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If that is an issue, why are the Conservatives now promoting a loan guarantee scheme, the whole purpose of which is to guarantee additional debt for companies?
I am not saying that it is a bad idea. It is a good idea, which deserves support, and I have supported it. It is not quite as simple and straightforward as they have argued, because it is complicated to asses risk, but it is fundamentally a good idea. But if debt is a problem for companies, why guarantee them to take on more? Would it not be more sensible to support debt equity conversions, or other forms of company financing?
Mr. MacNeil: The hon. Gentleman makes a good point. He refers to companies that were in his view perhaps under-leveraged, but they were prime pickings for the private equity houses to buy, to increase the leverage and to take a one-time benefit from that increased leverage. Does he have any suggestion to prevent that sort of behaviour in future?
Dr. Cable: I take a cue from the Conservative shadow Chancellor’s comment about tax treatment. The logical course would be to withdraw interest relief. I do not know whether the Conservatives would go to such radical lengths, but that would be the solution, as well as the capital gains treatment, which is still favourable.
I want now to move on to the Conservatives’ core criticism, which is at the heart of their economic strategy: the worry about public debt.
Mr. Geoffrey Robinson: Unusually, I am not following the hon. Gentleman’s point. Is he saying that there will not be any need for, or we should not make available, subsidised or guaranteed loans, which are one and the same thing, in a recession, which is precisely the period when companies cash flow and profits drop because volumes drop? It is that period that the Opposition’s ill-conceived or not yet explained loans scheme is designed to cover.
Dr. Cable: I do not think that the hon. Gentleman was listening; I said that I thought it a sensible idea. It is rapidly becoming redundant, of course, because if banks are nationalised, as some of the major ones now are, why would we want to guarantee their loans? That would be the state guaranteeing the state. None the less, the concept is right, and I have supported it and do support it; I hope that it comes into practice as quickly as possible.
Let me turn to the issue of public debt. Of course it is right—and the Conservatives are right to stress this—that, looking forward, there is a serious public financing problem. There is a major structural deficit arising from the collapse of income from the City and the housing market, and any Government will face very serious difficulties in reining in public expenditure in those circumstances. However, acknowledging that point is different from arguing that there is a legacy of excessive public debt.
The Government can make their own case, but it is simply a matter of fact that at the beginning of this crisis the level of public debt to GDP was less than it was at the end of the golden legacy of the right hon. and learned Member for Rushcliffe (Mr. Clarke). The shadow Chancellor said that such debt was potentially—he was talking about 60 or 70 per cent. of GDP—higher than ever in British history. I have a chart that covers the past 200 years, and it shows that only in the past 30 years have we gone anywhere near 50 per cent. of GDP.
National debt has been way in excess of current levels for much of our history. I was brought up during the era of Harold Macmillan; those were my formative years. [Interruption.] Actually, it was quite a good era for Britain; living standards rose. There is a lot to be said for that period of government. Supermac pointed out at the time that we had never had it so good. When he said that, public debt as a share of GDP was more than 100 per cent., twice the current levels. [Hon. Members: “That was because of the war!”] Of course it was an inheritance from the war, but it was not a crisis in itself.
David Davis (Haltemprice and Howden) (Con): May I ask the hon. Gentleman a question about that very point? As he and I have discussed before, one of the problems is Government creditworthiness. At the point that he was describing, sterling was a reserve currency, which it is not now. Therefore issues of creditworthiness are higher now than they were then.
Dr. Cable: The right hon. Gentleman is right, and that is the correct answer to my point. We now have international capital markets so we have to be much more sensitive to the ratios. That point is totally correct, and I accept it. However, it is simply not true to say, as the right hon. Gentleman’s colleague has been saying, that these are the highest levels of debt in British history. That is complete nonsense.
We have to be conscious of the issue of international markets, and I entirely accept that point. However, if there is an issue in international markets, perhaps the Conservatives will tell us the danger level for public debt—is it 60 or 70 per cent.? What is the trigger point at which it becomes dangerous?
Mr. George Osborne: With the greatest respect to the hon. Gentleman, I think that he is confusing his argument about overall debt levels—which, of course, are climbing rapidly—and my argument about the level of the budget deficit. That is indeed at a peacetime high and, as I said in my speech, was forecast in the pre-Budget report to be 8 per cent. Many now suspect that it is at 10 per cent. or higher; we will find out in the Budget. That is the serious problem that the country faces. We went into the downturn after a long period of economic growth carrying a 3 per cent. budget deficit and climbing public debt. That was the problem.
Chris Huhne: We are talking about debt, not deficit.
Mr. Osborne: Deficits contribute to debt.
Dr. Cable: We are getting to the bottom of the confusion, which I do not think is mine, to be fair. There is a big deficit, and it is a structural one, and we need to be careful about it for exactly the reason given a few moments ago. However, to assert, as the shadow Chancellor often does and as this motion does, that there is some massive legacy problem from past debt is complete nonsense. The hon. Gentleman should argue his point much more accurately in future if he is to be taken seriously on this issue.
