Charter for Budget Responsibility

Lord Redwood Excerpts

Wednesday 11th May 2011 Commons Chamber

[The Economic Secretary to the Treasury (Justine Greening)]

I beg to move,

That the Charter for Budget Responsibility, a copy of which was laid before this House on 4 April, be approved.

I welcome the opportunity to bring forward the charter for budget responsibility for the approval of the House. The charter sets out the Government’s new fiscal framework following the passage of the Budget Responsibility and National Audit Act 2011. I will start by setting out the context for the reformed framework.

Following the general election last year, the coalition Government inherited the largest budget deficit in our peacetime history, which was forecast to be the largest in the G20. Our structural deficit was the largest in Europe. The fiscal situation that we inherited was unprecedented, so on coming into office, the challenge that we faced as a new Government of two parties working together to resolve the problems left by the Labour party was to bring order back to our nation’s finances. The new fiscal framework contained in the charter is at the heart of that task. We published a draft of the charter in November last year, which provided time for substantial scrutiny. Indeed, it was considered at all stages of the passage of the 2011 Act. Perhaps before I get into the details of it, it would be helpful if I set out the Government’s broader fiscal aims.

We believe that fiscal policy should restore sustainability to the public finances. That is essential so that we can reduce our vulnerability to shocks or a loss of market confidence, underpin private sector confidence, support growth and avoid an irresponsible accumulation of debt at the expense of the next generation. We have taken tough and decisive action since taking office, and of course last May, the immediate reduction of in-year spending brought us much-needed breathing space given the acute sovereign debt concerns across Europe.

The emergency Budget in June was the moment when credibility was restored to Britain’s public finances, and in the 2010 Budget my right hon. Friend the Chancellor set out the Government’s fiscal mandate, which is now, for the first time, included in a statutory document, which is the charter that we are debating tonight. That mandate requires the Government to balance the structural current deficit by the end of the rolling five-year forecast period, and it is supplemented by a target for the public sector debt ratio to be falling at a fixed date of 2015-16.

The measures that we set out in the emergency Budget, alongside the departmental allocations that we set out in the spending review, represent a comprehensive four-year plan to meet that fiscal mandate. The 2011 Budget reaffirmed the Government’s consolidation plans set out last year, and reinforced them by implementing a balanced set of tax and expenditure policies. In the assessment of the Office for Budget Responsibility, we are currently on track to meet the mandate and the supplementary debt target one year early, in 2014-15.

[Mr John Redwood (Wokingham) (Con)]

Does the Minister recall that the decision was taken in the March Budget to increase both spending and borrowing by £34 billion over the following four years? Will she remind the House why we did that?

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[Kerry McCarthy (Bristol East) (Lab)]

I will bypass the first eight minutes of the Minister’s speech, in which she reiterated the usual mantra about everything being Labour’s fault—she usually resorts to that when questioned about the Government’s policy, but today she started her speech with it—and instead focus on the charter.

The Budget Responsibility and National Audit Act 2011 was passed with consensus, at least on the principle of setting up the Office for Budget Responsibility and introducing the changes to the national audit process that the previous Government had already floated and that we would have implemented had we been re-elected in 2010. There was consensus on the principle, if not on all the details that we discussed in Committee. We welcome the fact that the House is debating the charter in Government time, as we received assurances in the Public Bill Committee that it would do so. Indeed, that formed a central part of our debates on the Bill and it is a central facet of the Office for Budget Responsibility’s functioning and relationship with the Government.

However, I note that the Government have on previous occasions attempted to get this motion through on the nod at the end of the day’s business. Only after efforts made by the Labour Opposition to secure a debate do we now have the opportunity to talk about the charter, which rather goes against the spirit of the reassurances that were given in Committee. Indeed, I questioned the Minister repeatedly in Committee about what was meant by the phrase “laid before Parliament” and whether such a promise would mean—not just on this occasion, but on future occasions—a proper debate on the Floor of the House or the measure being put through on the nod. However, at least we are here now, with the opportunity to discuss the issue.

Debates on the Bill in Committee were, as I pointed out at the time, slightly hampered by the fact that we could discuss only the draft charter. I repeat my observation that it would have been better for the Committee—and for the House on Report when we approved the Bill—to have a finalised form of the charter for consideration. I note, however, that the final version laid before Parliament has not changed substantially, which is somewhat unfortunate, as it has not been improved as much as we had either been led to believe in Committee or had hoped for.

Chapter 1 of the charter refers to section 6(2) of the 2010 Act and confirms that

“the Charter may not make provision about the methods by which the OBR is to perform its duty,”

which is an additional provision. That is important and crucial to the OBR’s independence. However, we pressed for the final version of the 2010 Act or the charter to guarantee complete discretion on what the OBR can consider, as well as how. Regrettably, as I shall set out later, that has not been included. Chapter 2 has not been changed substantially, although we welcome the inclusion of other Departments in the memorandum of understanding with Mr Robert Chote, on behalf of the OBR, and the Treasury, which recognises that the work of Her Majesty’s Revenue and Customs and the Department for Work and Pensions in particular is similarly pivotal to responsible fiscal policy and sustainable public finances.

