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There is a particular difficulty with the position that the Conservative shadow Chancellor has taken. He assumes that the next Government, or this one, can somehow create rapid economic growth. Going back to the early days when the Prime Minister was in his ascendancy and the Secretary of State for Children, Schools and Families was at his side, they claimed that they had in some way changed the fundamentals of British economic growth. The rather mundane truth is that the underlying rate of economic growth in Britain has been pretty much unchanged since the Napoleonic wars. Different Governments claim that they have found a magic formula-Mrs. Thatcher did, as did the present Prime Minister-but of course they do not fundamentally change anything. Underlying growth is likely to be quite modest, in which case there will be a significant effect on what it is possible to do in terms of fiscal policy.
If we enter a period of rapid growth, the Government's aims will be too modest. There is a real danger that we shall get stuck in a slowly growing, recession-hit economy for a significant period, with high levels of unemployment. If that were the case, it would be disastrous to embark on rapid deep cuts in public spending in the short run. It would be completely inappropriate. Because we do not know what conditions will be, it seems foolish to set targets in stone in legislative form.
Does that mean that the legislation is completely pointless? No, there is a role for legislation to strengthen the fiscal framework. I am probably not too far from the Conservative spokesman in his belief that we need an additional independent element in fiscal policy, as we have in monetary policy with the Bank of England. However, my party's approach would be more modest. There is probably an argument for giving the National Audit Office a stronger role in auditing what the Government have done-not just their forecasts as at present. The NAO could make an assessment about whether the Government have delivered on their targets.
We have already had some strengthening of the legislation regarding the independence of the statistics office. That was a step forward and there is an argument for an independent audit role-an Ofsted-on fiscal policy. I agree with that, although I should not create quite such an elaborate institution as the Conservative spokesman proposes. None the less, there is a role for strengthening the institutional backbone of fiscal policy.
I switch to the other, much bigger subject: what is happening in the banking system. Over the past couple of days, we have been reminded in several ways that major problems are still unresolved. There was yesterday's Supreme Court ruling on banks imposing what many people regard as unfair charges. There were also the revelations about the so-called secret loans. Today, we have seen the pathetic report from a City insider-the Walker report, which is an absolute disgrace. Before I came to the Chamber today, I was in a television studio with Lord Myners, whose eyes were rolling in embarrassment as he tried to explain away the fact that the Government are committed to that rather pathetic and limited document.
Mr. Graham Stuart:
Does the hon. Gentleman agree that although the covert lending was probably right in the circumstances, it was unethical for the Government then to lean on another bank and broker a deal under which shareholders could not be told about the covert
loan? One bank merged with another with a huge loss of shareholder value. Even if we accept that the covert loan should have happened, we cannot accept mergers of institutions without openness, truth and transparency about what is really happening.
Dr. Cable: I think that was exactly what I said yesterday in relation to Lloyds bank. Equally, I said, and meant, that it was right for the Government to support the banking system and that there was a role for covert lending. I have no difficulty with that. I just want to make it clear, as I have done many times in the past, that although I have major disagreements with the way the Government managed the economy up to the crisis and with the way they have managed the banking system since, the intervention last October was right in almost every respect. It was right to give the guarantees, to make major Government equity investment and partially to nationalise the banking system. I do not retract that in any way.
However, major problems are unresolved and the Government have been failing by not addressing them. The first-where the Conservative spokesman rightly started-is the failure of lending. As information trickles out, we are discovering that although Lloyds is broadly meeting its gross lending objective, its net lending flows are very limited indeed. NatWest and RBS are failing even to meet the limited lending objectives they were set. One noticed in the press last week that RBS was willing to cough up enormous sums to help Kraft to take over Cadbury, but that semi-nationalised bank is still unwilling to lend to very large numbers of good, solvent British companies. They have a good credit history and track record, yet they cannot get credit on reasonable terms. There is a major policy failure, which is the failure of Government representatives in United Kingdom Financial Investments Ltd to make it absolutely clear that the banks have an obligation to act in the national interest.
Mr. Mark Field: Although I accept what the hon. Gentleman says, does he not feel that a fundamental problem is that huge amounts of toxic assets in our banks have still not been identified? That is the main failing. He is right to point out that it has been manifested in the lack of credit for small and medium-sized enterprises, but many people regard the unravelling of toxic assets as work that is very much in progress. It will take another two years.
Dr. Cable: The unravelling of the toxic asset problem may take a decade, which was the experience in many other banking crises. In the meantime, there is absolutely no reason why a clear steer should not be given to the nationalised and semi-nationalised banks to maintain a lending policy that helps to sustain the British economy, but that is clearly not happening.
The second big issue, which is not being addressed properly, is the structure of the banks. The Chancellor always groans when I raise the subject with him, and comes back with his prepared line: "That's got nothing to do with the structure of the banks, and it was small, narrow banks such as Northern Rock that collapsed." I do not particularly want to turn this into a personal argument with him; I simply suggest that he reads the evidence that the Governor of the Bank of England yesterday gave to the Treasury Committee.
