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I should like to refer to several points raised in the debate. The suggestion was made that the Government coupon on the preference shares should be reduced; I think that the phrase that the hon. Member for Tatton used was that 12.5 per cent. was “too expensive”. What is too expensive, I ask? When Barclays tried to raise money for itself in the market, it paid 16 per cent., so what is too expensive and what is too cheap? If we go much below 12 per cent.—if the Government were to negotiate—we would be talking about a subsidy to privately owned banks. We would effectively be resorting to privatising profits and socialising risks, as the old
adage has it; that is what the Government seem to be being urged to do. It may be the right thing to do; perhaps there is no alternative. However, let us be clear about how much subsidy is being advocated.
Mr. Tyrie: Would the hon. Gentleman agree that the 16 per cent. that he quoted is not really a market figure? There scarcely is a market for the papers that we are talking about at the moment. That market hardly exists, so the figure is not a reasonable comparator on the basis of which to try to calculate the size of the subsidy.
Dr. Cable: It is the only comparison we have, and it is what the bank paid, so presumably that is the alternative benchmark that we have to use. None the less, my point is a simple one. If the rate is to be cut, what will it be cut to? If there is to be a subsidy, who will pay it, and what should it be? I agree with the more fundamental point that the hon. Member for Tatton made—indeed, I have made it frequently myself in the past few weeks and months—which is that the banks are being given completely contradictory objectives. They are being told to lend more. They are being told to lend less by the Financial Services Authority, which wants them to hold more capital—perhaps too much capital, given the context. They are being told to repay the Government’s loans. They also have their own objectives—to service their shareholders.
Surely the one thing that the Government have to do above all else is to be absolutely clear about the priorities. If the priority is to lend more, that has to be spelled out explicitly, and it has to override the other objectives. It does not matter whether we achieve that by putting people on boards, or simply by making the objectives very clear. What is completely lacking is any clarity at all about the strategy for the banks. That really has to be sorted out.
Finally on banks, the Conservatives have come up with a positive suggestion—the idea of guaranteeing new credit. That suggestion is part of the mix, and I welcome it. I should confess that when it comes to that subject, I have some form: 25 years ago, in the last banking crisis, I was invited to work with Lord Lever, whom some Labour Members may remember, on coming up with a way of getting credit going in a banking crisis—in that case, the crisis related to Latin America. Indeed, my hon. Friend the Member for Eastleigh was involved in the same exercise. The solution that we came up with was a loan guarantee scheme. It never actually worked. The problem posed was as follows: either we insist that banks take a share of the risk—that is the right and fair thing to do, but if we do that the banks do not do anything, because they do not want to take risks—or we effectively underwrite the lot and nationalise credit. It is not clear which of the two is being proposed. It seems to be a bit of each, or something between the two.
A rather perceptive comment was made by the political editor of The Independent, who said that
“the National Loan Guarantee Scheme is potentially even more statist than Labour's schemes.”
That may be right. If the scheme is to work on a large scale, that is what is involved—the nationalisation of credit, and some of us are not totally repelled by the idea. None the less, we should be clear about what is involved.
In conclusion, we are faced with a desperately serious and deteriorating situation. The figures that have come out in the past few weeks for some of the other developed countries are positively alarming. What is required is not a single-bullet solution, but a combination of measures: a radical approach to monetary policy, cutting interest rates, fiscal stimulus and radical action to get bank lending working. What is needed is not one of those measures, but all of them.
Mr. Deputy Speaker (Sir Alan Haselhurst): Order. Let me remind the House that Mr. Speaker has placed a 10-minute limit on Back Benchers’ speeches; it applies from now.
6.15 pm
John McFall (West Dunbartonshire) (Lab/Co-op): It is a pleasure to speak in this Queen’s Speech debate. The 2008 pre-Budget report stands as a testament to the significant change in outlook for the economy over the next few years. There has even been a change since the forecasts provided by the Treasury at the time of the 2008 Budget. The downturn has spread to the real economy from the financial sector, so it is appropriate and important that we examine the issue of bank lending.
