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Dr. Cable: I do not think that that is the right way to approach the problem. There is a great difference between a public investment such as a stadium or sports arena, which provides no return, and a public investment in
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the form of, say, social housing, which generates a steady stream of income and is justified in economic terms.

Mr. Graham Stuart (Beverley and Holderness) (Con): How much?

Dr. Cable: Why have an artificial cap on sensible public investment that produces a return to society? It should be justifiable in its own terms. Capital rationing, which is the approach that Conservative Back Benchers seem to be advocating, is a narrow approach to a big problem, and that is completely wrong.

Rob Marris (Wolverhampton, South-West) (Lab): I am intrigued by what the hon. Gentleman is saying. I think that there is a need to build hundreds of thousands of social housing units in the United Kingdom, to deal with the 30-year backlog. I also think that, in order to meet our climate change commitments, there is a need to insulate homes and so on, to which the motion refers. However, I understand him to have just said that if something is worthy, there should be no cap on it. That seems to be an extraordinary approach for a Government to take towards capital spending. Will he clarify that? If he agrees with me that we need, say, 1 million more social housing units, does he think that we should start building them immediately, with no capital caps? Is that what he is really saying?

Dr. Cable: The hon. Gentleman knows perfectly well that when the Treasury evaluates a project, it takes account of the scale of the problem and the amount of spare capacity available, and that affects the economics of the project. In recent years, the Government have made public investments amounting to something in the order of 2 to 3 per cent. of GDP. That is the order of magnitude that we are talking about. My concern is that that should continue, but the danger in the current budgetary crisis is that it will simply stop. My concern is how we create a mechanism to ensure that it continues.

Mr. Graham Stuart: For those of us who are less economically capable than the hon. Gentleman, can he give us a rough guide to how much money we are talking about, if we take his figure of 2 to 3 per cent.? He is not being tied to this figure, but to give us some idea of the scale that we are talking about, if we take the figure of 3 per cent., how much more is he suggesting that the Government should be spending?

Dr. Cable: I thought that I had just answered that. If we can sustain that level of public investment, it will be an important achievement in itself. The danger is that that investment will simply stop. If we look at what the Government have done in their public investment programme, we can see that they have brought investment forward; I think that the figures are £365 million for the current financial year—that probably will not happen—and £2.5 billion for the next financial year. After that they want a big cut of £3 billion in public investment in the following year. That assumes a short, minor recession, which seems utterly foolish in the current context.

I want to ensure that a steady programme of public investment of the kind that the Government had built up, albeit artificially, in many cases through private finance initiatives, is sustained. I have given the hon.
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Gentleman an indication of the magnitudes that we are talking about. Many of those projects will be justified in any event by the economic returns—they will produce a return to the taxpayer. Those projects will, of course, be costly and involve public borrowing in the short run, but in many cases they will pay for themselves and reduce debt in the long term. That seems to be basic common sense. I am not sure why he is wrinkling his brow in such a confused way, because I think that I am making the point very simply.

Mr. Stuart: I am just checking, but the hon. Gentleman seems to be suggesting that those public investments will provide a long-term return on expenditure by the Government, who are not going to be subsidising houses, but making a great profit on them. Can he clarify that?

Dr. Cable: There may be a subsidy, which of course has to be weighed against other elements of current spending, but that is a separate argument. However, good public investment may well produce a return for the taxpayer, which has to be factored into all our calculations. Anybody who has read about what the American Administration argue on public investment, and anybody who has looked back to the 1930s and the role that public investment played in hauling western economies out of that slump, would not have difficulty with the obvious point that I am trying to make.

The Financial Secretary to the Treasury (Mr. Stephen Timms): I am listening with interest to what the hon. Gentleman is saying. He talked about the International Monetary Fund projections published last week. Of course, as he knows, another projection was published by the Institute for Fiscal Studies. It argued that the UK would avoid a long and protracted downturn, not least because of the effectiveness of the VAT cut. I wondered what he made of the arguments that the IFS set out.

Dr. Cable: I am baffled that the Minister—or, indeed, the IFS, if that is what it said—thinks that the VAT cut made a major difference to the UK economy, because it was less than 1 per cent. of GDP, and a substantial fraction of it flowed straight out to imports. I think that we all know, from the experiences of our local shopping centres, that much of it was completely lost. Most of that VAT cut finished up in increased margins for retailers, which of course has some kind of indirect economic consequence, but not very much. It is difficult to see how it could credibly be argued that the cut had a major impact in staving off recession; I simply do not believe it.

