I am just as good a monetarist as the next man. I am a Keynesian, and nobody wrote about monetarism with more authority than Keynes, but deflation is a very much more difficult problem to deal with than inflation. Everybody knows how to cure inflation, although it is extremely painful. To some extent, everybody had proceeded on the assumption that Keynes had buried deflation. Well, it has now risen from the grave and it is extremely difficult to cope with, because once one has reduced interest rates to a very low level, the monetary weapon ceases to be at all effective, as the governor of the European Central Bank pointed out yesterday, quoted in the F inancial Times.
In America people have been pouring money into the three-month Treasury note market, which as a result is already showing a minus zero return. At the same time, the long end of the bond marketthe Government endhas gone up enormously. I, naturally, have all my life savings in the American dollar and in long-dated bonds. The dollar has gone up enormously and the bonds have jumped by 20 per cent. in the past month. I do not understand why all our pension funds are collapsing. All the fund managers had to do was to do that and they would all have had enormous increases, but the fact is that the people who run our affairs are quite fantastically incompetent.
I made five suggestions to the Prime Minister on the Floor of the House before his Chancellor produced the pre-Budget report. He said subsequently that he had accepted and adopted them all, but that I had not convinced those on my Front Bench. That is not a new experience for me. I did not succeed in convincing those on my Front Bench not to join the exchange rate mechanism; I failed to persuade them not to introduce the poll tax; and I failed to persuade them not to support the invasion of Iraq. So I shall try again and suggest that we should not rule out the possibility of fiscal stimulus at a time when we face the prospect of the biggest deflationary slump that anybody can remember and when the monetary weapon has been virtually neutralised.
That is one of the reasons whyI want to try to curry favour, as always, with my Front-Bench teamI am a great admirer of their plan for a national loan guarantee scheme. It will be £50 billion, and what I like so much about it is that it will be a magnificent fiscal stimulus. As was pointed out with reference to the south American experience, one can be quite sure that the banks will not take on any of the risk. It will all be taken on by the taxpayer, it will be paid for by extra borrowing and it will do an enormous amount of good, because the three great dangers are, first, the banks not continuing and having to be bailed out, secondly, that the banks will not lend to each other, and thirdly, that the banks will not lend to business. The national loan guarantee scheme will greatly encourage banks to lend to business, which is exactly what we want, and will perhaps mean that unemployment will therefore not soar quite as high as I fear.
Malcolm Wicks (Croydon, North) (Lab): Most of the debate has, understandably, been on the grave economic situation that faces the country and our constituents. I, however, will move on to issues connected with welfare reform and the future of our welfare state.
I preface my remarks by saying something with which most people would agree. I believe that the advent of the welfare state, which my party in particular is pleased about in terms of our role, but which nevertheless has politically mixed parentage, has been one of the most civilising forces in our society. It has helped tackle some of the debilitating impacts of inequality, and within that welfare state our social security system is crucial. That is why I support reform of our welfare state.
Our welfare state, as it has developed over the past 10 or 20 years, faces many pressures and demands. Some are demographicthe ageing of our population, and hence the importance of the pension question, both the state pension and occupational pensions. There is a debate to be had about what I regard as unfinished business in relation to the costs of long-term care, which are a significant worry to many of our constituents and many families.
There have also been significant family pressures. We have seen a revolution in patterns of family formation and family dissolution, including the fact that growing numbers of our children in Britain, for reasons that we can understand, now spend significant parts of their childhoods living with just one parent, rather than two. All that raises a host of questions and any sensible answers that we seek in the coming months and years need to be grounded in an understanding of what a welfare state should be about in the early years of the 21st century.
Recently, I visited one of my constituentsan elderly gentleman who wanted to talk to me about these issues. He had two political heroes: Winston Churchill, whose portrait was on the wall, and Ernie Bevin. My constituent told me that during the war years and the period of social reconstruction, based significantly on the Beveridge report, after the war, British people understood what he called the rules of the game. He meant that people would make national insurance contributions when they couldthat was their responsibilityand that, when in need, they had an equal right to take from the community chest of those contributions. His concern was that he felt that there was no longer any kind of consensus about the rules of the game. He thought that the welfare state did many good things, but that people did not understand the foundation of values on which it was based. I have been reflecting on that since my conversation with my constituent from Croydon, North.
Clearly, the Governments, and surely Parliaments, objective is that those in a position to work or who could be in a position to work, with adequate supportperhaps through extra training and skills enhancementshould do so. That would be good for the individual and their family, good for the economy and good for the public sense of fairness; it would build up confidence again in our welfare state and what it is about. Moving from principle to practice has never been easy. A number of specific questions arise, such as, Which citizens are able to work? Those with the most serious disabilitiesand I mean the most seriouscannot work, and they deserve our support through social security and wider welfare state provision. But how do we account for the extraordinary increase in the numbers of our citizens on what we have until recently called incapacity benefit? Between the late 1970s and the mid-1990s, the number of people claiming it trebled.
