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5.37 pm
Mr. Kenneth Clarke (Rushcliffe) (Con): I am delighted to follow the Secretary of State. I have been an admirer of his over the years. In my opinion, he was correct about the invasion of Iraq, and more than any other opponent of that folly he was very courageous about it, so I am delighted to see him back in office. I may be quite an admirer of his, but I must say that I was disappointed today. He took the classic current Brownite pre-election strategic line of a clear division between the parties. The ground is very carefully chosen. The Secretary of State is not Mr. McBride; he is not Charlie Whelan. The argument used was quite bizarre—a description of the amazing cuts that we propose now, as opposed to the Government’s continuing generosity and fiscal stimulus, showing the clearest divide for a very long time. At one point the Secretary of State actually had the nerve to say that he believed it. I think better of him; I do not believe that he does. I was almost as shocked on discovering he had been to a gym, which I would never do in the course of a Government visit.
What we have advocated is that the process of efficiency savings should be started now. There is no policy advantage in continuing waste that one could avoid if one identified it, but we have not ever advocated fiscal tightening at the bottom of the recession. We have advocated spending the fiscal savings on help now for those unfortunate people leaving school and university. We have advocated a programme to provide masterships, to provide more training places and to do something to help those who need to develop their skills as, thanks to this recession, they will not get jobs. We proposed an easing of the tax on savings, because pensioners living on their savings, have, in particular, innocently been dreadful sufferers of what is happening.
We did allocate the money elsewhere, and our fiscal tightening comes later, unlike the Government’s, which is cynical. They propose bigger figures for efficiency savings and appallingly tight public spending programmes—we do not know yet whether that will be adequate—but everything that they propose starts after an election, and this year there is to be inactivity. I shall not go further into that, but I should say that this is a bizarre attempt to conduct a serious debate if it is to continue all the way to the next general election, as is possible.
I wish to deal with the two serious questions that the Secretary of State asked— how we got here and what the problems are—because he accused the Opposition of not understanding the situation and how we reached it. He said that we said that this was a totally and uniquely British recession—of course it is not. It is now a serious global problem, but there are serious reasons why the British were heavily involved in its origins and why we will probably be more severely affected than others because of the policies of this Government.
I wish briefly to give my analysis, which I do not believe to be terribly controversial, of how we reached this situation. The most serious financial and banking crisis that anybody alive has seen hit the United States and the UK first of all, and that earthquake was followed by a tsunami effect, which is engulfing the real economies of other countries, including the exporting nations such as Japan and Germany, which thought that they would be immune to the collapse in their principal customers but have not been.
Let us just think that through. The financial and banking crisis was created in New York and in the City of London during the Blair-Bush-Brown years and had two causes, one of which was the folly of bankers and the abuse of the devices of securitisation, which enabled ever-mounting risks to be taken off the balance sheets. People believed that they were disposing of the risks by transferring them away from balance sheets and that traditional risk management did not matter—that happened on both sides of the Atlantic. We have heard a lot about sub-prime mortgages, which were the first symptom, but this was not some funny version of swine flu that broke out in the mid-west of America and spread. Nothing happened in the markets of New York that did not happen in the markets of London. In this country 120 per cent. mortgages and mortgages for five times people’s earnings were given—sometimes those earnings were self-certified. We did not use the American jargon of “sub-prime mortgages” here, but we did have the financial folly.
Mr. Clarke:
I shall give way when I reach a natural break, as it were. On both sides of the Atlantic, but most importantly here, what I have described was coupled with the complete failure of the regulatory system even to address these macro-regulatory problems. The regulatory system that failed completely in this country was the creation of this Government. Their first dramatic act when they came into office, along with making the
Bank of England independent, was to take away the Bank’s regulatory function and give that to a new all-singing, all-dancing Financial Services Authority, which was a total failure. That was the origin of this. It is not a global origin—continentals would call it a failure of Anglo-Saxon capitalism. I am a defender of such capitalism, but it requires proper risk management in banks and it will require us to readdress a regulatory system to protect us against those risks in future. I shall give way now, before moving on to why I think that the situation will be worse here—again, it is because of the Government’s folly.
