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I wish to make one other major point before I conclude, and it involves contradicting what I have just said on cutting regulation. One regulation is essential, and it is not a matter of the regulation that may be necessary for the Financial Services Authority to determine whether or not the institutions are lending properly. It is the imposition of a new regulation or code of practice on our banks, which are turning the screws on all our
businesses and individuals like never before. Every business man and woman in my constituency to whom I have spoken, including someone I bumped into in London last night, has made the point that they have had letters from their bank saying that because of the change in interest rates their terms are being revised and charges on companies are being increased. As Bank of England rates get lower and as we pump more and more taxpayers’ money into some of these wicked banking institutions, all they are doing is taking the taxpayers’ money and then extorting more from the businesses to which they are supposed to be lending.
Martin Horwood (Cheltenham) (LD): Does the right hon. Gentleman think that the Conservative economic policy commission’s proposals made a year or two ago to deregulate the financial services industry were, on balance, a mistake?
David Maclean: Not at all. The hon. Gentleman is totally misrepresenting those proposals. I think that the Government made a mistake in not tackling some of the regulation, and their tripartite arrangements clearly do not work—nobody has been in charge, and a simple example of that is Northern Rock. I am told that six months after the Government took it over, Northern Rock was still lending 120 per cent. mortgages—even though the Government were in charge—and there is something wrong in the regulatory system if that can continue to happen.
Mark Durkan (Foyle) (SDLP): I fully agree with the right hon. Gentleman’s point about the practices of some of the banks at the minute and the further squeezes that they are putting on their existing business customers, even though they tell us that during this period their emphasis is on their relationship with their customers—which is certainly what the banks in Northern Ireland tell us. Is the problem not worse than he suggests? The banks are increasing the rates not just to get more money out of these customers; some of the banks, including the Ulster bank in Northern Ireland, are doing it deliberately to price customers off their books. The aim is not only to take the money off them, but to ensure that those businesses—sound, productive businesses—pay the pain of the banking excesses.
David Maclean: I agree entirely with the hon. Gentleman, and the point he raises has been made to me too. The Government just do not realise what is actually going on between the banks and their business customers. Admittedly, the Government and the Treasury have had to focus on the mega-picture of the scandal of the Royal Bank of Scotland, HBOS and so on—I leave it to others of my right hon. and hon. Friends to comment on how successful the Government have been in dealing with those institutions—but they do not realise what the banks are doing to their ordinary customers. The threat is there, because the banks say, “If you do not agree to our new terms and conditions, you realise that your overdraft is up for renewal next year or in two years’ time.” In some cases, the threat is overt; in others, the banks are pulling the rug from under customers who have quite good liquidity and who are not a risk. The banks are deciding to recapitalise by pulling the money out of the very businesses that will regenerate this country.
Although I have been highly critical of the Government in this speech, I beg the Treasury team to look at what the banks are doing to ordinary customers—to small and big businesses, which will give us the 3.25 per cent. growth. If the Government do not urgently introduce codes of practice or regulations to stop the banks, which have a monopoly and are all doing the same thing, albeit by using slightly different words, to all our constituents—to all their customers—and to control the way in which the banks are shafting our constituents and our businesses at the moment, we will be stuck in negative growth for far too long and there will be no prospect of 1 per cent. let alone 3.25 per cent. growth.
There were some good little things from the Government today. I of course welcome the £30 million for homes for our heroes, but it is a pity that it was in this Budget. It was the one really good thing and I do not want it tarnished by some of the other dross in the Budget and the denial. If the £30 million is going to clean up some of the service housing and to give the wives and families better homes in which to live while our guys are in Afghanistan, I hope it comes through in the next few months and is not scheduled for April next year. These people desperately need that clean-up in their housing now and they need more than that. If the Government want to make such investments, the plasterboard factory in my constituency will make more plasterboard, the HGV drivers will do more driving and all the other businesses will do more and get this country moving again.
I regret that the Budget was a denial Budget. The film “Carry On Regardless” was followed a few years later by “Carry On up the Khyber”. This was a carry on regardless Budget, but it will be followed by carry on up the creek without a paddle in a year’s time if we do not start cutting wasteful Government expenditure now.
4.20 pm
Barry Gardiner (Brent, North) (Lab): I am pleased to participate in this debate and to follow the right hon. Member for Penrith and The Border (David Maclean). He is widely respected on both sides of the House and held in great affection by many. He mentioned the Budget provision for homes for heroes, and I hope it will be one point of agreement between us that we should rejoice that the figure is not the £30 million that he suggested but £50 million.
What if today’s financial crisis were something more fundamental than merely a serious and deep recession? What if 14 September 2008—the date on which Lehmann Brothers was allowed to go belly up—represented the point at which the whole architecture of a consumption-led, growth-based economy collapsed? Perhaps this crisis is telling us that a system predicated on limitless growth must inevitably hit boundaries—boundaries that are not only economic, but ecological. What if 14 September 2008 were the point at which not only the market but mother nature hit the wall?
