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Even in a period of consistent growth, we were running material and non-forecast public deficits. The hon. Member for Sevenoaks (Mr. Fallon) drew attention to the consistent
misforecasting of our deficit in the early part of this decade. Merely reverting to pre-crisis patterns of spending and revenue-raisingeven if it were possible to do that; I shall touch on why it is notwould see deficits growing still further. According to one estimate that I have read, it will take until 2030 to return public finances to pre-crisis levels.
There are already signs that the scale of future deficits, unbacked as yet by clear strategies on how they may be corrected, are having an impact on the effectiveness of our short-term measures. Dissonance between the Bank of England and Government messages is one obvious example, but bond market reactionsthe willingness to purchase Government bondsmay be another indication of exactly the same concern. [Interruption.] My hon. Friend the Member for Wrexham (Ian Lucas) is very kind to give me a glass of water; it may also provide relief to Members listening.
The default past response to the need for reductions in deficits has been broad-brush top-down spending cuts. On the evidence of past programmes, that produces extraordinarily inefficient spending management. The cuts made are normally those easiest to makecapital expenditure is generally the first victimrather than cuts that may require longer gestation and will have a more enduring structural impact. Localised non-strategic savings are also produced; a cut in one area generates an increased cost within another budget heading, outside the responsibility of the accountable manager.
Clearly, we will need new tools in confronting the task that lies ahead. We have an extraordinarily limited institutional memory of robust spending management. The Gershon reviews yielded some material savings, although audit suggests that they did not add up to as much as has been claimed, but they were achieved within a comfort blanket of general public spending growth, allowing redeployment of resources to count as a saving towards new priorities and allowing long paybacks through substantial initial investment. Those luxuries will not be available to us in the future.
What must we do? First, we should use part of the time bought by the fiscal and monetary stimuli to debate the political framework within which we will have to operate. I say we, because I take the view of the hon. Member for Altrincham and Sale, West: this will be a task for whichever party wins the election and arguably it makes the election one that many might wish to lose. I am not a candidate at the next election myself.
To make serious inroads into our debt ratio will require far more than annualised savings or economic recovery, especially bearing in mind the large tax takes from banking and the City on which we have relied, and which will certainly not return in the short term and may never return. One estimate suggestsit was quoted by the hon. Member for Altrincham and Sale, Westthat merely to stop total public debt increasing further will require a real-terms cut in public spending of about 5 per cent. every year from 2011 to 2014.
First, what will be our political and ethical compass? The Government have indicated, rightly, that tax increases, particularly for higher earners, will play a part in addressing the deficit, but I would not try to exaggerate the significance of that in terms of the scale of the task ahead of us. We will be operating in a context where most losers will see themselves as victims of the errors or venality of others;
a willing partnership of burden-sharing will be near impossible to construct. To even attempt that, it will be necessary to demonstrate that there is clear ethical governance in what we do.
Secondly, we will need to reinforce our strategic armoury. Radical choices will be required. Incremental chiselling will certainly not deliver what is needed. To be honest, we will have to ask questions about whether there are parts of public spending that simply cannot be justified in the predictable circumstances of the next decade. Merely twiddling away 1 or 2 per cent. will not do the job.
Thirdly, we should use the recovery periodwhen a cuts programme would be counter-productiveto engage with our public sector work forces. In the straitened circumstances of the recession, collective bargaining in the private sector on the sharing of burdens has been shown to work effectively, with work forces clearly understanding the need to protect the business in which they work. It will be extremely hard to remove memories of rigid top-down programmes of savings, but the dilemma ahead will place in sharp focus the choices that have to be made by workers and management within the public services.
Finally, a change programme typically requires leadership quite different from that required to lead a stable organisation: that normally means importing hugely expensive consultants and their PowerPoint slides. Their presence in large numbers is a strong impediment to collective burden-sharing, and we must accelerate the growth of our own skills and their transference within the public sector.
One thing is absolutely certain: our public services will be reshaped very substantially as a consequence of this crisis. The moral compass and the methodology that we decide to use will be one of the critical choices before the electorate at the next election; so far, they have heard little that could inform their choice.