Mr. Redwood: Does the hon. Gentleman agree that if we had to account for the state as companies now have to account, we would have to include pension liabilities and consolidated major shareholdings? That would produce a balance sheet of £4.5 trillion.
Dr. Cable: That totally ignores the other side of the balance sheet. The banks will have to be, and should be, reprivatised in—I do not know—about eight or 10 years’ time. As the right hon. Gentleman knows perfectly well, when they are, all those assets will be realised. So the debt liability is completely different from the debt accrued as a result of previous deficits. The right hon. Gentleman, who is probably one of the most financially sophisticated people in the House, should surely realise that distinction.
The obsession with the legacy of debt seems to be inhibiting Conservative Front Benchers in taking what seems to me to be simply a realistic view about the need for a fiscal stimulus. The view that they take—that one should not have a fiscal stimulus over and above the automatic stabilisers—is so extreme. I do not think that any other country in the developed world now takes that view. I managed to unearth only two from the International Monetary Fund: the first is Argentina, which is in the middle of a financial crisis, and the second is Switzerland, which is not allowed to have a fiscal stimulus for constitutional reasons. The Conservatives are arguing for a policy of complete abstinence when it comes to additional fiscal stimulus. That seems utterly wrong during a crisis of this kind.
Most of the burden of fighting the recession is being carried by monetary policy. That is absolutely right; we are seeing the implementation of the ideas that Mrs. Thatcher, as she then was, brought in with Professor Walters and the others—of concentrating on interest rate cuts, expanding money supply and letting the exchange rate float. Fundamentally, that is how the British economy is being driven and that is right. However, it seems entirely sensible to put on top of that a modest fiscal stimulus, and I do not understand why the Conservatives have locked themselves into a completely reactionary position.
The fiscal stimulus is small—less than 1 per cent. of GDP—and the Conservative party is unique among parties in the developed countries of the world. Moreover, its position is blinding the party to the real criticism. The proper criticism was tellingly made by the hon. Member for Uxbridge (Mr. Randall) from his standpoint as a business person: it was that the value added tax cut was entirely the wrong way to do it. The Chief Secretary to the Treasury has tried to give a defence of it, but I do not think anybody believes it. It would have been much better to have used the money in targeted public investment. Everybody can make up their own list, but we, for example, argued for social housing, home insulation programmes and public transport—things that could be mobilised quickly. At the end of that investment, we would have had an asset. That would have been a better approach. It is much better to criticise the Government from the standpoint that the VAT cut was a wasteful, foolish way of giving a stimulus than to say that we should not have any kind of fiscal stimulus at all. That is the dividing line.
Mr. George Osborne: I struggle to understand the hon. Gentleman’s position. In November—that is, post the Lehman Brothers collapse and post the drop-off in demand across the world—he said, when talking about a stimulus, that it
“should be funded. There are dangers in doing what I believe the Government propose, which is to have an unfunded tax cut, which I understand would be financed by Government borrowing...We need a stimulus that will be funded”—[ Official Report, 10 November 2008; Vol. 482, c. 499.]
Dr. Cable: That is absolutely right. I was talking about tax cuts and had argued, as I continue to argue, that there should be a tax cut for people on middle and low incomes. We continue to express that view and to argue that the approach should be properly funded. We argued for a balanced approach to taxation combined with a fiscal stimulus in the form of public investment, and we continue to take that view.
David Davis: I am just posing this as a question; I do not actually know the answer. A few weeks ago, Paul Volcker made a speech about the intrinsic problems of the American economy. One of the things he said was that in the past decade, there had been a sharp increase of about 5 per cent. in aggregate expenditure—that is, public and private and capital formation put together—to the point of about 105 per cent. of GDP. We have the same situation; for us it is about 103 per cent. One of the points about the external borrowings is that they constrain what we can safely do before running into the creditworthiness problem. How would the hon. Gentleman get around the fact that spending got us into this problem and that spending therefore may not take us out in a safe manner?
Dr. Cable: The serious argument is that if we do not have a productive fiscal stimulus of some kind and do not take people out of unemployment, which is what a fiscal stimulus tries to do, the Government will then be borrowing to keep people unemployed instead of borrowing to keep them in work. A fiscal stimulus is a much better way of using the Government’s balance sheet and borrowing capacity than just allowing unemployment continue to grow—which the Government then have to continue to finance.
Patrick Hall: I understand that the IMF has declared that the entire package of fiscal and monetary stimulus in this country is worth 3.4 per cent. of GDP, not 1 per cent.—the figure to which I think the hon. Gentleman referred. Will he comment on that? Does he think that 3.4 per cent. is a significant step worth taking?
Dr. Cable: I am puzzled by that number, which the Chancellor used on Monday. I checked up afterwards on where he had got it from. I think that he added together the VAT cut, which is less than 1 per cent. of GDP, to the bringing forward of public investment; I think that that is how he got that number. The problem is that that bringing forward of public investment is not happening for the reasons given by the Leader of the Opposition in Prime Minister’s questions. We know that colleges in our constituencies have spent a small fortune doing feasibility studies or preliminary works, and that they have now been told by the Department for Innovation, Universities and Skills that they are not allowed to proceed. That public investment is being stopped and it will be clawed back during the next financial year of 2010-11. One asks a basic question about where the stimulus is and what will happen to it.
