| Previous Section | Index | Home Page |
Of course, it will be objected that with the deficit as high as it is, we cannot afford to increase it any further, but that is simply not true. Our current debt-to-gross
domestic product ratio is 61 per cent.-slightly higher, I agree, than that of France and Germany, but less than in the United States, where it is 69 per cent., or Italy, which is perhaps not the best example, where it is 102 per cent., with Japan still on 107 per cent.
Mr. Hands: Surely the right hon. Gentleman must realise, first, that our indebtedness is rising incredibly quickly, which is in itself a cause for alarm; and secondly, that the savings rate in countries such as Italy and Japan, as opposed to our utterly anaemic domestic rate, makes that comparison a very difficult one. If we had the savings ratio of Japan or Italy, perhaps we would not be as alarmed as we all are and should be.
Mr. Meacher: If we are looking at Japan and Italy, that is a perfectly fair point. The hon. Gentleman says that our indebtedness is rising quickly, and I accept that, but the question continues to be what is the best way of reducing it. The point that I was about to make-he did not give me a chance because he intervened a bit too quickly-is that the best comparison is with Britain's position during the second world war, when our debt-to-GDP ratio reached 250 per cent.-two and a half times our entire GDP. What happened after the war-did we tackle the situation with gigantic cuts in public expenditure? No, it was tackled in exactly the opposite way with large public expenditure programmes of just the kind that I am talking about to get the economy working again and to get unemployment down. I hate to say this but, in some says, that inaugurated the golden age of capitalism between 1948 and 1976. [ Interruption. ] I say that ironically. The fact is that that was a highly successful policy.
Let us not forget that, under the Thatcherite policies of the 1980s, we had not just one collapse, but two. It is all very well to talk about Geoffrey Howe's Budget producing a great deal of growth-it did in the end, of course, because of growth in other countries and the rise in exports, and the end of the oil inflation of the 1970s, but it then produced another collapse in the early 1990s.
I should make it clear that I am not at all opposed to public expenditure cuts where they are justified. We should always be looking to see whether public expenditure is justified. I think-a significant number of very senior military chiefs, if not most, agree with this-that the £75 billion planned over the next 30 years for continuing with Trident is not justified. I also think that the £10 billion or so for identity cards cannot be justified on a cost-benefit rationale, and that one cannot justify expenditure running into tens of billions of pounds on massive Government Department IT super-computers, which is pretty wasteful given all the experience we have had.
Let me say to the Conservatives, who may agree with some of what I have said, something that they may not agree with-that taxes on the wealthy should be boosted so that they pay their fair contribution at a critical time for the nation. The Government are beginning to do that, but in my book nowhere near to the degree that is justified given that the wealthy and the bankers have produced the problem and that the rest of the country are expected to pay for it. That simply cannot be justified-that is the bottom line.
We should crack down much harder on tax evasion, which is reckoned to cost the economy something like £25 billion every year, and significantly increase the
penalties for those who are caught. We should end the non-dom abuse, as it is insufferable that it has carried on for so long in this country, and we should certainly introduce a Tobin tax on financial transactions. We should raise capital gains tax to the level- dare I say it?--at which Nigel Lawson left it at the end of the 1980s of up to the 40 per cent. that is the higher rate of income tax. It is only fair that there should be a rate of 50 per cent. on incomes over £100,000 and 60 per cent. on incomes over £150,000. If the situation is as critical as many people believe, such rates are fair and equitable.
We need public expenditure cuts where justified, tax increases where necessary but above all a massive public investment programme in job creation to swing the economy out of recession and decline and back into growth and expansion. There is no other realistic foundation for the Government's prognosis of 3.5 per cent. growth by 2011-12. I trust that the Government will make that the highlight of their last pre-election Budget in March. It would be thoroughly good for the economy and extremely popular in the country, so I ask my right hon. Friend the Financial Secretary whether we can have that assurance.
