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"The closer one looks, the more worrisome this specific parallel becomes",
due to the concentration of banking in a few large firms, and the comparative lack of non-bank sources of finance for companies. The UK's banking structure, he said,
"could impede the return of trend growth in the UK to its previous rate, and...could if things worsen put on persistent deflationary pressure",
as the ongoing banking structural problems did in Japan.
Economies with up-to-date banking systems, or which have alternatives to bank lending, are the ones that recover faster and stronger. The need to reform our banking system is hugely important. We cannot continue with just five or six big companies: that spare tyre is needed, and it is needed urgently.
Going forward, we need to rebalance the economy away from consumption. Before the crisis, there was a steady decline in the household saving ratio, from over 14 per cent. in 1981 to zero in 2007. The recent bounce in the saving ratio up to 8.6 per cent. must be maintained if we are to have a strong economic recovery. Increasing household saving may not be achieved through macro-economic policy alone. I believe that we will need to widen access to savings products, and introduce new products appropriate for groups who were not targeted before.
The Treasury Committee has welcomed a number of Government measures in this area, such as the Saving Gateway, and I hope that further measures will be brought forward. I well remember the report that we published in 2004-05 on restoring confidence in long-term savings, in which we said that savings was a middle-class industry. A lot of people do not have access to savings and are not being encouraged to save, and that is an issue for the Government to take up.
On the public finances, there is a fine judgment to be made over fiscal consolidation, especially given the macro-economic uncertainty. The Committee said that withdrawing fiscal support too early could plunge the country back into recession, with dire consequences for growth and employment that would cost the Exchequer more in the long run.
The Governor of the Bank of England told the Committee that we needed to act "at the right time" but, as we all know, there is no consensus on what the right time for fiscal consolidation is. The Committee pored over that very question, but more clarity will be required to achieve that consensus.
Ms Keeble: Does my right hon. Friend recall that, when the Committee considered the scale and speed of fiscal consolidation, all the experts from whom we took evidence agreed that faster or deeper fiscal tightening would hit support for pensioners? Would that not be the unacceptable price of tighter spending cuts?
John McFall: I do recall that being mentioned, but I also recall that youth unemployment was mentioned as well. Like the pensioners, that is a really big issue for us.
The Treasury Committee also felt that the PBR did not provide enough information on how the structural deficit will be reduced. Because of that, we believe that the Government must bring forward a clearer and detailed plan. As has been mentioned, that should happen sooner rather than later, and this issue certainly needs to be
tackled after the next election. We also feel that the Treasury could provide more quantitative information on the public finances. As the shadow Chief Secretary to the Treasury has said,
"there is a sense that the Treasury are using uncertainty to suit themselves."
The PBR gives some forecasts to as far ahead as 2015, and illustrative projections to as far ahead as 2018, despite any worries about uncertainty. It could therefore be considered arbitrary that the Treasury fails to produce projections of future expenditure, or at least of the split between departmental expenditure limits and annually managed expenditure.
The Treasury must also provide more quantitative information on the risks around its forecasts for the public finances, given the degree of uncertainty surrounding them. We realise that the Fiscal Responsibility Bill will tie the Government into a fixed time scale for managing the deficit. The fact that that will require close parliamentary monitoring makes transparency all the more important.
The Committee notes the risk, however small, of another uncovered gilt auction and yields rising. Quantitative easing is slowing, and there will still be large gilt auctions in 2010-11. However, we also note the methods now employed by the Government to reduce the risk of uncovered auctions, and welcome the fact that there have been no further uncovered auctions since our Budget 2009 report.
The Treasury Committee report, like many earlier reports, also mentions child poverty. As a Committee, we remain convinced of the continued importance of the commitment to eradicating child poverty, despite the difficult economic circumstances.
Given the recent slow-down in progress on the child poverty targets, and the likelihood that this year's target will be missed, it is vital that the Government set out a credible plan to tackle child poverty, going forward. It is vital that the Government set out the steps that they propose to take to achieve the 2010 target, and to achieve the elimination of child poverty by 2020-a very bold but also a very proud manifesto commitment in 1997.
I turn now to the question of the bank payroll tax. The Treasury Committee has been at the forefront in calling for change in the culture of banking, but estimates suggest that the Treasury now expects to receive about £3 billion or £4 billion from the tax when it originally expected only £500 million. That shows that the banking culture has not changed-that banks have simply gone ahead and paid out the bonuses. That is hugely important, because there is public anger about this matter. People are not fooled, and they realise the extent of the bank bail-out. I made that point yesterday to the Economy, Energy and Tourism Committee of the Scottish Parliament, when I was giving evidence to its inquiry. It is important that we remind ourselves of that.
