Pre-Budget Report

My hon. Friend is absolutely right. If we leave this too late and as a result there is a crisis, we will have to take much more brutal action: instead of companies simply not recruiting, they will have to sack people; instead of voluntary redundancies, there will be compulsory redundancies. That will be the inevitable consequence of taking too long over implementing the measures that we need to take to bring the deficit under control. The Chief Secretary said that worries about major holders of Government bonds selling their bonds were overstated. He said that PIMCO was selling bonds because it was looking for riskier assets elsewhere. He must be the only person who thinks that PIMCO and other bond holders are selling UK bonds because they think that they are not risky enough—because they think that the Government's finances are not putting us in sufficiently great danger of bankruptcy. The truth is that they are selling them because they think that the price does not yet fully reflect the risks and dangers of financial collapse. They know that if that happens there will be higher interest rates, and they would prefer to buy them back then rather than experience the collapse in the price and rising interest rates while still holding them. The Government argue that withdrawing the fiscal stimulus too soon will risk provoking a double-dip recession. That is wrong for several reasons. The first reason is that it is an argument for never taking action. If withdrawing the supposed stimulus has a negative impact, it will do so next year, the year after or the year after that; after all, it was several years after the recovery had begun that the double-dip recession occurred in the United States in the 1930s. That was not because action was taken in the first or second year of the recovery; the action was taken three or four years later, in 1937. Like a lot of the arguments that the Government put forward on many of their policies, it is an argument for not doing anything. The second reason is that the stimulus effect of a deficit is grossly exaggerated. This country has a bigger deficit than almost any other comparable country in the world, yet it is the last to come out of recession, so there has not been a vast stimulative effect. Likewise, its removal will not have a vastly depressive effect. The third reason is that the Government's argument ignores the fact that the effect of action to get the deficit under control on improving confidence far outweighs the impact of the loss of Government expenditure feeding into the economy if the fiscal contraction and consolidation takes place sooner. The fourth reason is that we are dealing with a structural deficit, and the way to tackle that is to make structural changes, which takes time. If we do not start thinking them through and implementing them now, we will not get the benefits until it is too late. So, there are sound reasons in principle for disagreeing with the Government's view that there is a great danger in starting the process of fiscal consolidation at the first possible opportunity, and there is plenty of evidence in practice. We have seen Governments do this before. This country has previously started the process of fiscal contraction before the recovery has been long established. In 1976, the Labour Government did just that—they had to, because the International Monetary Fund told them to do so. At a recent seminar in the City, players in those past crises revealed that Jim Callaghan was quite keen to do it anyway and found what the IMF said to be a useful excuse. Lord Donoughue, the head of his policy unit at the time, said that having argued internally and with the IMF about whether they could avoid taking such action, they were struck by the fact that when they did so renewed growth in the economy came much more rapidly and strongly than they had anticipated and that the effect was positive, rather than negative. In 1981, the Conservative Government took such action. Some 364 economists wrote to The Times saying that any attempt to reduce the deficit at the bottom of the recession would turn that recession into a continuous downward spiral from which there would be no hope of recovery. Almost from the day that their letter was delivered and published in The Times, and, simultaneously, Geoffrey Howe—now Lord Howe—introduced his Budget, the economy started to recover. The effect on confidence outweighed the direct Keynesian effect. Plenty of evidence from overseas supports what I am saying. An excellent study that I have mentioned before in this House—I have still seen no evidence to suggest that the Government have yet read it—has been produced by the European Central Bank. Its occasional paper series No. 38 "Economic reactions to public finance consolidation: a survey of the literature" is very revealing. It reveals that on many occasions the effect of reducing Government spending, and even sometimes of raising taxes, in order to produce fiscal consolidation is positive. It states:""The issue attracted much renewed interest in the light of the experiences of fiscal consolidation in Denmark (1983-86) and ""Ireland (1987-89). In spite of the severe restrictive policies pursued in the two countries during the periods concerned, their rates of growth showed significant increases on previous years."" There was also a study of some 18 OECD countries over the last 30 years of the previous century which showed a range of expansionary and contractionary episodes. The conclusion was:""The effect of fiscal policy therefore becomes non-Keynesian"—" that is to say that a contraction of the deficit produces expansion of the economy—""when large and persistent budgetary adjustments are implemented."" That is precisely the circumstance that we find ourselves in today. By contrast, another study mentioned in the document considered five rather similar OECD countries: Australia, Canada, Germany, the United Kingdom and the United States. It concluded that""the effects of fiscal policy on GDP and its components"" have tended to""become substantially weaker over time"" and that since 1980, the""effects have been mostly negative"." In other words, a contraction in the deficit produces a sufficient return in confidence to produce expansion in the economy. So, we have the evidence to know that we ought to be taking action now. The sad truth is that we have a Government who are unable and unwilling to face up to reality, who are putting their party political interest before national interest, who are using tired economic dogma against actual experience that has been studied and seen to operate on the ground, and who make easy promises before the election, leaving tough choices until afterwards.