Sajid Javid (Bromsgrove) (Con)
I beg to move,
That leave be given to bring in a Bill to set a legal cap on the amount of outstanding net Government debt as a percentage of gross domestic product; and for connected purposes.
Before I came to this House, I worked as an international bond trader and structurer. One of my roles was to advise Governments that had gone bust. The Governments of Mexico in 1994, Thailand and Indonesia in 1997, Russia in 1998 and Argentina in 2001 believed that investors had an insatiable appetite for their bonds, regardless of their ability to pay. The consequences were devastating.
For the benefit of Members who might be tempted to write off sovereign defaults as a developing world problem, let me cite Iceland, Greece, Ireland, Portugal and—very soon, perhaps—Spain and Italy. Had we not had a change of Government 14 months ago, we could have been engulfed in a sovereign debt crisis of our own. Although the coalition Government have restored fiscal probity, it would have been far better if we had not been taken to the brink in the first place. That is why I believe that one idea that we could usefully pinch from our American friends is that of a debt ceiling. Despite the political debate that America’s debt ceiling has provoked in Washington—indeed, precisely because of it—Britain should set a cap on its net national debt as a percentage of GDP.
As in the United States, net public debt has soared in the United Kingdom over the past decade, rising from £312 billion to £920 billion, or from 31% of GDP to 60%. Of course, some of that was due to fiscal stabilisers resulting from the recent financial crisis, but most of it was due to a failure of government. Instead of trying to find solutions to long-term challenges to the public finances, the previous Government took the easy way out, believing that the answer to every problem was to spend more money.
Had that excessive public spending led to hugely improved public services, perhaps the previous Government could have been forgiven, but in many cases it made things worse rather than better. Under the previous Government, welfare spending increased from £149 billion to £218 billion, yet the number of workless households increased from 3.7 million to 3.9 million. Under the previous Government, health spending increased from £58 billion to £117 billion, yet England shamefully lags behind virtually every other European country for cancer and stroke survival rates. Under the previous Government, education spending increased from £50 billion to £87 billion, yet, according to the OECD’s world rankings, over the past decade Britain fell from seventh in the world for reading to 25th, from seventh in the world for maths to 27th, and from fourth in the world for science to 16th. In short, under the previous Government Britain has had Scandinavian levels of public spending but Mediterranean levels of service. Such an attitude to excessive debt was not only economically wrong, but morally corrupt. Politicians have no right to pass the buck to the younger generation by ducking the tough decisions now. Why should our children pay for our mistakes?
Britain would not be the only country in Europe to adopt legal fiscal constraints. Germany passed a debt brake law in 2009 to cap the federal deficit at a conservative 0.35% of GDP by 2016. Switzerland also has a debt brake, and France’s lower house voted just last month to pursue a similar idea. According to the International Monetary Fund, as many as 80 countries now operate fiscal rules, whereas just seven operated them in 1990. Some Governments, however, are determined to learn the hard way that the markets will impose a limit on state borrowing, just as they do on individuals and companies. The recent bail-outs of Greece, Ireland and Portugal show what happens when Governments ignore that fundamental truth, and act as though investors had no choice but to buy their bonds. Clearly, market discipline is not enough to hold back reckless state spending. By the time the market itself says no, it is too late.
Despite the Government’s efforts, Britain’s inherited economic problem is such that it will take at least another four years to eliminate the structural budget deficit. As a result, net national debt will peak at 71% of GDP in 2014. The coalition Government have not shied from tough decisions and have embarked on a major programme of public sector reforms, but what is to stop a future Government reverting to unrestrained borrowing? Thankfully we do not live in a one-party state, and it is possible that one day we may have a Government who are less economically literate than the current one; so why do we not make it harder for a future Government to create a mess in the first place? A debt cap is no guarantee against fiscal irresponsibility, but it will certainly make it harder for politicians to rely on their favourite ruse of “Buy now, pay later”.
Although my Bill would leave it to the Treasury to set the cap level, I think that fixing it at about 40% of GDP would be appropriate. There is nothing particularly significant about that figure, but, given my 20 years of experience, I believe it would be a sensible place at which to begin the debate.
The start date for the cap would have to be set at some point in the future, perhaps 10 years from now, but that would in no way diminish the effectiveness of the cap. Indeed, knowing the goal a decade in advance would provide the Government with a clear and consistent downward target.