The Treasury purchased £37 billion of shares in RBS and the Lloyds Banking Group; it gave indemnity to the Bank of England for £200 billion of quantitative easing; it has also agreed to guarantee up to £250 billion of wholesale borrowing by banks; it provided about £40 billion of loans and other funding to Bradford & Bingley and the Financial Services Compensation Scheme; and it insured banks' assets to the tune of £280 billion. The National Audit Office, in a recent report, suggested that the net cash outlay for the purchase of shares in banks
and the lending to Northern Rock will be about £117 billion, with a gross outlay of £131 billion. As a result, the Government's commitment to banks is 60 per cent. of GDP, and the value of that is 83 billion working days. The consequences for the UK are stark, but so are the consequences for the world. The International Monetary Fund says that 10 per cent. of global GDP will be lost for ever as a result of the banking crisis.
The banking crisis, which prompted the financial crisis, is at best halfway over. The IMF estimates the total non-performing assets in the world to be worth $3.4 trillion, of which only $1.7 trillion has been written down. So a second bank bail-out will not be tolerated in the United Kingdom or in other European countries. I have visited Germany, Austria and Belgium in the past few weeks, and I got that message. It will also not be tolerated in the United States, which I visited, too. Now is the time to fix the banking system, and I think that we have four to five years to change the financial architecture. That is why the Treasury Committee announced a few weeks ago that it would be undertaking an exercise on the "too big to fail" issue, which seemed to be brushed under the carpet last March, but has since been revived.
Adam Afriyie (Windsor) (Con): The right hon. Gentleman is making a powerful point about the action that would need to be taken either to reduce the size of banks or to ensure that they were not too big to fail. Why does he think that, despite his Committee's report last year, his many comments and his input over the past year, the Government have not taken any action to deal with the issue that he highlights?
John McFall: The Government have taken some action, but the issue is complex nationally and internationally. We see that from the tax on bank bonuses, whereby we have had a kick-back from the City, because some companies have said that they want to relocate. However, there is an international dimension, too. Given that we exist in a globalised world, we need to fix the matter globally, and that is a very difficult job. Like the Treasury Committee, others have taken to the stage and commented for a considerable period.
For example, the Governor of the Bank of England, who has appeared before our Committee, has been explicit on the issue. When we visited America, we met Paul Volcker, a former chairman of the Federal Reserve, who said that there was an issue that needed to be tackled. Indeed, he went further than any of us by saying that he wanted sound evidence from the banking sector that any financial innovation in the past 20 years had led to economic growth. The only financial innovation for which he gives the banking system credit is the ATM. There is deep scepticism.
Nicholas Brady, a former US Treasury Secretary under Ronald Reagan, had an article in the Financial Times this week, in which he said explicitly that the "banking system is unsound." Core reforms are essential if we are to provide the system with safety and soundness. People want safe deposits. One of the hardest questions that I asked the bank chief executives when they appeared before the Committee was, "Do you agree with the 'Oxford English Dictionary' definition of a bank, which is an institution for the safe keeping of people's money? If you do, you have screwed up." That is the issue: the consumer wants trust and confidence in the banking system to be restored.
Adam Afriyie: My point was, given everything that the right hon. Gentleman says, which people widely recognise, the Government are responsible for ensuring that the banking system works better than he describes. My question was simply: why have the Government not taken action in that area over the past 12 or 13 years?
John McFall: I am saying that the Government have taken some action in that area. I am sure that the hon. Gentleman, who sits on the Conservative Benches, believes in markets and free markets, but does he want Governments interfering in every single decision? I do not think that he does, so philosophically he will have to come to terms with the issue.
It has been proved that there is now no such thing as a free market, particularly in the banking sector. The Governor of the Bank of England came before the Committee and made this very point. It is a one-way bet for the banking system: if people do well, they get big rewards; if they do badly, they get big rewards. The Government need to go further on the issue of incentives in the banking system, because the incentive structure has distorted the long-term health of the banking institutions. People have had short-term returns but long-term instability. That is why we have joined all these eminent people such as Mervyn King, Paul Volcker and Nicholas Brady; no doubt I will add the hon. Member for Windsor (Adam Afriyie) to that list next time I speak on this issue.
Mr. Leigh: The truth is that nothing would militate more against recovery than for the Government to try to interfere in the banking system. However incompetent banks have been, that would be nothing to the levels of gross incompetence that would accrue were Governments to get involved in banking.
John McFall: The hon. Gentleman should take his colleague, the hon. Member for Windsor, for a quiet tutorial and make that point to him. The banking community has been absent from this debate; people have put their heads under the radar. If they do not want inappropriate legislation and heavy regulation, they will have to engage in this issue and ensure that we get a system that works-that we go back to a market system that operates in the interests of everyone in society. If the hon. Member for Gainsborough (Mr. Leigh) can join me in calling for that, I will be very pleased for him to do so.
Volatility and instability are at the core of the financial system at the moment. That is why the Treasury Committee has set up this inquiry. We are not saying that we should go back to the United States Banking Act of 1933 in its purest form; we are asking how we can make the system more stable and less volatile, and ensure that trust and confidence in the system is restored and that banks act in their own interests and those of their shareholders, the public, their customers, and society as a whole.
