Budget Resolutions and Economic Situation

It is a great pleasure to follow the right hon. Member for Fylde (Mr. Jack), but let me say, kindly and self-critically, that we have an unfortunate situation this afternoon. We have both no time limits on speeches and, from observation, a large number of Members who are retiring from the House. There is therefore a significant opportunity for self-indulgence. I will attempt to restrain myself a little, however. I do not think this will be my final speech in the House. For those who can bear it, I intend to make one further contribution, so I shall not conclude today with similar valedictions to those we have just heard. I last spoke at length on Treasury matters when we debated the autumn statement—or perhaps it was the last Budget—but the basic messages have remained the same. This is not the occasion for a serious discussion of how our public finances are to be brought back into kilter. I have set on record my personal views. It is regrettable that we are not able to have an adult debate in front of our constituents, to inform them better on how they might make their choices. I do not think that the Government, the official Opposition or the Liberal Democrats have set out with any great clarity what lies ahead in the next five years for the electorate. That is regrettable. Constituents of mine have said, "We would like to know what each party is intending in rather greater detail than the vague brushstrokes that have been applied so far." I regret that, but I am a realist, and I understand that few will volunteer hostages to fortune in that way immediately before an election. I will therefore not devote this speech to a discussion of that issue, on which I have said my piece. Instead, I want to speak about a much broader issue: the methodology of the governance of our economic policy. I was prompted to reflect on that issue by an article in the weekend's newspapers, although obviously not one that a lot of other people read. It was a piece in The Sunday Times about the donations to the Conservative party in various constituencies, including mine. I am standing down, so I have no personal interest, but I was prompted to look carefully at what had been said by Mr. James Tyler, the individual who had donated some £250,000 to a number of constituency parties in my area and in London. When I heard about his donations previously, I had wondered who he was and what his motivation might be. The article gave some insights and some steers into speeches that he had made, which left me with a little more information. The article also left me dusting down my knowledge of unfashionable economic theory. Why? Well, it turns out that Mr. Tyler is a new admirer of the Austrian school. I did A-level economics, and I can vaguely remember references to the Austrian school from then. Much the best known exponent of that group of beliefs was Friedrich von Hayek—I say that in a positive sense, because I am going to say some positive things first—whose name is identified with some of the valuable insights of that school. He rightly set out the necessary inefficiencies and irrationalities of a planned economy. He and others were also sceptics of the mathematical modelling of human behaviour, which has been an obsession of modern economics, and has also provided one of the bases, albeit a small one, of our current crisis. Applying confidence to complex models, with huge uncertainties and multiple assumptions, is entirely wrong. That was the point of my intervention on the right hon. Member for Fylde. Econometrics provides useful spreads of possible outcomes. As I said, I thought that the Leader of the Opposition's contribution, which highlighted a small relatively variance in possible outcomes between Bank of England and Government forecasts, indicated a certain immaturity on the subject. His speech also indicated how his view differs from mine on the value of predictions of economic activity, which are no more than that—useful indicators of possible future outcomes that may steer our policy. Those who have followed my contributions on the Treasury Committee will know that there have been many occasions on which I have commented on the difficulties of using short-term economic reporting of outcomes to drive future policy. The Monetary Policy Committee relies on information provided by the Office for National Statistics, but those data are regularly revised, and sometimes relatively materially. However, in a useful discussion, the Governor of the Bank of England took the same view as me: yes, there are variances, but they are not so profound as utterly to alter the truth of the economic situation that we face. Such data are useful in helping us to steer our policy making, but it is wrong to be obsessed about detail. The Austrian school took that message and almost banished mathematics from economic thinking, which is perhaps rather too extreme a position to take, albeit one that was welcome to me when I studied economics, because maths was not my strongpoint. Nevertheless, I have some admiration for that approach. Not all the thinking from that school attracts criticism, therefore, yet modern adherents are regarded by most people as outliers in economic thinking. Why? This question is a pointer on my slight concern about such a major donor to the Conservative party adhering to that set of beliefs. Mr. Tyler gives some clues in the speech he gave to the Adam Smith Institute in October of last year. I admire him for putting on the record what his views are—that is helpful. He sets out some of the fundamentalist thinking that has understandably relegated this school of thought to a backwater. Essentially, the school espouses the most severe form of monetarism. Every economic