The Governor said exactly what we Liberal Democrats have been saying: the structure of the British banks is not sustainable, and that is a serious problem. That problem does not centre entirely on the issue of the links between the narrow banks and the so-called casino banks, but he is seriously concerned. He is absolutely right to be concerned, because some of our very large global banks, which, for the most part, happen to have large investment banking operations, are expanding, or wish to expand, on the back of the Government guarantee. We know that in future crises, that guarantee will be called, as it was in this crisis. That is not an acceptable or sustainable position.
At some point in the near future, the Government will have an obligation to intervene to break up the very large banks, so that those banks do not create such a degree of risk. I am not sufficiently expert on the banking system to be precise on how that is to be done, but it could be done in different ways. The Government must respond. I do not expect them to respond to me, but I expect them to respond to the warnings of the Governor of the Bank of England, who continues to point out that the issue is the major unresolved problem; it has not been addressed.
On the issue of bonuses and remuneration, I have read the relevant sections of the Walker report. It pretty much reiterates what was said some months ago by Lord Turner, and what was already largely agreed at the G20. The issue is implementation, and how we create a regime in which bonuses are paid predominantly in shares, rather than cash. My question for the Government is whether legislation is necessary to achieve that purpose. I am not a parliamentary draftsman or a lawyer. I was under the impression that the financial services legislation and the powers devolved to the Financial Services Authority were adequate to allow it to impose an appropriate regime on the banks. Is that the case? What legal advice available to the Government has told them that they have to come back with yet another banking Bill to introduce measures that the FSA has clearly said are absolutely necessary to maintain the stability of the system?
The Walker report became a topical issue today, particularly as it relates to transparency and disclosure. There has been a movement in the argument over the past few months. It was clear that Ministers expected and wanted the Walker report to propose full disclosure in relation to not just the generality of what they call top-end employees, but those employees' individual rewards. The Walker report has clearly backed off from making that recommendation under pressure.
I think that Lord Myners is on record as having said that he saw no problem with individual disclosure. Why should there be a problem with it? Board members of public limited companies disclose their emoluments. What is there to hide? We are not talking about private companies that are completely independent. I can well understand why an entrepreneur setting up an engineering company-a private company-might wish to protect their privacy and not declare all their income, except to the tax man, but why should that apply in the cases that we are discussing? The banks in question are ultimately guaranteed by the taxpayer, and have an obligation.
We have had an embarrassing light shone on dark corners in this House in the past few months. It has been quite painful, but I think that most people now accept that it was legitimate to shine that light, and that
it is fundamentally healthy, in the long run, for there to be more transparency. That applies not just to Members of Parliament, but to other people in society, particularly those who depend on a taxpayer guarantee. The Government should have absolutely no inhibition in demanding individual disclosure. That is the central weakness of the Walker report recommendation. I note, however, that the Chancellor appears to be conceding that £1 million is perhaps a little bit too high an amount at which to set the poverty level in the City; he seems to be willing to drop that amount a little, and that is a step forward. On the question of individual disclosure, the report is, frankly, pathetically weak. Stronger action from the Government is needed.
I agree with quite a lot of the things that the Conservative shadow Chancellor said, but he has a phrase that he invented: "We're all in this together." The truth is that we are not all in this together. Some people have done extraordinarily well out of the crisis. There is enormous prosperity in parts of the country, much of it unearned and much of it lucky. At the same time, there is enormous poverty and hardship, and there are people struggling with unemployment. We need to reflect our concerns about those widening inequalities of income and wealth in the tax system, and in how we approach the regulation of remuneration.
Mr. Andrew Smith (Oxford, East) (Lab): I welcome the Government's measures in the legislative programme, just as I welcome the steps that they have taken to get the economy growing again. The extraordinary global crisis that we have been through has reinforced the case for strong Government action, and there is no doubt that the action that our Government and others have taken has made the difference between recession and depression, and has shortened the period of recession.
I would like to flag up two areas of concern, where a positive response from Ministers could make our programme even stronger. One is the position of mutuals, an issue to which others have referred on other days in this debate. Successful mutual financial institutions have particular strengths, in terms of a sensible balance between their borrowing and lending policies. They enjoy greater trust, especially among customers, than most banks. They are important to many communities and families throughout the country and, of course, they are critical for the housing market.
It is crucial that mutuals should not suffer from distortion of the financial markets because of the huge amounts of money and effective underwriting that the Government have had to provide for the banks. There is widespread concern about that among building societies. That concern was voiced a couple of weeks ago by the Building Societies Association chairman, Graham Beale, who said that in circumstances in which financial institutions were trying to refinance their balance sheets in the retail rather than the wholesale market:
"The net consequence is that the margin between savings rates and mortgage rates has been eroded.
But the demand for retail deposits is so intense that rates have been pushed up in some cases to uneconomic levels. And this is often by institutions that carry real or implied unlimited guarantees because of their full or part state ownership."
