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Mr. Michael Meacher (Oldham, West and Royton) (Lab):
Like most other speakers, I want to concentrate on the recession and how we should be dealing with it. Let me say at the outset that I strongly support the
Governments fiscal stimulus. When I listened to the shadow Chancellor, I heard nothing that persuaded me to change my mind about the fact that the Tories are making a very big mistake if they believe that showering the banks with billions of pounds of public subsidy at taxpayers expense is compatible with treating the situation of the rest of the population in the real economy as a no-go area, with retrenchment and massive public expenditure cuts.
Having said that, I believe that the means that have been chosen to deliver the fiscal stimulus need re-examining. Let me explain why. First, the Government are obviously right to try to increase demand by trying to get the banks to lend more credit and putting money directly into peoples pockets, but we seem to be getting the worst of both worlds. The Chancellor keeps urging the banks to pass on lower interest rates and to lend more credit, but it is just exhortation without any sanctions. There are no targets for lending in exchange for the billions of pounds of taxpayers money that the banks have received, and no penalties for falling short. I regret that my right hon. Friend the Secretary of State for Work and Pensions has left the Chamber. In his statement about welfare reform, conditionality was all the rage, but when it comes to the banks, in a much bigger economic forum, conditionality appears to go out of the window. That is a mistake.
The Government have also tried to put money into peoples hands directly through the 2.5 per cent. VAT cut. The trouble is that it is extremely costly in terms of lost revenue and it is disproportionately less effective. The deadweight cost of £12.5 billion in increasing demand is extremely high in the context of retail discounts, which have already been given, of 20 or 30 per cent. A far better way of trying to get money spent is to give to all people on the standard rate or below non-cashable vouchers for domestic goods and services that expire in, say, three or six months. They would have little option but to spend those vouchers. That would have been a much better idea.
The second area where the fiscal stimulus could be managed differently and rather better concerns the question of affordability, about which there has been some discussion today. The Tory argument is that the level of public borrowing is extremely high, which it is, and that we therefore cannot afford the fiscal stimulus. There are two ripostes to that argument. First, the Leader of the Opposition has made it quite clear several times that he is fully in support of the automatic stabilisers, which give benefits to people when they lose their jobs, and that they should apply in the normal way during the recession. Those stabilisers, of course, account for the vast majority of the increase in borrowing. If we look at the Treasury figures, we see that the Budget deficit will rise from 3 to 7 per cent. of GDP precisely because of the automatic stabilisers. All that the Government have done is add a further 1 per cent. To say that we can afford 7 per cent. of GDP but we cannot afford 8 per cent., which appears to be argument of the Leader of the Opposition, is totally unconvincing.
There is another answer to the central dilemma of alleged affordability that I fear neither Front-Bench team seems ready to contemplate. To be fair, the Chancellor did impose a higher tax rate in the pre-Budget report:
5 per cent. more for those earning more than £150,000, starting in 2011. I regard that as welcome, but it is little more than window dressing. The money raised will be only about £670 million, the rise applies to only 1.3 per cent. of taxpayers and the money will not start rolling in until 2011, whereas we need the money now.
That approach would have potential if it were used more widely, however, and I shall give two or three examples. First, companies are currently given their CO2 pollution allowances free. After the EU Council last weekend, they will be required to buy permits by auction; even if they bought just 10 per cent. of those permits, the Government would raise up to £20 billion to £30 billion a year. Shell and BP alone this year made windfall profits calculated at more than £20 billion, and they are expected to make a further unearned profit of £9 billion over the next four years from being given those permits for free. They should be made to pay for them in full.
Secondly, an extremely interesting report was written recently by the celebrated tax accountant specialist, Richard Murphy, called The Missing Billions. It details precisely how the Treasury loses more than £13 billion a year from tax avoidance by super-rich individuals, plus a further £12 billion from tax avoidance by the 700 largest corporations. These are all official figures. In addition, the Treasury estimates that a further £8 billion is lost from artificial tax restriction measures, such as switching to another family member, an offshore company, a trust or a tax haven. On top of that, tax evasion, which is of course illegal, is reckoned to lose the country about £10 billion a year. If even half that total of £43 billion a year could be clawed back by a strengthened and better-resourced Revenue and Customs, the fiscal stimulus would not need to depend at all on unfunded tax cuts or increased borrowing.
