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9.11 pm
Mr. Philip Dunne (Ludlow) (Con): I am pleased to have an opportunity to contribute to this debate, on what is the first parliamentary day of the new decade. It is also the first parliamentary day of the final year of this Parliament and, I hope, of this Government. Change will undoubtedly come this year, in that it has to be an election year.
As previous speakers have noted, the election is at the heart of this Bill. That observation has not been confined to politicians in this Chamber, as it has been made by
outside commentators as well. In its commentary on the pre-Budget report, Goldman Sachs wrote:
"The UK press has concluded that the relatively slow pace of tightening, which doesn't begin in earnest until 2011, reflects politics more than economics-there's a general election next spring."
We will have to wait and see whether Goldman Sachs is right about the spring, but the sentiment reflects what the Bill is all about.
I want to add my voice to those who have spoken in the debate and declared this to be an utterly feeble Bill. The only support for it has come from those on the Government Front Bench. It is one of the thinnest pieces of legislation that I have seen since I arrived in the House nearly five years ago, and it has quite properly been ridiculed-by the shadow Chancellor in particular, but also by every speaker other than the Chancellor himself.
No other issue is more significant, or a greater plank in the Government's own election planning, than sorting out the public finance deficit that this country faces after 13 years of Labour mismanagement. There is no bigger issue facing the country, or for voters to consider at the coming election. No difference between the Government and the Opposition is more striking than their respective approaches to dealing with this matter: the Government are clearly divided, and the Opposition are clearly united.
We could not have illustrated that better had we, as the potential Government in waiting, planned today's debate and set out the approach to be taken by Labour Members to supporting their own Government's legislation. They have not followed that approach. I said earlier that, apart from the Chancellor's, only one speech had been made from the Labour Benches, but now there have been two. Both speakers have said, in terms and at the outset of their remarks, that for very different reasons they would not be supporting the Bill.
There has not been a single speech in support of the Bill. That shows more clearly than we could ourselves the truth of the shadow Chancellor's allegation in his remarks that there is division at the heart of Government over how to tackle the deficit. As we have all acknowledged, I think, that is the critical issue that the country faces at present.
So given that lack of interest, I have to ask why the Government business managers have decided to rush the Bill through the Committee stages on the Floor of the House. The obvious answer may be that they need to get the Bill through quickly to have it on the statute book ahead of a general election, which may be called in early or late spring. But that is too simplistic an answer to my question. I think the simple fact is that the Bill will not be handled in Committee, where evidence sessions could be taken, because the Government are incapable of finding anyone to call as a witness to support the Bill. The evidence sessions would merely give grist to the mill of the Government's opponents on their own Back Benches and on the Conservative Benches in pointing out what a perfectly frivolous and ludicrous piece of legislation we have before us. In short, we are not dealing so much with solutions to a credit crunch. The Government are trying to deal with solutions to a credibility crunch.
The Government have form on the issue of fiscal stability. In his famous, or should I say infamous, Mansion House speech in 1997 the present Prime Minister, then Chancellor, set out his fiscal rules-his first attempt to provide an aura of credibility for his approach to the public finances. He said:
"We will introduce tough rules for government borrowing."
"I will never let the deficit get out of control. We will not spend money we have not earned."
Well, we all know what happened to those fiscal rules. The goalposts were moved as soon as it looked like they might be missed.
The commentators at the Institute for Fiscal Studies spelt out in their 2007 Budget briefing:
"The perception that the Chancellor has moved the goal posts and has delayed the tax raising measures and cuts in spending plans that we and other independent commentators had been saying would be necessary until after the 2005 election undermines the credibility of the fiscal framework."
The measures were obviously dropped.
