Pre-Budget Report

My Lords, I shall address those points later in my opening speech. I do not believe that the IMF used the term ““reckless”” to describe government policy. Indeed, I am very aware that over a number of years the IMF commended the British economy for its growth against low inflation and a fiscally prudent backdrop, and that was reflected in the Chancellor of the Exchequer’s thinking when he presented his pre-Budget review in November. If the noble Lord is correct and the IMF used the term ““reckless””, I apologise, but I am fairly confident that it did not. As I was saying, the UK is no exception. As the PBR set out, short and medium-term growth prospects in the UK remain subject to exceptional uncertainty. However, it is now clear that the UK, like the US, the euro area and others, is in recession. These are difficult times and that is why we have taken the action necessary to support people now and to lay the foundations of recovery. The problem of a lack of lending and constraints on credit is a worldwide one. All the important banks trade in every part of the world. The sources of finance that the banks have used in the past few years have dried up. Financial markets affect everyone’s daily life. If they fail to function properly, the impact is felt right across our economy and by every one of us. Therefore, restoring and maintaining financial stability is absolutely critical. In October, we took action to stabilise and improve confidence in the banking system and to recapitalise a number of banks. As a result of the action that we took, a collapse of the banking system was avoided and no savers in UK banks lost money. This action, which has since been emulated in a number of other jurisdictions, has resulted in some improvements in bank lending, with the rate of interest at which banks lend to one another coming down by a noticeable margin since the autumn. At the same time, we are putting money into direct support for small businesses, in particular, through different loan guarantee schemes to help them with short-term difficulties. However, we need to go further. The banks are still not lending to each other in the normal way and the global economic downturn has intensified since the autumn. We are now seeing a vicious circle of weakened banks damaging the economy and a weakening economy hurting the banks. The Government must act now to reverse that vicious circle, to get credit flowing again, to limit the extent of the downturn and to support the recovery, when it comes. That is why the Chancellor of the Exchequer announced last week, in his Statement in the other place, a comprehensive package of measures designed to reinforce the stability of the financial system, to increase confidence and the capacity to lend, and, in turn, to support the recovery of the economy. However, as I have said previously, this is a global problem. We have to get the banks lending to each other, not just in Britain but across international borders as well, and we can do that only by working with other Governments across the world. With the UK taking the presidency of the G20, we will take the lead in doing all that we can to prevent a recurrence of these problems, and in this respect we will be working very closely with our European partners. Because of the economic and financial situation, tax revenues are falling across the world. As company profits fall, so do the proceeds from corporation tax. Receipts from the financial sector alone are expected to reduce by 35 per cent this year. Slower growth in wages means less income tax. Fewer people buying houses and falling prices mean less money from stamp duty, where tax take is down by 40 per cent. This all means that borrowing will be significantly higher than forecast. As a result of the combined effect of lower revenues, our commitment to maintain spending and extra support to the economy, borrowing will rise to £78 billion this year and £118 billion next year, or 8 per cent of GDP. However, from 2010, as we act to reduce borrowing when the economy begins to recover, borrowing will fall: to £105 billion, then £87 billion, £70 billion and £54 billion. By 2015-16 we will, again, be borrowing only to invest. The economic crisis and action by Governments across the world will inevitably mean sharp increases in national debt relative to GDP. Again, the UK is no exception but, because we started from a stronger position, our debt is forecast to remain below that of most other major countries as we go through this downturn. UK net debt as a share of GDP will increase from 41 per cent this year to 48 per cent in 2009-10, then 53 per cent in 2010-11, before peaking at 57 per cent in 2013-14.