John Bercow (Buckingham) (Con): The motion before the House, and the hon. Gentleman’s speech, are properly focused on capital expenditure through the public sector, but I hope that he agrees that that need not be to the exclusion, or even to the detriment, of means by which to stimulate effective consumer demand. In that context, and focusing at least in part on private expenditure, what view does he take on the merits of a marked increase in the national minimum wage to stimulate consumer expenditure, particularly among people on notably low incomes?

Dr. Cable: There are many ways of stimulating spending, and to be frank, the one that the hon. Gentleman suggests is probably the least helpful in the short run, for the simple reason that it would make it difficult for a
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lot of employers who are currently struggling to hold on to their labour force. As a general social objective, I support the principle of the minimum wage, and would like it to be improved, but I do not think that that would help us better than many of the mechanisms that I have described. What does have to happen is the expansion of credit; that, of course, is the key. This debate is not about the role of the banks and monetary policy, but that is the key element in reviving demand and spending. However, it is a debate for another day.

Chris Huhne (Eastleigh) (LD): Is my hon. Friend as astonished as I am at the surprise that Conservative and Labour Members are showing towards the principle that he is proposing, given that that principle is put into practice by the most fiscally conservative Government in Europe, namely the German Government, who call it the golden rule? Matching borrowing with capital spending is a sound principle of public finance.

Dr. Cable: That is certainly right, and of course although the Germans were prayed in aid a few weeks ago in arguments against stimulating the economy, they have done exactly that—stimulated their economy—and have done so very much along the lines that we advocate.

Richard Younger-Ross (Teignbridge) (LD): Does my hon. Friend agree that if some long-overdue infrastructure projects, such as the dualling of sections of the A303 and the Kingskerswell bypass, were brought forward, it would not only create employment in construction and subsidiary industries, but benefit the south-west economy in the long term?

Dr. Cable: My colleague will have heard me say a few moments ago that the south-west councils have already expressed frustration at the fact that earmarked road projects, perhaps including the one that my hon. Friend mentions, were not proceeding as the Government said they would. I am sure that that is part of the problem.

Mr. Andrew Love (Edmonton) (Lab/Co-op): I have some sympathy for the argument that if shifting forward investment creates a problem a year or two on, that gap ought to be filled, but of course the classic argument in opposition to that is that a further build-up of debt will bring into focus the value of the currency. The hon. Gentleman refers to the United States, but its currency is, of course, the reserve currency, and is somewhat protected. Are there any concerns among Liberal Democrat Members about the possibility that our currency might be threatened?

Dr. Cable: Of course, any responsible person has to worry about that risk, which, although probably not large, certainly exists. I am surprised that the hon. Gentleman is reinforcing the rather hysterical approach taken by the Conservatives, who think we are on the edge of a major currency collapse and all that will follow from it. Nevertheless, that risk has to be taken into account.

To answer the hon. Gentleman’s question and to put the British financial position into context, we started the recession with the Government in a position where public debt was about 40 per cent. of gross domestic
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product—we can argue about whether they were concealing one or two percentage points, but it was of that order of magnitude and it was less than the figure for the United States, Germany or France. I am always happy to concede that. The worry is that public debt is growing very rapidly and that within two to three years it may well have reached 60 per cent., by which time other developed countries will also have increased their public debt as a share of GDP.

It is worth while putting that in the wider context and considering the extreme cases, such as those of Italy and Japan. As far as I am aware, Japan has not had a currency crisis, yet it has public debt of well over 100 per cent. of GDP. It finances that comfortably by patriotic saving on the part of the Japanese and their lending their money to the Government. Its high levels of debt are way beyond what we are currently contemplating and do not, by any means, necessarily create the kind of problems that some hon. Members are worrying about, but clearly we must be cautious. That is why any public investment programme has to be carried out in a disciplined way.

The problem relating to public debt arises not from excessive public investment, but from the fact that over the next two to three years the expected deficit will be very large compared with other western countries—8 to 10 per cent. of GDP is the relevant figure and it is a major worry. This situation is partly to do with the cycle and partly to do with a structural deficit, and it has emerged partly because of the collapse in the housing market and the revenue associated with it, and partly because of the collapse in the City and the revenue associated with that. The Government, the Conservatives and the Lib Dems—all of us—will have to face the fact that over the long term there is a structural deficit problem that will have to be dealt with, come what may. It is fair to say that none of us have yet come up with a convincing explanation of how that structural deficit will have to be addressed, but that is the nature of the problem—it is not, by any means, about excessive public investment.