4.1 pm
Mr. Richard Spring (West Suffolk) (Con): I congratulate the right hon. Member for Oldham, West and Royton (Mr. Meacher), who asked exactly the right questions-how can we stimulate demand and get confidence back into the economy? We differ, however, on how to resolve it. A bloated public sector, which is already extended, is certainly not the way forward, but his central point was correct.
There are two groups of key questions that must be asked when considering the pre-Budget report. First, what is the present and future state of the economy, is it acceptable to the capital markets and what are the threats that are facing it? Secondly, does the PBR do anything to resolve the economic mire into which we have fallen? The answers are that the economy is in a far more perilous state than the Chancellor indicated in the PBR, and that the PBR has if anything made matters worse.
Our whole economic system is based on confidence-confidence that the currency will be stable and that what we can buy today will be the same tomorrow, confidence that a job will not be taken away and confidence that an overdraft or bank loan will be there when it is needed. That confidence keeps money flowing around the economy and keeps people in work, businesses alive and factories producing. The central question is whether the PBR has done anything to improve that confidence. Has it dealt with the real risk of a strike by the purchasers of our debt, and what would that do to our economy? Equally, has it dealt with what will happen if and when interest rates begin to rise in both nominal and real terms as quantitative easing comes to an end? Of course the £4 billion that was sold yesterday in the gilt markets for 2015 and that fact that that went well is undoubtedly good news, but investor sentiment will be tested again next week for the year 2049 and far beyond, so there is still much to be concerned about in that regard.
At the heart of the answer to all those questions is whether the fiscal policy for the next 12 months will be credible. Our ability to borrow is the key to the market's judgment about that and will determine the outcomes
in the economy, from how much and in what terms we can borrow to how much individuals can spend. The whole object of policy should be to keep the fiscal reins sufficiently restrained so that interest rates can stay as low as possible for as long as possible. That is not what we received in the PBR-it is as simple as that.
In the PBR, the Chancellor talked about the deficit as a percentage of GDP rising to 12.6 per cent. this year. Very regrettably, that may be an underestimate. The Economist Intelligence Unit believes that the figure will be more like 14.5 per cent., by far the highest in the list of 43 countries that it monitors each week. The Government's ambition is to cut their deficit in half. When viewed in the context of any borrowing record before 1997, that makes the current forecast look unrealistic in the medium term, because it is based on some very optimistic growth assumptions. On top of that, the Treasury Committee yesterday said that
"although the Treasury believe the Pre-Budget Report contains sufficient detail about the way in which the structural deficit would be reduced, our expert witnesses all criticised the document for not providing enough information about how this will be achieved."
The same report expressed concern about the Chancellor's growth projections, which are fundamental.
Why is that so fundamentally important? Owing to the huge amount of money that we have to borrow and raise each year and roll over, even relatively small changes in the interest rates offered on Government bonds could punch huge holes through our finances in future. That is the key point. That is what will make investors-at best-more cautious.
Investor confidence in our yawning fiscal chasm remains crucial. If that fails, two things may well happen: we would have to fund the deficit through further cuts in spending or increases in taxes elsewhere, or we would regrettably find ourselves heading towards the situation that Ireland and Greece face. There is a vicious cycle of deteriorating confidence: worsening confidence leads to a further deterioration in fiscal problems, which leads in turn to a further deterioration in confidence, and so on, until we are forced to take actions that would be wholly unattractive and unacceptable to all hon. Members.
How large are the holes that could be punched through the national finances? The Debt Management Office said that it needs to sell £225 billion of gilts this year to cover the Budget deficit, and that debts need to be rolled over. A rise in the borrowing rate, for example from 3 per cent. to 4.5 per cent., would certainly cause difficulties. As it is, the Treasury is forecasting paying more than £60 billion a year to meet interest charges on the national debt. How would the Chancellor do that? If his plans for taxation and national insurance contributions are anything to go by, he would raise taxes on jobs and undermine that very employment so as to protect unsustainable levels of spending. I hope my hon. Friends agree that it would be good if he did not get the chance to do that for electoral reasons, but there is always the risk that he will.
That may well be the consequence of a steadfast refusal to plan for the future reduction of the deficit for the short term. In essence, that is what makes the PBR so unacceptable. The Government are refusing to publish their predictions of future interest rates costs on Government debt or say what they are likely to be.
