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I was coming on to talk about the impact on incomes. The Red Book is quite explicit about that, and has some very helpful tables. I suggest
that the hon. Gentleman gets a copy for his greater interests, as those tables make it very clear that the more one earns, the bigger will be the negative impact on earnings. As the Chancellor himself said, in that sense this is a very progressive Budget: he has shielded people on low incomes from part of the impact, and made those on higher incomes carry more of it. Although the hon. Gentleman represents a place with more people on lower incomes, they will be relatively protected.
Mr Nigel Dodds (Belfast North) (DUP): The right hon. Gentleman listed a number of measures that the Chancellor is taking to promote the private sector. I am sure that he will agree that one of the most welcome proposals is to reduce the volume and complexity of regulation. However, does he accept-I am sure that he will-that a lot of regulations come from the EU? How can we grapple with the extent and complexity of regulation if a lot of it emanates from somewhere other than Whitehall?
Mr Redwood: The hon. Gentleman is right to say that we have much less power to reduce or improve regulation from Brussels than we do with what is homespun. However, so much crass and foolish regulation has been put on British businesses over the past decade by the home legislators-the then Labour Government-that we can get quite a long way by removing, amending or changing that. In the meantime, we need to summon up a bit of courage and tell those in Brussels that they, too, should join in the process, as that would benefit their businesses as much as ours.
I have often said in this House that, from the point of view of running a business, reducing regulatory cost is a good way of offering something that is just like a tax cut without reducing the public revenue. Indeed, it is even better: not only is there no revenue loss, but public sector costs can be reduced, as the enforcement and monitoring costs of needless or over-the-top regulation can themselves be reduced. That means that businesses get a cash flow benefit, and that there is a reduction in the costs of Government.
The previous Government regulated too many things, and they did so too much and too often. They often regulated in a way that made things worse rather than better. We often found ourselves opposing them, even though we did not disagree with their aims. Like them, we wanted people to have nice lives and decent jobs, and to be free from risk in the workplace and so forth, but we often found that the regulation that the former Government proposed was very expensive and did not achieve the required result.
A tick-box culture means that people get very good at ticking boxes and writing memos, but that they do not manage in the proper way. A factory can be made less safe if the process is merely bureaucratic. Instead, the notion that safety comes first, second and third must be inculcated in all the senior people in that factory. They must manage safety intuitively, as ensuring that a workplace is safe cannot be achieved by tick boxes, inspectors or regulators.
Safety must be inherent in every workplace, and what we can do is to set a tone by saying that it matters above all else. We can have laws at a high level on safety but we need not go into as much detail as the previous Government did. Their approach often made things worse, and much more expensive.
The most important table in the Red Book can be found on page 45. It is one that we must discuss and understand, as it sets out the expenditure patterns for the forthcoming period of Government. The information in the table will come as a pleasant surprise to many neutral people outside the House, although it may worry Labour Members, who seem to be in denial about it. The table shows that total expenditure in the last year of the Labour Government reached £669 billion, and that expenditure will rise steadily to £737 billion by 2014-15.
Stewart Hosie: The right hon. Gentleman is accusing Labour over this cash-terms expenditure increase, but I am sure that he will remember that the Chancellor explained early in his speech that ever-increasing debt repayment costs were included. I have no doubt that, for the sake of completeness, he will want to remind the House of the gross domestic product deflators of 3.2%, 2.1%, 2.1% and 2.6% over the next four years.
Mr Redwood: I was going on to say that we are talking about a big increase in cash. If all of us in the public sector can get better at managing that cash, we should be able to do a good job for people because the amount of spending is going up.
What could go wrong? Well, the hon. Gentleman has mentioned two things that could go wrong. If public sector inflation is as high as, or higher than, forecast general inflation, that will eat away at the value of the money that we are spending and make it more difficult to sustain good public services. However, Ministers tell us that they will be very tough on wage increases. That will help, as it will share the work and mean that we can keep more people doing more worthwhile things for our constituents, without all the money being eaten away by wage increases.
After all, that is what the private sector had to experience for two or three years, during the worst of the recession. In that regard, I pay tribute to the many work forces and unions in this country that did not merely accept that there would be no pay increases; instead, they often accepted pay reductions and very tough work-sharing schemes. They did so because they understood how dire the position of their industries and companies were, and they helped their managements to see their companies through.
We do not have to go that far in the public sector, but there is something that we need to tell all our public sector employees, and I think that this is a task for Opposition MPs as well as Government MPs. We need to say, "Things will be less painful and better for all of us if we can keep costs down and wages and salaries under control. More jobs will be preserved and a better service delivered to the people whom we serve, because more of that cash increase is going to go into helpful spending."
