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I want to speak on the theme of what I consider to be a failure of economic intelligence-gathering. A number
of colleagues in the House looked askance when the Chancellor said that the year after next, there would be 3.25 per cent. growth in the economy. They thought that that was absolutely for the birds. In fairness, if we look at the National Audit Office report issued with the Budget, which talks about the assumptions, we see that there are some reassuring words in there, suggesting that the Treasury may have got it right. I have to say that I find that very difficult indeed to accept.
I note with interest that the Under-Secretary of State for Defence, the hon. Member for Grantham and Stamford (Mr. Davies), who has responsibility for defence procurement, is on the Front Bench. Newly ensconced in his role, he will understand the amount of money that is being spent on military intelligence-gathering. He will also understand the absolute importance of that intelligence-gathering if we are to configure our military forces’ activity properly. When I was in the Treasury, the Bank of England had its agents who went around the country getting a feel for what was happening in the economy, so that they could advise the Governor on what was going on, and what advice he ought to give—this was before the Monetary Policy Committee—on the setting of interest rates.
Those agents still exist, but I question the intelligence that they and the Treasury are getting, and indeed the foreign economic intelligence. A great deal was going on in the world of banking, and new financial instruments were being created. Last year, in my Budget remarks and the Budget remarks of colleagues, we talked about the beginnings of the credit crunch and toxic loans. We looked at some of the first estimates of how much that was costing American banks. One wonders what went wrong in spotting what was going on, spotting what the decision-making process was, and spotting what the effects of the new financial instruments, and the new things that were happening, would be on the overall economy. I say to those on the the Treasury Bench that in the light of what has occurred, the speed with which it has occurred, and the impact that it has had, there needs to be a fundamental reappraisal of the collection of economic intelligence if we are not to be caught out again.
In his Budget speech, the Chancellor put a lot of emphasis on improving the busted flush of tripartite regulation in our banking system. However, it was not so much regulatory failure that caused the problem in the first instance; it was the decision-making process in so many high-powered financial institutions on both sides of the Atlantic that fundamentally led us into the mess that we are in. If they had had better decision making or a less risk-averse approach, we might not be in this mess. I am all for making certain that regulation plays its part in protecting the public interest, but ultimately it is the decision-making process that got us to where we are. We need to understand what went wrong, and banks and financial institutions will have learned a bitter lesson and will now understand the need to improve their decision-making process.
In the Chancellor’s remarks he commented on the need to get the banking sector back into good order. I do not disagree with that. However, the Chancellor was somewhat sparse on what is really happening in that sector. I shall dwell for a moment on that because it still has a fundamental potential for impact on the ability of
the economy to recover. The Chancellor did not talk about the fact that foreign and secondary banking in the United Kingdom is effectively over. Those banks have pulled out of our banking system, and the burden of dealing with the economic consequences rests fairly and squarely on the major clearing and investment banks that are UK based.
The difficulty for those banks is that although their balance sheets have improved, and some of them have been stress tested and some of the news has been reasonably positive, there is still an innate nervousness in the banking sector about what may yet happen in terms of the toxic assets that are still out there, which are impossible to value and which may still have the potential to have a serious adverse effect on the world of banking.
As risks increase in the world of banking, so the capital provisioning to cover those risks on bank balance sheets must increase. As a result, the cost to industry of financing its future needs and the ability to provide the liquidity for those future needs becomes ever more testing. Although the Government have done something towards the emergency shoring-up of bank balance sheets, there is still considerably more work to do if we are to get the liquidity flowing at a price that business can afford.
In fairness, the banks are finding that their own lending one to another, though improved, is still costing them a lot of money. There are still difficulties out there if the economy is to recover. I say to the Treasury, and through the Treasury to the Bank of England, that there is still much work to be done if the banking system is to get back into operating properly.
Mr. Ian Taylor (Esher and Walton) (Con): Will my right hon. Friend also take into consideration the difficulty that the banking sector is having with the accounting regulations that relate to market to market, which effectively exaggerate the downgrading of a bank’s assets and therefore reduce the amount it can lend?
Mr. Jack: My hon. Friend makes an important point. Although there have been some beneficial changes in that situation from the point of view of American banks, is it a matter that affects not only banks, but companies with various financial instruments. Those companies are also having to make balance sheet provisions, which may upset, so to speak, the way that they present their trading circumstances to the wider world when they have to make such accounting provision. What we see is the unwinding of those very difficult positions. Unless banking gets back into good order, we will not see the rate of recovery that the Chancellor hoped for.