When challenged by the Treasury Committee on why that information was not provided, the Chancellor said that
"at the best times there is a degree of uncertainty, now there is a great deal of uncertainty."
The Government make other projections on many other key variables in the economy, but not on that most crucial one, though it is at the heart of our ability to borrow. The Chancellor confirmed that
"within the Treasury we have estimates".
Frankly, he should let us hear what they are.
Many will be asking themselves what is going to happen when the Bank of England asset purchase facility stops buying gilts. The supply and demand relationships in the gilts market will alter markedly. If next year the Debt Management Office tries to sell a similar amount to the £225 billion of gilts it sold this year, what will be the price with a £200 billion buyer effectively missing from the market? David Scammell, the fund manager at Schroders, said:
"With the Bank of England seemingly set to phase out its quantitative easing buying programme-which has seen it effectively fund the Treasury to the tune of £200 billion over the last nine months-the supply/demand imbalance will clearly tilt towards higher yields...A 'buyers-strike' would accentuate the move. This would be bad news not just for gilt investors, but also for the economy, the banks and the government".
That is at the heart of the dilemma.
Since the publication of the PBR, it is becoming progressively more expensive for the country to finance its deficit. The PBR failed to achieve the credibility that the markets were expecting, which is what led to the view that the Government are currently able to hold down the cost of servicing the nation's debt only because those who are buying our gilts expect a change of Government in the very near future, and a Government who inspire confidence in their competence. Frankly, after the shambles of their management of the economy in the last few years, it is hardly surprising.
We have heard a lot about PIMCO, the important American investment group. It has said that there is an 80 per cent. chance of Britain losing its triple A rating if the Government do not move swiftly. Scott Mather, head of global portfolio management, told Dow Jones Newswires that the current debt reduction plan
"is lacking in conviction and lacking in details".
When asked about a downgrade, he said:
"I think so...it's just a question of when...not if. Based on what we know today about the debt trajectory and about the inability to adjust that, I think it's greater than a 50 per cent. likelihood. Call it more like 80 per cent."
This comes a day after PIMCO, which is the world's largest bond fund manager, decided to cut back on UK gilts-yet another buyer missing from a market where the Debt Management Office is desperately trying to sell our national debts.
A clear measure that can be used to underline this erosion of confidence is how much someone would have to pay to insure themselves against losses suffered by holding our nation's debt. The figures are as revealing as they are shocking. As of last month, the annual cost of insuring $10 million of British debt for five years is $72,000. This is in the same league as Malaysia and
Chile and $2,000 more than it costs to insure Slovakia's debt. How do we compare to countries such as France and Germany? One would hope that Britain would be in a similar fiscal position to such countries, but we compare extremely badly. It costs just $22,000 per year to insure $10 million of Germany's debt, and $24,000 to insure France's-a third of what it costs to insure ours. That is a clear judgment by outside markets on the risks caused by the fiscal situation in this country.
Mr. Hands: Does my hon. Friend agree that investments in German or French bonds in the last two years have borne far less currency risk than a sterling-denominated investment, which makes our task even more difficult?
Mr. Spring: My hon. Friend is right. We have had a dramatic devaluation of our currency, although I suppose it will ultimately be helpful to the recovery. The markets have made a judgment on our currency based on their view of our economy, and it is not exactly an A-plus judgment.
Other statistics are also revealing. Not only are we a considerably less acceptable risk than other countries, but we are less creditworthy in fact than many firms and private companies. On the same basis as I mentioned a moment ago, it would cost $11,000 per year more to insure our debt than Vodafone's, $15,000 more than McDonalds', $32,000 more than BP's and an astonishing $35,000 more than Gap's. The sad fact of the matter is that the finances of large numbers of companies, in the midst of the biggest recession in living memory, are considered more creditworthy than those of the United Kingdom. That is an incredible judgment.