Kelvin Hopkins (Luton, North) (Lab): Deficits have two factors: spending and income. Our problem has been a failure to collect the taxes that were due and because we have a very low level of tax on the rich—we have tax concessions to the rich. If we just collected a little more tax, we could afford to spend more. Taking such an approach might move us a little in the direction of Sweden—a successful economy that has a much higher tax-take and a much higher level of public spending—and we could live in a much more civilised society.

Dr. Cable: If the hon. Gentleman reads my article tomorrow morning in his favourite newspaper, he will discover that we deal with tax havens —[Interruption.] Not the Morning Star.

To round off my comments, I acknowledge, as has been pointed out clearly in interventions, that we operate in an environment in which, although the British public finances are not in quite the desperate state that they are sometimes portrayed to be, there is a legitimate source of anxiety. Therefore, any public investment cannot be undertaken indiscriminately; it must be very carefully vetted. At the moment, we have no mechanism for
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doing that, because public investment has largely been undertaken through private finance initiative projects, which are subject to commercial confidentiality. Through the Public Accounts Committee we know very approximately and many years later whether such projects were good or bad ones, but there is no system for assessing in advance, publicly and openly, what are good projects and what are bad projects. We have to set such a system in train.

Mr. Love: Siren voices are coming from Europe suggesting that adopting the euro might be a fit and proper decision to take at the current time. Can the hon. Gentleman reassure us that that is not the official position of the Liberal Democrats?

Dr. Cable: I do not think that the hon. Gentleman will find any of those siren voices on the Liberal Democrat Benches. We have very carefully stated our position; our leader wrote an excellent article in another broadsheet last week explaining precisely how the joining the euro now should be opposed. We remain in favour of the principle, because we think it would be good for the British economy, but the worst possible time to make such a move is in the middle of a major financial crisis, in an environment of panic. We think it quite likely that after two or three years in which the weaknesses of the British economy have been brutally exposed, people in this country will consider the matter in a fresh and more positive way, but that debate remains to be had.

We have a very serious recession, much worse than we believed we were likely to have and almost certainly much worse than in other developed countries, and the Government will have to play a major role in countering it. Public investment has a key role, and we have set out a series of proposals on social housing, transport and environmental projects to fulfil it. The public need to be given hope that we are getting through this recession, and such investment is one of the best ways in which the Government can do that. We are seriously concerned that because of drift, difficulties with PFI and other problems, that is simply not happening.

4.55 pm

The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move an amendment, to leave out from “House” to end and add:

I shall disagree with a number of points that the hon. Member for Twickenham (Dr. Cable) has just made, but I welcome his thoughtful and interesting contribution to the debate.

When the Government came to office in 1997, we put in place a fiscal framework to bring some much-needed discipline to the public finances. The robust new framework that we introduced was extremely effective. Public debt fell from 42.5 per cent. in 1996-97 to 36 per cent. in 2006-07, as the hon. Gentleman acknowledged. That meant, for example, that when we received more than £20 billion from auctioning licences for third-generation mobile phone services in 2000, we used the proceeds to pay down debt. The Nobel prize-winning economist Joseph Stiglitz said when I was on “Newsnight” with him last Wednesday:

Mr. Tyrie: The right hon. Gentleman began by saying that Labour brought in fiscal rules to introduce fiscal discipline and sort out the public finances. Can he name any serious commentator who believes that the fiscal rules are any longer worth the paper that they are written on?

Hon. Members: Stiglitz.

Mr. Timms: Indeed, I have just named Joseph Stiglitz, who made the point that Britain did the right thing when the economy was good, thanks to the rules and framework that we introduced in 1997. That fiscal responsibility explains why we can afford to borrow more now to support our economy through these difficult times.

Mr. Mark Hendrick (Preston) (Lab/Co-op): My right hon. Friend will be aware that Joseph Stiglitz chairs a UN commission looking into the financial needs of many developing countries. One thing that it has said is that the depreciation of sterling and other currencies is having a big impact on the amount of aid that we can give the developing world. We know what is happening in Africa, Gaza and elsewhere, so is there not a strong case for revisiting our commitment to development aid?

Mr. Timms: We must certainly reflect on the interests of developing countries and the developments within them, and we will do that in the G20 discussions leading up to the summit in London in April. It is clear that the downturn is affecting not just developed countries but developing ones, and some investment is being withdrawn from developing countries. We need to consider that matter.

Mr. David Gauke (South-West Hertfordshire) (Con): The Minister has boasted about the Government’s record on public finances since 1997. Is he aware of the quotation from the Institute for Fiscal Studies last week? It states:

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