The Governor of the Bank of England, in his evidence to the Treasury Committee on the November inflation report, stated that he was in
“no doubt that the single most pressing challenge to domestic economic policy”
“to get the banking system to resume lending in any normal sense”.
However, the market is telling the banks that they must hoard capital, so individually banks are trying to strengthen themselves by reducing their lending. That action on the part of each individual bank is having a collective effect. The reduction in bank lending is slowing the economy to the point where jobs are being lost and companies are becoming insolvent. That in turn raises the loss rates on bank lending.
One expert witness before the Committee said:
“It seems to me to be not adequate to give the banks money to back up their balance sheets and then expect them individually to behave in the collective interest; they cannot. Any self-respecting bank management, not having confidence that the others were going to do the same, would batten down the hatches and be cautious—to the point of recklessness from the point of view of the collective interest.”
Let me stress the key phrase: banks are being
“cautious—to the point of recklessness”.
The Government face a dilemma. Despite the considerable injections of capital and the credit guarantees, bank lending seems either unavailable or overly expensive. Where, ask the public, is the payback for the taxpayer assistance provided to the banks?
We must be prepared to think flexibly, perhaps even radically, about the next steps. If the lending panel is unable to persuade the banks to start lending again, we may have to be bolder in our prescriptions. Nothing should be ruled out. Indeed, when the Governor of the Bank of England came before the Committee a couple of weeks ago, he said that nothing should be ruled out,
including the possibility of nationalisation. The Government must consider directing the banks to lend, as suggested by Roger Bootle to our Committee. It could be considered a market failure if the banks did not lend more, so a public sector intervention could be warranted to produce a better overall outcome, as I have said.
Of course, if the banks take that direction, it will raise its own problems. A careful balancing act is in operation between the Government’s need to receive repayment, the needs of the banks, which do not want further to damage their future profitability, and the needs of consumers and businesses, who need additional lending by the banks now. One of the messages that the Government should get across to the banks is that they should consider themselves nationalised for quite a long time, so that we can get the problem sorted out. The Committee visited Sweden; in the 1990s, that country had problems, and some of the banks there are still nationalised. In fact, there is still 20 per cent. Government investment in the top bank there. A long time is needed to sort out the problems that we are discussing.
Kelvin Hopkins: I am very interested in what my right hon. Friend is saying. What is wrong with a substantial part, or all, of the banking sector being permanently nationalised?
John McFall: That is my hon. Friend’s viewpoint. If we can get the system working, and do not rush to judgment, that is fine, but I want the system to work. We do not want the banks to lend recklessly. In the long term, we recognise that bank lending will need to come back into line with savings. We will need to close the £700 billion funding gap. I am talking about the difference between the level of savings and lending in the banking system; that gap has opened up since 2001, when savings and lending were in equilibrium. Seven or eight years later, there is a £700 billion gap. We will all have to address that in the medium or longer term. We need the banks to lend constructively in the short term. At present, viable businesses are not getting the money that they need, and if the economy is to recover as the Government forecast, the banks must begin to lend. The pre-Budget report highlights that lack of lending as a risk to the Government’s forecasts, and certainly the Treasury Committee will scrutinise that problem regularly. We will conduct a banking crisis inquiry in the new year, when it will still be a big feature.
May I discuss the fiscal stimulus to the public finances which, as the hon. Member for Twickenham (Dr. Cable) eloquently said, is absolutely necessary if we want to avoid a longer, deeper recession? The fiscal stimulus—excluding weakening tax revenues and a rising benefits bill; the so-called automatic stabilisers, which have been accepted by the official Opposition—has cost £20 billion so far. It is not a question of whether we can afford that but of whether we can afford not to have a fiscal stimulus. The answer to that is a resounding no.