There is a different kind of question: how old should be the youngest child of a lone parentwho is sometimes, but not always, unsupported by the childs other parentbefore that lone parent can reasonably be expected to seek a job? There are many other questions, but those two issues of incapacity and lone parenthood are at the heart of our reform agenda. They account for millions of our people, both adults and children. They involve billions of pounds of the publics money and are complex and controversialnot least because many of those affected are among our most vulnerable and deprived fellow citizens.
To help us through this political, economic and human minefield, I should say that the starting point should be about developing a newI suppose that I really mean a renewedpublic understanding, and therefore as much consensus as possible about the relationship between the citizen and the state. That should start with citizenship, a concept to which too often we pay lip service but neglect. What are the rights of the citizen in relation to the welfare state? Equally, what are the citizens duties and responsibilities? I mean the duties to work, when that is practicable, and to provide for dependants, even when separation or divorce means that one parent no longer lives permanently with hisor sometimes herchildren.
The British welfare state was established on a firm principle, which, as I implied earlier, was widely accepted; it was certainly accepted by my elderly constituent. It was that if people could work, they should work and they would work. However, if they could not, they could draw benefits, as of right, without stigma or fear.
David Taylor (North-West Leicestershire) (Lab/Co-op): Does my right hon. Friend agree with me about one point in the fine speech made by the hon. Member for Louth and Horncastle (Sir Peter Tapsell)? I believe that the hon. Gentleman went wrong in saying that the benefits provided to those who might be squeezed out of work would be infinitely more generous than they had been. That gives the impression that people can somehow fall back on cushioned indolence. That is the impression held by some members of the journalistic profession and of the wider population. It is not the case, however; benefits are a base from which to work, but they are certainly not generous.
Where are we now on these issues? I believe that the great majority of our constituents still accept the principle that those who can, need to work. I met another constituent at my advice surgery who was going to enormous efforts to maintain her work in the most difficult family circumstances, including domestic violence. That sense of work ethic is still held by the vast majority. However, I have learnednot so much through my past research studies, but more through the seminars, so to speak, at my advice surgerythat a minority do not accept their responsibility to work. Understandably, the majority of our constituents feel resentment towards them. A minority feel that work is merely one option alongside an equal option to stay on benefits. I have met those people; they sometimes come from households in which no one has worked for 10 or more years, despite having adult status.
We need to consider the workings of housing benefit; there is some review of the issue at the moment. We also need to consider the issue of fraud. To be blunt, if we are honestthe public know this, and we shouldwe need to look at those who are lone parents in terms of their benefit status, but are part of a couple in terms of their living arrangements. We need to be honest about that if there is not to be a gap between what the public understand on the estates and elsewhere, and what we in Parliament understand.
Alongside those work-shy householdsmy elderly constituents would call them thatare other citizens in the most chronic need. When I go around my constituency, I am struck by the fact that those in greatest need are still those with serious disabilities. Sometimes they are young children who have suffered the consequences of measlesthat is another debate. Sometimes they are grown-up children and sometimes they are the frail elderly. Those people, who often get a great deal of support from the public, need yet more. They and their carers need some of the help that we are squandering at the moment by not putting the principles about work first into practice.
Some of the people who feel that they have a right to stay on benefits have little understanding of the effect of that on their fellow citizens; those who pay for benefits include people on low wages, and their circumstances are often little different from those of people on benefit.
In conclusion, although I support the broad thrust of what the Government are doing on what we now callcopying the Americans, for some reasonwelfare reform, we need to approach the task sensitively. The Government are doing that. I always thought it nonsense that until very recently we were telling lone parents that they could stay on benefit until their youngest child was 16. That was nonsense, given that many other parents in two-parent families were working when their children were far younger. The policy did not do the lone mother or her children any good.
I like the direction in which we are moving now; we are being more realistic about the issue. However, we need to be sensitive, and Ministers are being so. There is some talk that people should be in work when their child is one year old. Let us be sensible. By all means, we should encourage such parents to go on training and enhance their skills and the rest, but such children are so preciously young and we should not spoil a good policy by appearing to be too tough-minded and too negative about those caring for the youngest child.
Sir Peter Viggers (Gosport) (Con): The right hon. Member for Croydon, North (Malcolm Wicks) made a thoughtful and constructive speech, and I am sorry not to follow his theme, but I want to talk about the economy.
Britain is better placed than other economies to withstand the slowdown in the economy.
I am able to report that the British economy will continue to grow throughout this year and beyond.
we enter this period of uncertainty better placed than any other major economy.[ Official Report, 12 March 2008; Vol. 473, c. 285-287.]
