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I want to say one last thing about how we get out of this recession and about the Tories' approach to the PBR. They basically want to create a quango rather than have Parliament oversee how we get ourselves through this time and pay down the debt in the next four years. Ultimately, that is about what kind of society we want. We want a good society, governed by smart government. The only way that we are ever going to
achieve that is through this PBR and this Government acting with the people to ensure that we elect a Labour Government in a few weeks' time.
5.26 pm
Paul Farrelly (Newcastle-under-Lyme) (Lab): I recognise the difficult balancing act the Chancellor faced in compiling the pre-Budget report in the most difficult economic and financial circumstances that we have faced in many years, as he will with the Budget proper. However, on fairness and taxation, I and many others believe that he has not quite got the balance right.
Every economy will have its peaks and troughs. No Government are potent enough to abolish the economic cycle, and no Government in the free world can dictate human nature, with its swings of optimism and pessimism, and the credit cycle, which results from the expansion of banking and credit over the centuries. However, it is important that the Government recognise the dangers and weaknesses within the modern free market and act accordingly, through fiscal and monetary policy in wider economic management, and through a robust framework of regulation, and the willingness to act promptly, when the public interest demands it, in the financial markets.
Before becoming an MP, my career was in banking and then in financial journalism. Latterly, I was the City editor of a national newspaper. From the early 1980s, I either witnessed close-up or reported in detail on each major financial and economic crisis as it unfolded, including the 1987 stock market crash, the 1990s recession, sterling's ignominious exit from the European exchange rate mechanism, the problems that engulfed the Lloyd's insurance market-the so-called LMX spiral-when nobody knew where the risks really lay, and the bail-out in the late 1990s of the massive US hedge fund Long-Term Capital Management, which happened because the Clinton Administration and, importantly, Wall Street, did not know where the liability merry-go-round would stop and how much damage could be done to the global financial system. The unique problem in my working life-it forms the context of this PBR-is the current credit crunch and global recession. In this crisis, the aspects of those other crises, save for the problem of maintaining a fixed exchange rate, have descended on us at the same time.
History will tell, but arguably the key individual action that crystallised the credit crunch, ignoring previous lessons from the 1990s, was the Bush Administration's decision to let Lehman Brothers go to the wall. Equally arguably, the single most important policy action to contain the damage was taken first not in the United States but here in the UK-prompt and decisive action to rescue the banking system by the Chancellor and the Government. That happened not in the bankers' interests, but in the public interest. Also in the public interest, the Government responded to stimulate demand and to contain a more damaging downward economic spiral, as any intelligent reader of history would have done. That is the background against which the Chancellor delivered the PBR before Christmas.
The key difference between this recession and the one in the 1990s is that in this one, the Government have taken positive action to ameliorate its effects-they have not simply let events take their toll on industry and ordinary families. The key difference with the 1980s is that this recession was precipitated by a massive shock
to the financial system. True, it was not helped by over-lax financial regulation, with the Government, in good economic times, continuing the previous Conservative approach. But unlike the 1980s' recessions, it was not brought on by the Government themselves through ideological experiments in monetary policy as a dose of harsh medicine, a self-inflicted pain that harmed much of our manufacturing industry, especially in areas such as mine in north Staffordshire, and permanently blighted much of our economy and many of our local economies.
Any reasonable person should welcome the individual measures in the PBR to help industry and businesses, as well as the determination not to jeopardise recovery by cutting Government spending too far or too fast. However, I would have liked the Government to go further on manufacturing. The financial crisis has delivered the sharpest lessons on the dangers of over-reliance on the financial sector and the City of London with all its short-termism. It is vital that we have a whole new emphasis on and encouragement for manufacturing. Our major competitors-Germany, France and Japan-do this. There, it would be inconceivable that only a fraction of the machinery for one of the UK's biggest renewable energy projects-the London Array-would be supplied by domestic companies. We have simply not taken enough advantage of new or existing industries.
