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Why does the Secretary of State simply not understand this problem?

Mr. Clarke: I cannot answer for the Secretary of State. The problem is real and it is as described by my hon. Friend, but that reality has not been addressed properly, as my hon. Friend the Member for Banbury also said.

We have been quite clear for several months about what we believe should be done. We have proposed that £50 billion should be devoted to a loan guarantee scheme, whereby the Government would guarantee a large part of the risk undertaken by banks when extending credit to their normal customers. The banks would have to make a commercial decision that they were prepared to take some of the risk, albeit a much lower risk than they normally would, thereby making the risk of default used in the risk judgment so much less.

That would apply to businesses of all sizes. It would be a straightforward scheme and could have been put into operation rapidly. Our scheme is also a direct response to the point that the three hon. Members who have just intervened on me have illustrated only too graphically, particularly my hon. Friends the Members for Banbury and for Northampton, South. The problem was a lack of access to any kind of borrowing by businesses of all sizes, particularly small and medium-sized enterprises, and we would have facilitated it.

The Government dismissed that suggestion, for the reasons given by my hon. Friend the Member for Banbury. They preferred to have a system of multiple micro schemes, carefully targeted at different sizes of company and different segments of industry. I am afraid that I share what might otherwise be thought of as my hon. Friend's unworthy cynicism. Why did the Government choose that route? One of its attractions was that they could put the support into so many little packages and so many press releases. They could announce that things were being done instantly, when the officials in the Department were not clear about what was being announced and were not yet ready to start discussions with the banks on what the rules might be in the latest scheme, and there are many of them, some of which my hon. Friend described.

Let me choose as an example the working capital scheme. The scheme is meant to guarantee credit lines to ordinary-risk businesses with a turnover of up to £500 million-very similar to what we propose, but for those businesses with a turnover below a certain level-covering 50 per cent. of the risk on working capital. On 14 January the Government announced that no less than £20 billion was available under the scheme. The scheme was announced on 14 January and was planned to come into effect on 2 March.

The long history would take too long to relate. However, as the first tranche came round the scheme was not ready; indeed, it was delayed for months. As late as 2 March, the Secretary of State for Business, Innovation and Skills still said that

In March, the Leader of the House told the House that

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None of that happened, and it fell to the right hon. Member for Doncaster, Central (Ms Winterton), to say:

Eventually, on 16 September-eight months after the scheme was first announced with its £5 billion of guarantees-the Financial Secretary to the Treasury said that

The rest had apparently been diverted to other policies. In the few weeks that have so far elapsed, hardly any of that £2 billion has been available. There has been press release after press release and fanfare after fanfare. On one occasion, the Prime Minister told some gathering that the money was being distributed under the working capital scheme; it was an illusion, like the illusion that has surrounded so much that he has said.

There will be an overhanging effect on business's ability to access capital and the price it will eventually have to pay in interest rates because of the tremendous threat posed by the level of public debt. Again, this debate is not about economic policy generally-certainly not as far as I am concerned-but the background is that the Government have, in effect, had to privatise a huge amount of private debt that was previously the debt of the banks. That came on top of a huge fiscal deficit, which the Government were already piling up despite the fact that we were in conditions of growth and boom. That gave us the worst debt problem of any developed country in the western world.

A debate is now under way-it is quite crucial to confidence in the British economy and the confidence with which British business will eventually be able to access proper capital-about whether the debt and the deficit need to be tackled now. This is almost a farcical situation. It is by no means a secure situation for the British economy and it is worrying for anyone with the interests of British business and future employment in mind.

We have to record the historic date of 15 September 2009 when the Prime Minister's colleagues finally persuaded him to use the words "spending cuts". I have not observed him repeating those words since, and they have not yet produced a great deal of activity, but at least consciousness dawned for a moment.

Now, however, we are meant to be having a great political debate about whether we start tackling the deficit now or whether we leave it until later and, indeed, about whether it is not somehow essential to the Prime Minister's great plan for the recovery of the world economy that no item of public expenditure is touched until we get beyond a general election. That is a quite foolish debate, not least because the choice will not be in the hands of British Governments much longer if we try to exercise it. It is the markets and the need to sell gilts to finance the debt that will decide this.

The underlying deficit of-people's estimates vary -6, 7 or 8 per cent. of GDP is structural, which means that it would be there in normal circumstances unless we did something about it. That has to be tackled now, and the only reason there is still any confidence in sterling, the British economy and British Government bonds is that the Opposition parties are at least talking
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about tackling the structural deficit. [ Laughter. ] Oh yes. The Prime Minister's remarks-this is not all about the Secretary of State's remarks-would cause market panic if anybody thought he was still in control of events and certainly if they thought he would be after May.

