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When Keynes first characterised his policy as a policy of effective demand management, it rested on the idea of the Keynesian multiplier. He was not the first person to talk about it, but he was the first person to popularise the idea. He and a man called Professor Hicks characterised it and demonstrated how it worked. It is very simple. If I spend £1 with you, buying something from you, you will spend a portion of that £1 with somebody else, who will spend a portion of that money with somebody else, and so on, so £1 spent has a ripple throughout the economy. Hicks demonstrated that the algebra was pretty simple. If you spend 90p of the £1 that I spent
with you and that works down, every £1 that I spend has a £10 effect in the economy. If you spend 80p of the £1 on average, every £1 that I spend has a £5 effect in the economy. If you spend half, every £1 that I spend has a £2 effect. That is what the algebra demonstrates.
What happens if one destroys confidence in the economy? If one makes people feel that commercial activity is dangerous, which it was not last year, one destroys the multiplier. We understand from the Chancellor today that the Government have injected some £20 billion, but I guess it must now be £22 billion given the further £2 billion spent, into the economy trying to reflate demand. That is about 1.5 per cent. of GDP, but with no multiplier effect, it is completely irrelevant. The economic demand management policy has been crippled by the Government’s failure to solve the banking crisis, but the issue of confidence and its effect on the multiplier was why Keynes rested so much on that policy. The point is that even if Keynesian policy had had a chance, the Government have destroyed it.
There are other reasons for concerns with neo-Keynesian policies, however, and the primary reason is that spending all that money has a series of effects on the long-term competitiveness of the economy. The most obvious has been discussed today: the long-term impact on tax and borrowing in the United Kingdom—and £600 billion is a spectacular burden on our future competitive ability. Before I address that issue, however, I shall deal with one that the Treasury Committee Chairman, the right hon. Member for West Dunbartonshire (John McFall), raised earlier.
The right hon. Gentleman attempted to argue—I think he was repeating Sam Brittan—that there was no limit to the amount that the Government could borrow and no issue about raising the money. He said that such money has been borrowed before—in the second world war. Well, what a devil of a comparison to make—that we borrowed that amount of money during the second world war. He missed the point, however, which was made by the right hon. Member for Birkenhead (Mr. Field), when he simply said that many people wanted us to win that war and, as a result, were willing to lend us a lot of money so that we could continue spending money to win it. We have had high borrowings at other times in our history, but, at those times, sterling was a reserve currency and it is not now. There are other reasons why we cannot compare our current situation to our history.
Today, we have a real problem: we might well be on a cliff edge in respect of our ability to raise money before we reach the £600 billion limit. One way in which that cliff edge will come nearer is if there is a further decline in our currency, because that would attack the source of much of our borrowing, which comes from abroad. A combination of poor credit worthiness on the part of the Government, an inability to raise taxes to pay the returns and a decline in the currency could have a serious impact on our continued ability to raise money.
That brings us to the issue of overall public expenditure levels, because what do the Government do when they cannot raise money? Then, they do not choose to cut; they have to cut. I am aware of only one point in modern times—peacetime, anyway—when any Government of any persuasion or party cut public expenditure: it was under the Labour party and Denis Healey, because they had to. The International Monetary Fund told
him that he had to. No Government willingly cut public expenditure, but it is entirely possible that the strategy that we are in the middle of will lead a future Government, of whatever party, to have no choice but to cut public expenditure, because they will not be able to raise money either by taxes or by borrowing. That is the potential horror story at the end of this situation. I began by talking about how economic historians will see this Budget, and that is the worst scenario—the tragic, potential outcome.