What is the impact of that lack of credibility when it comes to dealing with the current state of the public finances? We have heard from other speakers this evening about the impact within the market. The right hon. Member for Birkenhead (Mr. Field) drew analogies with the run-up to the second world war, clearly with an eye to securing an impact in the media. The impact of the lack of credibility is extremely significant. It is not just the credit rating agencies, which have put the UK sovereign debt on informal credit watch. It is not just the market commentators, who are saying that the Bill will do nothing seriously to address the debt-to-GDP ratios, which must fall faster. The Governor of the Bank of England himself has said that the deficit needs to be reduced much faster than is proposed in the Bill.
Apart from the commentators, the markets themselves are telling us that we are getting perilously close to an apocalyptic scenario. Let us look at the three market measures that are most regularly used to compare this country's public debt with that of our international comparators. We can see that the UK is in a perilous position. In the gilt market-which includes the impact of currency, so the measure is not the most directly relevant-the yield on medium-term gilt is up 43 basis points since 1 December 2009. There has been a similar increase in the US, yet in Germany the figure has risen by less than half over that period.
We can look at inflation-linked bonds, which remove the differences in inflation between countries. Since 1 December 2009, UK medium-term inflation-linked bonds have risen by 23 basis points to almost 3 per cent.-2.96 per cent.-which indicates an inflation risk over the risk-free rate.
Mr. Pelling: Is some of that movement in basis points to do with the market discounting the heavy prospective issuance of debt that is coming, particularly in the US and the UK? Reference was made earlier to PIMCO, which has invested heavily in Government bonds and has taken the view that the UK and the US are particularly difficult investments at this time.
Mr. Dunne:
That helps to explain the differential rates in different countries. I am trying to draw out the significant increase since this Bill was first referred to in
the pre-Budget report, to show that the markets have no faith in it as a means of trying to reduce the public finance black hole the country finds itself in.
The third measure is credit default swaps, which take out the currency risk because they indicate the premium this country would have to pay should it raise debt in other currencies. Here again, the issue is stark. The UK credit default swap rate today is 83 basis points, up 12 since 1 December 2009, whereas in Germany the rate is only 26 basis points and has risen by three since 1 December. We have had an increase of four times more than that in Germany, and we have a credit default rating twice that of the United States.
Where does that place the UK when competing for finance internationally to fund our deficit? A table helpfully produced by the House of Commons Library showing 2009 Government borrowing as a proportion of gross domestic product for OECD countries rates the UK as third worst. Only the economies of Iceland and Greece are in a more precarious position, and the country that is closest to the UK is Ireland. We have all seen what has happened to their borrowing costs and the stark action that has had to be taken by all three of those countries to bring their public finances under control. The UK sits right in the middle of that bunch.
Quite apart from the challenges of funding the Government's spending over the coming years, given the public finance position we are in, the other significant worry is the impact the increase in rates will have on the rest of the economy-the whole private sector, whose borrowing costs are also priced off the so-called risk-free sovereign rating. There is no question but that the volume of Government debt is not allowing private sector credit spreads to contract. The simplest indicator is the continued wide spread of new mortgages. It is not the supply of credit to the household sector that is so much of a problem, but the price. The Government need to recognise that their action in failing to get to grips with the state of the public finances is spilling over and restraining growth in the private sector of the economy that they are so keen to support.
The Government's credibility is the key to understanding whether the Bill has any prospect of achieving success. We have heard from many other speakers this evening that the Government have no credibility when it comes to forecasting either their debt levels or GDP growth. The track record for their debt forecasting was well demolished by my hon. Friend the shadow Chancellor. As he said so clearly, in every Budget or pre-Budget report from the Chancellor and his predecessor, there has been a claim for debt reduction over a four-year period-as envisaged in the Bill-yet not once has it been achieved.
On the forecasting track record for GDP growth, the pre-Budget report assumes, first, that the economy will recover in a more dramatic fashion than we have experienced in any previous recession. Secondly, it assumes a consistency in growth rates that is unprecedented on two counts. It assumes a 3.25 per cent. increase in GDP for the four years starting next year. This is not only above the trend rate that the Government have presided over throughout the past 13 years, but it is a greater and more sustained increase than in any comparable four-year period of the Blair/Brown chancellorship. One can only assume that those forecasts were optimistic.