I have one more example. It is easy to be accused of sloganising, but this example is for real. The Inland Revenue shows that those paid more than £100,000 a yearroughly 2 per cent. of the populationnow receive no less than £8 billion a year in reliefs and allowances. Pension tax relief alone costs the nation £36 billion a year, and higher rate taxpayers get more than half of that. If those subsidies to the richest 2 to 3 per cent. of the populationand after all, they are the ones who need it leastwere significantly pared down in the current extraordinary circumstances, that could certainly generate another £10 billion to £15 billion a year for the Exchequer. Finally, it is estimated that if the iniquitous non-dom rule were done away with, another £5 billion or so would be available to the Treasury. For all those reasons, the fiscal stimulus is not only affordable, but it could be extended substantially if we needed to do thatand we may wellwithout any increase whatsoever in borrowing or unfunded tax cuts.
The third way in which I believe the fiscal stimulus could be better managed concerns public expenditure. We know that the PBR indicates a proposed cut of £37 billion for the years 2011 to 2014. Instead of expanding public expenditure programmes as a potent stimulant of economic activity, it is proposed that public expenditure be reduced to staunch the ballooning Budget deficit caused by bank recapitalisation and unfunded tax cuts.
What is really needed is a carefully targeted increase in spending in sectors of the economy that are threatened by sharp decline or even meltdown, particularly construction
and housing. It could be paid for by increased taxes, national insurance contributions and reduced benefit payments that come from higher employment, by the tax surcharge on the super-rich and corporate tax avoiders that is clearly needed at the moment, and by an increase in the minimum deposits that the commercial banks are obliged to hold with the Bank of England, which could then be lent directly to the Government for new spending programmes. There are many options that I hope the Chancellor will look at
Harold Wilson famously said that a week was a long time in politics, but in 2008, three months has come to seem like half a lifetime. It is worth reflecting on how far we have travelled since 1 September. Three months ago, the Prime Minister was still bathed in a sort of jaded afterglow from his affair with prudence. It is ironic, given the events of last week, that at the beginning of the autumn, our most reliable ally in arguments in ECOFIN was Germany. The Germans saw the British Government as one of the most reliable advocates of the case for the liberal market economy, which is ironic given the statements that came out of Germany last week.
At the beginning of September, the Chancellor retreated to a Scottish island and told us by newspaper interview that we faced the worst outlook we had seen for 60 years. In the ensuing three months, we have seen things happen that were unthinkable as recently as summer this year. The Government have emerged as a majority shareholder in the Royal Bank of Scotland, and they are a major shareholder in Lloyds. They swept through a sweetheart deal between Lloyds and HBOS, which has established a dominant position for that bank in the domestic mortgage market, and we have seen the Budget deficit balloon in a period of eight months. The estimated Budget deficit for next year has increased by £80 billion, from an estimate of £38 billion at the time of the Budget to £118 billion now. There has been a new initiative every day and, as my hon. Friend the Member for Tatton (Mr. Osborne) made clear earlier, we have seen all the weaknesses of government by headline. Ministers have not thought through the detail of one policy before moving on to announce the next.
Against that background, I want to offer the analysis that two major policy developments have taken place during those three months: one with which I broadly agree and one with which I fundamentally disagree. I shall start with the analysis with which I broadly agree, and which led the Prime Minister and the Chancellor to call a press conference and say that the key priority facing the liberal economies of the world this autumn was the stabilisation of the banking system. That analysis led them to address the weakness of the balance sheet of the banks, and I believe that it was 100 per cent. right. There is no point in trying to build a future outlook for a market economy that does not recognise the centrality of the banking system to the allocation of capital within a capitalist system, and there is no point in talking about liquidity and getting credit moving again before the banks have been stabilised as institutions.
The Government were right to put the emphasis on achieving that result, but they have not followed through that analysis, because having stabilised the banking system, we have then witnessed round after round of ministerial frustration. We have been told repeatedly that the banking system has not been freed up; well, of course, it has not been freed up. One simple policy movestrengthening the balance sheetshas not solved the myriad problems that built up in the banking system in the period before autumn this year. The ministerial drive to move on to the next initiative rather than focus on the core priority of getting the banking system moving again is one of the core weaknesses of the Government policy that has evolved during the autumn.