Although I am not a Keynesian, I am not innately against public expenditure in a downturn. If one goes to America, one will see that much of its infrastructure, from roads to dams, was built cheaply in the 1930s and created an underpinning for that great country’s economic success thereafter. If one is going to spend money, a downturn is a good time to do so, whether one is a private or a public citizen. However, we must be very careful about how we spend it, and we must understand what we can and cannot do, and what Governments are good and bad at. Let us be plain: Governments, as we all know, are bad at picking winners; it is not what they do. Throughout history, all Governments who have tried it have failed. At one point in the Chancellor’s peroration, I heard him proudly lay out the fact that he was going to invest £750 million in high-tech industry. All I can say is that I will make sure that I do not invest where he puts that money; it is a fair bet that those industries will not succeed.
The Government should pump-prime and encourage investment, if not provide the whole investment, in areas in which large—often monopoly—industries underpin other industries. I say to Treasury Benchers that I rather support their idea of improving the status of our broadband structure; actually, what they plan at the moment is rather unambitious. Just as the roads and railways were an underpinning during the industrial revolution, broadband improvement will be an underpinning for industry in future.
Sir Robert Smith: One worry for those of us who represent rural areas is that it seems that the Minister is already conceding that that broadband development will not reach the highlands and islands and other rural areas of the country. Those areas, of course, would take maximum benefit from such development, because it would get around the need to commute and bring the economy to those areas.
David Davis: That is a good point. I do not want to go off on a big excursion on the issue, but I shall say this to the hon. Gentleman. The Government have been unimaginative on broadband development. The BBC is spending £5 billion on digitising the broadcast network—another issue that affects rural areas. If that money went into providing an optical-fibre link to all the rural areas, we would not need to digitise the broadcast network because there would effectively be a physical broadcast network.
A lot of things need to be done. The hon. Gentleman is absolutely right: rural areas would benefit most from what an optical-fibre network could provide. It would save money, encourage high levels of localised industry and cut back on the unnecessary use of cars and other vehicles.
There are benefits, but we have to be incredibly careful. The truth is that four of five Government investments will fail. We are also up against another delusion. In the past decade or so, the new Labour Government have insisted on calling every item of public expenditure an “investment”. They are not all investments—there are some items of expenditure and some of investment. It is perfectly proper for there to be welfare expenditure, for example, to save people from misery; that is part of the purpose of the Government. However, to call it investment is to confuse things.
The important thing to understand in a downturn is that the marginal extra money should be investment. We should be building for the future. If the money is not being spent on investment, we should think twice about spending it, bearing in mind that in any event the largest changes in the public expenditure accounts are in respect of the so-called automatic stabilisers—namely, the cut in taxes raised and the increase in welfare paid.
David Taylor (North-West Leicestershire) (Lab/Co-op): Surely expenditure on pensions and benefits can be an investment in the classic sense of the word. It provides a decent level of income that enables people to be properly fed and housed and to engage in social activity. The payback from that investment will be that those people will live longer lives. So there is a payback from such expenditure, which can properly be classified as investment.
David Davis: The hon. Gentleman demonstrates only too clearly why I think that he and his Government are wrong. I approve of expenditure for such purposes, but we do not have to call it an “investment” for it to be something of which one approves. He was discussing proper, social expenditure; I talk to him as a social Tory, if he likes. We could go back to Lord Shaftesbury. He called such spending not “investment”, but “social expenditure”. It is social welfare, and it is what a civilised society should have. However, we should not kid ourselves that it gives an economic return. It does not—it improves our civilisation and the nature of our country, and it enables us to live with ourselves, but it is not an economic investment. That is my point.
One issue of competitiveness—I am sure that Labour Members will entirely disagree with me on this—has worried me for some time. Incidentally, it also worried Keynes. If one goes back and reads Keynes, there are some interesting parts where he discusses reparations after the first world war. He was critical of the reparations that we imposed on Germany for a number of reasons. Some of those were moral and ethical, but he also said, to paraphrase, “If we put this burden on Germany, Germany will grow strong in having to pay this burden; we will grow soft in living off this burden.” He was talking about the work ethic in our respective societies. In the famous Keynesian example of the state paying a worker to dig a hole and then paying another worker to fill it back in, he was talking about not only effective demand but the need to maintain the work ethic in British society to ensure that when idleness is forced on people, that does not enter into their soul and institutionalise the unemployment that arises from major recessions.
