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8.42 pm
Stewart Hosie (Dundee, East) (SNP): I do not want to repeat what anyone else has said, but this is a profoundly pointless piece of legislation, because one would have imagined that the job of any Government at any time would have been to ensure fiscal responsibility and sound public finances all the time. One would not imagine that the Government would need a law to tell them to do that, and certainly not a law that will enshrine on the statute book, if it gets that far, deep and savage cuts-cuts that this Labour Government have already planned. An £800 million budget cut has already been announced for Scotland.
Only this Government, I suspect, could be so foolish as to lay out very broad and deep public spending cuts before we have a sustained and sustainable economic recovery from the recession. Only this Government, I suspect, would carve them into stone on the statute book, at a stroke sucking out the consumption and demand that has propped up the economy in the past little while and which is almost certainly necessary to ensure a further and sustainable economic recovery.
At its heart, the Bill is also dishonest. Although it is fundamentally about deep cuts-as I said, an £800 million cut to the Scottish budget has already been announced-the Government have refused to publish or carry out a comprehensive spending review. That means that we do not yet know the implications for every single one of the UK's spending Departments. We are therefore having this debate in a vacuum, without knowing the implications for ordinary people and ordinary services or for the economy more widely-the very point that the hon. Member for North Ayrshire and Arran (Ms Clark) made. It may be those at the bottom of the pile who will pay the price for this Government's economic failure.
The absence of both a comprehensive spending review and an understanding of what the cuts really mean make a mockery of the explanatory notes. The hon.
Member for Taunton (Mr. Browne), who speaks for the Liberals, mentioned this earlier, but paragraph 31 says:
"There are no significant financial effects of the Bill."
He seemed to agree with that, but I disagree entirely. There are massive financial implications for every UK spending Department and, potentially, for almost every piece of public investment. There are also implications for, in the first instance, the incomes of tens of thousands or hundreds of thousands of public sector employees who will lose their jobs and, in the second instance, private sector employees, as expenditure in local communities is reduced, as the cuts begin to bite on public sector income and the spending power in local communities. There are also massive financial implications arising from the increased social protection costs as people are paid off as a direct consequence of the cuts.
Do the Government not understand that it was only increased Government consumption-up 2.2 per cent. last year, at a time when household expenditure fell by 3.6 per cent., when total business investment was down by 22 per cent. and when gross fixed capital formation was down by 17 per cent.-that kept the economy afloat at all? Do they not understand that to begin the process of deep and savage cuts now, before the private sector has the confidence to spend and invest, and when credit for businesses and individuals remains incredibly difficult or expensive, is economically stupid? That is the economics of the madhouse. The measures-the Labour cuts-therefore not only put faltering economic recovery at risk but, as the hon. Lady said in her speech, run the risk of pushing the economy into a double-dip recession, which is something that I know the Treasury is concerned about. I am therefore at a loss to explain why they are introducing the measures today.
As an aside, I am also at a loss to say where the Chancellor is. There were only two, very modest financial measures in the Queen's Speech: the Financial Services Bill and the Fiscal Responsibility Bill. Both are small and modest-indeed, this one really does not matter-yet the Chancellor is not even here to listen to this short debate, on one of only two financial measures in the Queen's Speech.
Before embarking on this political dividing line of a Bill-that is all it is-this Labour Government should have learned the lessons of fairly recent history: the recessions of the 1980s and 1990s. The recessions of 1980-81 and 1990-91 lasted for five quarters. This recession has already lasted for six. The declines in GDP then were 4.7 and 2.5 per cent. respectively. This recession has already taken our GDP down by 5.9 per cent. The economy took two full years after the technical end of those earlier recessions to reach the point at which the GDP recovered to pre-recession levels. As I said earlier to the right hon. Member for Wokingham (Mr. Redwood), it took three years before unemployment stopped rising after the technical end of the recession in 1981 and two full years before it stopped rising after the technical end of the recession in 1991. In the absence of the clarity that a comprehensive spending review would give, the scale of the cuts envisaged by the Bill and the PBR run the risk of replicating, or worse, the human cost, as well as the economic danger, of the 1980s and 1990s recessions.
