Pre-Budget Report

It is a pleasure to address the House this afternoon, and I for one welcome the opportunity to debate the pre-Budget report. It is an incredibly significant economic and financial statement not only in its own terms, but because it has redrawn the financial and economic dividing lines between the two major political parties, perhaps for years to come. This afternoon, the Conservative spokesman made an interesting proposal on setting up a new state institution. I intend to discuss in due course how we deal with the resumption of inter-bank lending, but on the fiscal stimulus, the Conservatives have made an historic mistake. I say that because since the middle of September the terms of the debate have changed fundamentally, with the collapse of Lehman Brothers and the systemic risk to the banking system. Not only is the recession potentially severe, but the outlook has deteriorated very sharply, so we must contemplate using all the economic and financial levers at our disposal. That includes using monetary policy to its full effect, wherever possible; using financial policy where that is possible; and using a fiscal stimulus. That is necessary to stave off not only what is now an inevitable recession, but the prospect of a global slump. I shall start by discussing the macro-economic stance. Each week that goes by, the economic news seems to become worse. The speed at which this country, like every other major developed country, is entering recession seems to be gathering pace, whether we are talking about the rapid and significant increase in our unemployment, the dramatic fall in inflation and commodity prices or the further downturn in net mortgage lending, which we heard about yesterday. It is becoming widely accepted that our global financial system has experienced its most severe instability since the first world war. The Opposition would be right to suggest that monetary policy should take the strain if this were a typical downturn—a downturn generated by a failure of domestic economic policy or a downturn in domestic demand—with fiscal policy taking a subordinate but supportive role, but this is not a typical economic downturn.