I worry about the work ethic in British society. When I looked up the numbers in this morning’s publication, I found that there are currently 7,851,000 economically inactive citizens in the United Kingdom. That figure is
not quite as shocking as it sounds, because about 2 million are students, a couple of million are people raising families, and so on. What is interesting is that over the course of the past decade the number of people who have determined that they do not want to work has gone up— these are round figures; it has bounced around a bit—by between 500,000 and 600,000. Half a million people in our adult working-age population have decided that they do not want to work. We often see anecdotal evidence of people refusing work. A lot of the arguments about immigration have focused on the fact that people who come into this country are doing jobs that British citizens will not do.
That is worrying in terms of the nature of our society, which we were debating earlier, and our long-term competitiveness. We have to think very hard about the whole welfare structure of our society. I am pleased that the Financial Secretary is on the Front Bench, because I know that he takes an interest in this. I have been backwards and forwards on this argument, but I am beginning to think again that we have to reconsider workfare. If the forecast is wrong and we end up having a long recession, we must ensure, first and foremost, that that does not visit habits of idleness on our population. I am happy to hear the Chancellor speak about action to help the young, but it is not just about the young: we are talking about a much bigger sector of the population, particularly in some of the old industrial areas near where I live and where I come from. We do not want to allow such habits to take hold in those areas. The economic historians will answer these questions on the basis of whether we come out of recession, which is all about growth.
On taxation, everybody in this House knows that I am a low-tax Tory and that I would like to see lower taxes. I am not going to pick a fight with the Government over having a 50 per cent. top rate for those earning £150,000 a year or more—frankly, in terms of the argument, I do not care too much one way or the other. However, the independent Institute for Fiscal Studies has said in terms that a 45 per cent. rate would not deliver any more money—not a penny—to the Exchequer. Therefore, if that is the purpose, it will fail. What is more, it carries the risk—we do not yet know how big it is, because it depends on what other countries do—that people of talent will not come here. It is fashionable now to decry Ireland, but for 25 or 30 years Ireland has had a fantastic success story. One of the key parts of that was ensuring that talented people came to Ireland and had good tax arrangements in doing so. I suspect that if the Scottish Parliament had control of its own destiny, it would do the same. That is why I am in favour of tax competition. There is a real risk that in doing something that is designed simply as a trap for the Tories, which is what it is, the Government may harm our long-term economic prospects.
My right hon. Friend the Member for Penrith and The Border mentioned regulation, and he is absolutely right that that is the real impediment to employment growth in our economy. The reason why I specify employment growth rather than GDP is that the big generators of employment are small businesses, and those are the ones that suffer as the result of regulation. Big businesses have no trouble. I used to be a director of Tate & Lyle, and we had departments designed to deal
with employment regulation and to maximise the amount of money that we got out of the Government in grants here, there and everywhere. We had departments and specialists for all those things, and the regulation was no impediment to us. In fact, it was an advantage because it got other people out of the business. Others did not have those departments, so it was a competitive advantage to us. That is exactly what regulation should not do, but it is what it does.
I shall give an example. We will all have seen vans going around near here with “Pimlico Plumbers” on the side.
Mr. Frank Field: Yes, I use them.
David Davis: The right hon. Gentleman, who made a good point earlier and missed my compliment to him, says that he uses them. The man who runs Pimlico Plumbers is exactly my age. He went to school and got nowhere. He was useless at school—I hope that he will not mind my saying that—and left and became a plumber. I should not be giving him an advert, but he was a skilled, good plumber and turned that into a business in which he guaranteed the quality, speed and so on of the plumbing, which is a wonderful thing in its own right. He turned it into a pretty sizeable, effective and successful business. I remember him telling his story in one of the newspapers. He was asked whether he would do it today, and he said no, because he did not like reading and writing, he did not like filling in forms and all that. The very thing that in some ways distinguishes the skilled working class in Britain from the rest of us is that they do not like the literary aspect of small business, although “literary” is hardly the word. They do not like filling in all the forms. I am afraid that that is a major impediment to the growth of small business.