My hon. Friend the Member for Gosport (Sir Peter Viggers) was entirely right to say that we cannot expect the banking system to function properly again until the issue of inherited toxic debts is seriously addressed. The banks have to fess up to the level of bad loans that they have and the number of bad assets that sit on their balance sheets. Until those are cleared out, they cannot raise new loans in the inter-bank market and get the banking system moving again. That is one element of the problem.
Given the experience of what has happened to us during the past 12 to 24 months, far from being told by Ministers that we need a return to 2007 lending levels, weand certainly lenders to bankswant confidence that the banks themselves have relearned the basic essentials of good, sound risk assessment in making lending decisions. The ministerial focusthe focus by the authoritieson recreating a functioning banking system was an entirely correct priority, and it is overwhelmingly the most important priority we face today. It is regrettable that Ministers have flitted from initiative to initiative, rather than focusing on the delivery of that central priority.
As my hon. Friend the Member for Louth and Horncastle (Sir Peter Tapsell) saidhe bemoaned the factone can cover things only extremely superficially in 10 minutes. I said there was one area with which I agreed and one with which I disagreed. I have focused on the former and emphasised the need for the re-establishment of effective lending at the centre of the capitalist system. However, I profoundly disagree with the implication in the debate today that there is somehow a choice to be made about whether we are in favour of or against a fiscal stimulus, and that one can merely opt for one side or the other of that argument without any assessment of the quantum of fiscal stimulus being advocated. That is why I sought to intervene on the Chancellor and did, in fact, intervene on the hon. Member for Twickenham (Dr. Cable).
I wish to point out that, because of the choices that the Government have made to deliver fiscal stimulus and allow the stabilisers to work, and most importantly to build upon the inherited structural deficit that has built up over the past four to five years, we face, as we go into this recessionI agree with my hon. Friend the Member for Louth and Horncastle about its severitya situation in which, according to the Governments own estimated borrowing plans, in 2009-10 net borrowing will run at 8 per cent. of national income, and that assumes that they do not overshoot. However, at the same point in the 1975-6 cycle, the Denis Healey chancellorship incurred a borrowing level of 7 per cent.
of national income, which is 1 per cent. lower than that currently planned by Ministers. All those figures were set out in the pre-Budget report published by the Government.
We are already planning higher borrowing than the level the Government had in the mid-70swhich led to the arrival of the International Monetary Fundboth in the new borrowing to be incurred during 2009-10 and in the planned level of net debt that the economy will bear by 2012-13. That is the peak level in the Governments plans, which show 57 per cent. of net debt to national income against a peak level of 54 per cent. in the 1970s. The argument is not whether we are in favour of or against a fiscal stimulus. Of course, we know that if the stabilisers are at work, Government borrowing will increase during a recession. Conservative Members are concerned about the attitude of Ministers, because having gone from being prudent and cautious and seeking to dress themselves in the language and clothing of caution, they now imply there is no limit whatever on the Governments capacity to borrow to restimulate the economy. Ministers are already planning to take us into a deeper hole than the one Jim Callaghans Government took us into in the mid-1970s.
Mr. Frank Field (Birkenhead) (Lab): I wish to revert to the sombre note that the hon. Member for Louth and Horncastle (Sir Peter Tapsell) sounded, and the reality that he gave to the 1929 to 1931 slump by describing the impact on his family. He was too polite to remind the House that national income fell by 5 per cent. during the whole of that slumpa huge drop. He described the impact of such a fall in national wealth on employment.
The results that the National Institute of Economic and Social Research published a few days ago for the last completed quarter show that national income is falling at 4 per cent. a year. One hopes that the cumulative effect will not occur, but the treacherous economic domain into which we are entering may be as serious, if not more so, than the inter-war slump. We are debating that today, and we need to deploy whatever talent we have to try to influence Government policy.
In some ways I am more miserable than other hon. Members, because I fear that the Government do not have the room to manoeuvre that many Back Benchers suggested in their speeches. The amount of borrowing that we have to undertake and the potential troubling rate of inflation, which will dominate our economy, place genuine restraints on Government action.
