Finance (No. 3) Bill

I am grateful for the chance to speak briefly at the end of this debate. This Finance Bill is but one part and but one significant change to the economic policy framework in the UK. The significance of some of the details in the Bill is matched only by the modesty of the amount of comment that they attract. We are debating many of the detailed changes, such as expanding gift aid, helping low earners, supporting motorists and improving the environment for enterprise. I support all those measures and will speak about them later, but I first want to address the context and background set for the Bill by changes to the economic policy framework. One of the big changes has been referred to explicitly and implicitly throughout the debate. The hon. Member for Edinburgh South (Ian Murray) spoke about the Office for Budget Responsibility, and every Labour Member has referred to its figures. In that magnificent British way, we have managed to establish and accept a new tradition—the OBR—as if it were ever thus. I argue that that innovation in economic policy and others are significant and noteworthy for the long term. Over many years, evidence grew in the academic economic debate that economic policy is best set for the long term, and the short-term dash for growth became discredited. In the '80s and '90s a consensus grew that fiscal policy should be set for the long term, and that monetary policy should be set through an independent Bank of England and used to regulate demand in the shorter term—to keep inflation low and growth going. In fact, that became the cross-party consensus in the House. The shadow Chancellor even wrote a book on what a magnificent set-up that was. The problem with that arrangement is that it stabilised only one part of the economy, and it was far too narrow. Where discretion was allowed, and within closely prescribed rules, policy worked reasonably well, and policy makers hit the inflation target with commendable accuracy. However, the success of that narrow area of economic policy making led its creators to believe—absurdly—that they had solved the problems of economic policy making. We know the phrases. They said that boom and bust had ended, but that hyperbole led them to ignore the growing signs that all was not well elsewhere, and to commit vast policy mistakes that led to the enormous crisis that we have gone through, and that Government Members are trying to help to clear up. The Labour Government admonished anybody who claimed that Britain's economic policy framework was anything other than perfect, and that belittled debate. The problem was that by aiming at one target only—inflation, and consumer price inflation specifically—everyone missed the huge and unsustainable growth in balance sheets throughout the economy. There was unsustainable public debt and unsustainable private debt—a classic debt bubble. The problem first became obvious in fiscal policy. The now discredited fiscal rules allowed the labour Government to claim that all was rosy—indeed, the shadow Chancellor still claims that all was rosy. In fact, they were borrowing an unsustainable amount at the height of a boom. They then tried the classic trick of borrowing to fund their re-election. As the House knows, they fiddled the figures and moved the goalposts to keep on spending when the facts started to prove otherwise. The new OBR will bring long-term independence to fiscal policy making, which will constrain not only the current Government, but—I hope—all Governments to come. Crucially, the OBR's forecasts will define the discretion within which policy makers can operate, and will bring this constrained discretion, similar in structure to monetary policy, into fiscal policy. Different though the execution will be of course—because the policy levers will be different—the structure will be similar. Although having an OBR in the past might have meant not entering the crisis with unsustainable public finances, what of those unsustainable private finances? No one can argue that the amount of debt in our economy—in our banks and households—was sustainable. Britain entered the crisis as the most indebted nation in the G7 ever, and also had the biggest banking bust in the world. Those are not unconnected, however, because household debt and the banking debt that supports it are a reflection of each other—one group lends to the other. That combination of unsustainable public and private debts means that Government Members have a huge mess to clear up. The combination of targeting only narrow consumer prices inflation in one part of a tripartite system and the regulation of individual banks in another meant that the crucial piece of the jigsaw—looking at how bank balance sheets affected debt across the economy—was missed. It is a bit like a balloon: we pushed down on consumer prices and kept control of them, but all the extra liquidity shot out into prices of other assets, including, as we know from our personal lives and those of our constituents, the biggest asset of all—housing. We had a bonanza housing boom: equity withdrawal; get-rich, buy-to-let schemes; more than 100% mortgages. We all know about them. The bubble lasted all the longer, however, because it had a credible story behind it—of the extra savings being made in China and the rising Asian nations—and was harder still to argue against. Nobody was there to pull the punch bowl away when the party got going. As we know to our cost, the power to do that was removed from the Bank of England in 1997. At the time, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) predicted it would cause problems. The link between looking at the sustainability of individual banks and looking at the macro-picture had been broken. Now that link is being restored. First, clause 72 and schedule 19 will introduce and increase the bank levy. It will be a levy on banks' balance sheets, not bonuses, so will contribute to financial stability. Secondly, and crucially for the context in which we think about the Bill, the proposed financial policy committee, which will first operate in shadow form, will monitor that link. It will link the management of the country's debt and balance sheets with the management of the macro-economy, linking fiscal policy and monetary policy through financial policy, and therefore allow for a holistic big picture of how we are managing our economy. Instead of allowing a bubble to build up by omission, the FPC's job will be to look for it and act on it. Unlike under the former system, in which the Bank of England could complain and raise concerns but not act, the FPC will be empowered. Crucially, because the discretion is embedded in a respected institution, it will have the authority to exercise that discretion. For whereas discretion without rules gives us tyranny, rules without discretion give us futile bureaucracy. The changes have been praised by the OECD and the IMF, and they represent a substantial and fundamental shift in how we run our economy. However, we should resist the hubris of saying that these reforms will ever be finished or that the ancient challenge of economic management, first recorded in Genesis, is complete. As we debate the details of the Bill today, we should consider how the context of those changes, in strengthening our economic framework, is about learning the lessons from the past and helping us to be stronger as we face the inevitable challenges ahead.