Pre-Budget Report

What has been rather depressing about listening to the speeches of Opposition Members is how exclusively they seem to be concerned about the interests of the financial markets and how little concern they appear to have about the wider interests of the people of this country. All this is rather like a double-take of the Geoffrey Howe Budget of 1981, to which the right hon. Member for Hitchin and Harpenden (Mr. Lilley) has just referred. That Budget decimated the industrial economy and, as my right hon. Friend the Member for Holborn and St. Pancras (Frank Dobson) has said, produced a lower rate of growth over the relevant period than in the preceding period of the 1970s, which was extremely difficult because of hyper-inflation due to oil prices. It is rather tragic that minds seem to be closed to the idea that there are alternative ways of dealing with the deficit that will not be so socially destructive and that could be more effective in the long run. That is what I want to discuss. I shall focus on one crucial aspect of the pre-Budget report, which has had a little attention today but which has not been properly faced up to: the Treasury's assumptions about growth over next year and the year after. The Chancellor's view, as he expressed it, was that the worst is over. As we all know, the contraction of 4.75 percent. in 2009 is a post-war record and borrowing this year is on course to reach a peacetime record of 12 to 13 per cent. of GDP, yet the economy is forecast to rebound by 1 to 1.5 per cent. this year, rising to 3.5 per cent. in 2011-12. That would enable the Government to achieve their target of halving the deficit within four years, without the savagery of the full cuts that the Tory are clearly planning if they were to win the election. That projected growth is absolutely crucial to the PBR strategy but where is it going to come from? That is my question. It is true, of course, that there are some real signs of recovery. They include the unprecedentedly fast turnaround of financial markets, which some say has never happened so quickly in 300 years. The assumption is that somehow that will drag the real economy up behind it, but that remains to be seen. Other factors are the slowing in the increase in unemployment, which is very welcome, the lower rise in home repossessions than in previous downturns, and the greater support for youth employment brought about by the Government's present expenditure of £5 billion on job placements for 18 to 24-year olds and the increase in training and apprenticeships. However, my question remains: all that is important and useful, but will it add up to a huge surge in growth to 3.5 per cent. within two years? In the boom years before the crash in 2007, household consumption contributed 1.75 per cent. of growth each year, with business adding about another 0.25 per cent. for a total of 2 per cent. That, of course, was in the fat years but now—after the worst recession since the war, the collapse of large elements of the banking industry, a big drop in house prices, a record fall in investment and with tax rises and spending cuts being promised by all parties—the Treasury is looking to household spending contributing 2 per cent. to growth in 2011-12, and to business adding another 1 per cent. I simply ask again whether that is credible. Unemployment is still expected to rise to 2.8 million, and family budgets remain tight. Pay cuts, pay freezes and short-shift working are still spreading across the country. I ask again: where is growth on a sufficient scale going to come from? In my view, the essential element missing from the PBR is a major injection of demand in the public sector. The private sector will not provide that demand, because there is no prospect of profitability until there is a much more visible turnaround in the real economy. Quantitative easing even of £200 billion has not provided the necessary level of demand up to now, as the banks have used the money not to increase lending to struggling businesses but rather to consolidate their balance sheets. In any case, we understand that the Bank of England seems minded to call a halt to quantitative easing once gilt purchases hit £200 billion in February. Moreover, the injection of demand that we need will certainly not come from private consumption because, as we all know, the level of consumer debt is not far short of the whole of GDP. So the only way to inject the necessary demand into a very weak and fragile economy is through massive public investment in job creation: not £750 billion, which was spent bailing out the banks; and not £200 billion of quantitative easing, which has been much less effective than expected. A fraction of that could be used to underpin large-scale job creation in sectors where it is desperately needed, such as house building. There are 12,000 people in my constituency alone on the waiting list for a house, and I am sure that the situation is much the same throughout the country. House building is at its lowest ebb for 80 years, and with a recession that is an extraordinary combination. We need such investment for the restoration of our creaking infrastructure and to blaze the way for the new green and digital economy, which I think all Members agree is where the future lies. Why do the Government not make that investment? I suspect that it is because they came into office committed, after the Thatcherite monetarist years, to a complete repudiation of Keynesian demand management. The Opposition absolutely share that view, but I had rather higher hopes for the Government. We certainly heard that view in the speech from the Opposition Front Bencher, the hon. Member for Runnymede and Weybridge (Mr. Hammond). The story is well known, but I am embarrassed to recall that in 1997 the then Chancellor, the current Prime Minister, said that he was pursuing a regime of neo-classical endogenous growth theory. Shorn of the unfortunate terminology, it means that demand should be generated by the enhancement of supply within the economic system: from education, improvements in training, increased research and development, which is necessary, the commercialisation of science and so on. That, combined with Friedman's quantitative money theory, which was prevalent in the 1970s, certainly provided the basis for Mrs Thatcher's macro-economic policy. It is a quixotic, old-fashioned and perverse Tory theory, and regrettably—very regrettably—new Labour took it over wholesale in 1997. The policy works fine when other vigorous, external sources of demand such as strong export demand from other countries, major technological breakthroughs or continuing private sector investment are in place to drive the economy, as they were in the boom years of 1994 to 2007. The policy works disastrously when there are no strong external sources of demand, as there were after the infamous 1981 budget, which over the next four years pushed unemployment up to 3.2 million; and as there are now, after 2008, when unemployment is still heading towards 3 million and when even the type of fiscal expansion that in 2000 countered the downturn from the dotcom collapse is not possible because of the budget deficit. If there was ever a time for Keynesian measures to restore demand in a very fragile economy, it is now. The black hole in the PBR is not the opaqueness about where the cuts will fall, as the Opposition have repeatedly taunted, but the lack of any action to create the 500,000 to 1 million jobs that the economy desperately needs. Of course, the enormous budget deficit must come down; we all agree about that. But it is far better to do so by getting people off unemployment and housing benefits and back into work, where they start contributing to income tax, national insurance and VAT. The alternative, of rapidly making drastic cuts in public expenditure, clearly appears once again to be Conservative policy—but probably on a greater scale than any of us have yet realised. However, that could well have the opposite effect of turning a deep recession into a vicious spiral of decline, and prompt an even worse double-dip slump. That is exactly what happened in Japan in the late 1990s, when after a lost decade the Government increased public expenditure but also increased taxes. They did that prematurely and suffered the consequences of another lost decade. It was the same when Roosevelt came to office. He was a balanced-budget man, but he saw the plight of the country and got expansion going with the new deal. By 1935, two years later, there was an improvement—an expansion—in the economy, but at that point he started to raise taxes and the United States went into a fairly serious further decline from which it did not escape until the war. Of course, it will be objected that with the deficit as high as it is, we cannot afford to increase it any further, but that is simply not true. Our current debt-to-gross domestic product ratio is 61 per cent.—slightly higher, I agree, than that of France and Germany, but less than in the United States, where it is 69 per cent., or Italy, which is perhaps not the best example, where it is 102 per cent., with Japan still on 107 per cent.