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The third quarter gross domestic product figures, which will come out tomorrow, may well show quarter-on-quarter growth, and we very much hope so, but we should still bear it in mind that Britain will have come out of recession much later than our economic partners and competitors. Germany, France and Japan all showed growth in the second quarter of this year, and the UK
remains the only economy for which the OECD is predicting no growth at all this calendar year, although we hope that it is wrong about that.
Unemployment has risen faster here than in Germany, France, Japan and 16 other OECD countries, and Members will be aware of rising unemployment in their constituencies. We have already heard from one Member about that. Members will be especially aware of the appalling level of youth unemployment, which features prominently in the House Library briefing on economic indicators published earlier this month. It is massively higher than in the previous recession. In the early 1990s, 19 per cent. of those aged 16 to 17 were unemployed. Now that figure is 34 per cent. The figures are higher today also for those aged 18 to 24. As we have said in previous debates, the cost of this recession in youth unemployment has been severe, and getting young people into work will be one of the priorities for the next Conservative Government.
Mr. Love: Given the litany of evidence about the state of the economy that the hon. Gentleman has put forward, how can it possibly be sensible or economically literate to withdraw the stimulus at this time?
Mr. Hands: I thank the hon. Gentleman for that perfectly reasonable question. I shall come on to describe how we can both put the public finances back in order, or on the right path, and do something to help the economy along.
Regionally, the unemployment picture varies. According to the Library, the biggest percentage rises in unemployment have occurred in the west midlands and the south-west, by 71 and 72 per cent. respectively year on year. Those of us who remember the past two recessions will find it interesting that the west midlands now has the highest rate of unemployment of any nation or region of this country, at 10.5 per cent. The north-east is at 9.5 per cent., and London is third at 9.2 per cent. The latter two regions have shown smaller increases, meaning that both are suffering from the longer-term blight of unemployment during the years of economic growth of the 1990s and this decade-yet another sign that Labour failed to fix the roof when the sun was shining.
To return to the question of when the economy will start to grow again, we have always said that we expect growth in 2009. Nevertheless, even the predicted quarterly growth of 0.1 or 0.2 per cent.-we will know the figure for sure tomorrow-would mean that the economy has contracted by 4.7 per cent. year on year. That is no cause for celebration. Moreover, whether or not there is small quarterly growth tomorrow, the figures are already overshadowed by the appalling Government borrowing numbers that reached us on Tuesday. Britain borrowed £14.8 billion in September, the highest total ever for that month, capping off a third quarter of astonishing profligacy by the Exchequer. That is overspending of almost £500 million a day. That is like each taxpayer in Britain coming home every day and saying that they have just gone and borrowed another £20, without any sense of when the previous day's £20 will ever be repaid, let alone the interest on the previous borrowing.
Government borrowing rose to £77.3 billion in the first six months of this financial year, more than double the already high level of debt racked up in the same period the year before. Over the 12 months to September,
net borrowing was a massive £128 billion, up from an already high £47 billion in the year to September 2008. The public finances have been whacked by a double whammy of falling tax receipts and rising Government spending. Tax revenues have fallen 10 per cent. to £219 billion from £244 billion in the past six months, while Government spending has risen by an inflation-busting 4.8 per cent. from £266 billion to £279 billion.
Labour Members may claim that those appalling figures are not relevant to the question of economic recovery. I believe the Minister was saying that the deficit was somehow an entirely separate matter from whether Britain will have a proper economic recovery, but the two are very much linked, as I shall explain in a moment.
How can we secure a sustainable recovery? As we have said repeatedly this year, there are three essential aspects of any recovery: fiscal responsibility, monetary activism and supply-side reform. First, on fiscal responsibility, we need urgently to get a grip on our public finances. That much is obvious, except to the Prime Minister and Labour Front Benchers. That is vital in its own right, but it is also important when considering how to keep interest rates down, which will be a crucial part of our economic recovery. Huge Government borrowing will eventually push up interest rates, and the most recent figures that I have seen for the quantitative easing programme suggest that far more gilts and other fixed-income securities have been bought back than issued so far this year. Once QE has been wound up, as it must be in due course, we will need to keep a careful eye on the gilt market and other markets in which the UK might find investors for Government debt.
Our deficit is the worst of any major country. The Government sometimes say that we do not need to worry, as Government debt in the UK as a percentage of GDP at 59 per cent. and rising is still below that of Japan at 188 per cent., Italy at 116 per cent., Germany at 78 per cent. and France at 77 per cent., and only marginally above the rate of the United States at 54 per cent.
Mr. Redwood: Will my hon. Friend confirm that the Conservative Opposition are urging the Government not to do more quantitative easing?
Mr. Hands: I am not saying that, I am saying that QE will have to come to an end when the timing is right. Some of the tactical and practical details of QE are best left to the Bank of England.
To return to the deficit as a percentage of overall GDP, the crucial point is that if we divide the percentages that I mentioned by each country's domestic savings ratio, we find that we are actually in a far worse position than other countries, and possibly even than Japan. All that is before we consider any of the off-balance-sheet stuff. For some time we have had the problem that the UK gilt market is greatly exposed to weak domestic savings. Unless British households can start saving in a way that they have never done before, gilt issuance will depend on foreign demand.
