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I believe that my right hon. Friend the Chancellor was absolutely right to place a major emphasis in his speech and in his proposals on the longer-term economic and industrial strategy, with a focus on the low-carbon economy, as well as on dealing with the immediate economic and financial pressures. He was right to do that for two reasons. First, there are short and medium-term economic and employment benefits to be had from investment in the low-carbon economy. In my constituency, that is particularly relevant because we have had a major reliance on the financial services sector for a number of years. Much of the financial services sector in Edinburgh, as elsewhere, is still doing well, but some of what is happening in the banking sector is bound to have an effect on the local economy, and that will obviously be the case in other areas where the financial services sector has been important.
Fortunately, in my community and other areas where financial services have been important we also have a strong and growing energy and environmental sector. There are many companies big and small in the renewables sector that are well placed to gain from domestic and international opportunities in the low-carbon economy. There may even be expertise in the banking and financial services sector that could be used in the low-carbon economy. For example, there are interesting proposals for a green bank to use expertise in providing finance for long-term investments in low-carbon technology. That could represent part of a shift in emphasis in banking away from short-term speculation and playing financial markets to longer-term strategies and investment in the real economy, which certainly deserves every encouragement.
The shocks that we have seen reverberate throughout the world economy triggered by the mortgage and banking crisis in the USA have certainly underlined how interlinked and fragile is the structure of the world economy. I am in no doubt that, in the long term, returning to business as usual in the financial and wider economy is not a viable strategy to prevent future turbulence and shocks. While in the short term we are right to seek a global stimulus to bring back economic growth, we certainly cannot expect business as usual to return.
Mr. Hayes: The hon. Gentleman makes the case that we should be more economically diverse. He makes a persuasive case that there has been too great a concentration on financial services in Edinburgh and elsewhere. Yet the Chancellor told us yesterday that one of our “underlying strengths” was that we were already a diverse economy. How does the hon. Gentleman reconcile that with his own analysis?
Mark Lazarowicz: Clearly, we have to diversify more. There should be no dispute about that. We still have many good companies in my constituency in the financial services sector, which have many strengths and employ many people with skills and expertise, but clearly we want to diversify. Just as in the past not too many people criticised the strength of our financial services sector, it would be wrong for anyone now to dispute the fact that we need to diversify to reflect the lessons that we have all learned from what has happened in the past few months and years.
The situation is clearly going to change in the future, and we have to recognise that there are plenty of other destabilising factors out there in the world that could
easily trigger similar economic upsets. They include the demand for resources—energy and food—and environmental pressures, leading to the spread of deserts and an increase in flooding, which we were rightly warned earlier would accelerate as a result of climate change. Some suggest that some of those factors may have already played a part in triggering the current crisis. Certainly, they have every potential for doing so in even more dramatic ways. Those underlying issues must be addressed by the world community with every bit as much urgency as the economic and financial crisis.
The Government, and the Prime Minister in particular, have sometimes been criticised for focusing on the wider issues too much. Many of us remember the sneering comments from some Conservatives from time to time at the Prime Minister’s efforts to achieve a worldwide consensus. Reference has been made to the G20, for example. I am glad that the Prime Minister recognises the importance of tackling the wider issues. He will certainly have the support of Labour Members and many people in the country if he and his Government continue to devote considerable efforts to bringing about international agreement and action to tackle the underlying issues.
4.4 pm
Adam Price (Carmarthen, East and Dinefwr) (PC): The hon. Member for Edinburgh, North and Leith (Mark Lazarowicz) must be one of life’s eternal optimists. Perhaps that is no bad thing, given that he has a majority of 400. There are some points of light in the Budget, but I got the impression from listening to him that the problems that we face could almost be micro-managed away. That cannot be right. We are in the midst of one of the most severe economic downturns that we have ever faced. It might not turn out to be a great depression—that risk might have been averted at global level—but it will certainly be known as the great recession.
My criticism of the Government is that the Budget does not contain the kind of bold, confident thinking that we have seen from the Obama Administration in the United States. It contains hints of the things that the Government think are important. There is a nod in the direction of dealing with child poverty, for example, and a gesture towards greater progressiveness in the income tax system, but even these are not grasped firmly. I am left with the overwhelming feeling that the Government have run out not only of cash but of political capital and self-belief. I applaud some of the things that they have done, but the figures are so nugatory and limited that their effect will be negligible, given the scale of the overall challenge that we face.
A more fundamental charge can be made against the Government, although it cannot be made lightly: in many ways, this is a dishonest Budget. I understand why the Government might believe that being honest, open and up front with the electorate at this time could risk driving us further into a depression. If you like, this is the beneficent lie—the white lie—that the Government feel that they have to tell to put a positive gloss on the economic situation that we face. I understand the argument that they are in the business of perception management, but I believe that things have been done for political reasons. As the hon. Member for Tiverton and Honiton (Angela Browning) suggested, the Government need to
treat the electorate as adults. We can see a sleight of hand at the heart of the Budget statement, which is unforgivable, and I think that the electorate will see through it. That expresses itself in a number of different ways. Earlier, the Secretary of State suggested that this was a case of “We say cuts, they say efficiency savings; let’s call the whole thing off”. The electorate probably will, soon.