Kelvin Hopkins: I am interested in what the right hon. and learned Gentleman is saying, and I have some sympathy with it because I am a regulator, not a deregulator. But was it not his party that abandoned exchange controls, that started the process of deregulation and that, throughout the past 10 or 12 years, has been saying that it would deregulate more than this Government?
Mr. Clarke: The hon. Gentleman may be the last man living who wants to bring back exchange controls to the British economy, but I am astonished. When the Conservatives first took office in 1979, we abolished exchange controls, in the teeth of a lot of conventional advice, and that was probably one of the most successful policy steps we took. When this Government took office, one of their first steps was to set up the new all-singing, all-dancing FSA, which has landed our financial markets in this trouble because it failed and it was not able to cope with the regulatory problems with which it was faced.
Of course the world as a whole is suffering, to everybody’s surprise—including mine, as I had not anticipated how far the problems would spread to Germany, Japan and the emerging markets. Other countries that have not indulged in financial creativity to the same extent as the UK are now at least as badly affected, but all the forecasts are that it is likely to be worse in this country. That is not just a party political point: there are some good reasons for saying so.
First, our unregulated financial services industry has grown to be a bigger proportion of the total UK economy than is the case in any other advanced country. It is overblown, but it is shrinking. Secondly, the housing price bubble was bigger in this country than in the US, in Ireland or in Spain—to cite the other three countries in which the worst excesses of the house price bubble occurred. Thirdly, the level of household indebtedness that accrued during Labour’s years in office is higher than anywhere else in the western world. It is higher proportionally than in the US, which is the other badly affected country.
The fourth reason is that we were the only major developed country whose public finances were deteriorating and becoming unsustainable even in the boom years before the credit crunch. We were the only country that sailed into the whole crisis with a serious public debt problem, which is why we cannot afford even the modest fiscal stimulus that has been applied by the Government. It is countries in surplus that should apply a fiscal stimulus, not this one— [ Interruption. ] I am asked to name a country that has not applied a fiscal stimulus—Ireland and Iceland, which are suitable comparisons for a country that has been governed by new Labour for the
past 12 years and had an acute fiscal crisis before the dip even started. That is what the Budget should have addressed— [ Interruption. ] If the Secretary of State is not careful, I will cite one or two examples of quotations of myself and the Prime Minister to show that I always believed that, while he was in denial.
The test for this crucial Budget, which I and many others set out repeatedly beforehand, was whether the Chancellor could set out a credible path back to a sustainable level of public debt eventually. The real failure of the Budget—as perceived in the widespread reaction to it outside this House—is that the Chancellor failed to meet that test. He ducked out of giving any workable plan for a path back to a sustainable level of debt—
Mary Creagh: Will the right hon. and learned Gentleman give way?
Mr. Clarke: In a second. The Chancellor described the reality of an enormous problem. The Budget has opened more people’s eyes to the sheer enormity of the public debt problem that we will face over the next several years. The Budget offered no credible solution to that problem. All it offered was a return to boom in about 18 months’ time that would miraculously make the problem go away or at least diminish to manageable size. That is not a sustainable approach.
For their last 12 months the Government will be incapable of dealing with the hard reality of the problems that the country faces, because their forecasts are fiction. The Secretary of State has just done the same thing—setting out a fiction in describing our political position. He said that if it were left to us there would be no schemes, but all the schemes he listed we have not opposed—we have merely complained that they were announced with a flourish months before any of them were to be put into effect. However, that is a point of detail. The absolute failure of the Chancellor to face the reality of how this problem should be tackled—either he could not or he was not allowed to do so—is obviously at the heart of the Budget.