Ms Sally Keeble (Northampton, North) (Lab): The right hon. Gentleman is making a very interesting speech on a matter that the Select Committee is considering. Will he give full credit to the Government for the asset protection scheme and, through the Bank of England, the asset purchase facility, which between them have done a huge amount to clear some of the toxic assets off banks’ balance sheets and get liquidity starting to flow back and starting to produce results in the lowering of long-term interest rates?
Mr. Jack:
I acknowledge that a sensible series of measure were introduced to address some of the balance sheet difficulties encountered by the banks. Bearing in mind that if something of the order that the hon. Lady
mentioned had not been done, bank collapse might have been reality. We have staved that off, but we still have some way to go.
May I raise one issue which I think is interesting? There have been calls already in the debate for greater information about what is happening. My right hon. Friend the Leader of the Opposition listed many Government scheme that he believes are not working and not delivering results. On the other hand, the Chancellor enunciated and re-announced a further set of schemes. It is extremely difficult to know what is going on. Interestingly, a FTSE 100 company has to report to the City on a quarterly basis. It has to tell people what is going on. It makes a statement to the City because it is of material interest.
We in the House of Commons have, in effect, two bites at the cherry in debating and dealing with the economy. We have the pre-Budget report, and sometimes it is difficult to get a debate on the economy after that report. Apart from that, we can ask the Chancellor a few questions. Then there is this debate, which lasts for four parliamentary days. After that, apart from Treasury Question Time, we cannot have a discussion on the topic most central to all of us, except in an Opposition day debate on the subject.
Ministers on the Treasury Bench ask companies to pay their corporation tax on a quarterly basis. They are happy with major companies making statements to the City on a quarterly basis, so why cannot we have a quarterly statement to the House of Commons of what is happening, particularly at the current time? The Government owe it to the financial community to report with greater regularity on what is happening in the economy. Why we are sceptical about some of the numbers in the Red Book is that enormous sea changes occur between one set of forecasts and another.
I had a look at table C3 in the latest Red Book. When I see the difference even between the pre-Budget report in terms of the borrowing figures and the figures that are now projected, I discover that in the financial year 2010-11 there has been a change of nearly 65 per cent. in the amount of money projected to be borrowed. For the next financial year, 2011-12, the projected degree of change is nearly 71 per cent. All I can say to the Treasury is that I am jolly glad it does not run a real business. If it was the finance director of a real business, or the sales director, and it came along and said, “I’m sorry, boss, I’ve got the sales figures over 60 or 70 per cent. out,” it would be going out of the door rather rapidly.
It is no wonder people are sceptical about some of forecasting that goes on when that degree of difference is presented on a year-on-year basis. That is why quarterly reporting is needed, so that we do not have to deal— [Interruption.] The Minister says, “Rubbish.” He is right—economic rubbish. From the mouths of babes and sucklings on the Treasury Bench, we have the magic word “rubbish”. That is the problem. Unless the Treasury updates and reports on a regular basis, people will think the figures are rubbish, because the degree of difference between the previous and current projections is so enormous.
May I comment on one aspect of the Budget that I very much welcome? The Economic Secretary to the Treasury and Under-Secretary of State for Business, Enterprise and Regulatory Reform is present. When he
made his statement on the motor industry, he announced that the Government were working on a trade credit insurance scheme. I know that it has proved particularly difficult to find a mechanism for doing that, but I am delighted that a scheme now exists. I look forward to learning more about the details.
I hope the focus of the scheme will be on the small and medium-sized industry, which is finding trading without that facility extremely difficult. There is a real urgency to get the scheme off the ground. I hope that at some stage in the course of the debates we might hear a little more about the timing. If the Minister wants to intervene and tell me a little more about how it will work and when it will happen, I shall be happy to give way. I see that so far he has not taken that opportunity.
I shall move on to the Budget’s contents for savers. I welcome the fact that people will have an opportunity to save a little more with their ISAs, but, for many hundreds of pensioners in my constituency, if not thousands, low interest rates in the real market have had a devastating impact on their standard of living. It is difficult for them to find an outlet where their money has security of tenure and can earn more than 3 per cent. It is interesting to note that one sector of the financial world where such returns can be achieved, however, is in corporate finance. The ratings agencies’ opinion of some corporate bonds is still very high, and the coupon that they pay is attractive. However, it is a sophisticated area of investment, and not one that is easily accessible by the citizen who wants security for their savings while craving a better rate of return.