In Wales, the Labour Finance Minister has confirmed that changes announced in the pre-Budget report and the Budget will mean that the £416 million that the Labour-led Welsh Assembly thought was available for public services will no longer be available. The Minister on the Front Bench might find that amusing, but many people, including Labour Assembly Members—and people who have hitherto been Labour voters—will not find it amusing when those measures result in cuts in public services. The Labour First Minister—the leader of the Labour party in Wales—has said that he cannot give any guarantee that there will not be public sector job cuts or cuts in the quality of public services as a result of the changes made in the Budget.
The Barnett formula means that, regardless of any efficiency savings made in Wales or Scotland, we have no choice about this. The changes will affect the bottom line there. The Government’s report on the operational efficiency programme praises the efficiency savings programme in Wales. On page 34, it refers to Value Wales and to the savings that have already been made. The First Minister in Wales told the Prime Minister that one would need to be the Archangel Gabriel to find any further efficiency savings in the Welsh Assembly Government. They simply are not there, as what the devolved Administrations by and large do is focus on health, education and public services; there are no armies of project managers and other non-jobs that may abound here in London.
I find it curious for a Government suddenly to find all these efficiency savings when they have been in office for 12 years. Is it an admission of their inefficiency and the lack of productivity in the public sector? If these are genuinely efficiency savings and not cuts, why have they not been found up until now? Why did the Government, by their own admission, waste public money while the economic situation was far better than the one we face at the moment?
The other element of dishonesty is, as we have heard, in the growth figures. We may have averted an L-shaped depression, but we are in the middle of a classic U-shaped recession, which is going to continue for some time. Nobody believes that this is a V shape and that we are suddenly going to bounce back from the worst fall in economic output in the post-war period. It has never happened—not once in the post-war period—that we have bounced back to a reasonable level of growth in the second year. That is clear if one looks at the Government’s own table on page 200 of the Red Book. All the post-war recessions have involved either a second year of output reduction or minimal and negligible growth, which happened in the early 1990s. The British economy has never bounced back, as I say, in the second year. Nobody believes that.
Mr. Bone: The hon. Gentleman makes a good point. Will he expand on it, because the depth of this recession is much worse than the previous one, making it even more unrealistic that we will bounce back?
Adam Price: Absolutely. This recession is much deeper than all the other examples that are cited. The other factor, of course, is the global economic outlook, which was different in the 1990s—the example most often cited by the Government as the comparator for this recession. If anything, this recession is closer to what happened in the 1980s. The three great drivers of economic growth in the UK— exports in the global economy, financial services and the housing boom—have all gone, so where is the basis for this projected incredible growth? Suddenly, it appears, after next year we are going to re-enter the golden days and a halcyon era will be born again. That is the only way anything close to the Government’s projections on tax revenue will be realised.
Mr. Hayes: The hon. Gentleman is making a studious argument and he is right. Does he accept that growth over the last 12 years was predicated on two bases—first, borrowing, both Government and personal; and, secondly, state or Government spending—and given that neither will apply, the economy cannot possibly bounce out of the recession in the way the hon. Gentleman describes?
Adam Price: The hon. Gentleman has put his finger on it. There is a structural demand gap and an output gap in the British economy, and the loss of the financial services sector means a once-and-for-all loss of about 2 per cent. of non-inflationary economic output, which will certainly have repercussions for many years to come. It is absolutely right that the public sector was a major driver, but that will not be there either.
One feasible scenario is that we could face a double-dip recession, which is what happened in America in the 1980s. There was a recovery in 1980-81, but the effect of the fiscal stimulus America had embarked upon fell off, taking the country back into recession in 1982. A double-dip recession is as likely as any other scenario, because the growth in public sector spending is falling.
Mr. Hayes: The point that I was making, which I think the hon. Gentleman accepts, is that the basis of economic success over the past 12 years was flimsy. The case that he seems to be making is that the response to the recession must not be equally flimsy. In other words, if we invest in infrastructural improvement, we can shorten the recession and make it more shallow, but if our response to it is flimsy, like the one in the USA which he described, the recovery is likely also to be temporary.
Adam Price: I am one of those who say that if we are to rip up the public balances, we had better make sure that we do it with a comprehensive strategy in place. We have not seen such a strategy from the Government. I advocate a radical fiscal expansion on the Obama model, which is based on long-term investment in the economy. David Blanchflower has made a similar point, as has the National Institute of Economic and Social Research. We have not seen that from the Government; nor have we seen the Conservative line of retrenchment and a more targeted approach. What we have seen is something in the middle, which amounts to nothing at all.
