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I made inquiries of the Government, and last Thursday had the courtesy of a telephone call from the head of the civil service, who confirmed that this problem had
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arisen. He asked me not to publicise it for several days in order to give the Government the opportunity to inform the pensioners personally of their difficulties—I think that I have now abided by that. He said that tomorrow, a written statement would be made that would explain the background to the problem.

As the House does not have the opportunity to respond to a written statement, I thought that it would be more useful to mention the subject this afternoon and to pose the obvious questions, to which I hope that the Minister who concludes the debate can reply. How many people are we talking about? How much money is involved? What steps will be taken to retrieve the overpayments? I understand that in some cases those overpayments go back decades, and are potentially enormous. I do not know the answer to those questions, and I hope that the Government will clarify them. I hope that none of us will face the possibility that large numbers of ex-servicemen will suddenly be faced with bailiffs turning up and asking them to repay overpayments, as we have already seen in the appalling instances involving tax credits. I simply ask for a proper explanation of what has happened.

Mr. Darling: I half expected the hon. Gentleman to intervene earlier. There will be a statement tomorrow, but I want to clarify one of the points that he made. He was asking about repayment of money that has been wrongly paid. I think it would be better if I made it clear that that will not happen. It will be necessary to adjust what is paid in the future, but the Government recognise that there have been such payments for a long time. I would not want people to think that we will start clawing back money that has been paid erroneously. Things need to be put right from next year, and there will be a statement tomorrow by the Cabinet Office.

Dr. Cable: I thank the Chancellor for that clarification. I am not sure about the reference to adjusting what will be paid in the future, because that could mean returning to the normal arrangements or it could mean a clawback. We will no doubt receive clarification on that.

I endorse the comments made by the hon. Member for Tatton (Mr. Osborne) about Equitable Life. I think that I have introduced at least three debates on the subject over the past 10 years, and we are finally grinding to a conclusion. It is inexplicable that yet another postponement has occurred. The hon. Gentleman did not mention the dreaded word “compensation”. I would simply like to ask the Chancellor whether in the current environment compensation payments would be regarded as a fiscal stimulus; that might help the Government to face the issue that they will have to face.

Let me turn to the main issues surrounding the economy. The position is deteriorating very fast. Quite apart from the difficulties in our own economy, within the past few days the five leading German economic institutes have suggested that the German economy may decline by 5 per cent. next year. We are seeing similar figures from the United States. The fixed-interest market, if it is extrapolated forward, suggests that the markets are already expecting that the period of deflation will last for five years in the US and for three years in the UK. We are talking about something much more serious, much deeper and much longer than any Government forecasts have yet acknowledged. I do not say that with any relish, but simply because we need to face up to the implications of what is involved.

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One commentator observed this morning that this is no longer a question of averting the modern equivalent of the 1929 crash. The crash has already happened. The question is whether we can avert 1930, 1931 and 1932. As a reminder, in that period the American economy declined by 30 per cent. and took a decade to recover. Britain’s experience was not dissimilar.

We are talking about a magnitude of crisis way beyond what has been contemplated hitherto. We need to approach it in that spirit, and not with the tiresome party games that we have several times a week in which we decide whether the Prime Minister is 80 per cent. or 20 per cent. responsible for the problem and whether, after the crisis is over, he should be subjected to the economic equivalent of a Nuremburg trial. The responsibility is shared. There have been policy failures here and there is a big international crisis at the same time. We do not need to say anything else at this stage. We need to focus on solutions.

I want to address three issues that have come to the fore in the past few weeks that we need to think a little bit about. The first is the issue of exchange rates, which is relatively new. Secondly, we need to reflect a little on where we are with the fiscal stimulus arguments. We then need to talk a little more about the banks. The hon. Member for Tatton raised the problem—if it is a problem—of the euro-sterling exchange rate for the first time several weeks ago. He was chided by the Government for being unpatriotic and for talking down the pound. I want to make it clear that I have absolutely no truck with such idiotic arguments. It is perfectly reasonable for the hon. Gentleman, or anybody else, to talk about the pound, and to do so pessimistically or optimistically. That is an entirely sensible subject for debate and there is no reason whatsoever why he should not talk about it—although whether what he said is sensible is a different matter.

Kelvin Hopkins (Luton, North) (Lab): Talking about the euro-sterling exchange rate, does the hon. Gentleman accept that for a decade or more the pound was overvalued relative to the euro, and that we had a structural trade deficit as a result? Have we not just experienced a sensible readjustment? Does he think that depreciation is a necessary condition, if not a sufficient one, for Britain’s recovery?

Dr. Cable: I agree with almost every word of that, which makes me wonder why the issue was raised in the first place. Is it a problem? Why is it a problem? If it was raised as a problem, what is the solution? The question of whether there is a problem goes back to the precise point that the hon. Gentleman has just raised: all the manufacturers tell me that they are privately rather relieved that they can compete more effectively in their export markets and, even more importantly, compete against imports.