As the hon. Gentleman says, the rising interest charges are also a worry, albeit one that makes the coalition Government's case rather well. If we do not tackle the rising deficit now, more and more of the money will go on paying interest bills for past spending, rather than being available for paying teachers' or nurses' wages, which is what we would rather be doing with it. His
point therefore makes the case strongly that the more action that is taken at the beginning, the better, because then more of the quite large sums of extra money that will be available will go on buying real improvements or maintaining a decent quality of public service, instead of going on the rising interest bill.
The Government have had just one piece of good fortune with their rather bleak inheritance, as well as quite a lot of bad news from outside the United Kingdom. The one piece of good fortune is that over the weekend the Chinese Government announced that they were going to allow their currency to start to move upwards against the dollar. We have had quite a long period of the yuan/renminbi being pegged to the dollar. That has meant that China has been super-competitive. China works hard, she is developing much better technology and she produces good products. With the managed exchange rate that we were experiencing, with the pound sticking around with the dollar in recent months, we discovered that China was getting more and more competitive. Indeed, there has been another huge surge in Chinese exports in recent months.
Let us hope that the Chinese will now allow their crawling peg to crawl up quite a bit. The last time they had a crawling peg, it started a bit slowly, but then there was a 20% revaluation of the currency, which was quite helpful. We need all the help that we can get, because Britain has to export more and earn more money in overseas markets. The world's No. 1 colossus-the dominant, most competitive exporter-is China, and any currency revaluation would be helpful. We still have to work hard-we have to get smarter and control our costs-but that revaluation might take some of the pressure off.
However, the bad news is that the European market is getting worse. We had hoped that European countries would have a normal, cyclical recovery, such as that which the United States is enjoying. However, it now looks as if their recovery will be slow, with quite a number of countries going backwards this year and early next year, because of their deficit problems and difficulties with the euro. Indeed, those countries' economies might continue to fall or start to fall again. That is difficult for Britain, because euroland is an important marketplace for our physical goods-it is not nearly so important for services or inward and outward investment, but it is important for physical goods. It is therefore in our interests that euroland starts to mend itself as soon as possible. I therefore hope that the Chancellor will continue his negotiations and work with his European partners, because it is important that we allow them to take the actions that they need to take to start mending the euro.
The euro is a single currency in search of a single country, and that has been its tragedy ever since it was first created. Those of us who warned that we could not have a single currency without a single economy, a single budget and a single Government were told that we were quite wrong and that we had misunderstood things. Apparently all that history that we had read was a waste of time. However, all the history of currency unions that I have ever read shows that they work only if there is control of the borrowing and spending levels through a central power, which is what we are now told our friends and colleagues in euroland are learning. They have discovered that they cannot allow Ireland,
Greece, Portugal and Spain to free-ride at the expense of the rather more prudent core. Those in euroland are learning that, if they allow those countries to borrow and borrow at the lower common interest rate that Germany has granted them, there comes a point when the markets no longer believe in those countries and they start to blow their debt markets apart.
Sammy Wilson: Is the right hon. Gentleman not a bit concerned that the Government now accept that the European Union perhaps has the right to scrutinise the budgets of euro countries before those budgets are implemented? Does he not believe that that could be the thin end of the wedge, and that such scrutiny might eventually extend to all members of the European Union?
Mr Redwood: I am very strongly of the view that countries have to do that, and more, in euroland. As Members might guess, I am passionately of the view that that has nothing to do with Britain. The deal I want my right hon. Friends to offer our European partners is that we will accept more or less any kind of treaty change to give them proper control over the budgets of euroland as long as we get some powers back and it is made very clear that we are not part of this new machine to try to create an economic Government of Europe.
There need to be changes. The system is not at all stable, and I do not think that the much advertised trillion dollar package of loans and guarantees, and possible facilities, is necessarily going to see all these countries through the future threats to their stability. Given the rather damaged states of their private sector economies in many cases, there is a danger that, if all they do in response to the financial market pressures is to cut public spending to try to get their borrowing down, they will not succeed. If they are cutting their public spending, but there is no growth coming through in the private sector to take up the slack, or if they are cutting their public spending while their tax revenues are falling, the gloomy pundits will be right and the medicine will not work. Just cutting expenditure does not create a strong economy.
It is important to cut spending sufficiently to allow the private sector to grow and it is important to cut spending sufficiently so that the deficit does not get out of control and produce too much pressure on interest rates, but that needs to be done against the background of the beginning of a recovery-as we have in the United Kingdom. For a country in turmoil with a deeply damaged economy, as some of the southern states seem to have, simply cutting expenditure might make the problem worse, not better, without taking other action to try to get the economy's private sector going.
The proof of the Budget will be in what happens to the private sector recovery over the next year or so. I hope that the Office for Budget Responsibility will turn out to have been too gloomy. It says that the impact of the Budget in the first two years will be to lower the growth rate slightly; it says the growth rate will be better in the following years when the full benefits of deficit reduction and private enterprise promotion kick in.