I do not believe all this guff about how we are about to enter a period of negative price increases. I think that, sadly, the opposite will occur. The projected levels of borrowing that the Government gave us in their pre-Budget report, which the right hon. Member for Charnwood (Mr. Dorrell) touched on a moment ago, are in the region of £150 billion a year for every year until the Government stop estimating. There will be real problems in unloading that level of debt in the gilts market. The amber signals will flash for the economy when long-term interest rates are pushed up, which will kill the chance of a quick economic recovery.
I have also questioned elsewhere whether we will be able to unload that level of debt, and what that will mean for parliamentary and party government in this country. It is crucial that the leaders of the three major parties and the parties in Scotland and Northern Ireland should now be involved in talks about what we do if the worst scenario comes about. Of course we all hope that the best scenario will embrace us, but we also have a duty to think about the worst scenario.
That is why Wednesdays debate on the VAT increase will be so important, because it will be a pointer to the markets. Nobody is now defending the 2.5 per cent. cut in VAT. It is like spitting in the face of an economic hurricane. The shops are already cutting prices by 30 to 50 per cent. If anybody on the Government Benches thinks that a cut in VAT will save one job in their constituency, I will give way now. Sensibly, nobody is rising to the challenge.
Because of the restraints on the Government, we desperately need to look into how we best spend our money. We need to spend our money on extending credit to the firms that will go bust unless they can secure it. If hon. Members do not take the argument seriously enough, let me give an example. The cargo rates to China are now one tenth of what they were last year. The reason is not that China is not trying to suck in huge amounts of the worlds primary resources, but that people who trade do not believe that their bills of exchange will be met. Companies will foldthey will fall like dominoesunless the Government act.
My plea to the Government is to rethink how we can get some of that precious £20 billion that will otherwise be wasted on the VAT measures into credit for firms, and thereby protect our constituents jobs.
The other thing that limits the Governments room for manoeuvre is inflation. For the Bank of England to say that inflation is not a worry, when the current rate of inflation is well over two times higher than the top of the target range, is moonshine. The spot market in oil is already prophesying that the price of oil will be significantly higher next year than it is now. Hon. Members nodded in agreement when the Liberal Democrat spokesman pooh-poohed the worry about the falling pound. A falling pound might give our exporters a greater chance, if there are markets in which they can sell, but a falling pound pushes up import prices and therefore adds worryingly to inflationary pressures, which are already high in this country.
There are two huge restraints on the Government. I beg them before Wednesday, when we debate the order giving them the authority to make what now appears to be an absurd cut in VAT, to save that £20 billion and get it to companies, which may save some of our constituents jobs. Before I leave this point, I too remind the House what the 1930s were like for someone who had to live through them. We now need to move together to try to get policies that will mitigate the terrible economic disaster that is about to engulf our society.
In saying that, I welcome the welfare reform measures. We have a most talented Secretary of State for Work and Pensions, but he is being wasted by the absurd programme, to which he has nailed his colours, that says that if we talk tough and start roughing up claimants, they will somehow start going to work. Claimants know that Governments have spoken like that before, and then we hardly apply any sanctions.
The one piece of information that I want to give the House, however, is this: one third more claimants were leaving jobseekers allowance at the bottom of the last recession than were leaving it earlier this year, at the top of the boom. There is clearly something happening in our labour market to suggest that welfare reform is crucial. I make a plea that we do not get too serious about single mums, who actually have the job of raising children. However, there are large numbers of people under 25 who have never worked, who think that they have a minimum income from the Government, and who have no intention of working. That applies in my constituency and in every other constituency in the country.
The previous Labour Government introduced the community programme, which was workfare by another name. It did some useful work in our constituencies. My plea is that we should scrap all this new deal stuffthe treadmills that people are on that punish them by sending them on training, instead of regarding training as a reward to get them out of the rut that they are inand concentrate money on reinventing the community programme. We should say to young lads, Youve been on benefit for this long. Theres now a job for you on the community programme. You either take it or you lose benefit. That would smack of serious welfare reform. Given our Secretary of States talents, I hope that he will return to that theme before too long.
The theme of this debate is, rightly, the sombre note that the hon. Member for Twickenham (Dr. Cable) and the hon. Member for Louth and Horncastle struck. We might be on the brink of an economic catastrophe, and we need to mitigate its effects on the lives of our constituents.
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