As I understand it, the Chancellor has announced that he would take £5 billion in efficiency savings from Government Departments from 2010 onwards. There is absolutely no indication from the Government which Departments that will come from. They cannot tell us what the total spending will be on health, defence, schools or anything else, so it is a little unreasonable of the hon. Member for Wolverhampton, South-West
(Rob Marris) to ask me what my health spending would be as opposed to the Labour partys, when we do not even know what the Labour partys plans are because they came up with the £5 billion figure and have not filled in the details yet. Once again, further evidence that everything they say on spending is total nonsense.
Stewart Hosie (Dundee, East) (SNP): Before the shadow Chancellor moves on from VAT, may I point to him that it is £12.5 billion of real money in the real economyabout 1 per cent. of GDP? Would he have been more satisfied if the Government had been straight and said that business would keep that to see themselves through the recession, rather than pretending that it would be passed on to consumers?
Mr. Osborne: I know one business that kept some of the VAT for itselfthe Labour party, whose own shop did not pass on all the VAT cuts. Some businesses made use of the potential secret fiscal stimulus.
I was speaking about the lack of evidence that the stamp duty holiday, the VAT cut and so on had made the slightest difference. There is plenty of evidence that the prospect of a trillion pound national debt and the tax bombshell to pay for it is undermining national confidence in the future, and that makes the recession worse today. We will begin to see proof of whether the Prime Ministers tax and borrow recession plan is working when we see the unemployment figures later this week, and particularly when we see the unemployment figures in January and February, by which time the Government will have been dealing with the recession for more than half a year.
The Prime Minister has staked his claim to office on the performance of the economy. Let him, then, be judged by it, just as we are prepared to be judged by the positive action that we now urge on the Chancelloraction that really would help reduce the length of the recession and instil the confidence that we need for a future recovery. That action begins, as my hon. Friend the Member for Bournemouth, East (Mr. Ellwood) said, by addressing the problems in our credit markets, for this is a credit crunch, and until we address the lack of credit, the Government are only scratching at the surface of the deep problems that we face.
The problem for the Government, and particularly for the Prime Minister, is that it requires an admission that he does not want to make. That admission is that the bank recapitalisation may have rescued the banks back in September and October, but it has not rescued the wider economy. There remains an acute shortage of credit. An over-leveraged economy is de-leveraging [Interruption.] The Chief Secretary to the Treasury, who survived the fire that was taking place behind her on the Andrew Marr programme yesterday, is obviously very excited by the incident and is gabbling away. If she wants to make an intervention, she is more than welcome to do so
Mr. Osborne: I notice that, again, there was not a word on Equitable Life; perhaps the Chancellor will deal with that issue. In a recession, of course we want to be getting money to the front line. I think that the money for things such as the pensioner bonus could have come from within Government.
Mr. Osborne: By the Chief Secretarys own admission, there are billions of pounds of efficiency savings to be made. We have said that the £12 billion VAT cut was a waste of money. If, when he responds, the Chancellor of the Exchequer can provide any evidence that that cut is having a significant impact on consumer confidence, or changing the spending patterns of British people in the run-up to Christmas, I will be delighted to hear it. So far, we have seen absolutely none.
Mary Creagh: What would the hon. Gentleman say to the right hon. and learned Member for Rushcliffe (Mr. Clarke), who spoke in support of the VAT cut on Sky News yesterday? He said that the best fiscal stimulus was a VAT cut, and that such a cut gives a little boost to consumer demand and stops us hitting the bottom too hard. Is this another split in the Tory party?
Mr. Osborne: With the greatest respect to the hon. Lady, I should say that I think that she is reading the planted Whips note from three weeks ago. It has not been updated to take account of the fact that my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) has made it very clear that, given the scale of Government borrowing, this could not be afforded. He said that in the House and on many occasions. I apologise, but if that was a Whips note issued yesterday, the Labour party needs a new set of Whips as well as a new set of notes.
Mr. Andrew Pelling (Croydon, Central) (Ind): On the hon. Gentlemans plans for recapitalisation and repairing the banks, why has the Conservative party set its mind and not made any positive comments about the use of what might be described as the bad bank solutionthat is, taking bad debts off the banks balance sheets so that they feel more confident about lending to each other? Has that been a consideration in policy making within the hon. Gentlemans party?