Ideally, the cap should include off-balance-sheet liabilities such as unfunded public sector pensions and private finance initiative schemes. Following the creation of the independent Office for Budget Responsibility, this Government are leading the way in trying to assess the amount of such “hidden” public debt. Indeed, tomorrow the OBR is set to publish the whole of Government accounts for the first time in Britain’s history, and that is likely to estimate such debt at over £l trillion. Once a suitable method to measure such liabilities becomes more commonly accepted, perhaps they, too, can be included in a revised cap.
Without proper enforcement, good intentions count for little, so the OBR should be given the task of monitoring compliance with the cap. Should the cap be violated, the Government would be given a fixed period to remedy the situation. Failing that, the Government would be forced, by law, to repurchase Government bonds early, thereby reducing net outstanding debt. Nevertheless, critics will say that faced with the prospect of cutting spending or raising the cap, a Government will always opt for the latter, but my Bill would require the Government of the day to make their case openly in Parliament and to explain to the nation as a whole exactly why they believe they need to borrow more. There will need to be a vote, and MPs will have to explain their decision to their constituents. For any Government conscious of their duty, let alone their popularity, the disincentive to doing this should not be underestimated. My Bill will, at the very minimum, force a national conversation where previously there has been only stealth and obfuscation.
Nation states have rightly used public debt as a fiscal tool for centuries. Britain’s debt has been both far higher and far lower than it is now, but it has never been more unsustainable. I believe that restoring Britain’s fiscal rectitude is the calling of this generation of politicians, and the time to start is now.
John Mann (Bassetlaw) (Lab)
It is always a joy to listen to new Members coming up with old ideas, or old Members coming up with new ideas, and here we have a new Member eagerly supported by many of the new generation of Tory MPs—a generation who fundamentally hate the concept of the public sector and Government. The tradition they—
John Mann
Well, my right hon. Friend the Member for Blackburn (Mr Straw) is one of the few who would be able to pray in aid the key point I am about to make about previous debates. I am sure the hon. Member for Bromsgrove (Sajid Javid) would love to pray in aid some of the past figures of the right, such as Margaret Thatcher, Ronald Reagan and Winston Churchill, but unfortunately for him there is only one politician whom he can pray in aid on the proposition of capping the national debt, and he is a Labour politician; or rather, he was a Labour politician but he switched sides. His son was once the MP for Bassetlaw, and his name was MacDonald: Ramsay MacDonald. At that time, a failure to understand basic economics led to the formation of a national Government and to John Maynard Keynes having to rescue those who were stuck in the failed logic of the gold standard and everything that emanated from that. A similar constraint on Government action was rejected between 1980 and 1984 by Ronald Reagan, who in fact did exactly the opposite. Such a constraint was also rejected by Margaret Thatcher between 1979 and the end of the 1980s. Although she did many things wrong, she did not accept this fundamental concept and she failed to shrink the state.
Such a constraint was also rejected by Winston Churchill, and that example is perhaps the most relevant. Can we imagine being sat here in 1939? Luckily, Keynes had by then won the argument against Ramsay MacDonald and the Labour traitors who formed the national Government on the flexibility of economic policy. Hitler was determined to invade this country, as well as the rest of Europe, and we were required to spend to defend ourselves. Can we imagine our being hamstrung by a requirement to change legislation to allow this country to spend money from the public purse in order, rightly, to defend ourselves? Now we see the shaking of heads by those on the Government Benches, because the argument has been lost—I will demonstrate precisely why they have lost the intellectual and economic argument.
In 1999, my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) decided to pay off some of the national debt. Which bits of it was he paying off? He was paying off national debt from the Napoleonic wars, which went back nearly 200 years, to a time when, again, there was a national crisis and a wise Government determined that this country should spend to defend itself. So, we see the naivety of the would-be Reaganites and Thatcherites, who are, in fact, the MacDonaldites. They would restrict our ability to act at times of crisis on the economy, they would reject the wisdom of Keynes and they would opt purely for the logic that Milton Friedman adopted and tried out in 1973 in Chile—the people there were the only ones after Ramsay MacDonald to attempt this economic philosophy. That is what the motion proposes.
I have learned over the years in this place that it is sometimes best that these arguments are had and then left to rest, particularly as we reach the summer recess. This is such an unwise proposition that I shall resist even the temptation of allowing a vote on it and, thus, giving it credibility.
Question put and agreed to.
Ordered,
That Sajid Javid, Mr Frank Field, Mark Garnier, Matthew Hancock, Joseph Johnson, Mr David Laws, Andrea Leadsom, Jesse Norman, Claire Perry, Mr John Redwood, Mr David Ruffley and Nicholas Soames present the Bill.
Sajid Javid accordingly presented the Bill.
Bill read the First time; to be read a Second time on Friday 20 January 2012, and to be printed (Bill 218).