The Economy

It is a pleasure to follow the hon. Member for Warwick and Leamington (Mr. Plaskitt). It was also a pleasure to listen to earlier contributions to the debate, notably those of my hon. Friend the Member for Chichester (Mr. Tyrie) and my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), who have been involved in the discussion about the framework of financial regulation much longer than I have. My 12 years in the House have rather reflected the experience of new Labour. I spent my first six years entirely focused on schools and hospitals. I then became absorbed in foreign affairs. It is only in the past couple of years, since I had the privilege of joining the Treasury Committee, that I have had to confront the horrible reality of the current economic situation. There have been a number of comments from Members on both sides of the House about the real implications of what is going on in the economy. One of the early remarks was about the failure of some of the schemes that the Government have put in place to try to support business and make sure that lending is happening and that credit is moving in the economy. In particular, the enterprise finance guarantee is not operating as effectively as the Government or the business community had hoped. As members of the Treasury Committee who went to Leeds, Halifax and Edinburgh heard from banks and business people, one of the problems is that the banks have been charged with assessing the viability of a business as a threshold for giving the enterprise finance guarantee. As one banker asked, "How are we meant to assess the viability of a business which may have been operating profitably until just a few months ago, but suddenly doesn't have an order book on which to base its future projections?" What is really needed may be gap funding for businesses, rather than such a viability-based guarantee. The Forum of Private Business and some other business organisations have been quoted this evening. In its recent survey, the Forum of Private Business found that nearly a third of its members needing finance have failed to obtain it. The forum also found that among its members, from October to December the cost of overdrafts had gone up by 1.4 per cent. and the cost of commercial loans by 1.6 per cent. at a time when interest rates were being cut. That has clearly not fed through. There are three main aspects that I shall address briefly in the time available. The first is how we look at the management of the bank assets that the taxpayer now owns, which have been put in the hands of the new organisation, UK Financial Investments. A number of Members have raised concerns already about the way in which the publicly owned or part-publicly owned banks are behaving, and whether they are fulfilling the remit given to them by the Government or the remit that Members might see as appropriate for them. We need real clarity, which is currently lacking, about the powers of UKFI and the independence of its operation. It made a bad start—a point that I raised in the Select Committee—by being seen to act on behalf of Ministers in the matter of Sir Fred Goodwin's pension, even though UKFI admits that it did not have a specific remit to do so. If, as I think we all hope, the taxpayer is to emerge eventually bearing as little cost as possible from the ownership of those bank assets, UKFI needs a clear mandate, clear independence and clear objectives to that end, looking at how, ultimately, we will extricate ourselves from the present position. I shall not go over the ground that has already been covered regarding the depths of the financial crisis, the efforts that have been made to combat it through monetary and fiscal policy, and the quantitative easing that is being embarked upon by the Bank of England. Some of those measures may be entirely necessary and appropriate, but they do not come without a cost in the longer term. The G20 has been mentioned, as it is meeting in London over the next couple of days. We have heard about the importance of the co-ordination of policy from different countries or, as my right hon. Friend the Member for Hitchin and Harpenden put it, the need for bifurcation of policy—a co-ordination of different approaches by different countries. Crucially, the situation is still getting worse. As we look at the way different recessions have been charted over time, and the projections and predictions about the route that they would take, we find there is a long history of progressive forecasts being proved wrong, usually because they are too optimistic. They tend to project an early and steep emergence from recession, and then they are revised to suggest that that will be much more gradual. That seems to be happening now. The Governor of the Bank confirmed to me last week that the Bank's view is changing, having originally envisaged a fairly steep V-shaped recession. As he said, "That was our view in February," which seems a fairly explicit recognition that the view is changing monthly. Secondly, one of the crucial problems that we face, which has been alluded to this evening, is the unprecedented rate at which unemployment is rising, and the fact that that rate is itself accelerating. In my constituency, the unemployment increase from January 2008 to January 2009 was 88 per cent.; from February 2008 to February 2009, however, it was 105.4 per cent. All the surveys suggest that the situation will continue to get worse. As the hon. Member for Northampton, North (Ms Keeble) mentioned, a large part of that unemployment increase has affected young people in the 18 to 24-year-old age group. That is a particular concern and a particular problem. If we do not address the problem of increasing unemployment, we will quickly get into the second-order effects and problems for other aspects of the economy. A greater number of people facing unemployment, negative equity and housing repossessions will impact again on the toxicity of bank assets, and make all the problems worse again. It is a worrying spiral. My third point is about public debt, which Members—on both sides of the House, I hope—are increasingly coming to see as something that will dominate the national debate for a long time. It will do so regardless of which party wins the next election. We have already seen the level of net debt as a percentage of GDP go rapidly back up to 43 per cent. after a period in which it had been rather lower. However, the rises projected for the next few years are truly frightening. By 2013-14, the level is projected to go up to 57 per cent. or more. As has been noted, that is due to a combination of the operation of fiscal stabilisers, the fiscal stimulus that has been applied and the high and increased levels of public expenditure in the past few years. Some of the warnings have been stark. Writing in The Times, Robert Chote says that the continuing cost to the Exchequer could be about 3.5 per cent. of national income. Professor Colin Talbot looked at the cost of bringing debt back to sustainable levels in the next spending round. He said that that would be tantamount to real-terms reductions of 5 per cent. a year in public expenditure, which by 2013-14 would amount to a cut of almost 17 per cent. or £125 billion in public spending, roughly equivalent to abolishing the national health service. The real test of the Government will not be what they say on 22 April about the next financial year, but how plausibly they start to chart the course for the medium and longer term to bring the levels of debt down to sustainable levels, with which the country can live in the future.