I put it to the Economic Secretary that, between now and the Committee stage of the Finance Bill, he might like to think about carving out a special ISA that would be underpinned by the Government and enable people to put some money into corporate bonds. That would have certain advantages: first, people would receive returns tax free; secondly, if the Government could underpin the measure initially, it would have a degree of security; and thirdly, pensioners could access a higher rate of return. The latest corporate bond rate for Tesco, for example, is about 6 per cent. and, for BMW, it is about 5 per cent. There are other really good, gold-plated private companies offering to pay above the market rate, but it is difficult for the citizen to access that asset class.
Perhaps the Treasury will consider a meaningful way to improve returns for savers by carving out a special additional ISA category for that type of investment—particularly for the older pensioner. I notice that the Chancellor, in making the changes to ISAs, distinguished between people above and below the age of 50. The people about whom I am talking are the recently retired whose pensions have suffered because of what has occurred. They desperately need a higher and better source of income, and I believe that that is something to be sorted out.
May I raise with the Treasury Front-Bench team one or two specific points? The Chancellor seemed to assure us that, if the retail prices index was recorded as a minus figure in September, pensioners would not lose out, but I was not sure whether he said that there would still be, for example, a 2 per cent. increase in their pensions in real terms or in percentage terms. We need some clarification of what is going on, because, as I understand it, technically speaking, pensions could decrease
this year if the RPI formula is followed. Many people will be unclear as to precisely what the Chancellor meant.
I welcome the investment announced in green energy, which is certainly to be applauded, but the Select Committee on Environment, Food and Rural Affairs, which I have the honour of chairing, will produce a report fairly soon on fuel poverty, so I counsel the Treasury to wait until we have reported before looking at exactly how it will spend the additional moneys, particularly on domestic energy efficiency, because we will highlight a better and more focused means of spending the money to address our current difficulties.
On Monday 20 April, the Financial Times made a simple but none the less profound statement in one of its leading articles. Addressing the question of public expenditure, it said that
“the UK must start a national debate on fiscal priorities.”
Although it is easy from the Opposition Benches to pick schemes such as ID cards, or anything else on which we do not think we should spend money, it must be noted that this country has not discussed what the state should spend taxpayers’ money on. What are the fundamentals? I think that the public are open to a candid discussion, but I am worried that, given the electoral cycle, with a year to go until an election, both Front-Bench teams will be very nervous about discussing the unthinkable—about cutting back on public expenditure. However, I do not think that the public, who want to know the situation as it is, are so fearful that they could not express an opinion about what should occur.
The reason I mention the issue is that about one third of public expenditure is on social benefit payments, and, understandably in the current circumstances, that is difficult to change. In fact, we are increasing support through the tax credit system. Therefore, when we look at what is left, the two thirds, we realise that we do not have a lot left to reduce. We need a discussion about what reduction the public would stand either in absolute terms or at the current rate of increase in planned expenditure. I ask the Government to do that, because I notice that, for example, in table A1 of the Red Book, they already seem to have made a decision to reduce to the monetary sum of zero the reserve support for military operations. I am intrigued to know why our forces will seemingly have no reserves to call on from financial year 2010-11 and thereafter. The Government have rather cunningly hidden away in that table what appears to be a large cut in potential public expenditure. They have done that without any discussion, however, and I think that the public would like to know what that decision means for our armed forces. Against that background, let us also have some candour about the standard of forecasting.
I shall conclude by considering some growth projections, however. Let us compare the previous Budget’s growth projection for the current financial year of plus 2.5 per cent. with this Budget’s projection of minus 2.75 per cent. The 2008 Budget document projected next year’s growth to be plus 2.5 per cent.; now, it is projected to be plus 1.75 per cent. The fantasy world starts in 2011-12, because whereas in 2008, the projected growth figure for 2011-12 was 2.5 per cent., we are now asked to
believe that, then, the economy will grow at 3.25 per cent., which is about three quarters of a point above the trend rate of growth for the United Kingdom economy.
Notwithstanding what the National Audit Office said, I see the hand of a particular kind of Treasury discussion around such forecasts. Officials turn up, saying, “Here you are, Chancellor: here’s the macro-economic model; we’ve done our sums; this is what’s going to happen.” Then, we get the political horse-trading, when the Chancellor of the day says, “Hmm, well what does perhaps another quarter point on growth mean in terms of either increasing tax revenues or reducing the borrowings? How much can I tweak these numbers so that the figures don’t look in the real world quite so bad as the economic model suggests?”