Sir George Young (North-West Hampshire) (Con): It is a pleasure to follow the hon. Member for South Derbyshire (Mr. Todd); I am delighted that his vocal chords lasted as long as his notes. He made a thoughtful, well-informed and rather sobering speech reminding us that whoever wins the next election will have to take some difficult decisions given the scale of Government borrowing and Government debt. Tantalisingly, he implied that some sacred cows would have to be slaughtered, but he did not tell us which were his chosen ones.
I want to make three points in my brief contribution to the debate. The first is a criticism of the action taken in the pre-Budget report, but the other two are helpful suggestions as to what the Chancellor might do in his Budget both to bring down Government debt and to stimulate economic activity. The criticism relates to the £12.5 billion to reduce VAT for 13 months that the Government announced last December. Let me pick up a point made by the hon. Member for Twickenham (Dr. Cable). I am not against a stimulus to help to kick-start the economy, but the VAT reduction was sensationally misdirected. I believe that the Government should have used the money not to encourage shopping
but to encourage housing. The money should have been invested in assets in housing and infrastructure, which the Government could then have set against liabilities that they had incurred through borrowing £12 billion. Those assets would also have generated an income through the rental stream from the houses that were built or from selling on those houses for low-cost home ownership. It would have been prudent to borrow to invest rather than borrow to spend. When the VAT reduction comes to an end, the Government and the taxpayer will have nothing tangible to show for it whatsoeverand, I fear, very little intangible either.
Furthermore, investment in housing, construction and infrastructure would have had far bigger employment consequences than the VAT reduction, much of which will have leaked into imports. How many jobs, if any, have been created by the VAT reduction? Yet £12 billion injected into construction and housing would have provided work for the thousands of people in the building and construction materials industry who have lost their jobs during the recession. Crucially, it would have produced more homes for those in housing need and would have brought the Governments target of building 3 million more homes by 2020 within range, whereas the current public expenditure provision of some £8 billion is going to fall well short of that. The money could have enabled registered social landlords to acquire land at good prices to build out schemes that are stalled because section 106 funds are longer available. Starts could have been made on land that has planning consent. Some of the money could have been used to buy new homes that are overhanging the market and would have been put to good use by those on waiting lists. If the Government had done that instead of the VAT reduction, some of us might even have voted for itwho knows? It would certainly have been far more popular outside than what the Government did.
My second point is related to the first. That £12 billion is no longer available, but the housing market is still on its knees. We need to increase the supply of housing without further driving up public borrowing. The Budget should promote long-term, sustainable investment in new private rented housing by pension funds and insurance companies facilitating housing investment trusts. That policy has been around for some 15 years and has had all-party support. The portfolios of our institutions are not exposed to residential housing. They can invest in commercial property, in gilts and equities, and in other esoteric products, but they cannot invest in bricks and mortarhomes that would produce a growing revenue stream, as rents have historically risen with prices. The Government should deliver on some of their promises made over the past 12 years. In 2004, the Treasury consultation paper promised us a real estate investment trustREITstructure that would encourage the development of new housing. Then we had the 2006 Budget, which said:
To attract more capital into house building, we are now legislating to introduce for Britain the real estate investment trusts that are so successful in the USA.[ Official Report, 22 March 2006; Vol. 444, c. 293.]
However, nothing has happened. REITs have been used only to convert commercial property and pubs; as far as I am aware, not one single residential property has been built through a REIT. That Budget initiative produced nothing at all.
The challenge for the next Budget is to come up with a structure that works. I was delighted to hear at a meeting with Bob Kerslake, chief executive of the Homes and Communities Agency, that that dialogue with the Government is at last being revived. With public expenditure now stretched to its limits, we need a fresh look at how institutional funds can be harnessed to tackle housing needs. Housing starts this month are 59 per cent. down on the figure a year ago. The Government are producing one third of the number of houses this year that they need to meet their target, so there is a real need for fresh investment in housing, and I hope that they will look at the initiative that I have proposed.
