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That is not something that should be too unfamiliar to us in this country. We have had three major recessions since the late ’70s. In 1976, the Labour Government faced a terrible recession with a huge and burgeoning deficit. The Keynesians among them said, “Let’s add to it. Let’s borrow even more, spend even more and try to get out of this recession.” Unfortunately, there was a run on the pound and they had to call in the International Monetary Fund—the only time the IMF has ever been called in to a developed economy—and the IMF said,
“Stuff that for a lark. Forget about Keynes. Just get your books balanced again, raise your taxes, reduce your spending and that will restore confidence and get things going.” And it worked. I went to a seminar recently at which someone who was one of the Government’s chief economic advisers at the time said that they were astonished at how rapidly it worked, and how rapidly the economy started recovering thereafter.
In 1980-81 the economy appeared to be in freefall, with a decline in output. At the same time, there was a terrible deficit. The then Chancellor, Geoffrey Howe, had the courage to say, “We’ve got to get the public finances back into order if we are to restore confidence and resume growth.” Then 364 economists, led by the man who taught me monetary economics—or tried to, as I am happy to say that I did not imbibe all his views—published an open letter to the Chancellor saying that there was no reason in theory or in past experience to believe that if he persisted with his policy it could lead to anything other than an intensification of the recession. If we plot what happened, we can see that the economy was in freefall until 13 March, the day that they published that letter. From then onwards, a V-shaped recovery began. They were completely factually wrong. We know from experience that it can sometimes be right to get a grip on the public finances. That restores confidence and leads to a resumption of growth. The same applied in 1992.
That, of course, is why the Government, despite all their rhetoric and talk about an additional fiscal stimulus, have not introduced an additional fiscal stimulus on top of what is already happening through the automatic stabilisers. They are right not to take that risk. On the other hand the German Government, which is in a much better position, ought to be increasing spending, borrowing and trying to get their economy going. Other economies that are in that happy position should do likewise.
Ms Sally Keeble (Northampton, North) (Lab): As a simple-minded Keynesian speaking to a simple-minded monetarist, may I say that if the right hon. Gentleman looks at the pattern of fiscal support for the economy across Europe and the G8, he will see that, astonishingly, the support provided by the different Governments is very similar? The only variance is whether it takes place through automatic stabilisers or a separate fiscal stimulus. The pattern of support is very similar, and that blows a hole in much of his argument.
Mr. Lilley: My argument was based on the fact of what has happened in the past rather than projections of what might be happening now. We shall see. It might provide an interesting test case if we come back in three or four years’ time and argue it out. The hon. Lady describes herself as a simple-minded Keynesian and me as a simple-minded monetarist, but if we are both simple-minded enough to say that we should look at the evidence, we will see that the evidence is clear. The evidence is not just what I have put forward; the evidence has been put forward by the European Central Bank in its study of studies and the European Commission in its study of studies, and the conclusion they have come to is that on a lot of occasions the Keynesian stimulus does not work and has a contrary effect.
I am relatively optimistic that a recovery might soon be under way, because we will see the normal inventory cycle reverse. When final demand for goods falls, as it fell after the Lehman effect with the collapse in confidence across the world, that is amplified as companies do not merely reduce their demand by the 10 per cent. fall-off in final demand but reduce their inventories, too. Back down the supply chain, the 10 per cent. decline in demand might become a 20 per cent. decline and then a 50 per cent. decline in demand for components. We have seen that across the world, and it is partly why the great manufacturing economies, despite the great strengths that my hon. Friend the Member for Macclesfield (Sir Nicholas Winterton) pointed out, suffer a particularly sharp downturn during that inventory cycle. It merely has to stop, in a sense, for it to reverse. When people stop reducing their inventories, that feeds back through the chain and produces a sharp rise in output, even if it does not go back to the level it was at before the crisis began. We may see that inventory cycle go through its normal process.
My worry is more for the longer term. Again, I just look at the evidence. What evidence have we for what happens when a modern developed economy experiences a banking crisis and a subsequent recession? The only such experience that we have is that of Japan. It did many of the things that we have done, but in a slightly different order, and some people say that it did not do them fast enough. It managed to avoid the worst of a recession, but it had 10 years of sluggish growth. My fear is that if we do not get rid of the overhang of both public and private debt as speedily as possible we, too, may first enjoy something of a recovery but then have quite a sustained period of sluggish growth.
That is why it is absolutely vital that the Government realise the supreme importance of getting a grip on the nation’s finances. We face the most enormous deficit; it is unbelievably large. Effectively, the Government are saying, “We will borrow to finance the entire military, education and law and order budgets, and much of the health budget, too.” If we closed down all the Departments concerned, it would just about eliminate the deficit, but I certainly hope that the Government will not close them down. We have to look for savings wherever and whenever we can find them.
