The Economy

It would be ridiculous to say that the Government are responsible for all Britain's economic problems, but it would be equally ridiculous to say that there is no connection between the policies that they have pursued and the crisis that now confronts the country. But that is what the Prime Minister is saying. The public can see that he is in denial about his role in aggravating the crisis. Whether it is in the interests of his party to be more frank is a matter for him, but I am confident that frankness is required to help the Government get the policy right. The country will not believe a Government or a Prime Minister who are in denial about the causes of the crisis that we are in. The Government will have no credibility on their emergency measures or for longer-term proposals for reform. The Government share the responsibility for the crisis in three important respects. The first is the regulatory system, largely designed by the Prime Minister. It is very important not to assume that, with a better regulatory system, we could have wholly avoided the crisis. There are considerable limits to what can be achieved by regulation, as the Governor of the Bank of England pointed out recently. Excessive regulation may reduce economic performance, but too little will lead to systemic collapses. The Government aggravated the crisis by introducing a new regulatory framework in 1997 that simply did not work. They created the tripartite committee system, which manifestly and predictably failed. During the passage of the Financial Services and Markets Act 2000, when we debated the memorandum of understanding that explained the new tripartite arrangement, I questioned whether those new arrangements—which left no one in overall charge in a crisis—were sustainable. I pointed out the risk of conflict between the FSA and the Bank in a crisis—exactly what we have experienced. I pointed out that banks tend to act like sheep, like the Gadarene swine, ploughing over the cliff all together. When banking problems come, I reminded the Committee,""they come not as single spies, but in battalions."—[Official Report, Standing Committee A, 13 July 1999.]" In response, all I got from the then Minister was a claim that a great deal of time had been wasted on the matter. I was not the only one raising such concerns. Howard Flight did so, from the Front Bench, as did my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley). On Report, I said that the new tripartite system was""wholly untested. If it is tested, I worry that it might be found wanting."—[Official Report, 27 January 2000; Vol. 343, c. 609.]" It was found wanting. That system led us to the extraordinary position of not even collecting liquidity statistics for the banks. The Bank of England thought that it was no longer its responsibility to do so, and the FSA had not yet got round to doing so. The plain fact is that the tripartite arrangement, with its division of responsibilities, leaving no one with clear overall responsibility for leadership in a crisis, was an accident waiting to happen, and it happened with Northern Rock. The second important respect in which the Government aggravated the severity of the crisis was by running a huge deficit during the boom phase of the cycle. That was, as far as I know, not just folly, but unprecedented folly in modern economic history. We have heard a lot from the Government, and especially the Prime Minister, about the need for, and the value of, a fiscal stimulus. We have heard more such talk today from several hon. Members. Setting aside the issue of whether we need such a stimulus over and above the automatic stabilisers, the plain fact is that Britain is extremely badly placed to increase the size of its deficit. That is why the Governor took the unusual step of cautioning against any further substantial discretionary easing last week.