John Reid (Airdrie and Shotts) (Lab): I do not think there is anyone in the House who does not accept that we have to find a route back to prudence by cutting expenditure and increasing income. However, I hope that the right hon. and learned Gentleman is not dismissing as irrelevant the debate about when we do that cutting and how much we cut. Everyone agrees that trying to make significant cuts in public expenditure before a sustainable recovery is under way is like trying to shove a car into fourth gear at 10 mph, because we will stall and run into a second deep depression. Will the right hon. and learned Gentleman confirm that there is at least a legitimate debate to be had about when significant cuts should proceed?

Mr. Clarke: We have to start tackling the deficit as soon as possible; we have no realistic choice about that, and we will pay a great penalty if people begin to believe that we are not going to do that.

The background to the debate is that the Government have proceeded, despite our warnings, on the basis that they are going to carry on increasing public spending by about £30 billion next year. That is Mickey Mouse economics, particularly when it is defended as though any challenge to that figure represents a threat to the financial future of the country. This is left over from careless pre-election commitments to public expenditure, and it should be tackled in order to restore confidence in the British economy and ensure continued confidence in those to whom we are going to have to look to finance our debt. It is important that we make a start on tackling the structural deficit now. It is absurd to say that the Government are somehow free to postpone this for a year or two, and to wait until they judge the time to be right.

The Secretary of State for Work and Pensions (Yvette Cooper): Will the right hon. and learned Gentleman confirm that this means that his party's policy is to oppose the £5 billion of additional funding that we are putting in to help the unemployed this year and next, of which £2.9 billion is for the next financial year?

Mr. Clarke: With anything of that kind, we are going to say, "Where are you finding the money from?" I shall leave it to my right hon. Friend the Member for Maidenhead (Mrs. May), who is winding up the debate, to describe the package that will be essential to tackle the real needs of the unemployed now and through this recession. We have addressed the question of how we would finance it and what it would cost, although we have the disadvantage of having only half a dozen very bright young people trying to work out the costs and helping us to put the policies together. The thousands of civil servants that the right hon. Lady has at her disposal have not enabled her to come up with quite the right answers on public finances so far.

Yvette Cooper: Just to clarify: we have increased the funding by £5 billion this year and next. It is discretionary additional spending funded by additional borrowing,
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and it is part of the wider support for the economy that the right hon. and learned Gentleman and his party repeatedly oppose. Will he confirm that he is opposed to that £5 billion of additional spending to help the unemployed?

Mr. Clarke: If I heard the right hon. Lady properly, she said that this was going to be financed by "additional borrowing". I must say that nothing causes me deeper dismay than to hear a Treasury Minister get to her feet- [ Interruption. ] She is no longer a Treasury Minister; I am sorry. Nothing causes me deeper dismay than to hear a distinguished former Treasury Minister get to her feet at the Dispatch Box in October 2009 and lightly trot out a policy, believing that she does not have to answer the question of where the money is to come from, but say merely that she will borrow it. This was indeed the policy of her Government two or three years ago, and it has contributed to the total disaster that the country is now suffering.

Mr. Michael Meacher (Oldham, West and Royton) (Lab) rose-

Kelvin Hopkins (Luton, North) (Lab) rose-

Mr. Clarke: I have given way, and I will do so again in a bit, but I must make some progress. I am in danger of making one of my longer speeches in a debate in which there is a time limit for everyone else. Let me just get through the things that will be required to restore growth, apart from tackling the credit market problems and the problems of the public debt that loom so heavily over everyone.

When we look at what is needed to restore to this country a climate that is fit for business enterprise to get the country back to work, the first thing that we need to address is the taxation of business. Whenever I go to meetings with small and medium-sized business men, they can normally be relied on to raise the issues of taxation and regulation, so I shall begin by dealing with both those subjects.

The Government have raised corporation tax, and, in particular, they are in the process of raising the rate of the tax on small businesses. It has already gone up from 19 to 21 per cent., and in the Budget it was announced that it would go up to 22 per cent. in 2010. That is complete nonsense. To increase the burden of taxation on business-and on small businesses in particular-at the present time is folly. This was done at the time of the Budget in order to make the books look right and to put the cost on a corporate and collective tax that might not upset too many voters. However, it will upset voters when they see the consequences that the measure will have on small businesses in this country.

We have committed ourselves to bringing down the headline rate to 25 per cent., because we need a competitive rate, and to reducing the small companies corporation tax rate to 20 per cent. We have said how we will finance that-by abolishing the elaborate system of allowances, which has complicated taxation and can be used to finance the reduction in rates. We also strongly object to the other increase in tax on business, which is tax on employment. The Government have already put that into the pipeline and are going to raise national insurance rates. We would hope to be able to avoid that, and we would like to be able to give some relief, particularly to small employers.