My final suggestion is a response to the ballooning public sector borrowing requirement, and the difficulties that confront the Government in financing their debtan issue to which others have referred in this debate. My hon. Friend the Member for Altrincham and Sale, West (Mr. Brady) referred to an article by Robert Chote in The Times on 19 March, in which he said:
The biggest task for whoever is unfortunate enough to win the next general election will be to mop up the gallons of red ink spilt over the Governments finances by the economic crisis.
The Government have made it clear that they are bringing forward elements of the capital programme from year three to year one, such as the Homes and Communities Agency budget. I welcome that, but it will push up the PSBR. To counterbalance that, the Government must bring forward some of their income, and they should do that by selling interest-bearing tax certificates. These bonds could be used only to settle future tax bills. I suggest that in his Budget statement, the Chancellor makes such certificates available for sale, bearing interest at 4 per cent. tax freethat being the figure assumed in the pre-Budget report as the average interest the Government would pay on their debt.
These certificates have been introduced before, in 1941, at a time when the Government had to manage a huge amount of debt. Interest then was tax free, and the certificates were discontinued only 30 years later when Government borrowing had been reduced. Those approaching retirement, for example, may wish to invest in these certificates, in order to reduce the tax they pay when they retire. Others may want to buy them to reduce the duty on their estates. They would be even more popular if one could transfer them to other members of ones family, but they would be of interest to anyone who pays tax, not just the well-off.
These certificates are essentially different from straightforward borrowing. Borrowing pushes up the PSBR, whereas the measure I have suggested would reduce it. It is like a company discounting its invoices by selling them for cash. If the Government borrow, they have to pay the money back, but when they sell a tax certificate, they do not have to pay the money back. It also solves another problem. Many people want to save and, looking ahead, we will have to encourage saving. How do people save at the moment? Do they invest in gilts or equities, do they leave their money in their current accountmy high-interest current account pays 0.1 per cent. interestor do they buy gold? We need a new savings vehicle that whets the appetite of savers, and which helps the Government to manage and reduce their debt, and restore confidence in the currency.
There we have it: a rebuke for some well-meant, but hopelessly misdirected fiscal stimuli; a request to do far better and to deliver on a housing policy which the
Government are committed to but have failed on; and some lateral thinking on promoting saving and managing debt. I will not mind at all if the Chancellor steals those ideas and puts them in his Budget.
Alan Simpson (Nottingham, South) (Lab): I was intrigued by the ideas outlined by the right hon. Member for North-West Hampshire (Sir George Young). We would all do well to think carefully about them. My intention probably differs from his because I have no interest in rescuing the system as is, but his ideas may well be part of the system we have to move towards.
I would like to use my time to put on the record a number of heresies about the mess we are in. I have no desire to reach for the olive branch held out by the shadow Chancellor on a consensus that can be agreed on in the G20 or in this House. I have no desire whatever to save free trade from protectionism. I have no desire to reform the International Monetary Fund, rather than replace it. I have no desire for an agreement that would rescue regulators by giving them some sort of global therapy network where they could cry on each others shoulders.
The current crisis is an ideological one; it is a crisis of globalisation, and we should acknowledge that, rather than pretend it is somehow accidental. As soon as the deregulating bandwagon got running and production started to chase the lowest labour costs and the least environmental obligations, we were always going to face a looming crisis. Beginning in the 1970s, this was a crisis of overproduction.
The crisis took us into other contradictions. Those who were producing on the back of cheap labour still wanted markets to sell in. Within the industrial world, the problem was that this put a squeeze on median wages, and the sections of consumer society to which corporations wanted to sell their products were workers who no longer had the wages to buy goods that they used to produce themselves.
To get out of that messsquare the circlethe answer was burgeoning credit. Unfortunately, that was sold to us as a solution that would deliver everlasting growth. Public debt was changed into private debtit went off balance sheet. Somehow we allowed ourselves to be mesmerised and think that this would give the world a way out of the mess we were creating. Had we not done that, we would have faced deflationary problems. As it is, we now face a global recession that runs the risk of becoming a global depression.