I can tell the Economic Secretary to the Treasury that I have been responsible for the biggest-spending Department in Government, and I have seen the problems and pressures of trying to control public expenditure from within the Treasury. The single most important thing, and the first thing, that one must learn to do is to say no. Until we can stop inventing new ways of spending money, we will not get a grip on the total imbalance between our propensity to spend and our ability to raise revenue through taxation. The Government keep adding to the burdens. I get summoned, as Members do, to sit on little Delegated Legislation Committees. There was one the other day that proposed spending an extra £120 million on some benefit for expectant mothers. Even the Liberals, I am happy to say, thought that the measure was complete rubbish and voted against it, as did I. Nobody on the Committee thought that the benefit would do any good to anybody. I am generally in favour of feeding expectant mothers every kind of
nutrient that they could need, but there was no support for the measure, and it was badly timed and badly focused. It was a pure gimmick—but it will cost £120 million. The deficit is made up of thousands of £120 millions, and we have to get a grip on them and stop giving the money away.
Ms Keeble: There is clear medical evidence that if we support women during pregnancy, particularly with food, for which they need money, the outcome for babies is improved. In particular, doing so tackles the problem of low-birthweight babies, which is a problem in some of our inner cities. That measure is a practical way of tackling that problem.
Mr. Deputy Speaker (Sir Michael Lord): Order. Before the right hon. Gentleman responds, may I say that we are rapidly running out of time, and there are more hon. Members who want to speak? Perhaps he would bear that in mind.
Mr. Lilley: I apologise for going on for so long. It was a mistake for me to bring up a detailed issue. There are clearly arguments in favour of the measure concerned, but at a time of national emergency we ought to be saying, “Not now.” We have done without it for the past 50 years; we can do without it for the next five years. Until the Government learn to say, “Not now. No new projects or programmes. Let’s get a grip on the ones that we have,” we will not avoid the prospect of 10 years of sluggish growth.
1.23 pm
Mr. Robert Goodwill (Scarborough and Whitby) (Con): Despite the fact that Scarborough was recently voted the most enterprising town in Britain, and went on to the finals in Prague, where it was voted the most enterprising town in Europe, we have not managed to buck the trend of this Labour recession. Between April 2008 and April 2009, unemployment has gone up by 68.7 per cent.; that is 1,000 more people out of work.
The biggest shock to our local economy was the closure of the two Greaves printing works. On 9 April 2008, almost 200 jobs were lost at the gravure print works, and on 30 January 2009, 200 jobs were lost at the finishing works. On the day of the European elections, people ask, “What are the benefits of Europe?” and some might answer, “Structural funding has gone into the former coalfield areas and into the areas where heavy industry is in decline,” but ironically it is precisely because Polestar printing got a £6-million grant from the European Commission under objective 1 funding for its new print works in Sheffield that the print works in Scarborough has had to close. The law of unintended consequences has come into action.
The building and construction market is dire. The second-home market for premium flats on the seafront is holding up reasonably well, possibly because many people cannot see the point of keeping their savings in the building society given the low interest rates being offered, and because of the worry that there may be inflation coming down the road as a result of quantitative easing. However, the market for residential property,
and certainly new-build property, is very poor indeed. Given that people previously got 95 or even 100 per cent. mortgages, I suppose that now that they are being told that they need a 10 or 20 per cent. deposit, it is not surprising that there will be a time lag before people in rented accommodation come into the market, if indeed they can save that money.
The automotive industry is doing better in Scarborough than in other parts of the country, mainly because the Plaxton bus factory and the Bluebird coach factory are selling to local authorities and to the public sector. Of course, the McCain chip factory makes the ultimate counter-cyclical product; there is nothing like a bit of comfort food during a recession.
Of course, the lifeblood of Scarborough and Whitby is the tourism industry, and the weak pound is helping there, as people are choosing not to go abroad. As a result of the uncertainty, people are leaving it later and later before they make their booking. In fact, last year, I asked an hotelier in Whitby on a Thursday what the bookings were like for the weekend, and he said, “It’s too early to say.” People wait for the weather forecast on Thursday night, or even on Friday, before they go online and book their rooms. Fortunately, weather forecasts are more accurate than some of the Chancellor’s forecasts in the Budget. For example, the Economic Secretary to the Treasury mentioned the fact that the economy had contracted by 1.9 per cent. That was announced by the Office for National Statistics only two days after the Chancellor had forecast a 1.6 per cent. contraction in the economy. In fact, Treasury forecasts are so consistently wrong that they are in the same league as Michael Fish was when he told us not to worry about that hurricane.
I should like to flag up a couple of issues that affect the tourist industry, and they give another example of the law of unintended consequences. The first point is about the threshold for VAT registration. We are trying to make Scarborough and Whitby a 12-month-a-year resort, but all too often, when it gets to February or March and the owners of small guest houses look at their turnover for the year, they see that they are on the point of breaching the £68,000 VAT threshold. It makes more sense for them to close down their guest house and go to Tenerife for a few weeks than to stay open. It is a real problem. If they go over the threshold, they have to pay VAT on all the money that they have taken since the previous April. I do not know whether Ministers are thinking about how that could be addressed. Perhaps we will have to leave it to the next Government to try to come up with a solution to that problem.