Mr. Geoffrey Robinson:
I hesitate to involve myself in this economic seminar with the Liberal spokesman, but again, I did not understand—unusually—his reply to the shadow Chancellor’s intervention. In November, the hon. Member for Twickenham (Dr. Cable) said that he wanted tax cuts on the one hand and stimulus on the
other, and that tax cuts would, in some miraculous way, fund the stimulus. I do not get that at all. I did not hear an answer to what he was asked.
Dr. Cable: I apologise to the hon. Gentleman; I may be particularly inarticulate today. I thought that I made two very simple points. People may or may not agree with the policy, but we believe that there should be a tax cut for those on low incomes that should be fully funded by tax increases elsewhere on those who we believe should pay for it. People may disagree with that policy. They may think that it is impractical and that it has bad incentive effects, but what we are arguing is clear.
Let me move away from the economic seminar—we are getting rather bogged down in economics—and on to something a bit cruder and more straightforward, which is the role of the banking system. That is fundamental to the matter. We supported the Government five months ago when they embarked on the capitalisation of the banks. I have to say that we have become progressively disenchanted as it has become clear that the Government have taken on ownership and responsibility for the banks without having a clue as to what they will do with them, and without exercising any effective governance. The banks are still completely unclear as to whether their primary job is to lend more or to accumulate more prudential capital—they are torn between those objectives. The Government are not giving them clear instructions. They do not need to get involved with the administration of banks, where they obviously have no competence, but they should give them a basic sense of strategy. They have still not sorted out the appalling remuneration arrangements, and the Conservative shadow Chancellor was right about that. There does not appear to be any structure for dealing with those arrangements. We have a shocking situation where semi-nationalised, nationalised or guaranteed British banks seem to take it for granted that they have a perfect right to avoid paying UK taxes—there has been no effective attempt to clamp down on that—and five months after the beginning of the capitalisation programme, that is simply not good enough.
Another aspect of the banking issue is the future-looking exercise by Turner. I guess that most of us have not had time to read it in full, but we had a brief reprise of it from the Conservative Front Bench. Most of Turner’s points are fairly uncontroversial. Clearly, the wrong model was pursued early on, but speaking as a veteran of the legislation relating to financial services, it is fair to say that there were not too many people on the Conservative Benches at the time who warned about light-touch regulation and its consequences, or about the problems associated with process regulation.
Mr. Gerald Howarth: May I remind the hon. Gentleman what he said just 10 years ago? [Hon. Members: “Just!”] In his lifetime, that is merely a passing moment. He said:
“No one is arguing for an increasingly severe, more onerous and dirigiste system of regulation.”—[ Official Report, 28 June 1999; Vol. 334, c. 55.]
So he was not in the camp calling for more dirigiste and heavier regulation. He was on our side, not on the Government’s side.
Dr. Cable: I am glad to be welcomed to the Maoist self-apology system. Actually, I argued in 2000, at the time of the Cruickshank report—if the hon. Gentleman goes back to the Hansard record, as he was obviously primed to do, he will see this—that the banking system had to be more effectively regulated. I was the first person, and the Liberal Democrats were the first party, to argue that. I did so nine years ago, the year after I made the comment that the hon. Gentleman read out. I repeat, however, what I said 10 years ago: where institutions do not pose any systemic risk—and many of them do not—there is no justification for onerous, intrusive regulation.
Mr. Howard: Before the hon. Gentleman indulges in a further orgy of self-congratulation, will he concede that, contrary to what he just said—and as I shall demonstrate with chapter and verse if I am lucky enough to catch your eye, Madam Deputy Speaker—my party did warn about the transfer of responsibility for supervising the banking system from the Bank of England to the Financial Services Authority?
Dr. Cable: The right hon. and learned Gentleman is quite right. The Conservatives did do so, and from day one, they have been consistent on that point. I have never entirely seen the force of that argument, however, because the whole of the banking supervision section of the Bank of England moved, lock, stock and barrel, into the FSA. The name and label was changed, but the same people were there. It is a perfectly valid point, and he is right to say that the Conservatives consistently warned about it, but it is not clear that that in itself made an enormous difference.
Mr. William Cash (Stone) (Con): The hon. Gentleman said that he thought that the Turner report was somewhat uncontroversial. Does he agree with the report’s proposal that we should have Europe-wide supervision of the regulation of banking and financial services, or does he have reservations about that?
Dr. Cable: I read that bit because I anticipated such an intervention. Turner says, and he is absolutely right, that regulation should remain nationally based. There is clearly scope for more effective European co-operation; the hon. Gentleman may remember the chaos that resulted from the Irish breaking free last autumn, with separate guarantees on banks. Surely he will acknowledge that there are some things the Europeans have to do together, albeit within a fundamentally national regulatory system.
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