The Chancellor has kept quiet on the specifics of the pain to come. That is of course simply naked politics. He steadfastly refused to go into the detail of how and where he would cut spending, or how and where he would raise more money, and therefore how, in reality, he would go about dealing with the crisis that the country faces. The IMF says that $36 billion needs to be cut from Department budgets by 2013-14 to meet the borrowing requirement.
The few measures that the Chancellor did announce included an increase in national insurance contributions. That is a tax on jobs and affects everyone who earns as little as £20,000 a year-hardly progressive politics. That is why Richard Lambert, director general of the CBI, wrote in his editorial page in the CBI's magazine:
"The Chancellor managed to annoy almost everybody with his Pre Budget Report. Yet despite imposing higher taxes on business, he failed to show how he would restore the public finances to health."
"Put simply, the extra taxes he announced are being used mainly to support current spending for the next couple of years, rather than to reduce borrowing."
That view can only be reinforced, because the Prime Minister has claimed that, if there is better than expected economic news in the next few years, some of the extra money could be used to sustain public spending rather than to reduce the deficit. And of course the Chancellor has disagreed with him. That is part of the problem of a disunited and dysfunctional Government.
As the right hon. Member for Oldham, West and Royton effectively said, the key issue is what effect these policies have had on consumer confidence in the UK.
According to the most recent survey by the Nationwide building society, in December consumer confidence suffered its biggest fall in more than a year. The proportion of consumers who thought that the economic situation would be better in six months fell to 34 per cent.-down from 41 per cent. the month before. The proportion of consumers who felt that now was a bad time to make a major purchase rose by 4 per cent. to 38 per cent. last month.
Expectations for employment also worsened in December, with the proportion of people who thought that there would be many or some jobs available in six months falling to 25 per cent. from 27 per cent. Nationwide's chief economist said that although it is still early days, those lower expectations might foreshadow a more sluggish consumer outlook in 2010 as stimulus measures are withdrawn-we certainly hope that is not the case, but it does not look good. Consumer confidence, which is at the heart of our system, is one of the fundamental elements that the Government should be working to improve. It is what keeps money flowing around an economy and people in work. In that, I am afraid, they are clearly failing.
When we look at these statistics, we have to ask ourselves whether any of this is in the least surprising given that since last year the Government have been borrowing at the fastest rate ever and the Bank of England has printed enough money to purchase the economic output of Denmark. People are crying out for somebody to show the way out of this mess. Regaining the confidence of the British people should be the job of the Government now. That is what will decisively break the country out of this vicious cycle of debt and decline. That is what will keep interest rates in this country as low as possible for as long as possible. In turn, that will help to lead to a sustainable economic recovery. We are now borrowing net nearly £500,000 per minute. It is simply not sustainable.
I accept some of the points made by Labour Members-of course this debate might be arid, and I accept that we have to relate what we say to the reality of people's lives. Of course it is a matter of some satisfaction that, for a variety of reasons-not least the growth of the public sector, but also flexibility in the labour markets-unemployment has not reached the levels that some had forecast. Ultimately, however, we simply cannot deal with problems of employment, confidence or interests rates if we do not grasp that particular nettle-borrowing. However, that simply is not being dealt with.
The whole picture of chaos and contradiction in this Government was truly exemplified by the Prime Minister on Sunday talking about his pursuit of aspiration-one could not make it up-while attacking the Conservatives for wanting to make cuts. Absurdly, the next day, the Chancellor, and indeed the Chief Secretary, launched a document attacking the Conservatives for excessive spending promises. One need not have graduated from a kindergarten class to know that that is completely contradictory and shows that the Government have no clue how to respond.
When the Government leave office this year, we will have seen a decline in our international competitiveness and relative educational achievement, the longest ever recession and our international reputation in tatters. How dismissive our European partners are of a country whose tripartite regulatory system so failed us that we
now have so little credibility in influencing the key area of European financial services regulation! We have been led not by Presbyterian frugality, but by the most profligate Chancellor in history. When this tired, broken-down, dysfunctional and disunited Government leave office, this PBR will simply be a milestone on the path to the electoral oblivion that they deserve.
| Next Section | Index | Home Page |