I have been a critic of the deficit and the debt levels since before the recession and before the banking crisis. Going into the recession, I said that there was nothing in the tank, because our debt at that point was around
£500 billion and due to rise. I want the deficit and the debt to be reduced, but there are alternatives to what the Government propose in the Bill. When the New Zealand Government introduced their Fiscal Responsibility Act 1994, they did so on the basis of five important principles. I shall go through them briefly. The first was that Government debt would be reduced to a "prudent" level. That principle acknowledged that the existing level of Government debt was too high-as it is here-and that the Government needed to run operating budget surpluses for a period of time to reduce the outstanding debt and the annual deficits. They talked about a "prudent" level, not about an arbitrary 50 per cent. cut in order to be able to afford an artificial political dividing line.
The second principle was that, once debt was reduced to a prudent level, the New Zealand Government would seek to maintain a balanced budget on average over the medium to long term. They did not seek to do so over one economic cycle, in which the Government would change the start and end dates to make the cycle fit the numbers, or over a single Parliament. They sought to achieve their aim using an average over the medium to long term. That was very sensible. If the Government here were to adopt that principle, they would still be able to invoke counter-cyclic measures in the midst of an ongoing debt and deficit reduction programme, if we were to hit a further significant downturn. The automatic stabilisers would kick in safely, and we would have the ability to use fiscal stimulus measures, if they were required, while we stuck to a medium to long-term objective of bringing the debt and deficit down to a prudent level.
The third principle was that the New Zealand Government would achieve and maintain a level of net worth that provided a buffer against unforeseen future factors. That principle recognised that factors other than explicit Government debt-such as public service pension liabilities or bank deposit insurance such as the asset protection scheme-have an impact on the fiscal position.
The fourth principle was that the Government would manage fiscal risks prudently. That called for attention to be paid to all fiscal risks, such as shifts in the demographic structure of the population and off-balance sheet state guarantees. This Bill, however, is a blunt measure to camouflage risky and damaging cuts, and it says nothing about prudent financial management.
The fifth principle was that the Government would pursue policies that were consistent with a reasonable degree of predictability in regard to the level and stability of tax rates for future years. That principle recognised the importance of tax stability for private sector planning and growth. Although this Bill is called the Fiscal Responsibility Bill, it says nothing about the important matter of tax stability.
Whether the Bill is passed or not, we might have a Budget in the spring. On the "Andrew Marr Show", the Prime Minister said that that could happen
"if it's the right time",
which was meaningless nonsense to avoid saying yes or no. There might be a Budget in the spring, but there will be no time for a Finance Bill to consider its tax implications. There will almost certainly be an emergency Budget closer to the summer, but that will cause further uncertainty and delay. We are already seeing further tax rises, more
tax changes and more tax uncertainty, all of which risk discouraging the investment that we need in order to grow the economy. Growing the economy is the real key to tackling the deficit and ending the debt, but the Bill says precisely nothing about that.
I heard the Chancellor's rhetoric earlier, but when I looked at the Bill, I wondered whether he was talking about the same piece of legislation. I also wondered, when I heard him justifying some of the measures, whether he was on speaking terms with the Prime Minister, who said on 10 June last year that
"you cannot cut your way out of the recession".
On 21 October, the Prime Minister said:
"The only way forward for this economy at the moment is to maintain the fiscal stimulus".-[ Official Report, 21 October 2009; Vol. 497, c. 906.]
In The Daily Telegraph on 25 October, he said that
"it would be suicidal to put recovery at risk by suddenly cutting".
"What sense does it make to withdraw the fiscal stimulus now...?"-[ Official Report, 28 October 2009; Vol. 498, c. 279.]
He is, of course, the Prime Minister of the only serious economy in the world that does not have a fiscal stimulus package any more. As recently as 2 December, he railed against those who wanted "immediate and savage" cuts that would prevent Britain from recovering from the recession, yet that is precisely what the Bill and the pre-Budget report will achieve. It is precisely what the noble Lord Mandelson was referring to at the Press Gallery lunch in July, when he warned of austerity "for the next decade". When I hear the Chancellor and other Labour figures railing against so-called Tory austerity for a decade, I am reminded of the noble Lord Mandelson warning against Labour austerity for the next decade. The Herald reported accurately-I was there at the lunch-that
"Lord Mandelson has raised the prospect of an age of austerity in Britain under Labour, with spending cuts... running right the way through to 2020."