In today’s Budget debate it is more important than ever to understand the context of the financial crisis that we face. Today we must look beyond the local dispute between those who say that we must cut public expenditure as a way of managing the recession and those who believe that the public expect the Government to provide greater support in times of distress. This
suddenly fashionable interest in macro-prudential regulation and imposing counter-cyclical reserve and capital requirements throughout the economic cycle has been beset by disagreements about who should determine where we are in the cycle and who should determine the level of reserves. The real question is not who, but how. We need to focus on the most appropriate way of modelling market transactions and their velocity to indicate what part of the cycle we are in. That is much more important than the party political spats that we have seen about whether the Bank of England or the FSA should be the implementing body.
If we can generate such models, they will provide the regulatory prudential controls for the economy if two double tensions are resolved. The first is the conflicting messages that have been sent to the banks. On the one hand they are told to stimulate the economy and increase lending. On the other, they are told to reduce their liabilities, increase their reserves and minimise risk. I am no apologist for the banking industry, but it is unfair to demand that they do both at the same time.
It is understandable that the Government should tackle social and financial exclusion. We sometimes forget that the expansion of credit that is now so universally derided enabled 1 million people to avoid financial exclusion by acquiring property through mortgages. That credit expansion was to achieve clear social policy goals. In and of itself, it was good and laudable, but it came at the price of financial instability through under-capitalisation and inadequate reserves. That institutional tension was compounded by the fact that householders then sucked equity out of their properties for personal consumption. They also spent a larger share of their disposable income.
Now that household net worth has dropped so dramatically, what used to be the engines of demand-led growth are now too feeble to lift the economy off the ground. The management consultancy firm McKinsey has calculated that, for each 5 per cent. fall in the debt-to-income ratio, the US economy experiences $500 billion less available consumption going into the market. Britain is no different.
The second tension—between growth and sustainable development—is more fundamental. Those who accept the growth model of the economy believe that there are no limits to growth and positively welcome the fact that the global population is projected to rise between now and 2050 from 6.7 billion to approximately 10 billion. They believe that that 50 per cent. increase in the number of global consumers will be able to fuel the demand-led growth that will lead us to recovery. However, even as we see consumption rise and living standards around the globe rise with it, we are forced to acknowledge that the world is already consuming each year the resources that it takes the planet one year and four months to replace.
If we are able to see that the economy has experienced a credit bubble of consumer-led growth, surely we can see just as clearly that we are experiencing an ecological credit bubble that is potentially far more dangerous. We cannot afford a fiscal stimulus to be simply a way to get back to the status quo ante. Recovery must be a stimulus to transformation—a new model of sustainable development, and not just a way to regain the old growth path.
Borrowing at a personal level imposes an obligation to pay one’s creditor in future. Borrowing at a national level imposes that obligation on a population and its children. If we need a fiscal stimulus to keep people in jobs and to stimulate the market now, we should, in justice, be using the money to invest in making tomorrow’s world better and more sustainable for those future generations. That means new jobs in biotech, digital communications and, above all, in green technology and renewable and low-carbon energy.
Climate change is certainly the most complex question of justice that the world has ever faced. It is about justice across the generations and not just geographical boundaries, and about the equitable distribution of natural resources and not just money. That is why the term “capital” needs to be redefined: we must move away from an exclusive focus on financial capital to include natural capital.
The services that ecosystems provide are largely unvalued. They are treated as externalities by our economic model. The flood protection provided by forests is an externality, and the value of the pollination services provided by insects has not even been calculated. The world is prepared to spend millions of dollars on providing naval escorts and increased insurance for cargo vessels off the horn of Africa, but nothing is done to resolve the ecosystem collapse brought about by desertification that spawned the social and economic chaos that gave rise to the pirates in the first place. That is economic madness.
In an economic crisis, it is possible to provide a fiscal stimulus, but nature does not provide bail-outs. Nature no longer has an infinite capacity to absorb waste, and Governments around the world need to engage in a new paradigm, where natural capital is valued and budgeted for. The valuation of ecosystem services such as watershed protection, climate regulation, and soil stabilisation may seem recherché ideas, but I remind the House that 20 years ago, when officials at the World Bank first proposed that there might be a value attached to carbon, and even that carbon markets might be developed, Treasuries around the world dismissed the idea as peripheral and not worth pursuing.
I am delighted that alongside this Budget there is a document that forms a separate carbon budget, “Building a low-carbon economy: implementing the Climate Change Act 2008”. The Chancellor highlighted that. I welcome the commitment to cutting our CO2 emissions by 34 per cent. against 1990 levels by 2020, and 80 per cent. by 2050, but I am concerned that the overall investment in green growth is not substantial enough to meet even those laudable objectives. Over the next few days, I will carefully examine the figures that he sketched out. We will not be able to get the level of investment right unless we put in place a new system for the evaluation of natural capital, ecosystem services and biodiversity.