We are looking at all the options. The idea of a bad bank is at least worth considering, although the problems that the troubled assets relief programme, or TARP, encountered in the United States make it clear that that route is not easy. However, as I am sure the hon. Gentleman is aware, because of his knowledge in this area, there is plenty of speculation that this may
not be the end of the story of bank recapitalisation when it comes to rescuing the banks. We may need some further form of recapitalisation. That might take the form of injections of share equity, as we have seen, or something else, such as a TARP scheme for the United Kingdom. It is not sensible to rule any of those options out, but if we look at the problems with the Paulson planor the Paulson-Geithner plan; we will see what Mr. Geithner does in officewe see that there may be other, better routes to pursue.
Another aspect of bank recapitalisation was raised by my hon. Friend the Member for Bournemouth, East. As I said, there remains an acute shortage of credit. An over-leveraged economy is de-leveraging at an alarming rate, and money is being withdrawn from our economywithdrawn because those who used to fund loans from the wholesale markets cannot get that wholesale funding; withdrawn as US money market funds and other international investors pull back from the UK because they can see the truth about our economic prospects; and withdrawn as recapitalised banks use what resources they have to pay the Governments coupon or buy out the Governments stake as quickly as possible, instead of using the resources to lend out to business.
The fact is that the 12 per cent. rate that we are charging the banks is too high; it is more than twice the rate that the American Government are charging and half as high again as the rate that the Germans and French are demanding. Instead of summoning the bank chiefs to endless summits and briefing the press in advance about the ticking-off that they are going to get, the Chancellor would surely spend his time better looking at exactly what he is asking the banks to do. He wants them to pay the Government coupon, repay the preference shares, rebuild their balance sheets, lend more money in a deteriorating economy and pass on rate cuts to borrowers while protecting rates for saversno wonder that last week the Council of Mortgage Lenders took what for it was the pretty extraordinary step of issuing a press statement:
Current policy objectives are conflicting and incoherent...The tug of war with lenders being pulled in every direction at once needs to end.
The Treasury and the Prime Minister need to go back and negotiate a different deal with the banks, cut preference share rates, and cut the costs of the inter-bank guarantees, as the Dutch have done. If that requires them to swallow some pride, they should swallow a bit more and introduce, alongside the recapitalisation deal, the Conservatives national loan guarantee scheme, for which we have been calling for over a month.
Earlier, in his statement on the European Council, the Prime Minister said that the Chancellor is about to announce a lending scheme of some sort. We will wait to hear what he has to say about that. I hope that he follows our lead and the model that we have set out, which has been discussed with and approved by many business organisations and individual businesses. We need the Government to underwrite, for a fee, lending from the banks to businesses in the same way as they are underwriting lending from one bank to another. That is the only way to ensure that sound firms get their overdrafts extended and their loan facilities renewed. It will not be enough merely again to back up securitisation in the international markets.
I would argue that directly guaranteeing lending is the only way to restart the credit insurance that, for example, underpins the supply chain, the absence of which contributed to the sad demise of Woolworths. Everyone knows that that is required. The CBI, the Federation of Small Businesses and the British Chambers of Commerce all support a version of the Conservatives national loan guarantee scheme, and it needs to be introduced now. The Chancellor of the Exchequer, who has a long and distinguished history of copying the ideas that we propose from this Dispatch Box, is more than welcome to copy this one. If he does, it is of course an admission that the Government are looking to the Conservative party for solutions to the Labour partys recession.
Mr. John Baron (Billericay) (Con): To substantiate what my hon. Friend is saying about our proposals for a loan guarantee scheme, is he aware of further evidenceif that is requiredfrom a new survey by Essex chamber of commerce showing that a quarter of all businesses have found that their banking terms and conditions have deteriorated markedly in recent weeks courtesy of the banks tightening of conditions? There is clear evidence that credit flows are not working and small businesses are suffering, and the Bank needs to stop talking, get on its bike and start acting to get some fresh proposals.
Mr. Osborne: I agree with my hon. Friend, and I would be delighted to read the survey from Essex chamber of commerce. He makes a good point. There are all sorts of ways in which credit is being withdrawn from businesses. In some cases it is simply refused, in others a very high interest rate is being charged, and in others a very high arrangement fee is being charged. This credit famine is manifesting itself in several different ways. There are other ways in which the Government can help businesses that are struggling to stay afloat and to keep people in work, which I entirely agree with the right hon. Member for Birkenhead (Mr. Field) is the key priority for the Government. They could allow businesses to defer their VAT and tax bills, cut national insurance costs for the smallest employers, or provide a chapter 11-style breathing space so that problems can be worked out before the liquidators are sent in.