What we are seeing today is the enabling legislation to do that.
The Government appear to be determined to risk economic recovery by withdrawing the lifeblood from the economy before we have a sustained and sustainable recovery. I believe that they will pay the price for that at the ballot box, but that will be of little comfort to the hundreds of thousands of ordinary people who will pay the real price for Labour's economic failure and this inflexible Bill.
I want to see the deficit and the debt cut, but I want to see that done from a position of a sustained and a sustainable economic recovery. I conclude my remarks by saying that if anyone thinks that tackling the deficit and then the debt will be difficult from a position of sustained and sustainable recovery-and it will be; there will be tough choices to make-it will be absolutely impossible from a position of faltering recovery or a double-dip recession or one that will require the kind of swingeing cuts that other Members have spoken about, made in a knee-jerk and panicked way. That is something that none of us wants to see.
I tell the Government that we will oppose the Bill today and bring forward amendments in future stages. The attempt to tackle the deficit and the debt must be
done in a flexible way that protects genuine front-line services and allows the deficit and the debt actually to be reduced from a position of real growth, rather than having the whole economy butchered simply to create an idiotic dividing line between two parties in the run-up to an election that the Prime Minister does not even have the guts to call.
8.57 pm
Mr. Andrew Pelling (Croydon, Central) (Ind): I congratulate the hon. Members for North Ayrshire and Arran (Ms Clark) and for Dundee, East (Stewart Hosie) on breaking the ice on the consensus in the debate on this cold winter evening. It is important to talk about the economic implications of the Bill.
In reality, what we have seen over the last 18 months or so has been a socialisation of the bad debts that were created on the banking books as a result of huge leverage and excess capacity within the debt markets, making it inevitable that the Government would transfer those debts into the public sector. It would have been completely irresponsible for any Government not to have acted in that way. In respect of the current Bill, however, running down that socialisation of bad debt in a compulsory fashion could lead to very significant economic damage for our country.
The dangers of having a double-dip recession are real. My own professional experience involved spending a great deal of time working for Japanese financial companies, but the last thing I would like to see is our country suffering the 20 years of economic turpitude that that country has faced. If we take away the ability to use proper fiscal stimulation, there may well be real problems.
There are many clouds over the economy. VAT is going to increase, for example, and internationally, US housing is still in great difficulties. Only last week, the US Government found it necessary to give another bail-out to GMAC. There are weaknesses in other economies. French consumer confidence was unexpectedly down today, while there are tremendous weaknesses among our European partners, particularly in Ireland and Spain. We must also remember that for our own economy, manufacturing production is down almost 11 per cent.-10.8 per cent.-over last year and the service economy has contracted by 4 per cent.
In considering the Bill, we should bear in mind the tremendous fragility in our economy. Many pressures-well-meaning pressures-were exerted for banks to be required to put a significant amount of extra capital on to their books, but in the coming years that would inevitably result in continuing severe restrictions on the ability of private sector banks to give stimulative support to our economy, and in such circumstances it is important to maintain full fiscal discretion.
There are real questions to be asked about whether quantitative easing is an appropriate tool, but there is no doubt that if we withdrew it, the need for fiscal stimulation would become ever more important. We must bear in mind just how significant the removal of credit from the economy has been as a result of the financial crisis. A substantial amount of that credit came from financial organisations that were not banks. There was a heavy reliance on short-term borrowing from the financial markets-perhaps, in the UK economy,
the equivalent of £240 billion of credit stimulation. The £200 billion of heavy gilt issuance represents only one part of meeting the amount of credit creation that has been withdrawn from our economy, and a severe reduction in fiscal stimulation could lead to significant troubles for it.
Much reference has been made to history in today's debate. Members have mentioned, for instance, the crisis that followed the post-war period. It should be remembered that the success of the recovery in Europe was the result of a considerable fiscal stimulus on the part of our United States partners in terms of the recapitalisation of Europe. Members were making false assumptions when they cited that period to justify significant reductions in fiscal spending now.