Mr. George Osborne: You want to join the euro.

Dr. Cable: I shall come to that in a moment.

If there is a problem—the Conservative spokesman clearly thinks that there is—what is the solution? We need to ask why the pound has been falling for a prolonged period against the dollar, and for a rather shorter period, but substantially, against the euro too.
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The standard answer, of course, is that there are interest rate differentials and the markets expect bigger movements in interest rates than would occur in the eurozone. Of course, that is a mechanical answer. Why has the British reaction to the crisis had to be so much more dramatic than that in the eurozone? There are two reasons for that. First, the bubble in the British housing market was much more extreme. The other reason, which is an important one, is that Britain has a much bigger financial sector.

Professor Buiter at the London School of Economics, who I believe is offering advice to the Conservative party on these matters, has set out a very careful argument along the lines that Britain is beginning to suffer from, or already suffers from, what he calls an Icelandic problem, which is that it is very dangerous for a middle-sized country such as Britain to have a very large banking sector or financial sector. That exposes such countries to big financial shocks and to big movements in the exchange rate. If that is the case—I think that it probably is—there are two practical solutions. First, of course, one can reduce the scale of the financial sector and do to the City what Mrs. Thatcher did to the coalmining industry; one can reduce vulnerability in that way. However, that is brutal and negative and destroys a lot of wealth creation in the process.

The other solution is to lock in the exchange rate to a much bigger area. I shall not cause excitement by saying that that is what we ought to do, but we certainly need to have an open mind on the issue, and when the crisis is over, we may well have to return to it. I leave that with the Conservative spokesman. If he wants to raise the pound-euro issue, he must presume that there is a problem and that there is a solution—and if that is not the solution, I would be interested to know what is.

Mr. Pelling: I thank the hon. Gentleman for giving way, despite the fact that that displeased his colleague the hon. Member for Taunton (Mr. Browne), who is sitting next to him. Is not a better measure of the problem the credit default swap and the way in which the spread is widened out to 113 bases at once for five years of CDS? Surely, as has been suggested in the media, the problem is that the Government are ultimately liable for the £9 trillion of liabilities and assets from the banks. The country is exposed to a very real danger if the Government are driven to nationalising the entire banking sector, excluding HSBC.

Dr. Cable: I think the hon. Gentleman is putting my point in a slightly different way: the British financial sector is extremely large relative to the economy and a lot of risks flow from that. I should be interested to hear his solution.

The second issue arises from the controversy with Mr. SteinbrĂ1/4ck in Germany over the past few days about fiscal stimulus. I agree with the hon. Member for Tatton that there is an element of schadenfreude. The Germans have been lectured for years about how wonderful it would be to adopt the Anglo-Saxon model of financial capitalism and how they should copy everything the British Government have been doing, but have now discovered that it was not so clever after all. The Germans are obviously having a bit of fun, but Mr. SteinbrĂ1/4ck
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has been making a serious point about the lack of wisdom—as the Germans appear to believe, or at least he does—in having a fiscal stimulus.

The Conservatives have taken a certain amount of moral encouragement from the fact that they have at least one ally in the argument. I am not sure how firm the ally actually is, because over the weekend the Germans seem to have capitulated and agreed that there should be a fiscal stimulus after all. None the less, there is a strong argument made by the Germans and, among others, the Polish right wing, that we should not have fiscal stimulus. We need to examine such arguments carefully, because this is absolutely crucial to where we go from here.

Mark Lazarowicz (Edinburgh, North and Leith) (Lab/Co-op): Will the hon. Gentleman give way?

Dr. Cable: I will take interventions shortly.

Western economies are in an extreme state of crisis. If interest rates cannot do the job, fiscal stimulus has to be the alternative. As my hon. Friend the Member for Eastleigh (Chris Huhne), has already pointed out, we already accept a fairly high degree of consensus that a large part of the present deficit will have to happen; we are arguing about whether a little more should be put in on top. In the British case, we are talking about between 1 and 2 per cent.

What are the arguments against the fear felt by the Germans—and, presumably, the British Conservatives? Their first argument is that there is no point in a fiscal stimulus because people will not spend, but will just save. They will see taxes coming in the future so they will see no point in spending the windfall; they will hoard it and save it, so nothing will happen. There may be an element of truth in that, but it depends on exactly how the measure is applied. One of the reasons why we shall be coming back to discuss the VAT changes on Wednesday—having prayed against the order—is that they are not the best way to provide fiscal stimulus. They create precisely the problem that the Germans have identified, which is why we argue that fiscal stimulus is better done the American way, predominantly through public works. What the Americans call shovel-ready projects are a much better way of getting income into the economy.