In the short term, both official and market interest rates are low at the moment, but enormous care is needed. Forward interest rates such as forward rate agreements-in other words, where the market thinks
rates are headed-are much higher than short-term rates. In fact, the multiplier of long-term rates, at about eight times the level of short-term rates, may be at a record level. As I have said before from the Dispatch Box, it is worth remembering that a 0.5 per cent. increase in interest rates is far more significant when rates are low than when they are high.
The market has already anticipated substantial rises in interest rates, and even before any such rises have taken effect, the Treasury itself projects that debt interest will rise from £22 billion to £67 billion per annum. Obviously that bill will rise substantially if interest rates rise significantly. That is another reason why fiscal responsibility is so important for our economic recovery. If the Government continue to borrow uncontrollably, not only will the interest rate bill rise substantially and potentially unsustainably but the public sector will crowd the private sector out of the credit market. Members of all parties rightly urge the giving of more credit to small and medium-sized enterprises, but that will be made much harder if we do not get a grip on the public finances, because the state will crowd the private sector out of the market.
Jim Sheridan: The hon. Gentleman mentioned the possibility of increased unemployment. Does he accept that if his party were elected and carried out the cuts to public services that it proposes, that would create unemployment in the public sector?
Mr. Hands: No, I do not accept that at all. In fact, we have laid out a quite extensive set of proposals to get Britain working again that are perfectly compatible with doing something about the appalling condition of our public finances. We have to recognise that we can do both-we need to do more with less.
Christopher Fraser: Does my hon. Friend agree that businesses not Governments create jobs? The simple fact is that Governments must create the environment in which business can thrive, and not create artificial jobs just to massage the figures.
Mr. Hands: My hon. Friend is absolutely right. He makes that point extremely well, and I wholly concur.
Mr. Love: Will the hon. Gentleman give way?
Mr. Hands: No, I am going to make a little progress.
Specific measures to help us out of the recession have been outlined by the shadow Chancellor for some months now. A few weeks ago, we published our proposals to do something about Labour's jobs crisis: "Get Britain Working" offers a new, integrated welfare-to-work initiative. This year has seen the highest increase in unemployment on record, with more than 2,000 people a day losing their jobs. We have a comprehensive programme, including tax incentives for micro and small businesses to take on new staff, which we believe will incentivise businesses to create around 60,000 new jobs.
The shadow Chancellor announced two weeks ago a set of proposals to get the public finances in better order. At the same time, we remain committed to real help now in the form of our £50 billion national loan guarantee scheme and funded cuts in corporation tax.
Mr. Love: The shadow Chancellor's speech to the Conservative party conference laid out savings of the order, I think, of £7 billion. In the context of the debt figures that the hon. Gentleman has been giving, that is a pinprick. We hear all this talk about fiscal responsibility. Will he lay out for us today where that fiscal responsibility will impact?
Mr. Hands: I thank the hon. Gentleman for that, but it was not as good as his last question. He is being a bit churlish, because the Government have failed to outline more than a tiny amount of savings that might be made in public finances. The shadow Chancellor-
Mr. Love: You are the enthusiasts!
Mr. Hands: If the hon. Gentleman will let me speak, the shadow Chancellor laid out pretty clearly a menu of different things that a new Conservative Government will introduce. He did not at any point say that it was an exclusive list, but it was intended to give a direction of travel and to show the rough, overall approach that a Conservative Government would take. It is too early to lay out one's plans in full, not least because we do not know what appalling inheritance we are likely to have. That is partly a result of the Government's failing to face up to the simple facts of the budget deficit.
As I said, we have also published longer-term proposals for the economy, entitled "Reconstruction: Plan for a Strong Economy". When it comes to supply-side reform, no single policy can achieve everything, but we have begun to set out a programme of reform that I believe will be no less radical than the one that restored the UK's economic competitiveness in the 1980s and in the 1990s.
We need to save and invest more for the longer term, and achieve a model that is both greener and more sustainable. Most of all, we need to send a powerful signal that Britain is still open for business. With the right combination of monetary activism, fiscal responsibility and supply-side reform, we can rebuild confidence in the British economy and take full advantage of recovery.
That is the Conservative strategy for the recovery. It is the only sustainable route from austerity to prosperity. The other choice-the Government's choice-is a recovery built on yet more debt and yet more Government spending, which is just like an economic boom built on debt. It is living on borrowed time; a course which, in the name of patriotic duty, must be rejected.
12.53 pm
John Thurso (Caithness, Sutherland and Easter Ross) (LD): Those of us who were working or in business during the recessions in the '70s, '80s and '90s will remember not only the immense damage that was done to our businesses and the time it took to recover and get back to growth, but the social evils that followed from the unemployment caused at those times. Therefore, to me, securing economic recovery is of the first importance, not simply so that businesses can get back to business, but so that the social evils that follow from unemployment and other effects of the recession can be minimised and mitigated.