My final point on the credibility of the Government in their approach to the Bill relates to their actions. The Bill does nothing to restore faith in the Government's competence in administering the economy or to restore faith in the Treasury's competence. Let us take a recent example of Treasury competence to see whether the current Treasury team are the right people to monitor the reductions in the deficit envisaged in the Bill. Let us take the issue of the bank bonuses.
At the time of the pre-Budget report, the Government announced that they wished to get a grip on bank bonuses. Their objective, which was widely shared across the House, was to extend the period of deferral of bonuses to bank executives in particular, to ensure that they were not motivated to bet the bank's balance sheet, to put it crudely. Let us take as an example the largest financial institution over which the Government have some direct influence-the Royal Bank of Scotland, where the taxpayer is the largest shareholder.
The Government have proposed a bonus scheme for executives at the Royal Bank of Scotland that envisages payments over a three-year period-50 per cent. in year one, 25 per cent. one year later, and 25 per cent. a year after that. That is, broadly speaking, more generous than the current market norm, where deferred bonuses are typically paid equally in three instalments, rather than loaded to year one. Leaving that criticism aside, the other issue that the Government have completely failed to take into account when considering introducing a deferral scheme to Royal Bank of Scotland is that a large proportion of the senior executives at RBS who are transacting in the markets and who are therefore eligible for bonuses are former ABN bankers-the very bank that got RBS into the perilous state that it is in.
If we look at the bonus scheme that applied to those bankers-the current RBS executives who were formerly ABN AMRO executives-the Government's proposed bank bonus deferral scheme, far from extending the period over which they get paid their bonuses, will actually reduce it. Their scheme had a four-year deferral provision, whereas the proposed scheme has a three-year deferral. Not only have the Government introduced a more generous scheme in the one company over which they have some direct control, but they have exposed an issue in relation to the Bill-that is, what happens to a Government Minister who makes such a mess of an area for which they are responsible, such as the bank bonus deferral that I have just described?
What sanctions apply? Will such a Minister be fired or moved on? Who knows? That is highly unlikely. In this Bill no sanctions at all are proposed in the event that one of the targets is missed. As Martin Wolf suggested in the Financial Times to add to the ridicule of the Bill, a future Chancellor who failed to meet the targets might be sent to the tower of London. What chance of this Chancellor or the Minister accepting that as a suitable sanction in the event of failure of the Bill? Perhaps she might be able to tell us.
9.29 pm
Mr. David Gauke (South-West Hertfordshire) (Con):
This has been a somewhat curious debate. I do not know whether there has been a precedent for such a Bill. The Bill was at the heart of the Prime Minister's party conference speech in 2009; it was the flagship economic Bill in the Queen's Speech; and it is the
centrepiece of the Government's economic strategy to reduce the deficit. However, I wonder whether we have ever had such a Bill, because it has attracted not a single voice of support from Back Benchers on Second Reading.
I suppose that the Government might have hoped that in a time of crisis the country would unite around them as they set out to address the problem, but as it happens the Bill has managed to unite the House in opposition. The fact is that we have had only two contributions from Labour Back Benchers in the debate. I do not know where the rest of the parliamentary Labour party are tonight-they may be plotting, once again, if the rumours that have been reported this evening are true-but not one Labour Back Bencher could be prevailed upon to speak in support of the Bill.
Instead, we have had from Back Benchers a series of critical contributions. The right hon. Member for Birkenhead (Mr. Field) and his hon. Friend the Member for North Ayrshire and Arran (Ms Clark) took somewhat different perspectives on the Bill, but they both opposed it. The hon. Member for Dundee, East (Stewart Hosie) from the Scottish nationalists, the hon. Member for Croydon, Central (Mr. Pelling) from the independents, my right hon. Friend the Member for Wokingham (Mr. Redwood) and my hon. Friends the Members for Chichester (Mr. Tyrie) and for Ludlow (Mr. Dunne) were all critical, too. Almost any speaker this evening could have uttered the words that we have heard used to describe the Bill, including "profoundly pointless", "frivolous", "a political prank", "an expensive press release" or "mere words", but we have not heard any words of support for the Bill.