Anyone who had cause to go to the old Department of Trade and Industry to seek help for industry would have been dismayed by the "hands off, can't do and won't help" mentality of officialdom. That was another painful hangover, like the so-called light-touch regulation of the City, from the Thatcherite days. A whole new attitude and approach is needed. I encourage the Chancellor to take up that theme strongly when he presents the Budget proper.
The Chair of the Select Committee has already addressed at length the City and financial regulation, including in particular the importance of getting performance incentives right-
Frank Dobson: What is my hon. Friend's response-
Mr. Deputy Speaker: Order. If the hon. Member for Newcastle-under-Lyme (Paul Farrelly) is giving way, he must not remain on his feet.
Frank Dobson: Does my hon. Friend agree that the public should be slightly daunted by the fact that no fewer than 50 of the new and improved Tory candidates actually work in the City of London and must have been involved in some of the dubious transactions that got us into the mess we are in?
Paul Farrelly: I was involved in the City myself many years ago, and I had very good reasons for leaving it. My right hon. Friend may not be surprised to learn that the City will be well represented in the constituency of Newcastle-under-Lyme during the next election, as my Conservative opponent is 27 and a City lawyer with Sullivan & Cromwell, which advised Lehman Brothers just before it collapsed. He will be close at hand on Monday, when bankers and lawyers will be emptying their wallets at the Carlton club-president, one Margaret Thatcher-for a £65 a head fundraising dinner. I have the invitation here if my right hon. Friend wishes to take it up.
It is clear that the behaviour of City bankers has not changed, even in cases when the banks have benefited from the public purse, even given the reduced competition after the turmoil. The extra levy on banking bonuses is therefore welcome. It is only a short-term measure and it may be subject to fancy avoidance schemes, but it is important in encouraging a greater sense of responsibility in the City. I wish that the Government had done it and been tougher in action and rhetoric before. Shareholders-the major pension funds and insurance companies investing our money-should also have taken a more active stance in the past.
In the PBR, the Chancellor also said it was important to take tough decisions on tax now. He said that he was determined that any tax increases would be guided by our values of fairness and responsibility. In a decent, civilised and progressive society, that overall philosophy is surely right. In the PBR, the Chancellor has finally recognised that a quarter of all the money spent on pension tax relief goes to the top 1.5 per cent. of earners. He will now reduce those benefits. I welcome that limited measure, but again wish that the Government had done it before.
With respect to fairness in taxation, there is one glaring issue that this PBR, like its predecessors, does not address. That is the rate of capital gains tax which, at 18 per cent., remains lower than the basic rate of income tax and much lower than the higher rate of income tax. As such, it remains unfair: some of the lowest-paid workers will pay a higher rate on hard-earned income than many wealthy people will on unearned income. Also-this is very important-it constitutes a continuing huge incentive to tax avoidance. To eliminate that incentive, therefore, and to protect the tax base, capital gains tax should be aligned with the marginal rate of tax. I hope that the Chancellor will address that glaring anomaly in the Budget.
We inherited that position from the Conservatives in 1997. Progressively, we reduced it under taper relief, which between 2001 and 2008 cost the Treasury an enormous amount of money-£28.1 billion. To put that into context, it is £6 billion more than the £22 billion proceeds from the 3G mobile phone licence auction, which itself reaped more for the Treasury than all previous privatisations put together. Far from taking the long view, the move has encouraged exactly the opposite: a constant churning of deals and investments. The British disease became ever more rampant, and frankly it was a huge tax break that in great part went to the City and private equity.
I do not yet have figures for how much the change to 18 per cent. is estimated to have cost. In the future, it would be useful if the Treasury could provide them and explain why we have yet to address the glaring anomaly that I have highlighted. According to the Treasury's own figures, a rise in the marginal rate of tax would raise £2 billion for the public finances. The proposal to lift the rate of national insurance by 0.5 per cent. would raise £3 billion and mean that, however regrettably, ordinary families would share the burden. In the interests of fairness, however, it is important that the anomaly be addressed.