In the short time available to me in the debate, I shall look at three matters. First, as has already been discussed, a precursor to any attempt at securing a recovery is the restoration of financial stability: creating a banking
system that is effective and fair, with the minimum of systemic risk. The second issue is restoring growth in the economy, which is about the financial stimulus and the right moment to put the brake on; and the third issue is restoring order to the public finances and dealing with the deficit.
Mr. Redwood: I feel very sorry for the hon. Gentleman. There are no other Liberal Democrats in the Chamber. Does he have no friend to come and hear his words of wisdom?
John Thurso: As is often the case, my party is represented by quality rather than quantity, which I might say.
To return to financial stability and banking, the recession is a direct result of a financial crisis. The Government were absolutely right to launch a rescue. That is not to say that they are not culpable for the reasons we arrived in that position-that is not today's debate-but they were right to restore stability in the financial system. The real test now is whether that simply leads back to business as usual, and after being rescued the banks go back to big bonuses and ever more innovative instruments, and we start the whole merry-go-round again, or whether we come out of this with a refreshed banking system that is more responsive to the needs of commerce and industry.
I have a strong belief, which I stated at greater length in Monday's debate, that one impact of what happened in the banking system was the use of the resource of capital in unproductive speculation rather than investment in either equity or debt in commerce and industry. I would like that to change under a rejuvenated banking system.
I was interested to hear the comments made by the Governor of the Bank of England in Edinburgh, because they happened to mirror what I have felt for some time. We need a return to a narrower form of banking and to segregate banks whose principal role is the provision of prudent lending for commercial purposes from those whose primary role is to take appropriate risk in investment. My argument is not about utility versus casino, but about the two separate cultures that are required in such institutions. If they are mixed together, one simply gets the worst of all worlds.
Mr. Love: Is not the real problem with the Governor's proposal the same as that highlighted by the Opposition-namely, that there is no international agreement on a return to Glass-Steagall or something approximating it? Without such international agreement, it will be impossible for the UK to go ahead.
John Thurso: The hon. Gentleman, who is my colleague on the Treasury Committee, tempts me into a debate for which I do not have time. Suffice it to say that I believe it possible to construct institutions in this country that can compete very effectively internationally. I think Glass-Steagall is old language. "Narrow bank" is also difficult language, but such banks would have a separation of functions and would be more commercially viable. I would start-I encourage the Treasury to think about this-by taking Bank of Scotland out of the Lloyds group and putting competition into Scotland by making it independent. I suspect that Europe may well ask the Treasury to do that anyway.
On my second point-restoring growth-the Government have given us a blizzard of schemes throughout the recession, ranging from the rank failures of the automotive assistance scheme and the credit insurance scheme, through to the enterprise finance guarantee scheme, which is muddling along, and up to some quite good schemes such as scrappage. However, the characteristics of the schemes have been headlines and public relations, with money not effectively getting out to the companies that need it.
I reiterate what I said on Monday: the single biggest factor in rejuvenating the economy-the one thing that businesses in my constituency have cited as a real help to them-is the devaluation of the currency and the fact that we are now that much more competitive in our exports. That is of course nothing to do with the Government and carries its own risks in the future. We have seen the first minuscule shoots of hope appearing, but there is a real danger of a double dip. I remember the recession in the early 1980s, when the brakes went back on in 1981. That was too soon, and we went back into recession. It would therefore be wrong to end the fiscal stimulus too early. There is a balance of risk, but there is a larger risk in ending the financial stimulus too early than in ending it too late.
The deficit problem is worse than it was in the 1940s, when we came out of the second world war. The deficit then was larger, but it was mostly dealt with by being inflated away, and that is not an option that is open to us this time. It is clear that cuts, and quite large cuts, are needed in public spending, but there is a difference between cuts in public spending that have a direct impact on front-line services and cuts in expenditure planned for the future, such as ID cards-an expenditure that we do not need to make. My hon. Friends have suggested that the Trident programme is another area for cuts.
Mr. Love: Is not what we have lost in this debate about public expenditure the role that a return to growth can have in solving some of these problems?
John Thurso: The hon. Gentleman makes the point that I am coming to in a moment.
We will be living beyond our means, and cuts in public expenditure are inevitable. We need a grown-up debate to decide where they should fall. Increases in taxation will almost certainly also be necessary.
The really important thing is to get the recovery going to improve the employment situation. We need employment that comes from sustainable jobs, and such jobs will be grown by business, not created by the Government. The Government's job is to create the conditions under which business can flourish, but it will be business that actually creates the jobs. As we move to recovery, we need to put in place the mechanisms to assist businesses to grow, and I outlined some of those in the debate on Monday. The creation of mechanisms by which small businesses in particular can obtain access to affordable finance and capital rank at the very top of what is required. The Government have a track record of ineffective schemes for business. Businesses, especially SMEs, want a properly functioning, fair and well-regulated banking system. We would create the fertile conditions that would enable British business to lead us into a secure recovery.
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