Economic growth in 2009 is forecast to be about half a percentage point higher than it would have been in the absence of a fiscal stimulus. The 2005 figures from research undertaken by the House of Commons library show that the Exchequer cost for each additional unemployed person was about £10,000 per year in benefits and lost national insurance contributions. Those figures take no account of indirect costs, such as
reduced output and corporation taxation, increases in bad debts, and the social costs of unemployment, which result in higher demands on the NHS and social services agencies. They do not take account, either, of direct local authority costs through housing and council tax benefits and free school meals. Action at this stage can therefore prevent catastrophe at a later stage for individuals and families.
We cannot allow the recession simply to take its course, and wait for the resulting redundancies and repossessions to materialise. Not only would that be completely unfair on thousands of hard-working families and undo a decade of the work Labour has done to combat poverty and promote social and financial inclusion. But as I have said it would be expensive in the long run. We cannot rule out the possibility that we may need to go further and invest more to guide the economy through the downturn. The Government should consider putting money into the pockets of those with the lowest incomes—they are the people who need the most support during these tough times, as they are most likely to spend rather than save any extra money given to them—as that would provide a kick-start to the economy.
I have looked at the blogs of certain right hon. and hon. Members, including the right hon. Member for Wokingham (Mr. Redwood), who said on 10 December:
“Any tax reductions this year should be Income Tax reductions helping the lower paid.”
That is a very good start to the fiscal stimulus—someone is coming on to our side on that issue. There are a number of inconsistencies in the argument made by the official Opposition. They have said quite clearly that they would do nothing to protect the homes and jobs of families across the UK during the recession, and the Leader of the Opposition said on the “Today” programme last week that he would let the “automatic stabilisers” operate—he would allow tax receipts to fall and unemployment costs to rise, as is normal during a recession.
However, as I said in an intervention, Treasury figures show that most of the Government’s borrowing is down to those automatic stabilisers, which the Conservatives support. Next year, when the Government’s fiscal deficit reaches 8 per cent. of GDP, only about 1 per cent. of that will be due to the Government’s fiscal stimulus measures, with the other 7 per cent. made up of increases in borrowing relating to the automatic stabilisers. Indeed, figures from the Institute for Fiscal Studies, which the official Opposition love to quote, show that over a five-year period until 2013, due to automatic factors alone, projections of Government borrowing have increased by more than £310 billion compared with the outlook at the time of the March Budget. That is far above the Government’s discretionary measures, and the Conservatives have committed themselves to it. The Conservatives are therefore committed to increasing public debt, and they should be honest, clear and transparent about the issue.
The Conservatives have spoken, too, of a tax grab after 2010. Again, according to the IFS, the measures in the PBR will increase the tax take by only 0.6 per cent. by 2013. It is economic growth that will be the major factor in paying off the extra debt, not higher taxes. When the economy returns to growth, the automatic stabilisers will therefore reverse. The official Opposition need to be reminded that between 1997 and 2002, the Labour Government decreased public sector
net debt from the 43 per cent. of GDP that they inherited to 29 per cent. That was not the result of higher taxes, but of economic growth and careful financial management. When the deputy governor of the Bank of England, Sir John Gieve, appeared before the Treasury Committee and was asked about that extra borrowing, he said that if we went back to the position in the early 1990s with GDP debt at 8 per cent., that could be cleared up over a 10-year period. We must therefore have faith in the fiscal stimulus, and in the longer term ensure that the budget is balanced. If we could do it from the ’90s to 2000, we can do it now.
Roger Bootle said in The Daily Telegraph:
“Extra borrowing by the Government, if it encourages more output, can be self-financing.”
The debts can be paid off when the economy returns to growth. The official Opposition, however, would cut spending now, at the worst possible time for the economy. Cuts in public spending mean cuts in benefits and public services, and public sector job losses. At a time of recession, that is economic madness. The Government plan to reduce spending when the time is right, to allow our debts to be paid off when the economy returns to growth, and they are absolutely correct to do so.
The official Opposition say that under the Government’s policies public debt is too high. Again, the Leader of the Opposition said on the “Today” programme:
“We are going to have the public finances of Italy”.