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Secondly, the Government have talked deregulation ever since they came to office. I actually think that Prime Minister Blair was a genuine enthusiast for deregulation and tried to infuse it into his Government. As all Prime Ministers probably find, and as he certainly did, he never had the time to apply himself to any of the detail, so it never really happened. The result so far of 12 years of stated commitment to deregulation was revealed by the latest PricewaterhouseCoopers global survey of chief executive officers, showing that more CEOs with businesses headquartered in the UK felt that their Government had failed to reduce the regulatory burden than any other country covered by the survey. We are losing competitive advantage.

Only a week or two ago, my hon. Friend the Member for Weston-super-Mare (John Penrose) produced our latest and most detailed policy so far, on which we are still working. It is based, among other things, on regulatory budgeting-that is, before introducing a new regulation, having calculated the burden of compliance with it, another equivalent regulatory burden must be found for repeal. That, for a time, was the Government's policy.

When appointed to my current position, I was mystified to discover that the Secretary of State had stopped work on regulatory budgeting, to which the Government were then committed. No explanation has ever been given for dropping that commitment. The nearest I ever got to an insider piece of gossip about what went wrong was that civil servants in other Departments had constantly objected to it and tried to block it. Well, they would, wouldn't they? That is why we have prepared ourselves for regulatory budgeting, approved a sunset clause for regulatory bodies and supported other measures set out by my hon. Friend. The important thing is that we are preparing to ensure that, unlike the current Government, we will not only speak the language of deregulation, but actually deliver a change of culture in practice. That requires the processes that we are planning to introduce.

Rob Marris (Wolverhampton, South-West) (Lab): Will the right hon. and learned Gentleman provide us with three examples of regulations that he would abolish if he were in government?

Mr. Clarke: That is the question I use when people complain to me about European regulations! What I would repeal is the whole system that requires companies and voluntary bodies to go through a process of vetting the records of more than 5 million citizens if they are likely to meet children in the course of their work or their daily activity. I am thinking of recent examples; otherwise, the hon. Gentleman has defeated me with the same trick question that I sometimes put to others. [Interruption.] If the hon. Gentleman's point is that the process of regulation is not a burden, not a cost and only an illusion, that it is not true that managers are spending hours of their time complying with regulations imposed by different bodies, or that businesses are not subject to inspection by countless different inspectors, some of whom give contradictory advice about how to comply with those things for which they are responsible, I believe that I am nearer to reality than he is. Neither is this a problem only for private business, as the public sector suffers from the same process. Thus, a process of examining the regulatory burden will reveal the answer to his question. We are proposing such a process and we are not going to introduce new regulations until we get rid of the equivalent older ones.

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Mr. Meacher rose-

Mr. Clarke: I will give way one last time, which might give me more time to think of another regulation for abolition.

Mr. Meacher: Let me return the right hon. and learned Gentleman to the most important thing he said-that a future Tory Government would engage in early cuts as soon as possible and that those would be big cuts. Is he aware that the President of the Japanese Government tried exactly that against the background of a precarious recovery at the end of the 1990s, only to precipitate a deeper slump? Is he aware that Roosevelt, having initially launched the new deal, then increased taxes and reduced public expenditure, which took America back into unemployment? Is it not obvious that what is needed is not public expenditure cuts on a large scale, but a massive investment programme in job creation in housing, infrastructure and manufacturing?

Mr. Clarke: Few things are certain and obvious in economic policy, and it is certainly necessary to have regard to historic precedent. We may consider Japan in the 1990s, the United Kingdom in 1981 and the experiences of the 1930s, although it is debatable whether what is now called President Roosevelt's Keynesian expenditure was actually the principal cause of recovery. Indeed, I think that that theory is very doubtful, although it is, I know, much loved by people in the labour movement.

What we must look at, however, are the realities of today. No two financial crises are exactly the same, and no two recessions are the same. What we have at the moment is a massive burden of debt, which is a major feature of the current problems and a major challenge to confidence. To pretend that the Japanese experience shows that there is no need to tackle it is to be under an illusion. We have a larger deficit, and we have seen a faster increase in debt in relation to GDP, than any other G7 country. Others can afford fiscal stimulus, but we cannot. It is my judgment that we must start cutting the deficit as rapidly as possible. We cannot simply point to one feature of the Japanese lost decade and say that it proves that Britain in 2009 must avoid taking that step.

Tom Levitt (High Peak) (Lab): Will the right hon. and learned Gentleman give way?

Mr. Clarke: I will not give way again straight away, although I may do so later. I will take too long if I keep giving way and dilating on these impossible subjects. Almost every Member in the House is briefer than I am, but the hon. Gentleman is a possible exception, and an exchange between him and me is a risk on which I will not embark at this stage.

The next specific question that we must address is why we lost our advantage in flexible labour markets. That is undoubtedly extremely important to getting employment going again, and we are going to devote some study to it. We believe that the Government have moved far too fast and gone too far in some instances, although they too seem now to be having doubts about the agency workers directive. We believe that it should not be implemented until the last possible date, and certainly should not be implemented on fiercer terms vis-à-vis employment than those adopted by other western European countries complying with it.

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