Since then, of course, the markets have blown the Government a decisive raspberry. The pound has fallen 26 per cent. against the dollar and 14 per cent. against the euro. The Government have clearly got this completely wrong, and the situation is dire. For 10 years, they have been boasting about their brilliance, notably the current Prime Minister with his glutinous self-satisfaction in his Budgets. How did they get away with it for 10 years? The truth is that during that period we have had a tailwind of globalisation, with first, the Asian tigers, and then the BRIC countries of Brazil, Russia, India and China. They have had 9 to 14 per cent. growth, and the rising tide of prosperity has covered the horrors that this socialist Government have imposed on us.
There are two main issues: first, we are over-taxed; and, secondly, we are over-governed. Both are equally important. Tax is cumulativewe pay direct taxes, indirect taxes, fuel duties, excises, and council tax. The burden of tax is too high, unfair and, in many cases, too complicated. We are over-governed, with all kinds of legislation under the umbrella of human rights, European legislation, health and safety, freedom of information and the ghastly tax credits system. We are being micro-managed, and too many public sector jobs and pensions have been created. The situation was really quite bad, but it has taken this Government to make it dire.
The hon. Member for Twickenham (Dr. Cable) tried to think of a doppelganger for the Prime Minister and came up with Stalin and Mr. Bean. I have been pondering this, and I think that I have come up with a better one. Think of a big guy, a bit overweight. He is a Labour Member of Parliament, difficult to work with, thinks that he is brilliant and the rest of the world is stupid, tells us that black is white and white is black, and goes around stealing from pension fundsyes, it is Robert Maxwell. I mention pension funds because the two legacies that this Prime Minister will leave are the damage to the economy and the damage to the hopes of many people in their thirties and forties who have no chance of enjoying the level of dignified and comfortable retirement that current pensioners have. The Prime Minister is responsible for that serious problem, which results from the loss of and damage to pension funds together with the weakness of the stock exchange and assessments on longevity.
I want to turn to the banking crisis and where we stand now. The diagnosis of the problem and the analysis of how to work our way out of it have been very unsophisticated. In the United States, the concept of putting together a $700 billion fund to buy out toxic assets was completely wrong. Similarly, in this country, pumping money into the banking system has been unsophisticated. Why should anyone invest in an asset of uncertain value? The best analogue for our present situation is the situation at Lloyds of London in the early 1990sit was called the spiral. Lloyds underwriters would underwrite a risk and pass it on to sub-underwriters, and it went round in a spiral, with sometimes the same risk being insured several timesnot just twice or three
times but many times more than that. The spiral caused Lloyds immense problems. I was there. Following my time as a director of a secondary bank in the 1970s, I sat on the Council of Lloydsin fact, I sat on its audit committee as an outside nametrying to put the situation right.
Lloyds, the insurance market that almost collapsed under heavy losses, survived through a restructuring that was the prototype of the bad bank, offering hope to financial institutions grappling with toxic debt, said Lord Levene of Portsoken, chairman of Lloyds.
Lord Levene went on to explain how this was done. Banks should create a subsidiary to accept the assets that cannot be confirmed to be of a certain value; for the sake of shorthand, I will call them toxic debts. The toxic debts are put into the toxic subsidiary, and then the purged entitythe parent companyis a bank that can demonstrate its value and the fact that it is worthy of investment. As I said, why should anyone invest in an institution if its assets cannot be confirmed to be of a certain value? That is why people have been so reluctant to invest in the City and in banks, and why all banks are now reluctant to pass on credit to other banks and make loans.
That approach can work out extremely well, as it did in the case of Lloyds. The subsidiary in question was called Equitas. Each of the insurance underwriting syndicates delegated its toxic assets to Equitas, which was managed separately. As Lord Levene said in his interview with the Financial Times:
If you have got this great boulder hanging over your head you need to concentrate on that all the time, he said. It makes it easier to move on, if you say we will let someone else concentrate on that and we will carry on running the ongoing business.
In the case of Equitas and Lloyds of London, the asset was eventually sold off to Warren Buffett. The toxic assets had been managed on. The great advantage of doing it in that way is that by pulling together the spiral of collateralised debt obligations and other assets that have been loaned on from bank to bank and identifying the weakness in the market, one finds that the loss had provision made against it by more than one institution, so the provision against loss is not only duplicated but multiplied many times, and the loss is less than one originally expected.
The Government have completely failed to identify the main problem, which is the banks unwillingness to lend. The Conservative Opposition are exactly right in proposing a scheme that would guarantee lending and carefully target action where it is most needed. This Government are floundering. I have never felt more strongly that workers and advisers in the Treasury and the Bank of England should argue their point strongly with the Government. Above all, however, it is crucial that we have the opportunity to give the voters a chance to vote this Government out and a competent Government in.