There is a deal to be struck with the European Union. A number of other countries in the EU, of which Denmark is one, have arrangements that protect small companies and give them exemptions or limit the size of the issues that they face on some aspects of employment law, health and safety law and so on. There is a deal to be struck across the whole EU, all of which faces this problem. Every company with fewer than 50 people could have certain levels of reduced regulation, or perhaps every company with fewer than 10, so that small businesses can start up. If we really want a solution to the problem of growth in the new era, that will be one big step.
Mr. Ian Taylor: It is interesting that even France, which, by goodness, has regulations every day of the week that we have not even dreamed of inventing yet, has started to do exactly what my right hon. Friend is talking about for people who want to enter employment and to set up their own companies. It has got rid of a raft of regulations. We will see how effective that is, but it has taken a lead that we should do even more to follow in this country.
David Davis: My hon. Friend makes my point perfectly. This is an issue not only for us but for every other country in Europe, and every other political class in Europe now understands that. They all have the local equivalent of the Federation of Small Businesses writing them letters, sending them e-mails—probably burning tractors in France, I do not know. They are all coming under the same pressure.
There is also something to consider in the nature of the business that small businesses go in for. They tend not to be in the great international areas of business that have to compete with China and India. They tend to be localised and service-oriented, so they create the sort of business that is viable in the long term in our western economies. There is a serious deal to be struck among all the EU countries. For me to talk about doing deals in the EU is interesting in its own right, but that is something that we could usefully do.
I want to make a rather more esoteric point. The western capitalist market system has been allowed to slip, often by people who do not understand it well. The financial markets in the past few years have resembled a Marxist parody of a free market. They have had huge burdens of silly check-box regulations, but no serious, sensible regulations. Silly decisions have been made, such as the abolition of Glass-Steagall under the Clinton Administration. I cannot make up my mind about whether they did not understand it or whether they were simply bought out by the lobbyists, because $200 million passed into the electoral system from Wall street in those years. The system has come under much pressure, and failed for the reasons that I have discussed, including self-delusion.
The massive flow of money from east to west accelerated the failure. India and China saved large quantities of money—much more than they spent—exported the money to us and we spent it. I believe that a Governor of the Bank of England, doing what the FSA was supposed to do, would have spotted, for example, building societies and banks giving 125 per cent. mortgages. A mortgage is part of an investment process, up to spending 100 per cent. of the value of the investment. However, a mortgage of 125 per cent. is a way of transmitting capital into consumption. Somebody who exercised a little common sense would have realised that. He would not have needed a rule, regulation or something laid down by Parliament—he would have seen it coming.
We must consider two things. First, we should try to ensure that the structure of our banking and financial systems is such that the important bits can be tackled with some simplicity, not complex check-box regulations. That is one component, and why Glass-Steagall is worth revisiting.
The second component relates to the aggregate macro-economic strategy. We must think hard about striking an east-west deal so that the money that has been flowing in a tide from east to west is recycled and goes back, too. The breakdown could happen again in another decade. We should bear it in mind that, in the century before last, such breakdowns happened approximately once every 10 years in America. It could happen again in another decade because the same pressures apply. At the moment, the Chinese are in a mood to talk because their economy is suffering quite seriously.
The Financial Secretary to the Treasury (Mr. Stephen Timms): I am listening to the right hon. Gentleman’s speech with great interest. He mentioned Glass-Steagall. Will he reflect on the impact of the collapse of Lehman Brothers, which was not a deposit taker on the Glass-Steagall model? It would not necessarily have been protected, yet its failure has had catastrophic implications around the world. I wonder whether the distinction is perhaps harder to make today than it was in 1933.
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