It need not be like that; we could do better than that. If the Chancellor wishes to do better than that, as I trust he does, he needs to turn his attention urgently to
the state of the British banking industry and the capability of British banks to finance the private sector-led recovery that we clearly need. I do not believe that the current regulators of the British banks have got it right, and although I fully support centralising the regulation of money markets and banks in the Bank of England-I advocated it myself and I am happy that that is going to be done-that in itself is not enough. That is a structural change, but what we also need is an attitude change.
The sad truth of life is that we have just lived through the worst five years I have ever seen in terms of mismanagement of money and banking in this country. Labour Members will want to blame just the private sector banks, and I agree that some directors of those banks got it horribly wrong and they deserve to be dealt with in the appropriate way by their shareholders and by others. However, I hope that sensible Opposition Members would agree with me that it does not speak well of the monetary control system and the regulatory system that that happened. Why do we have financial regulators? We have them to stop that kind of thing happening. They are meant to stop runs on banks, even if banks have directors who are likely to produce a run. They are meant to stop systemic collapse, even if directors get a bit carried away.
Mr Binley: Is it not right to point out to the Opposition that the then Chancellor of the Exchequer, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), asked the Financial Services Authority to apply a light touch in order to sustain his myth that he had done away with bust? Is that not one of the reasons that Labour Members should apologise?
Mr Redwood: If one interprets light touch as meaning regulating the wrong things, I would agree with my hon. Friend. There was a huge increase in the amount of regulation during the Labour years, as one would expect, as Labour Members believe in regulation, but I think that they have demonstrated that it does not work. Our old friend the box ticker is relevant. There were many more box tickers in the City at the end of the Labour period than at the beginning: lots of nice, neat forms were duly filed; and people got into trouble if they put the wrong figure in the wrong box, which was apparently a great crime.
Meanwhile, the regulators simply ignored the phenomenal explosion of the banks' balance sheets. I do not mean just hedge funds or off-balance-sheet items; the actual balance sheets ballooned in a crazy and unreal way. As I recall, the main banks went from 20 times to 34 times leverage, and not once did the regulators ask, "What is going on here? Is this not a bit excessive?" Why did the banks have only 20 times leverage in Lady Thatcher's day? She was not known for being too shy about promoting private sector recovery. Perhaps there was a reason why banks were only allowed to gear that much in those days, and perhaps we should think again about the degree of gearing.
We then lurched from that to the opposite position. At the depth of the recession the regulators said, "We have now decided that the banks must get rid of all this leverage. They must have huge amounts of cash and capital pumped into them so that they cannot lend anything to anyone." That made the recession 10 times worse.
Mr Graham Stuart (Beverley and Holderness) (Con): My right hon. Friend has just made the very point that I was going to make. The regulators compounded their failure to regulate at a time when they should have reduced the lending of banks by, during the bust, doing the precise opposite, and compressing lending when the economy desperately needed the banks to lend more. That was a double whammy for the British economy, it was entirely due to the behaviour of the Labour party, and it has left a terrible economic legacy which the Chancellor today set out bravely to put right.
Mr Redwood: I think that we now need to be positive, and I want to try to engage the Labour party in the process. I understand that the hon. Member for Leeds West (Rachel Reeves) used to work at the Bank of England, and we may have learnt from her speech why it is a good thing that her advice is no longer available to the Bank; I do not think that she would have helped to get us out of the mess. From now on, however, we need to ask ourselves what we should do about banking regulations, because I do not believe that the current system is right. It is all very well for us to say that it was wrong under the previous Government, as it clearly was, but it is our duty now to try to ensure that we do a better job. Unless we change the system, it will not be much better under the present Government.
I believe, and I think Treasury Ministers believe, that we should now have counter-cyclical rather than pro-cyclical regulation. What does that mean? It means that when times are tough and we are in recession, we should allow banks to lend more money on easier terms, and when times are really good-as in 2006-07-we should rein in the banks and say, "You cannot go on lending like this." In the immortal words of the Governor of the Bank of England, we should remove the punchbowl before the party has everyone blind drunk. It is a pity that we did not do that in 2007.
Some of my critics say to me, "That is all very well, but how do we know where we are in the cycle?" We can never be sure where we are in the cycle, but I should have thought that it was fairly easy at the moment to agree that we are somewhere near the bottom of it. Heaven help us if this is not the bottom of it. I do not believe that all the figures in the Red Book about growth from this point are wrong, and I do not believe that all the independent forecasters are wrong. I think it quite likely that there will be some growth, but not as much as I would like and not as much as we will need.
The main reason that there will not be enough growth is that we do not have easy enough money for the private sector to refuel the recovery. The overall money supply figures are pretty dire, and we should bear in mind how much of the money is circulated around the system from the Bank of England to the Treasury to the spending Departments. Labour left a perfectly good money machine to put relatively low-cost money into the public sector, but at the cost of the private sector, which-particularly small and medium-sized enterprises-is still shivering in a world in which there is not enough sensible credit.
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