crisis, and certainly the current one, as he says, is attributed to credit growth and the solution lies in a return, essentially, to a gold standard. Interestingly, one of his key villains of recent past economic history is Alan Greenspan and his response to the 1987 crash. Presumably, Nigel Lawson features in his rogues' gallery, but is not mentioned in his speech. Alan Greenspan has a long history. In an earlier stage of his career, he was a strong advocate of using gold as an anchor to currency in circulation. Let me quote a remark he made in 1966, to show how rapidly people change their views on economic policy:""In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold."" I have to say that that is from a gentleman who has been an adviser to our current Prime Minister, so it is an intriguing view of where he stood in the past. He went on:""Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands ""as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."" Of course, the gold standard was a strong feature of debate in the 1920s and the economic crises of that decade. The rigidity imposed made it impossible for an economy to adjust the realities of a changing competitive environment other than by sharp reductions in costs, prompting mass unemployment and deflation. The social consequences of that aspect of this school of thought are dramatic. The school also welcomes—as does Mr. Tyler, explicitly, in his speech—deflation. The theory is that prices fall to the point at which people are willing to make purchases. However, economists have pointed out that the real history of periods of deflation shows not merely the inevitable consequences of lost capacity, but the deferral of spending decisions that most purchasers make when prices fall, for the perfectly obvious reason that when one sees prices falling it is difficult to time the point at which one makes one's purchase, because one anticipates future price falls beyond that. The data show that that is exactly the behaviour of most people in a deflationary period. Milton Friedman, who is quoted as one of Mr. Tyler's former gurus, has demonstrated that the Austrian school's explanation of business cycles is false. The school rejects the main functions of central banks, and I must admit that I was intrigued by Mr. Tyler's adherence to the Conservative party, which, of course, wishes to enhance the role of our central bank in a variety of ways—certainly by reactivating it as a regulator of key parts of our financial systems. There is certainly some variance, at least in public policy terms, from one of their major donors. He rejects, in particular, the role in permitting credit to rise and would certainly dissent from the measures the Bank of England has taken in facing this crisis: both setting low interest rates and providing monetary easing, through which it has sought to staunch the shortfall of money supply caused by this recession. The school also strongly favours the small state, yet the evidence shows that countries with well developed welfare states and strong investment in education perform better than countries with low levels of outlay. In the modern world, it is hard to conceive that any competitive advantage is granted to a country that invests little in its infrastructure or its people's skills. Mr. Tyler ends his speech with a resounding call. He states:""Austrian economics predicted this crisis and has solutions. Austrian economics can prevent this from happening in the future. Find out about it and understand it."" As I have demonstrated, I was certainly prompted to look a little harder at this perhaps neglected area of economic thinking, and it was an interesting but concerning experience—concerning, because this gentleman is a major donor to Her Majesty's Opposition, second only to Lord Ashcroft in personal contributions. As far as I know, he is a UK taxpayer, and that is excellent. It is also fair to say that the business he established flourished under a Labour Government. He was a financial trader in the early part of this decade, and presumably did very well under many of the policies that this Government have adopted. It is a puzzle to me as to how he reached the judgment he did concerning the prospects of a Conservative Government. In his speech, Mr. Tyler highlights some of the failures of past Conservative policy. He draws attention to the response to the 1987 crisis, for example, and he certainly damns the response to what he describes as the "ERM crisis". I would hazard a guess that he puts with that the tracking of the Deutschmark and other behaviours of the Conservative Government of the time. He does not expand on his criticism but the Leader of the Opposition was, of course, an adviser to the Chancellor during that exchange rate mechanism crisis, yet he appears to enjoy the confidence of this major donor. One has to presume that Mr. Tyler has not offered £250,000 in the expectation of a continued adherence to policies that he clearly disdained in the past. Presumably, he wishes to have at least a friendly ear for his thoughts. If his ideas are adopted in any substantial part by Her Majesty's Opposition, and if they are fortunate enough to be elected at the forthcoming election, we face the prospect of a sharply smaller economy and long-term mass unemployment. I can well understand the strengths of Mr. Tyler's economic principles. People who hold monetary as opposed to asset wealth might welcome them, as they protect and could enhance the value of savings. Everyone else, however, including those who hold wealth in companies, would face a gloomy future. One can only hope that this man is donating money in some fantastic hope, and not any great expectation, of a serious ear in Her Majesty's Opposition's leading counsel.