This was always inevitable, and we need to acknowledge the collusion between successive Governments in the past 20 years. Many of us on the Labour Benches argued that new Labours economic and political error was to sign up to an agenda scripted by the old Conservatives, but that, too, is part of history.
We have to address the fact that in our position, there is probably no choice other than to have an interventionist Government with clear notions of where we want to end up. The question is what sort of interventionism we have and where we intend to redirect the economy.
In principle I am in favour of bank nationalisation. The Government were right to be willing to step in to guarantee savings. They were probably not right to accept that, as part of the deal foisted upon us by the
banking and finance sector, we should somehow have a duty to pay off other peoples gambling debts. It is not the duty of the taxpayer to bail out the speculator, but that was the financial absurdity that we allowed ourselves to be bounced into.
Before the Governor of the Bank of England tut-tuts about a second financial stimulustargeted at the real economy this time, I hopeI want him to explain to the public and the House how he justifies the £1.5 trillion stimulus that made up the rescue package for the financial services sector that took us into this mess. I find myself in the same position as Joseph Stiglitz, the former World Bank governor, who says that it is not the job of Governments to do anything other than rescue narrow banking, real banking, proper banking or whatever we want to call it. We ought to have the courage to say that we will allow investment banking to collapse.
This will allow us to get back to a proper framework in which those who run up gambling debts have to take responsibility for them and we do not saddle the taxpayer with them. I suspect that what I am saying is what is said to virtually every Member by people in their constituency. We are challenged by members of the public saying to us, This is not my crisis, these are not my debts. Why should I accept the liabilities and the mess that have been created for us by gamblers?
Had we nationalised the banks and brought them into public ownership as utilities, we would be in a very different position. We could have instructed them to lend into the real economy rather than charge prohibitively to repay the Government or restock their own finances. Part of the problem that firms across the country are facing is in accessing any of the money that has been put into the banking system as notional liquidity.
The UK has put £285 billion of up-front support into the financial sector, which is 20 per cent. of the UKs GDP and four times the average percentage of the G20 countries that are meeting this week. My argument to the Chancellor is that we have to draw a line and make it quite clear to the financial services sector that we will not take on any more of its bad debts. If that results in collapse, so be it. We should take in fire sale assets and not the debts that we should not carry. However, even if we do that, it will not be enough. I hope that the Chancellor will introduce measures in the Budget that allow us to shift from the old to the new economy.
Many of those who have the courage to think beyond where we are suggest that, when we come out of the credit crunch, we will find ourselves knee-deep in the climate crunch. The economic issues that define our political agenda and our future will centre on food security, water security and energy security. To those in the energy sector, sustainability will mean a shift to renewable energy sources, not a replication of the polluting energy sources on which we have relied in the past.
We need a new Bretton Woods, with two distinct features: first, all the aspects that Keynes wanted to includeall the internationally rebalancing mechanisms between rich and poor; and, secondly, the ecologically balancing measures, which were not even considered at that time.
Like it or not, we live in an era of protectionism. The World Bank recently reported that 17 of the 20 countries that it examined had introduced protectionist measures in the past few months. I hope that our choice will be environmental protectionism rather than the protectionism that has done so much damage in the past. However, we cannot continue to pretend that protectionism is not the realistic scenario that we face. Our history shows that the countries that became the most rich and powerful insisted on the right to protectionist policies to become rich and powerful. In our context now, perhaps we are required to do that to survive.
In the debates in the G20 this week, I hope that we will have the courage to say that we will not put more money into the banking coffers, but that we will shift the basis on which funding is provided to international institutions through introducing a new global Tobin tax. We need to get corporations to fund a way out of the mess that they created, not citizens and taxpayers.
Outside the House, on the streets of London and cities throughout the world, protesters demand a different regime from the one we have constructed so far and anything that Parliament has debated. They regard our debates as a feast of fools and, unless we have the courage to go further, they will be proved right.
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