Similar pressures and potential distortions operate in the wholesale and inter-bank markets. The building societies that are able to access those markets face a bigger differential, as compared with the banks, than they did a few years ago. I hope that the Minister who replies to the debate can give me an assurance that the Government and the Financial Services Authority are fully seized of that, and of the importance of ensuring fair conditions and regulations for the building society sector. It would be an utter tragedy if the action taken to rescue the public from the banks that were responsible for the financial mess had the perverse consequence of weakening the building societies, which were not responsible for it.
The second issue that I want to raise, which has not featured much so far this afternoon, is the importance of environmental sustainability and responsibility in bank regulation in general, and in the lending policies of banks sustained by public funds in particular. Let us take the example of the Royal Bank of Scotland. The Guardian reported on 2 March this year that in the six months following the initial bail-out, RBS had been involved in financing loans worth nearly £10 billion to coal, oil and gas companies. That is more than a quarter of the amount that the bank had received from taxpayers at that point. Its loans finance oil exploitation in conflict regions in Africa and south Asia, drilling in untouched areas of the Arctic, tar sands oil extraction, and open-cast mining. We need to question very seriously whether, at a time when we rightly voice the priority that must be given to combating climate change, those are the investment priorities that public funds should be underwriting.
I ask the Government to consider the environmental conditions that they should place on the bailed-out banks' use of public money, and I commend to my right hon. Friend the Chancellor and his colleagues the excellent book by Nick Silver, chair of the actuarial profession's resource and environment group, who, in conjunction with a number of environmental non-governmental organisations, puts the case for RBS becoming a bank of sustainability.
There are three main thrusts to the argument. First, UK Financial Investments Ltd, as the custodian of the public interest, should ensure that RBS and others in which it holds a stake follow good practice for institutional investors in relation to environmental, social and governance considerations. The Government also have environmental and social obligations, so they should go further and seek positive incentives for environmentally sustainable investment policies, including targets for, and the monitoring of, cuts in damaging emissions.
Secondly, as RBS is an important provider of finance to fossil-fuel and carbon-intensive industries, it, together with the businesses in which it invests, is attempting to externalise the risks of climate change which, sooner or later, will fall on taxpayers. Those are the same taxpayers who now own RBS, so those external costs are no longer carried by a third party. We can cut the long-term cost to the taxpayer by acting now on sustainability. That is the important message.
Thirdly, if we are to cut our carbon-reduction targets, we need a huge increase in investment in low-carbon industries and renewable energy. I know that the Government accept that point, and clearly RBS could play a big and environmentally beneficial role, by making good use of its expertise in renewable energy. The Environmental Audit Committee commended that approach to the Government in its report on 10 March, when it recommended that
"the Treasury examine and report on how some form of environmental criteria for the investment strategies these"-
"banks pursue might be imposed, and what impacts this might have on UK sustainable development objectives."
I hope that the Government will see the good sense in those ideas, and I am pleased that my good and right hon. Friend the Chancellor is here to hear them. There is enough of the Treasury chip still in my brain for me to know how resistant Treasury culture will be to those ideas, but they raise vital issues that will not go away. If there is a global danger even more potent than financial meltdown, it is climate change. It is surely right that, in pumping billions into the banking sector and looking at how to regulate it against financial irresponsibility, we put in place requirements for environmental responsibility to help the world to avert climate catastrophe.
Mr. Edward Leigh (Gainsborough) (Con): I am just about to refer to the Chancellor, so, as he is leaving the Chamber, I hope that he will not mind if I take issue with what he said earlier this afternoon. My point relates to the very serious matter of the loan that was made to HBOS and RBS. I am not arguing with the principle that the Government wanted to keep it secret so as not to destabilise the markets; I am saying that there are clearly established protocols, whereby, when the Government decide to give an indemnity in secret-for instance, on a matter affecting national security-they must inform Parliament in confidence through the Chairman of the Public Accounts Committee and the Chairman of the Select Committee on the Treasury.
There is a very good reason why. It is not my amour-propre, or that of the Treasury Committee Chairman, who is equally upset about the matter; it is because if I, as the Chairman of the PAC, had been informed of the matter, I would have told nobody. I would not have told anybody from my party's Front-Bench team or anybody else. I would, however, have discussed it with one person-and one person only: the Comptroller and Auditor General. He is the auditor of the Government, an independent figure, and he would have checked matters out and ensured that the whole thing was kosher. That is why he is there, and he would have done so in complete confidence.
Over the eight years that I have been Chairman of the Public Accounts Committee, I have been told in confidence of many instances, particularly concerning national security, when the Government have had to issue indemnity. I have never leaked a single thing. In the 150-year history of the PAC, no Chairman has ever leaked anything that has ever been given to them of that nature. It is a serious matter-that, contrary to all those protocols and conventions, the Government decided not to inform Parliament in confidence through the Chairmen of those two Committees.
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