Amendment of the law

May I first remind the House of my entry in the Register of Members' Interests? I am a non-executive director of a plc. The first test that one has to apply to any Budget is a bit like the question that one asks after a Chinese meal: "There is an awful lot of it to digest, but how will I feel in the morning?" The second test is to ask what the reaction was in the House. This Budget got what I might describe as muted applause towards the end. Both the Chinese meal test and the applause test reflect that there was an awful lot of very difficult information to digest. I was thinking about the Budget and, remembering the time when I was in the Treasury, reflecting on the kind of decision-making process that has to be gone through when a Budget is framed. I was almost stunned mentally by the enormous size of the numbers, and the changes that have occurred in the state of the public finances even since Budget 2008; that is without even commenting on the pre-Budget report. Last year, I wrote an article for my local newspaper, in which I said that between planting my potatoes on my allotment in May and harvesting them in September the world had fundamentally changed, economically speaking. I do not think that any of us have seen such an enormous turnaround—not just in the United Kingdom economy but in the global economy—involving such very large numbers in so short a space of time. It takes a long time for the public to come to terms with the enormity of what has occurred. The Chancellor was almost emotionless in his delivery; he read out the Budget a bit as though it were the annual statement at the annual general meeting of some great corporation. The attitude was, "We've got everything under control. Fingertips are on the pulse. We have understood the numbers, and we have got the model working. Everything is all right. In about 2015, all these problems will be over." It was just surreal. It was too serene and did not, in my humble judgment, reflect the reality and the pain to which the real economy is having to adjust in a very short space of time. At Prime Minister's Question Time, the Prime Minister denied to my right hon. Friend the Leader of the Opposition that boom and bust was the busted flush. That was not looking reality in the eye. Let us spend a moment analysing what the former Chancellor of the Exchequer used to say. When he said, "I'm bringing an end to boom and bust," fundamentally he was trying to say, "I'm going to restructure the economy. We're not going to do what previous Administrations did. We're not going to put the economy at risk." However, if we look in the Red Book, we see a rising trend in the percentage of gross domestic product that was used for public expenditure before the recession. That brings to mind that much-used but now rapidly discarded word, "prudence". It indicates that what perhaps was a responsible start to the former Chancellor's regime rapidly went off the boil when public expenditure and borrowing got out of control. I want to speak on the theme of what I consider to be a failure of economic intelligence-gathering. A number of colleagues in the House looked askance when the Chancellor said that the year after next, there would be 3.25 per cent. growth in the economy. They thought that that was absolutely for the birds. In fairness, if we look at the National Audit Office report issued with the Budget, which talks about the assumptions, we see that there are some reassuring words in there, suggesting that the Treasury may have got it right. I have to say that I find that very difficult indeed to accept. I note with interest that the Under-Secretary of State for Defence, the hon. Member for Grantham and Stamford (Mr. Davies), who has responsibility for defence procurement, is on the Front Bench. Newly ensconced in his role, he will understand the amount of money that is being spent on military intelligence-gathering. He will also understand the absolute importance of that intelligence-gathering if we are to configure our military forces' activity properly. When I was in the Treasury, the Bank of England had its agents who went around the country getting a feel for what was happening in the economy, so that they could advise the Governor on what was going on, and what advice he ought to give—this was before the Monetary Policy Committee—on the setting of interest rates. Those agents still exist, but I question the intelligence that they and the Treasury are getting, and indeed the foreign economic intelligence. A great deal was going on in the world of banking, and new financial instruments were being created. Last year, in my Budget remarks and the Budget remarks of colleagues, we talked about the beginnings of the credit crunch and toxic loans. We looked at some of the first estimates of how much that was costing American banks. One wonders what went wrong in spotting what was going on, spotting what the decision-making process was, and spotting what the effects of the new financial instruments, and the new things that were happening, would be on the overall economy. I say to the Treasury Bench that in light of what has occurred, the speed with which it has occurred, and the impact that it has had, there needs to be a fundamental reappraisal of the collection of economic intelligence if we are not to be caught out again. In his Budget speech, the Chancellor put a lot of emphasis on improving the busted flush of tripartite regulation in our banking system. However, it was not so much regulatory failure that caused the problem in the first instance; it was the decision-making process in so many high-powered financial institutions on both sides of the Atlantic that fundamentally led us into the mess that we are in. If they had had better decision making or a less risk-averse approach, we might not be in this mess. I am all for making certain that regulation plays its part in protecting the public interest, but ultimately it is the decision-making process that got us to where we are. We need to understand what went wrong, and banks and financial institutions will have learned a bitter lesson and will now understand the need to improve their decision-making process. In the Chancellor's remarks he commented on the need to get the banking sector back into good order. I do not disagree with that. However, the Chancellor was somewhat sparse on what is really happening in that sector. I shall dwell for a moment on that because it still has a fundamental potential for impact on the ability of the economy to recover. The Chancellor did not talk about the fact that foreign and secondary banking in the United Kingdom is effectively over. Those banks have pulled out of our banking system, and the burden of dealing with the economic consequences rests fairly and squarely on the major clearing and investment banks that are UK based. The difficulty for those banks is that although their balance sheets have improved, and some of them have been stress tested and some of the news has been reasonably positive, there is still an innate nervousness in the banking sector about what may yet happen in terms of the toxic assets that are still out there, which are impossible to value and which may still have the potential to have a serious adverse effect on the world of banking. As risks increase in the world of banking, so the capital provisioning to cover those risks on bank balance sheets must increase. As a result, the cost to industry of financing its future needs and the ability to provide the liquidity for those future needs becomes ever more testing. Although the Government have done something towards the emergency shoring-up of bank balance sheets, there is still considerably more work to do if we are to get the liquidity flowing at a price that business can afford. In fairness, the banks are finding that their own lending one to another, though improved, is still costing them a lot of money. There are still difficulties out there if the economy is to recover. I say to the Treasury, and through the Treasury to the Bank of England, that there is still much work to be done if the banking system is to get back into operation properly.