Mary Creagh: I thank the right hon. and learned Gentleman for giving way—persistence does pay off. I want to give him the opportunity to state clearly whether he supports the Chancellor’s VAT cut. He went on BBC television and said that he did support it, and there was some confusion afterwards, even among some of his fellow Front Benchers. I would welcome it if he took the opportunity to clear that up. While he is putting that straight, will he at least accept some part of his party’s responsibility for what has happened— [ Interruption. ] No, I should be allowed to finish; I have waited 20 minutes for this. The deregulation bubble that led to some of this had its origins in the big bang—the massive deregulation of the City of London—which led to the use of increasingly complex financial instruments to finance all sorts of things, such as securitisation, hedging and so on. That meant that managers lost oversight and regulators did, too.
Mr. Clarke:
I will happily deal with both those points. First, on the point about VAT, I voted against the measure when I had the liberty of the Back Benches. I made a speech at the time, which one can look up,
about why I voted against it. When I was asked by The Times—and not on television—what would be the best form of fiscal stimulus, if one went in for it, I said that in my opinion if it was affordable the best form was a reduction in sales tax, or VAT. That does not have an immediate effect, but when it is increased again after a temporary reduction it brings forward sales of big ticket items. That was my view at that time. I added the rider, as I emphasised in the interview, of, “If you can afford it.” I do not think that deficit countries such as the UK can afford fiscal stimulus. Fiscal stimulus is for China, for Germany and for those who have managed their affairs so that they are in a position to give it. When I took part in the exchanges about the pre-Budget report, I put it on the record that, in my opinion, we could not afford fiscal stimulus and that however desirable it was, it was reckless. I voted against it when it was proposed.
I will not go into all the theories about whether this situation had its mysterious origins in our deregulation and the big bang. I have heard Mrs. Thatcher blamed. There are those in the banking world who say that it has all been got up by the newspapers. I thought that those theories were going out now, however.
Let me address what would have happened if we had carried on. It is highly improbable that we could have won an election in 1997. In the highly unlikely event of a Conservative Government’s continuing, I am quite sure that we would not have got into this position. We would not have transferred responsibility for the regulation of the banks from the Bank of England to the FSA or anything like it. I had the misfortune to be the temporary occupant of this seat on the Opposition Front Bench, because we had just been defeated and did not yet have a shadow Cabinet, when the then Chancellor made his announcement on that point. I did not know what to say, because I did not know what on earth my colleagues were going to say that their policy was afterwards. It took me by surprise and took the then Governor of the Bank of England by surprise—he threatened to resign—because nobody knew anything about it until about 20 minutes before the present Prime Minister, who was then Chancellor, got up and announced it. That was a disaster, which we would not have introduced. Indeed, it never crossed my mind to do any such thing when I was in office.
More importantly still, we had fiscal rules of a balanced budget over the cycle, which we were sticking to, which we would have stuck to and which we would not have departed from. Indeed, the only period when this Government had a period of fiscal responsibility was when they at least honoured their election commitment to stick to my figures. They were prudent for three years, anchored by the fear that they would be accused of being old Labour if they did not stick to my figures on tax and spending. So, the public finances improved and they got into surplus. The dotcom bubble made them go into surplus—we would have achieved it, too, and we would have stuck to it.
The new Government’s fiscal rules turned out to be fiction. Let me give one quote to show the Prime Minister’s approach. The Prime Minister regarded his fiscal rules as a challenge to the Treasury and himself to produce some statistics to show that they were still abiding by them year in, year out, when everybody knew that they were totally discredited and were not
being adhered to at all. The hon. Member for Wakefield (Mary Creagh) will remember that extraordinary process whereby the dates of the cycle kept changing every year when we had Budgets, in a ridiculous attempt to show that a tax-and-spend Chancellor who was accruing enormous debts, despite the fact that we were in the middle of a boom, was sticking to those fiscal rules.
It is no good saying, “I told you so”, but I have quotes from 2002 and 2004. All Members, including me, like to quote themselves, but those quotes just show the folly during that period, which led us to where we are now. In the debate on the pre-Budget report on 6 December 2006, I told the then Chancellor that he was
“only extending our record-breaking period of growth and stability on a sea of mounting public debt and consumer debt”.—[ Official Report, 6 December 2006; Vol. 454, c. 321.]
