Pre-Budget Report

I strongly welcome the Government's decision to accept the Treasury Committee's recommendation to hold a full day's debate on the pre-Budget report. That is an important step in parliamentary scrutiny of public finances. In that respect, I thank the staff of the Treasury Committee. We took evidence from the Chancellor, his officials and experts in the last week before the Christmas recess, and work was done to write the report during the Christmas recess. The report was agreed only on Tuesday and printed on Wednesday. I thank both the staff and my colleagues on the Committee for that. The main issue that we considered was the macro-economy, which is best described by the word "uncertainty". Uncertainty is certainly present in the economy, whether in bank lending, the future path of unemployment or even GDP growth. We noticed that that is causing some businesses to delay making important decisions that could benefit the economy, such as investing and hiring staff. Mention has been made of the scepticism among some economists about the 2011-12 growth forecast, given the considerable degree of uncertainty. It is therefore critical that the Treasury should provide more quantitative information on the risks in relation to its forecasts, especially on economic output. As has been mentioned, there has been some good news. Unemployment has been substantially lower than was expected for such a severe recession, and there have been fewer repossessions than expected. Business insolvencies are also far lower than would have been expected in previous recessions, and the recent manufacturing statistics show promise. Much of that is due to the Government's policy of supporting households and businesses through the recession with fiscal measures. It is obvious that the fiscal input has worked in such cases; without them, the recession would most certainly have become a depression. However, we must be vigilant about a further weakening in the labour market. As we feared, young people in particular have been hit by the recession. In November, youth unemployment in the UK reached a record high of 943,000, or 19.8 per cent. So, I welcome the Government's measures to support youth employment, but I urge them to do more to ensure that young people who are unemployed have the opportunity to get into the labour market, because statistics show that if young people are unemployed for a considerable time, their life chances are impaired as a result. House prices have also settled, but at a historically high loan-to-income ratio that may be unsustainable, especially if monetary policy eventually tightens. The concern over repossessions means that the Government must remove support in this area very carefully. The Committee urges them to report in this year's Budget on the housing market's sensitivity to future fluctuations in employment and interests rates. As we have known for quite a long time, bank lending, sadly, remains uncertain. As a Committee, we do not want a return to easy credit, but neither do we want the economy to be crippled by a lack of access to credit. That is particularly important for those businesses that still cite the lack of finance as their most pressing problem. I still receive communications on a regular basis from businesses telling me about their difficulties with the banks in that respect. There is a danger, therefore, that bank lending may not support recovery in the private sector, and the Treasury has assured the Committee that it will remain vigilant in this regard. The Government have put in place measures to improve businesses' access to finance, and that is commendable. However, I would like future measures to be aimed at encouraging non-bank sources of finance for businesses, and especially for small and medium-sized ones, so that they are not so dependent on the banking sector in the future. Adam Posen, a recent member of the Monetary Policy Committee, appeared before the Treasury Committee and said that the UK lacked a spare tyre for when the banking sector goes into crisis—a lack that means that any future recovery will be threatened. Posen compared the UK to Japan, saying:""The closer one looks, the more worrisome this specific parallel becomes"," due to the concentration of banking in a few large firms, and the comparative lack of non-bank sources of finance for companies. The UK's banking structure, he said,""could impede the return of trend growth in the UK to its previous rate, and…could if things worsen put on persistent deflationary pressure"," as the ongoing banking structural problems did in Japan. Economies with up-to-date banking systems, or which have alternatives to bank lending, are the ones that recover faster and stronger. The need to reform our banking system is hugely important. We cannot continue with just five or six big companies: that spare tyre is needed, and it is needed urgently. Going forward, we need to rebalance the economy away from consumption. Before the crisis, there was a steady decline in the household saving ratio, from over 14 per cent. in 1981 to zero in 2007. The recent bounce in the saving ratio up to 8.6 per cent. must be maintained if we are to have a strong economic recovery. Increasing household saving may not be achieved through macro-economic policy alone. I believe that we will need to widen access to savings products, and introduce new products appropriate for groups who were not targeted before. The Treasury Committee has welcomed a number of Government measures in this area, such as the Saving Gateway, and I hope that further measures will be brought forward. I well remember the report that we published in 2004-05 on restoring confidence in long-term savings, in which we said that savings was a middle-class industry. A lot of people do not have access to savings and are not being encouraged to save, and that is an issue for the Government to take up. On the public finances, there is a fine judgment to be made over fiscal consolidation, especially given the macro-economic uncertainty. The Committee said that withdrawing fiscal support too early could plunge the country back into recession, with dire consequences for growth and employment that would cost the Exchequer more in the long run. The Governor of the Bank of England told the Committee that we needed to act "at the right time" but, as we all know, there is no consensus on what the right time for fiscal consolidation is. The Committee pored over that very question, but more clarity will be required to achieve that consensus.