Mr. Hands: I thank my hon. Friend for giving way, although this is not a question about Germany. One of the sectors that have been particularly badly affected by the credit crunch is that of housing associations building social housing, which are being offered terms by banks whereby they will get new loans only if they renegotiate the terms of their existing loans to give them higher interest rates. Does he agree that one of the worst effects of the inability to get banks lending falls on people in our society who desperately need new houses and proper Government financing to be delivered for those homes now?
Mr. Osborne: I absolutely agree with my hon. Friend that that is another example of how the credit problems in the economy are affecting all sorts of different sectors. One of the Prime Ministers great boasts was that he was going to build 3 million homes, but house building has virtually ground to a halt. That is due not only to the lack of a market for homes to be sold to the private sector but to the lack of credit for social landlords and the like. That is further evidence of why we need to address the credit problems.
The Government can do other things to help businesses, all of which would keep people in work over the coming months, which must be the priority. With a freeze on council tax, which I am delighted to say many Conservative-controlled councils are trying to bring about anyway, and which a Conservative Government would help them to bring about, we can bring rising household bills down and give greater confidence in the future.
That greater confidence has to be the priority. We have to rebuild confidence in Britains ability to pay its way in the world. People need to know that we can bring public spending under control and get government to live within its means. Our independent office for budget responsibility will tell the country the truth about this countrys liabilities, including the liabilities for the 10 years of dodgy PFI deals that they all signed up to.
Rob Marris: On the point of control of Government expenditure, the hon. Gentleman is making a thoughtful speechhe is more thoughtful today than he is often, and I salute him for thatand I understand that in the medium term he cannot tell what will happen to the economy, as none of us can. However, perhaps he could tell us, without contrasting it with the spending of the Labour Government, what the position of his party is in the medium term on the percentage of gross domestic product that a Conservative Government would spend each year?
Mr. Osborne: Since we are in a recession of unknown length, and the hon. Gentleman cannot tell me what gross domestic product will be even in a years time, let alone in three or four years time, how can I be expected to offer a percentage of that as what a Conservative Government would spend? I do not believe in setting figures as a percentage of national income for public expenditure; I believe in public expenditure that is affordable for the Government given the prevailing economic circumstances and the demands of the public sector, and that is what I will do.
Mr. Pelling: It is generous of the hon. Gentleman to give way to me a second time. He has shown that he is determined to use realistic policies to bring the economy out of trouble, but one of the problems for the banks is that they are so shocked by the losses that they have incurred, they are unwilling to risk any further losses. Would his loan guarantee scheme provide protection for the banks initial losses? It is only by following that route that the scheme will be successful.
Mr. Osborne: The way in which we envisage the scheme working is that the losses will be shared pari passu. It would greatly reduce the risks to which the banks are exposed, but to remove all risks for the banks could lead to some considerable distortion in the operation of such a scheme. It is right, by the way, to use the banks ability to assess credit risk in businesses, and the network that they have.
Mr. Osborne: Let me give way one more time to the hon. Gentleman. He is hovering because he sees a potential opportunity opening up in the next few months and I want to give him every possible platform.
Chris Huhne: I would like some clarification of the hon. Gentlemans fiscal policy. Is he still committed to the full use of the automatic stabilisers, and, if so, does he accept that the vast majority of the projected increase in Government debt will come about through the use of a fiscal policy that relies on the automatic stabilisers?
Mr. Osborne: As my right hon. Friend the Leader of the Opposition, I and many other Conservatives have said, we are committed to the use of the automatic stabilisers, as the Conservatives were when in government in the early 1990s. There are several components of national debt. There is the element of the automatic stabilisers, of course, but there are other elements, too. The Government took a large structural deficit out of the boom years, almost alone among the advanced economies, into a bust at about 3 or 4 per cent. of national income. That is an absolute scandal. They had the biggest boom of almost any economy because of the size of financial services and the property industry, but still managed to run a large deficit. That is part of the problem. There may be a new form of structural deficit caused by their over-reliance on tax receipts from the City and propertywhen those may return we do not know. There is the element of the automatic stabilisers, and then there is the additional discretionary element, such as the VAT reduction. We took a decision on that, and I think the Liberal Democrats will also vote against the VAT cut later in the week. Both parties agree that that is not the best use of Government money.