The answer I received was the most staggering of errors. He dismissed, as he always did, my mounting fears each year about where public debt was going and how sustainable it was. He said that I should be congratulating the Government on their achievement.
More recent examples show the unreality that afflicted this Government 12 months ago, when they said that we were unaffected. Unreality affects them when they concoct this curious division for their argument at the next election, but let me give a quotation from the present Prime Minister that is more recent than 2006—although I can go back to 2002, when he started ignoring my warnings and those of many other more authoritative people than me. He said:
“We keep borrowing under control and we also keep debt under control and I think the reason that we’ve had an economy where America’s had a recession, Germany’s been in recession, the Euro area’s had very difficult times, Japan has had a terrible time, but we have managed to continue to grow sustainably and stably over the last ten years and continue to grow this year, and we’re the fastest growing economy of the G7 this year”.
He said that on the “Today” programme on 7 January 2008—a little over 12 months ago. Is it any wonder that the Secretary of State comes here, duly following the line that he has to take and living in a world of apparent unreality about the political debate, about where we are now and about where we are going? He is in a Government led by someone I increasingly believe now to be completely in a world of his own, and who has been in a very dangerous world of his own so far as our national economy is concerned for a very long time. The problem now is overwhelmingly debt and the effect that it will have.
I thought that we might hear of green shoots. That would have been a better aspect of the occasional stray line from Ministers than what we heard from the Secretary of State, but green shoots have been firmly removed from the line that should be taken so we did not hear of them from the Secretary of State. I hope that we have some green shoots soon. If it were possible to believe that we were going to see growth by the end of this year, which is where the Chancellor has shifted to, and we were going to have boom conditions, no one would be happier than me. Of course we need a revival of the economy, but I do not think that that will be the case.
As we go into this 12 months of inactivity and as the Government claim that they are saving the nation from the risk of a debt-cutting Conservative Administration,
it seems to me that the objective view of what is happening now is that the rate of decline is decelerating. Things are still getting worse, but they are not getting worse at the same speed as they were during the two months after Christmas. That is a perfectly fair and objective description of where we are. The rate of unemployment is still going up, and what has horrified me about that since Christmas is that no one recalls unemployment going up this quickly. The figure has been higher and we do not where it is going on this occasion, but its rising at such a rate is a horrific thought. I hope it slows down.
The one good thing I can see is that there are some signs of a return to normality in the credit markets. Things have eased a little—let me not be a total Jeremiah—but they are nothing like back to normality and the recession will not start to turn in this country until ordinary credit at ordinary cost is available to a solvent business, which it still is not, but spreads are improving slightly.
Rob Marris: Will the right hon. and learned Gentleman give way?
Mr. Clarke: I will, and then I shall explain why there are very sensible reasons, not just partisanship, for not expecting a rapid trampoline-type rebound from this recession.
Rob Marris: I agree with the right hon. and learned Gentleman about his trampoline analogy and about deceleration—that things are getting worse but at a slower rate. Does he think that deceleration has anything to do with Government policies and if so, which policies?
Mr. Clarke: No, not really. The Government have done certain things. We supported recapitalisation of the banks. If the banks had completely upended it would have been a disaster. If there had been quicker action on credit it would have helped, but some of the schemes are coming through at last. That has had an effect, but we have just seen the first, acute crash. Things are still going down and we do not know when the turn will come. A lot is dependent on conditions elsewhere.
All recessions eventually reach the bottom and come back, but there are worrying reasons why this recovery could be particularly slow. Even if the credit markets and the banking system resolve themselves a bit, we are not out of the woods yet. I am not certain that we shall not have to do more to recapitalise the banks. Until we are certain there are no toxic assets on the balance sheets of banks in the UK and abroad, we are not out of the wood and the banking crisis may still have to be revisited by this Government and others. However, let us say that there might be a resolution. Even so, the recession will still leave a huge level of excess capacity in the near future. The OECD actually expects that, over the whole OECD, the amount will be 8 per cent. of gross domestic product by the end of 2010. We shall not be bouncing back quickly with that degree of excess capacity.
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