As the country begins to emerge from the current crisis, we need to reverse the patterns of internal macro-economic policy as a means of correcting external imbalances. That means moving from consumption-led growth and fiscal deficit to investment-led growth, fiscal balance and higher saving. Key to that transformation is the proper identification of subsidies that still provide perverse incentives to consumption of carbon-intensive products that degrade our environment unsustainably. The key consequence on which the Budget will and
should be judged is not how quickly we see the green shoots of recovery, but how deep and how wide it spreads the green roots of sustainability.
4.32 pm
David Davis (Haltemprice and Howden) (Con): It is a great pleasure to follow the hon. Member for Brent, North (Barry Gardiner). Listening to him reminded me how much I used to enjoy his philosophical excursions when he served on the Public Accounts Committee under my chairmanship. They may have been philosophical excursions, but they were always useful and reminded us of what was important. He did that again today with his reference to world ecology as well to the world economy.
That being said, I suspect that this Budget will be judged on a rather simpler basis. When the economic historians look back on it—it will be to them that we will have to look, because I am sure that the economic journalists will give it hell—they will consider a principal, objective aim: whether it gets us out of this recession. It will be as simple as that, and all the complexity of the numbers should not obscure that. Those economic historians will probably look back on what preceded the Budget as a decade of delusion; that is probably the simplest way of putting it. There was self-delusion on the part of the Government in many ways, ranging from the way in which they introduced creative accounting into our national accounts and fell for their own propaganda in so doing, right through to the hubris of believing that they had put an end to boom and bust. All that was self-delusion, and it has lasted a decade.
There is also the self-delusion of the bankers, who created instruments that they told us would minimise risk, but in fact simply concealed it. That led to the maximisation of that risk, which, of course, is what broke the system in the final analysis. There is also the self-delusion of the professions—the accountants and the credit-rating agencies—that failed. It was a criminal failure in my judgment, and I say that not in hyperbolic terms. I mean a literal criminal failure to protect the public from the misrepresentations that were visited on them, both by the public sector—the Government—and the private sector.
I will leave it to colleagues to enumerate the massive overspends, false forecasts, incredible levels of debt, and debt burdens that have been visited on us as a result. I want to focus, briefly, on the consequences of those delusions for the set of policies that were explained to us today, and on the likely effectiveness of those policies.
A few weeks ago in the Chamber we debated the Government’s response to the banking crisis and, in particular, one of the delusions that they wanted to maintain in their response. They wanted the public not to recognise the size of the problem early on. Look at the delays that they undertook in responding to Northern Rock and to all the other problems that they had to face. Why did they do that? Because to recognise those problems was to shoulder the burden of responsibility for them.
So the Government took a route that was probably most like the route taken in the 1990s by the Japanese Government who faced a similar sort of problem and colluded with their banks to cover up the size of the
problem. Contrast that with what the Swedish Government did, also in the 1990s. The Swedish Government forced into the public domain the size of the problem, forced the banks to recognise the liabilities that they faced, forced the shareholders of the banks to face those liabilities, and then stepped in, cleaned up the mess, sorted out the banking system, and underwrote the depositors. Within three years they had their economy back on track. By contrast, Japan 20 years later still does not have its economy back on track.
I am afraid we are on a Japanese trajectory rather than on a Swedish one. Government action has not been seen to resolve the problem of the banking crisis. That has, as I shall explain, some pretty sizeable implications for their policies today. The IMF stated in its report yesterday:
“Systemic risks remain high and the adverse feedback loop between the financial system and the real economy has yet to be arrested”.
That is the problem that the Government face. It is time for them to get a grip on that banking problem, make the banks face the losses, end the tripartite system and replace it with a Bank of England control system.
My right hon. Friend the Member for Penrith and The Border (David Maclean), who spoke briefly, made it clear that there has been a major regulatory failure. In responding to his comments about the behaviour of the banks, I would say that we have seen a distinction between large quantity of regulation and a high quality of regulation. The failure has been a quality failure in regulation. We used to have a very good Governor of the Bank of England control system that was subtle and able to respond to delicate signals and unforeseen problems when they came up.
That is the nature of the problem. The most obvious short-run effect is the problem that my right hon. Friend raised—that banks have been in receipt of vast quantities of public money, which has been used to improve their balance sheets and not to improve the prospects of their customers—a point that the hon. Member for Brent, North characterised perfectly when he highlighted the contrasting aims and purposes put upon that money given to them.
That is one consequence, but there is another. There is a confidence effect. The way the Government have approached the banking crisis leaves a massive gap in commercial confidence, which in turn has an impact on the Government’s own neo-Keynesian strategy. The House will not be surprised to know that I am not entirely comfortably with neo-Keynesian strategies. I think they are over-rated and pose a major series of problems, but let us for a moment accept the Keynesian analysis. Let us accept what it sets out to do, and see what the banking crisis has done to it.
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