, meaning that it will surge to 8.2 per cent. from the current 5.3 per cent.
As you might have seen in this morning’s newspapers, Mr. Amess, the EU is predicting the deepest UK economic slump since 1946. Brussels is equally full of condemnation for the state of our public finances. It says that the UK’s national debt is set to swell to £1.06 trillion, or 72 per cent. of GDP, by 2010, which is a very fast rise of more than £400 million on previous levels. That compares with the current Government forecast of debt being only 65 per cent. of GDP in 2010, which is already a massive figure, and accelerating rapidly from the 43 per cent. that was seen as recently as 2007. In only three years, there will be an increase in our indebtedness from 43 per cent. of GDP to 72 per cent. That is a shocking record.
The Commission is forecasting that the UK will have a deficit of 8.8 per cent. this calendar year, and 9.6 per cent.—
5.7 pm
Sitting suspended for a Division in the House.
5.22 pm
On resuming—
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