I am afraid that asking us to believe that 3.25 per cent. growth is do-able for the period to which the Red Book refers calls into question some fundamentals of the recovery programme that the Chancellor sketched out in his Budget. There is a basic need to consider very carefully how such numbers are put together, because they fundamentally determine the outward projections of the state of the British economy. If the Treasury gets them wrong in the next 12 months to the degree that it got them wrong in the last 12 months, I am afraid that, while President Obama may talk about glimmers of hope, we may be talking—if we are still here in 12 months’ time—about glimmers of true disaster.
3.19 pm
Sir Stuart Bell (Middlesbrough) (Lab): I say with all sincerity that it is a great pleasure to follow the right hon. Member for Fylde (Mr. Jack), who made pertinent and sensible points. He talked a lot about forecasts. As a Member who is a bit of a sad case, I spent some of yesterday evening reading the noble Lord Healey’s autobiography “The Time of My Life”, in which he was critical of the forecasts that he got as Chancellor in 1974, 1975 or whenever it was. He said that all the errors that he was making—he writes about them quite freely—were due to the fact that the forecasting was all wrong, or at least very far wrong. The right hon. Gentleman discussed coming back from working in his garden and finding that the forecasts had changed, and he was absolutely right about that. I call it “the complexity of Budget ratiocination”. Budgets are extraordinarily complicated—how they are put together is something of a miracle.
At the beginning of his speech, the right hon. Gentleman put forward the example of a Chinese meal—the time it took to figure out, the indigestion and the rest of it. That reminds me of Rab Butler’s comment as Chancellor of the Exchequer. He said that it takes about six months to figure out the Budget. By the time we get round to figuring it out, it is time for the next pre-Budget report.
I certainly agree with the right hon. Gentleman’s sentiment that we do not have full economic debates here—but then we do not have full debates at all. The right hon. Member for Wokingham (Mr. Redwood) was saying how we could save £5 billion by getting rid of the identity card scheme, but nobody mentioned saving £5 billion by getting rid of Trident, for example. I am not suggesting that we should, but I am saying that there is a debate. If we have a debate about the economy, we ought to have one about the country. We were asked
what would happen to businesses if business forecasts were way out. The Government’s difficulty, however, is that they have to run a country. One of the points that I make—it links in with what the right hon. Member for Fylde said—is that we need a debate on our economy and country, on where we are and where we stand. We could take that opportunity, given that we are coming up to the second decade of the 21st century.
The right hon. Gentleman also mentioned boom and bust. This is the first Budget in 12 years of a Labour Government that has come in a recession. I am willing to accept that the boom period began under the right hon. and learned Member for Rushcliffe (Mr. Clarke). We had a period of stability that we could call a “boom”. Now, however, there is a global recession, and that is a fact no matter how we debate it. It affects Germany, France, Italy, Spain and the United States. Some 20 million workers in China are losing their jobs. As I mentioned, I am a sad case—I have also looked at the Brazilian economy and what steps the Brazilians are taking to face the recession. However we look at the issue, we cannot get away from the fact that this is the first global recession that we have seen.
Lembit Öpik: I studied economics for a time at university, and it seems to me that we have to accept that forecasts are, to a large extent, guesswork, except in periods of extraordinary stability; the variables far exceed our understanding of them. Does the hon. Gentleman not agree that, if there are large swings between periods of contraction and expansion in the economy, one of the biggest dangers is that demand and supply will get out of kilter and there will be increased oscillation? In simple terms, if the forecast is correct, we could go from a period of dramatic contraction to one of dramatic growth. That might create future instability and perhaps an even bigger crash.
Sir Stuart Bell: The hon. Gentleman is right about forecasting, but forecasting moves around. The forecasting in the press today, which was confirmed, was that we would have a fiscal deficit of £175 billion; yesterday’s Daily Telegraph, however, forecast one of £200 billion—that is, £25 billion more. That was another forecast. I am grateful to the hon. Gentleman for giving me the opportunity to cite the latest forecast of the ITEM Club—when it suits the newspapers, it is the “respected” ITEM Club; when the club does not please them, they do not refer to it. It is simply a forecasting club, which uses the Treasury model. It is Ernst and Young-based; I used to represent that institution, although I do not any more, so I declare that non-interest. In its spring forecast published today, the ITEM Club identifies
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