In conclusion, I welcome much of what is in the PBR, but in many respects, particularly on encouragement
for manufacturing and fairness in taxation, we could be much bolder. I hope that the Chancellor will address those issues in the Budget.
5.36 pm
Mr. William Bain (Glasgow, North-East) (Lab): The pre-Budget report safeguards vital investment in schools, hospitals and policing, and more importantly helps to create employment and training opportunities across the country as we prepare for the return of economic growth this year, after what was, in 2009, the most difficult year for the UK economy since 1922.
No country has been insulated from the devastating effects of the collapse in the derivative markets, which has been the root cause of the recession. This has been the first global recession of a globalised financial system. However, the Government have taken strong action to recapitalise the banks and save the financial system through £850 billion in recapitalisations, loans and other guarantees. They have also shown strong leadership at a time of economic crisis.
The Bank of England has also taken decisive action in monetary policy in maintaining interest rates at 0.5 per cent., and in my view the policy of quantitative easing has been broadly successful in injecting almost £200 billion into the economy through asset purchases. As the Japanese recession of the 1990s and early 2000s has shown, interest rate reductions on their own cannot generate a lasting recovery. On that point, I take issue with the shadow Chief Secretary, the hon. Member for Runnymede and Weybridge (Mr. Hammond). In Japan, quantitative easing was used too late and too weakly to produce a strong stimulus for recovery. To produce a strong recovery here, fiscal policy is as important as monetary policy, which is why we need to maintain an equally bold direction in fiscal policy in 2010, to make it a steady year of recovery that benefits everyone.
The real issue dividing the House is whether that stimulus should continue this year to allow for stronger growth in 2011 or whether we should engage in fiscal retrenchment through deficit reduction now. In my view, taking the latter approach this year would be disastrous for our prospects and run the risk of a double-dip recession. I take issue with the right hon. Member for Hitchin and Harpenden (Mr. Lilley) on this point: despite her many mistakes, which generated great hardship for my constituents in the 1980s, the noble Lady Thatcher did at least not cut public spending in the immediate aftermath of a recession, which the Conservative party is proposing to do now.
Time is marching on and the wind-up speeches are about to begin. I urge the Government to continue the fiscal stimulus this year. It is a policy that will promote much-needed employment in my constituency and those of many right hon. and hon. Members. I commend the pre-Budget report to the House.
5.39 pm
Mr. Greg Hands (Hammersmith and Fulham) (Con):
It seems like an awfully long time since the publication of the PBR for us to be debating it now. If the Government had followed the Opposition's advice and moved the start of the Christmas recess, so that it was actually closer to Christmas, we could easily have debated the PBR when it was truly tropical. Nevertheless, as we
know, this debate is all about the deficit and how we secure economic recovery in this, the last G20 country still in recession.
I will deal with the deficit and bond markets in due course. However, it is interesting that today, in the week that PIMCO, one of the world's largest bond funds, starting dumping UK Government gilts and only a few weeks after the OECD, the CBI and the Bank of England all warned that there was no proper plan in place to deal with the deficit, we have seen no response from the bunker, other than the pathetic Fiscal Responsibility Bill, which panned so badly on Tuesday. Not only is there is no plan; as I said from this Dispatch Box in October, the Government seem to be reverting to the view that there is actually no problem, returning to their position of last June, which is that there will be growth in spending after all.
I want to digress for a moment and mention one item in the PBR that has not been mentioned today, namely the one tax cut in it, which is actually another tax con. The Chancellor has reduced bingo duty from 22 to 20 per cent., without bothering to mention that it was 15 per cent. before the last Budget. The Government claim that removing VAT offset the damage, but their sums were a mess. Even with duty at 20 per cent., bingo players today are paying more.
Listening to the Back-Bench speakers, I noticed a curious tale from those on the Government Benches. Perhaps they thought better of it, but on Tuesday there were no Government Back-Bench speakers whatever, on the Government's flagship Fiscal Responsibility Bill. Clearly the Whips put out the call today, and the call was answered. The first three speakers were, again, mainly opponents of the Government, which I think is a sign of Labour's lurch to the left. Perhaps the Whips decided to bring them in here to prevent them from plotting.