Let us imagine the scene in the Treasury last year as preparations were made for the pre-Budget report. The public finances are in ruins and we are borrowing more than at any time in our peacetime history. For every £4 spent by the Government, £1 is borrowed. We are borrowing more than any other G20 country. The CBI, the International Monetary Fund, the OECD and the Governor of the Bank of England are all calling for a credible plan to reduce the deficit. The credit rating agencies have started to express their concerns about the UK's triple A rating, and the risks of failing to set out a credible plan are becoming clear in the markets, as my hon. Friend the Member for Ludlow so clearly set out. We even have the example of Greece, one of two OECD countries borrowing more than the UK, where confidence has been lost and it costs them an extra 2.5 per cent. on interest rates to clear Government debt. It is plain that without a credible plan, mortgage rates may go up and businesses will find credit hard to secure.
The challenge that the Treasury faced at the time of the PBR was to restore fiscal credibility, and what did we get-a clear acknowledgement of the scale of the crisis, details of departmental spending in the years ahead, a general sense of direction on how the deficit would be reduced, or even just policies to improve the dismal and discredited forecasting record of the Treasury? No, we got this Bill: a Bill that sets out targets but no enforcement mechanism-no sanctions if they are breached. That is not a credible response; it is a distraction policy.
Mr. Redwood:
Has my hon. Friend noticed that neither Labour Back Bencher who spoke in the debate has returned to the Chamber for the winding-up speeches
as is traditional? Does he share my concern that the Labour Whips may be dealing with them at the moment-trying to re-educate them?
Mr. Gauke: I am grateful for that intervention. I look forward to reading on tomorrow's blogs reports of the mobile phone conversation in which the Government's Chief Whip explains exactly what he is going to do. I believe that he has a habit of making such phone calls on trains.
This Bill is a distraction policy. The idea that the existence of a target somehow provides credibility in itself is ridiculous, even if it is a target devised by the people who brought us, and broke, the golden rule. I suppose that we should be grateful that there is some acknowledgement of the credibility problem, given that the Prime Minister is currently going through one of his bouts of total denial as to the need to address public spending in this area, but that is very little comfort.
Let us not ignore the intellectual confusion at the heart of the Bill, which has been brought out by several speakers, including my right hon. Friend the Member for Wokingham and the hon. Member for North Ayrshire and Arran-we hope that she is safe. It is not often, I suspect, that those two Members agree on much. Nevertheless, the point has to be made.
In the past couple of years, the Government have argued that nothing could be done to reduce the deficit until the recovery was well under way; that notwithstanding the record levels of borrowing, fiscal policy could continue to be used to counteract the recession; and that it was appropriate to have a discretionary fiscal stimulus through a temporary cut in VAT. Now, however, we have a Bill that means that from 2011 to 2016 borrowing must fall year in, year out, regardless of the economic circumstances and where we are in the economic cycle. Never mind the discretionary fiscal stimulus-this could preclude even the use of the automatic stabilisers, as my right hon. Friend the Member for Wokingham pointed out. Does that mean that the Government now believe that we have borrowed so much, and will continue to do so; that we do not have room for manoeuvre; and that once we are through a general election the fiscal levers will not be available for at least six years?
Mr. Cash: Does my hon. Friend recognise the problem that I have presented to my right hon. Friend the Member for Wokingham (Mr. Redwood) and my hon. Friend the Member for Braintree (Mr. Newmark)? All three of us have argued for a long time that the Government's figures on net debt are simply not true. They are not giving the real picture to the British people, and they are not even giving the picture that the Office for National Statistics has given.
Mr. Gauke: My hon. Friend raises an important point. One of the benefits of an office for budget responsibility would be that we could provide some credibility in exactly that area.
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