What absolute nonsense. What sort of statement is that? The Leader of the Opposition should know that the public sector net debt in the UK will peak at 57 per cent. of GDP in 2014, which is lower than today’s public sector net debt figures for France, Germany, and the USA and, indeed, Italy, which has double that figure at over 100 per cent. The debts of other countries will increase, too.
The Conservatives have found themselves on the wrong side of the argument on the international stage, as the G20 have agreed with the Government. They have found themselves on the wrong side of the argument with respected economists such as Sam Brittan, who said:
“Maxims about debt that might be prudent for families can be the height of folly for governments.”
They have found themselves on the wrong side of the argument with the former Conservative Cabinet Minister, Michael Portillo, who wrote in The Sunday Times yesterday that
“the opposition is... doomed to replay its bad dream.”
He said that the Leader of the Opposition would find himself on the same ground as two previous leaders of his party, the right hon. Member for Richmond, Yorks (Mr. Hague) and the right hon. and learned Member for Folkestone and Hythe (Mr. Howard), and would be asked repeatedly at the next election where the cuts would come from. We should not allow the British public to face the chill winds of the economic recession over the next few months alone. We must do everything to assist and help them, so that the recession is more palatable for them, we can come out the other side, they can spend and we can end up with a balanced budget.
6.28 pm
Sir Peter Tapsell (Louth and Horncastle) (Con): Under the 10-minute limit for speeches, one can really utter only a few soundbites, without giving any supporting arguments. I will save nine and a half minutes by saying that I agree with almost everything that the hon. Member for Twickenham (Dr. Cable) said, and that I am a regular reader and admirer of Mr. Bootle’s articles in The Daily Telegraph. That saves a lot of argument.
To be entirely serious for a moment, I am probably one of the few people in the House—perhaps the only one today—who remembers the 1930s slump. My father was unemployed, and I remember my mother weeping in the kitchen, and all that. I agree with the hon. Member for Twickenham that we are facing a very grave situation indeed which, I am afraid, will be comparable, in due course, with the 1930s. So I do hope that the House of Commons will stop the amusing knockabout atmosphere in which these matters have largely been discussed up till now. They are too grave. Nobody enjoys parliamentary knockabout more than I do, but the country faces the gravest crisis since May 1940. The whole world capitalist system is in danger and there could be mass unemployment in this country in two or three years.
In 1932, 20 per cent. of our work force were unemployed. I have listened with interest and studied all through the past week the quotes from Germany, but it is worth remembering that Chancellor BrĂ1/4ning, who was the chancellor in the last years of the Weimar republic, was advancing views and pursuing policies almost identical to the speeches that we have just heard from the German Minister of Finance. Although it was quite unintentional on Chancellor BrĂ1/4ning’s part, he had the effect that whereas the Nazis got 8 per cent. of the vote in 1928 and 20 per cent. in 1930, they were in power by 1933. Herr BrĂ1/4ning, as he had then become, very wisely fled to Harvard and spent the rest of his very long life lecturing on the merits of classical economics.
I am not suggesting that anything of that kind is likely to happen in Germany again, but it is interesting that Chancellor Merkel slapped down her Finance Minister within 48 hours by signing up to a fiscal stimulus of €200 billion for the 27 countries of Europe. My German friends—hon. Members may be surprised to know that I have quite a lot of them—tell me that she is waiting to produce a much bigger fiscal stimulus at the same time as President-elect Obama’s Administration produce theirs. I predict that when President-elect Obama becomes the President, he will produce the biggest fiscal stimulus that the world has seen since Franklin Delano Roosevelt.
Of course, every country is different, and each country is influenced by its history. The German nightmare has always been the inflation of the 1920s, and our nightmare has always been—though perhaps much more among my generation than among younger Members—a return of unemployment. I remember when the Speaker in Ted Heath’s day had to suspend the sitting of the House of Commons when unemployment went over 1 million. There would not be that reaction today, but in the early 1970s everybody in the House remembered what unemployment was like. People have forgotten it, and it will be much more difficult this time because the benefits system is so infinitely more generous. The enormous increases in expenditure that we will have to make in order to look after our unemployed will make the whole financial situation even more difficult.
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