The other way of arguing that fiscal stimulus is a bad idea is to say that although we get something today, we shall have to pay for it tomorrow—an argument that Keynes famously demolished with the line:

He was not simply saying that the long term is further away than the short term, as it obviously is, but was making the more profound point that if Governments do nothing the recession is even deeper, so the public finance position is even worse. Government deficits and debt will be even worse if there is no financial stimulus. That is the core of the argument that all the other members of the developed world—and, it would appear, the Chinese and the Indians too—now accept. It has to be right—and Mr. SteinbrĂ1/4ck has to be wrong—that a fiscal stimulus is a necessary part of the solution. I am very disappointed that the Conservatives have not understood that fairly simple basic point.

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Mr. Andrew Love (Edmonton) (Lab/Co-op): On the basis of what the hon. Gentleman has just said, and the gloomy scenario he painted at the beginning of his speech, is there any room for further fiscal stimulus in the future?

Dr. Cable: There may have to be, although we are rapidly exhausting it. The issue we face—and a question I intended to put to the Chancellor—is whether what has been done is too little, too late to avoid a major contraction. The issue being raised by the chairman of the United States Federal Reserve is that we need to go further than cuts in interest rates and fiscal stimulus; he used the phrase “quantitative easing”, which is a nice, economist’s way of talking about printing money. That raises all kinds of concerns in “The Dog and Duck” about what printing money actually means—but in fact it would mean the Government borrowing from the central bank and using that money either to make cash available or to buy up bonds to drive down the interest rate yield on long-term bonds and the cost of capital, or it could mean buying up assets. The Government can do lots of things, but that is the next issue on the agenda. If we are to have a forward-looking approach to the problem, it would be useful to know the Government’s view of that idea. Would they support it? Are they advocating it?

Mr. Osborne: The question is whether Britain can afford a fiscal stimulus, not whether China, or indeed the United States, should undertake one. There is pretty broad consensus, expressed recently by the European Commission:

In other words, Britain cannot afford extra discretionary borrowing. It relates to the point that the hon. Gentleman was making earlier when he was comparing the British and Icelandic situations; there are serious issues not only about Britain’s creditworthiness, but also about how a country that goes into recession with a high budget deficit can afford to add to it in a discretionary way.

Dr. Cable: The European Commission is not always right, and on this occasion I think it is wrong, for two reasons. The first is that although the British economy undoubtedly has problems—the British fiscal deficit is one of the largest in the western world—British public debt in relation to the economy is not exceptionally large. It is lower than in the United States or in Germany, which puts Mr. SteinbrĂ1/4ck’s comments in context—but I do not totally disregard what the Conservative spokesman said; we have to be careful. We are already beginning to see that highly indebted countries such as Italy are finding it increasingly difficult and costly to borrow in international markets. If we reached that point, we would be in some difficulty. What he says is not completely wrong, but there is much scope for the Government to act, and they should act.

Mr. Dorrell: Does it not give the hon. Gentleman pause that the Government’s figures, set out in table 1.1 of the pre-Budget report, show that if they borrowed in accordance with their plans, both the new borrowing they incur and the total stock of Government debt
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resulting from that borrowing would be higher as a percentage of national income than at the peak during either the 1975 recession or the recession of the early 1990s?

Dr. Cable: The right hon. Gentleman is right, because this recession is very bad and public debt as a share of the economy will indeed rise to alarming heights, as it will in all other major western countries.

The Conservatives constantly ask the Government to confirm that British debt will double. Of course it will. Why cannot the Government admit it? It is part of the logic of what is happening.

Kelvin Hopkins: Does the hon. Gentleman accept that there is still more scope for increasing taxes on the very rich? That revenue, if not spent directly, could help to service Government debt.

Dr. Cable: That is right, and we have made a few suggestions about how it could be done. We wish the Government had pursued them rather than flying their little flag about the 45 per cent. rate, which will not raise much money at all.

Mr. Frank Field: The House would find it valuable if the hon. Gentleman could spell out the differences between Government and Liberal Democrat policy. Might the difference be that his policy has a much greater chance of raising revenue, because he would change the value of tax allowances to the rich—for people who were claiming the allowance, who would thus already be paying tax—whereas we just hope that the rich will be a little more honest in completing their tax returns?

Dr. Cable: I thank the right hon. Gentleman for making my point. I think the Government are saying that they will not make the change for two years, but if the top rate is raised to 45 per cent., top-rate taxpayers will have two options: to convert their income to capital, on which they need to pay only 18 per cent., or to put the money into large pension pots, where they will have relief at the 45 per cent. top rate. It is to stop those two things happening that we suggest a more far-reaching reform of the tax system, which would raise much more revenue.

Let me move on to my third issue, which has to do with banks. Again, the Conservative spokesman was absolutely right to emphasise that decisions taken on the banking system are much more important than many of the issues that we have been discussing. The balance sheet of two of our banks—the Royal Bank of Scotland and Barclays—is substantially bigger than the whole of Government debt; that puts what we are talking about in context.

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