I think that the danger of a crisis in the bond markets has been greatly exaggerated, in terms of their ability to absorb significant issuance of United Kingdom Government debt. The right hon. Member for Birkenhead (Mr. Field) recalled that in the 1980s the Swedish Finance Minister greatly resented having to come to speak to young people in the City, and to justify why people should buy Swedish debt. I was one of those young people in the 1980s, although I am less young now.
There is no doubt that the power of the bond markets is very important. I remember a senior financial official in the Reagan Administration saying that if he were to be reincarnated he would want to be reincarnated as the bond markets, such was their influence and strength at the time. I believe that, particularly if there is a significant reduction in Government spending, banks will be keen to buy issuance from Government-they are being pushed in that direction by regulatory change-but if we move too quickly to remove fiscal stimulation, the only productive area in which banks will invest will be gilts, because the return from them will be significantly higher than that provided by other potential investments or lending in the United Kingdom economy.
If I wanted to be particularly controversial, I would say that the UK Government's triple A rating does not really exist any longer within the capital markets, as the credit level is treated as being below that. There is a danger in us, as politicians, regarding that as absolutely totemic. This is obviously a matter of great historical departure-other than, potentially, on some war bonds, our country has never defaulted-but being rated double A-plus would not be such a severe challenge. Many other G7 countries have gone through such change.
The hon. Member for Chichester (Mr. Tyrie) made the most pertinent point when he said that the debate is also about our credibility as politicians. Legislating to deliver a promise weakens the position of politicians because it implies, or even states, that any other promise that politicians give which is not backed by legislation is inevitably of a lower calibre. This highlights the way in which politics has become so debased that legislation comes to the House purely on the merits or demerits of making a particular point with the media.
Unfortunately, as the hon. Member for North Ayrshire and Arran has pointed out, the type of restriction involved could be very severe in terms of public services dislocation and the lack of discretion that politicians would have in future. I cannot see the sense in both of the main political parties, which have for so long emphasised that they like the flexibility that this country enjoys because it is not part of the euro, wanting to move on
and suggest that our country can do well and prosper if our politicians are straitjacketed by a restriction on their future discretion to make judgments about appropriate economic policy. In reality, if we needed, through economic policy, to have a higher rate of fiscal stimulus than that required by the tapered approach to reduction in the annual public deficit, we would probably-as has happened in the past to meet the European 3 per cent. of gross domestic product borrowing requirements-have a system of obfuscation and using different means of private finance initiative to hide real Government borrowing. As a result, we would end up further undermining our credibility as politicians. We should have the confidence to be straightforward with the electorate about the requirements of Government and about our finances.
I agree strongly with the comments that my hon. Friend the Member for Castle Point (Bob Spink) made in an intervention on the Chancellor. It seems reasonable that the approach to politicians' pay should be the same as that in the private sector. If the Government are determined to put the Bill through Parliament, and if they think it is important, perhaps there should be performance-related payments for the Chancellor if he hits targets. Let the Bill have real bite if they think it is important. There is no point in passing legislation with no sanction or incentive of any kind for the Chancellor regarding the proposals.
Let me address the Opposition's amendment. Initially, I decided not to support it because I think it is important that politicians should feel that they can deliver results by their actions rather than through legislation or the setting up of alternative quangos. However, I think that the amendment is written in such a way that there is sufficient flexibility to allow those of us who are not members of the Conservative parliamentary party to support it. In particular, this House would be strengthened if the opportunity were taken to set up an independent Budget office, similar to the one in Congress, to look at how the Government are performing their fiscal and debt management.
Such a body would revitalise this place's ability to hold the Government to account about their finances. This House's inability to do that on taxation issues has been a long and unfortunate tradition in this House, although the Public Accounts Committee has done extremely well in its endeavours to look at whether Government money is well spent.
In conclusion, this Bill will place our country and politicians in such a fiscal straitjacket that our very prosperity will be put at risk, and it is being done on a mere whim. The Government are playing to the media, and trying to create false division lines between the two main parties represented in this Chamber.
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