On holiday lets, bookings are up, but I am concerned about changes in the Budget that affect the holiday let market. From April 2010, income from holiday lets will no longer be classified as earned income; it will instead be classified as unearned income. One consequence is that income from that side of the business cannot be offset against income other than other property income. That affects many small farms that have invested in their farm buildings, and converted them into holiday lets. Those farms now find that the two businesses cannot be offset against each other. Also, income from such holiday lets now does not qualify as “relevant earnings” for pension fund contributions. Such holiday cottages can no longer be considered a business asset, and that will have far-reaching implications for capital
gains tax planning. All sorts of reliefs that are available for business assets, such as roll-over, hold-over and entrepreneur’s relief, will no longer be available.
We know why the Government did that; it was because many people had second homes on the coast, or even abroad, and it was seen as unfair that they could use the cost of running those holiday homes, assuming that they let them for 140 days, against their income from their ordinary jobs, but the case of farm cottages is entirely different. They are a diversification of a business. Farmers do not stay in their holiday cottages, but the cottages are usually in the farmyard. They are an integral part of the steading. In many cases the planning permission given by the local authority or the national park authority means that those holiday cottages cannot be sold off separately from the unit. In fact, in some cases, land cannot be sold off separately from that unit. I hope that the Minister will look at that problem and make sure that we can do something to try to help the hard-pressed tourist industry in my constituency.
1.30 pm
Mr. Mark Field (Cities of London and Westminster) (Con): I agreed with my hon. Friend the Member for Macclesfield (Sir Nicholas Winterton) and, indeed, with my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands) on the Front Bench, when they referred to the fantasy figures that undermined much of the recent Budget. The very idea that there might be 3.5 per cent. growth during the year after next provided the Government with a very convenient alibi with which to avoid making some of the tough decisions that they must make on public expenditure. Those decisions have effectively now been delayed until after the next general election.
My hon. Friend the Member for Hammersmith and Fulham rightly recalled the emergence of the International Monetary Fund, as, indeed, did my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley). We went to the IMF some 33 years ago, and the big worry in many people’s minds is that we will have to return to it. I suspect that, if we do go down that path, the Government will do all they can to avoid it happening on their watch.
As the Member for the City of London, I believe that in the months ahead several pressing issues will emerge in our financial heartlands. As the Minister knows, two of the big four domestic banks are now all but fully nationalised. One of those, Lloyds Banking Group, contains what might euphemistically be called “assets” from HBOS, which engaged in a series of balance-sheet boosting debt-for-equity deals during the boom years in the middle of this decade. As a consequence, Lloyds Banking Group has large holdings in a swathe of leading UK companies. Doubtless, many such household names will require refinancing as the downturn proceeds, and their financial rescue will come from the taxpayers’ coffers, for obvious reasons. In short, before long, considerably large parts of mainstream corporate UK could end up being effectively nationalised.
We need to use some much smarter intelligence to nip regulatory problems in the bud. An enhanced role for the Bank of England is very much a part of my party’s policy, but that development will have to be accompanied by the appointment of some high-calibre, trusted and respected professionals to the Bank’s top roles. That in
turn should be augmented by the emergence of prosecutors with US-style status to replace what I am afraid is an increasingly discredited Serious Fraud Office. Nothing less will restore the confidence of market professionals and the public at large.
I fear that the banking bail-outs will turn out to be an expensive failure. Indeed, that has already been proved to a large extent, and I do not entirely agree with the earlier comments of my right hon. Friend the Member for Hitchin and Harpenden. The lesson that we must learn is that any institution that is deemed too big to be allowed to fail will forever be prey to reckless risk-taking. If banks cannot fail, they cannot effectively be regulated, because regulation requires the eradication, not reward, of recklessness.
I appreciate that, in the current economic situation, in relation not so much to banks, but to depositors, it is difficult for us simply to stand aside. However, the operation of capitalism requires corporate failure. It is not “market failure”, as it has been articulated by many in the governing circles; it is a sign that capitalism is working properly and efficiently. The message that banks will not be allowed to fail serves only to make their effective regulation all but impossible, because regulation creates tremendous barriers to entry and therefore advantages larger corporations over smaller start-ups. The wisest policy option is to create smaller, more competitive financial institutions, and I fear that nationalisation, of which we may see more, leads us in precisely the wrong policy direction. The best form of regulation must always be open competition, and public ownership is anathema to that policy goal.
Dr. Pugh: How do the Government create smaller financial institutions?
Mr. Field: I shall come on to that point in a moment. One of the great mistakes that the US made a decade ago was to break down the Glass-Steagall distinction between investment and depositor banks. We must protect depositors’ interests, but the core problem with the nationalisation of our banks is that bondholders’ interests are now also preserved—at the expense of taxpayers, both present and future.
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