One aspect that has been missing from this debate is the public-the debate has been between the City and the political community. That is why, along with my colleagues, the right hon. Member for Haltemprice and Howden (David Davis) and the hon. Member for Twickenham (Dr. Cable), we have established the Future of Banking Commission, which has been supported by Which? and eminent economists such as Roger Bootle, John Kay and others. That is intended to give the public a voice so that their interests are looked after and
safeguarded and we end up with an appropriate banking system that serves the interests of society-nothing less than that. Only by ensuring that that happens will we restore the trust and confidence in the system that we all desire.
2.38 pm
Dr. Vincent Cable (Twickenham) (LD): We have had two debates on the economy this week. I judged, wrongly, that this would be the centre of attention, but the Chancellor and the shadow Chancellor clearly took a different view. Nevertheless, I persist in my belief that this is an important debate, for several reasons. First, it centres on the pre-Budget report, which was a very important event, however we judge it. As the Chairman of the Treasury Committee pointed out, the debate represents an advance, albeit a small one, in parliamentary accountability, because it represents an acceptance that the PBR should be subject to debate. Moreover, we now have access to the Treasury Committee's review of the PBR, which we did not have on Tuesday. There is therefore a lot to discuss today that we were unable to discuss properly then.
I want to say something about the deficit and the controversies surrounding it; something about the issue that dominated the PBR but has now largely been forgotten-the banking tax, and what has happened to it; and something about the long term, because we are very preoccupied with the short-term fiscal position. There was an interesting half one-liner in the PBR about the creation of an infrastructure bank and a vision of how the economy could develop in the very long term, and we need to refocus some of our attention on long-term structural issues.
I start with the deficit. This debate has been a good deal less emotional than bits of the one that I heard on Tuesday, in which the right hon. Member for Birkenhead (Mr. Field) among others proclaimed that the fiscal crisis was comparable to the crisis in 1940. Other speeches were at a similar level of emotion. Today everybody has been a little bit calmer, but we clearly have a serious problem and it is helpful to start by stating what the deficit problem is.
There are two linked problems: a deficit or borrowing problem and a debt problem-a cash-flow problem and a balance sheet problem. The problem of debt and the balance sheet is clearly serious, because the situation is deteriorating rapidly. However, as is often pointed out from various parts of the House, as things stand the level of British public debt in relation to the economy is actually one of the lowest in the developed world and much lower than at various periods historically.
Mr. Cash: Will the hon. Gentleman give way?
Dr. Cable: Perhaps I can anticipate the hon. Gentleman's intervention. I know he believes that there is a measurement problem, and that if we measured public debt differently, we would come up with much higher figures. I am merely citing the international conventions of the OECD and the International Monetary Fund; he might have something to add.
Mr. Cash:
The figures on which I rely are from the Office for National Statistics, and indeed the researchers in the House of Commons Library have confirmed them. They illustrate the point that I, my right hon.
Friend the Member for Wokingham (Mr. Redwood) and my hon. Friend the Member for Braintree (Mr. Newmark) have made that the figure is not £850 billion, as is suggested. The true figure, which I believe is now endorsed by our Front Benchers-it certainly appears to be-is nearer £3 trillion, and maybe more. If the measurement is out by a factor of three or four, does the hon. Gentleman not agree that that underlines all the difficulties about what the deficit is and what the definition of net debt should be?
Dr. Cable: I am sure it does but, equally, other developed countries have the same problem of incorporating public sector pensions. However, I accept the hon. Gentleman's broad point that there is clearly a problem. A more acute one is the borrowing problem. Some 13 to 14 per cent. of GDP is currently being borrowed, and it is being done in a very artificial way because the Government are buying up their own debt in the current strange monetary circumstances. The level of borrowing is unprecedented, I believe, and it is the highest in the developed world except possibly the United States, which is in the rather different position of being able to borrow in its own currency. There is a serious cash-flow problem, which we must take seriously and which is at the heart of the debate.
Two policy issues come out of that problem, both of which have been touched on. There is the historical problem of how we got into this situation and who is to blame, and the forward-looking problem of what we do next and how we manage what we all accept to be a difficult balance. The hon. Member for Runnymede and Weybridge (Mr. Hammond) summarised in numbers how we got here and why we have our public financing problem. Roughly a quarter of the problem is accounted for by the cycle, the ups and downs of the economy and the recession, and three quarters is structural. The problem is that the word "structural" is bandied around, but it is never terribly clear what people actually mean when they use it.
I know that the Conservative argument has always been that the structural problem is the "hole in the roof" showing the neglect of the budget over many years. That argument is partly true, but the problem with it is that the hole in the roof was actually quite small. I have been doing this job for five or six years now, and I remember debating the matter with the predecessors of the hon. Member for Runnymede and Weybridge, the right hon. Member for West Dorset (Mr. Letwin) and the former Member for Arundel and South Downs, who had an unfortunate slip-up at the last general election. When we talked about the structural deficit then, we were talking about roughly 1 per cent. of GDP. Now we are talking about something rather different-an over-dependence of the economy on the banking sector and to some extent on the ups and downs of the housing market as a source of revenue. It is quite right that we now talk about how to adjust the level of public spending down to one that relates to stable sources of revenue. That is what we mean by the structural debate.
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