Angela Eagle:
The hon. Gentleman has been brandishing the Red Book. Would he care to look at page 28? Box 24 contains a chart entitled “G7 average annual effect of discretionary measures and automatic stabilisers”. That
is the fiscal stimulus to which the hon. Gentleman is referring. On the chart, the United Kingdom comes second.
Adam Price: If we add up the figures, we may find that I am wrong, but the pre-Budget report mentioned a stimulus of about £21 billion. According to my analysis, the maximum in terms of active stimulating measures in the Budget is not much more than an additional £5 billion. That does not compare with the £820 billion to which the Obama plan amounts in toto, and it is a fraction of what others have demanded. David Blanchflower called for a £90 billion stimulus in the Budget, and the NIESR called for a similar figure—£50 billion or £60 billion. Even the Sustainable Development Commission called for a £30 billion green new deal.
The hon. Member for Edinburgh, North and Leith quoted some positive comment about green jobs in the Budget, but most people in the sector have been desperately disappointed by the lack of delivery. According to Friends of the Earth:
“The Government has squandered a historic opportunity to kick-start a green industrial revolution”.
Even Jonathon Porritt of the Sustainable Development Commission has said that the scale of Government investment
“is not going to put us on track to achieving the extremely ambitious targets of the Climate Change Act”,
and the Campaign for Better Transport has observed:
“The Budget is a missed opportunity on transport.”
We have not seen the green new deal. Once again, the Government’s rhetoric is not backed up by reality. We are not seeing in this Budget anything like the stimulus that is needed to counteract the difficulties that we face. In this so-called Budget for jobs, I see nothing that is likely to deliver a significant number of new jobs in any part of the United Kingdom.
There may be difficult times ahead. It is possible that we shall experience a further round of financial shocks at a global level. Some hedge funds may collapse. What is the Government’s strategy for dealing with that? What if there is a fully fledged financial crisis in some of the eastern European economies? What will be the effects on the economy here? I certainly do not have any confidence that the Government have a comprehensive strategy to get us through the next few years.
The final dishonesty is to do with tax. People say that new Labour is dead because the Government have finally embraced the idea of a progressive income tax system, but I think the Chancellor was hoisting a white flag yesterday, not a red flag, because this was a defeatist Budget. It is almost as if they have given up, because not only is the cupboard bare financially, as they believe, but it is bare of ideas as well.
I welcome the fact that the Government have finally come round to the idea of tax justice, but to give the impression that raising the tax on the 1 per cent. of taxpayers who earn more than £150,000 will do anything to close the massive deficit that we face is deeply and utterly dishonest. The Government must be honest with people. It is my understanding—I would be happy for Ministers to correct me if I a wrong—that 60 per cent. of tax revenue comes from income tax, national insurance and VAT, which are paid by most people—or everyone,
in the case of VAT. Therefore, everyone will have to contribute more to close the Budget deficit; otherwise that will be impossible.
There is an obscure theorem in economics called Ricardian equivalence, which suggests that in a perfect world of perfect information and perfect markets, a Government do not have to say that they will raise taxes because, in the current situation, people will read the Red Book, see how much the deficit is, and realise that it is inevitable that they will raise taxes. However, most people might not have the time to plough through the 280-odd pages of the Red Book in the way that we Members do, and it is important that the public realise that we will be paying for the mistakes that have been made in economic policy and the management of the public finances for many years to come.
This great recession will cast a long shadow. Unemployment continued to rise in Wales from the early ’80s right up until 1986, and the Welsh economy did not begin to pick up again and emerge from that lost decade until the early ’90s. I fear that we are facing a similar situation now. The Government have not been honest with the electorate—or possibly even with themselves—about the scale of the challenge we face both in terms of the economy, unemployment and growth and in terms of defending public services, because of the economic hole that I believe the Government have, in part, dug for this country.
4.23 pm
Ms Sally Keeble (Northampton, North) (Lab): The hon. Member for Carmarthen, East and Dinefwr (Adam Price) made an interesting speech, but I do not agree with him that the Government have not been honest or bold. If he wants to compare us with the United States, the tables in the Red Book that have been referred to show that the Americans did implement a large number of discretionary measures, but that was because their automatic stabilisers were so small that they had to have a much bigger discretionary package to deal with the pressures they were facing as a result of the same global recession that we have experienced. Our discretionary package is smaller because our automatic stabilisers are larger—by and large, in line with those of our European partners, with whom our welfare packages and tax systems are also much more closely aligned. The hon. Gentleman is therefore wrong to say that we have acted differently from the Americans. We have dealt differently with some of the macro problems to do with the banks’ toxic assets and cleaning up their balance sheets, as well as getting cash flowing again.
Adam Price: But does the hon. Lady accept that some key commentators, not least Nouriel Roubini, the so-called “Dr. Doom”, who more than anyone else predicted the worldwide financial crisis, have been critical of the level of the fiscal stimulus in Europe as a whole? The point has been made by a number of US-based commentators.
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