We heard similar themes from the right hon. Members for Holborn and St. Pancras (Frank Dobson) and for Oldham, West and Royton (Mr. Meacher) and from the hon. Member for Great Grimsby (Mr. Mitchell)-real "Back to the 1980s", old Labour socialism. We even heard an incredible and wide-ranging attack on the financial services industry as a whole from the right hon. Member for Holborn and St. Pancras, which I found remarkable coming from the man who not so long ago ran to be Mayor of London.
We also heard from two or three other Government Back Benchers who were perhaps a little less opposed and a little less socialist. The hon. Member for Sedgefield (Phil Wilson) seemed to be rather obsessed with class and what school people had been to. I shall have to disappoint him, because, in 386 years, I am the only former pupil of the state school that I attended to become a Member of Parliament, which would seem to contradict his overall thesis that everybody on the Conservative Benches comes from Eton.
Among Opposition speakers, we heard from my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), who made a sound attack on the Fiscal Responsibility Bill and powerfully outlined the urgent need to close the deficit, the dangers of high interest rates across the economy and the lessons to be learned from domestic and international experience. My hon. Friend the Member for West Suffolk (Mr. Spring) also
eloquently outlined the challenges ahead if the Government do not get a grip on the deficit. Indeed, his insights on financial matters will be much missed in the next Parliament.
My hon. Friend the Member for Mid-Worcestershire (Peter Luff), who has had to go back to Worcestershire, also made a good speech-a real tour de force-about the PBR, and in particular about how it affects industry. I should also mention my hon. Friend the Member for Putney (Justine Greening). She tried to get in, but there was simply too much demand to speak.
The hon. Member for Dundee, East (Stewart Hosie), who was the only Back-Bench speaker from a party other than the two major parties, also returned our focus to the PBR and Government failings in industrial investment, and highlighted high youth unemployment.
The hon. Member for Newcastle-under-Lyme (Paul Farrelly) made a slightly more thoughtful contribution, and we also heard a short but useful contribution from the hon. Member for Glasgow, North-East (Mr. Bain).
To return to the deficit, the British people clearly get the message that they have over-borrowed. According to the most recent figures that I have seen, new consumer borrowing per household has fallen, from £11.11 a day in January 2008 to just 34p a day in October 2009. The equivalent figures for new Government borrowing over the same period have risen from only £3.65 to a staggering £18.44 per household per day. I applaud the efforts of the British public to get to grips with their own debt. As the shadow Chancellor said, we are all in this together. Imagine our dismay, therefore, that the good work done by the British consumer to repair his or her own balance sheet has been submerged by the explosion in Government borrowing overseen by those on the Treasury Bench.
There is a link between consumer credit, our disastrously poor savings ratio over the past 10 years, and the all-important bond markets. The Financial Secretary to the Treasury, who is going to wind up the debate, knows that I used to work in the international fixed income markets, so he could take heed of my warnings. Official and market interest rates are currently very low, but great care will be needed in the future. Forward interest rates-the indicator of where the market thinks rates are heading-are much higher than short-term rates. In fact, the multiplier of headline long-term rates, at about eight times the level of short-term rates, could represent a historical record. It is worth remembering, as I have said before in this place, that a half per cent. increase in interest rates is far more significant when rates are low than when they are high.
So the market is already anticipating substantial rises in interest rates. Even before any such rises have taken effect, debt interest is projected by the Treasury itself to rise from £22 billion this year to £67 billion in 2013. Obviously, the debt interest bill will rise substantially if interest rates rise significantly. That is another reason why fiscal responsibility is so important. If the Government continue to borrow uncontrollably, not only will the interest bill rise substantially, and potentially unsustainably, but the public sector will crowd the private sector out of the credit market. Members on both sides of this House rightly urge that more credit be offered to small and medium-sized enterprises, but this will be made much harder if we do not get a grip on the public finances and, at the same time, do all that we can to keep interest rates low.
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