Given the importance of the memorandum to the transparency, objectivity and impartiality of the OBR, it is only right that the House should consider it. We therefore welcome the Treasury’s publication of the memorandum. The document refers to the forecast liaison group. Given the Government’s professed commitment to guaranteeing the transparency and independence of the OBR, will the Minister confirm that the Treasury will publish the minutes of the group meetings? If a dispute is escalated to the chair of the OBR or the permanent secretaries, will a Minister report to the House on the cause of the dispute and how they intend to solve it? Finally on the memorandum, it states:

“Analysis of the direct impact of Government policies on the public finances will be provided to the OBR for independent scrutiny which will state whether the OBR agrees or disagrees with the Government’s costings”.

Such analysis is one of the fundamental roles of the OBR, yet neither the memorandum nor the charter explains the consequences of the OBR’s assessment contradicting the Government’s own report. I will come later to the worrying implications if the Treasury were to disregard the OBR’s verdict.

We also discussed in the Public Bill Committee the possibility of duplication and inconsistencies in OBR and Bank of England forecasts. Neither the charter nor the memorandum addresses that, and the Minister has previously advised that it would be for the two organisations to formalise their relationship in this respect. Perhaps she could update us on any discussions that the Treasury has had with the two organisations on their roles, and indeed on how the Chancellor intends to proceed in the event of a disagreement between the two.

[Mr Redwood]

Perhaps it would be a good idea if there were such a disagreement, because the Bank of England has been so bad at forecasting inflation, and we hope that the OBR will be a bit better at it.

[Kerry McCarthy]

The Bank of England’s forecasts have not always been as accurate as one might have hoped, but that proves my point: there could well be conflict between the Bank’s forecasts and the OBR’s forecasts. It is therefore right to ask what the Government would do in such circumstances. Would such a disagreement discredit the Bank of England’s forecasts? Will the OBR be seen as the ultimate arbiter on such matters, or will the Government be able to pick and choose whichever forecast suits their purposes?

Chapter 3 of the charter and the Government’s objectives for fiscal policy are obviously at the core of the document. Some of the provisions in the charter might not be entirely necessary, however. For example, it places the Treasury under a duty to prepare a Budget report for each financial year, which one would hope would happen without it being told to do so. We acknowledge, however, that including the Government’s fiscal mandate in the charter and consequently requiring any modifications to be laid before the House is a welcome step. We hope that it will enhance Government accountability, although that should not be taken as an endorsement of the Government’s economic policy or of their fiscal policy objectives.

Regrettably, given that economic growth has flat-lined under this Government and that forecasts have repeatedly had to be downgraded, it remains to be seen whether the Government are meeting their stated objectives—particularly that of supporting confidence in the economy. Nevertheless, we approve of the idea of working towards maintaining confidence in the economy. The charter rightly acknowledges that achieving that must be the responsibility of the Government and not of the OBR.

The second objective, that of promoting inter-generational fairness, is much more contentious, and it has been challenged here and in the other place. It is not at all clear from the document what the Government mean by the term, although from the Minister’s comments tonight and on previous occasions, I assume that it refers to passing debt from one generation to another, rather than to passing on wealth, advantage and opportunity from one generation to another. If that is indeed the case, and the objective refers simply to inherited debt, it would appear that the Government under this Chancellor’s leadership have an exceptionally narrow conception of fairness which does not chime with most people’s understanding of the world.

We should not be surprised by that, however, given the Government’s record on fairness to date. A Government who choose to take £7 billion of much-needed support from children in their first Budget and comprehensive spending review—three times the amount that they thought appropriate for bankers to pay—who choose to target women for spending cuts, who choose to penalise people on lower incomes, and who choose the regressive measure of increasing VAT can hardly be considered fair.

Earlier today, many of us met constituents supporting the Hardest Hit campaign for people with severe disabilities and chronic illnesses, and I would ask the Government to explain to them how making people with disabilities and chronic illnesses pay the price for the financial crisis is fair. One of the constituents I met today is registered blind and has a guide dog, but she has been told that she is not eligible for the higher rate of disability living allowance. She used to work for a bank, and she wants to know why she is paying a bigger price for the financial crisis than her former bosses in that industry.

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[Mr John Redwood (Wokingham) (Con)]

Like all those who have participated in this debate, I welcome the four principal aims identified in chapter 3 of this document. It is exactly right when it says that we need to

“ensure sustainable public finances that support confidence in the economy”.

We see all too many examples within Europe of what happens to countries that lose the confidence of world markets and the world’s bank managers. We see that far from being able to sustain high and rising public spending, such countries end up with far worse cuts, which can be deeply damaging to their public services and social fabric. The Greeks seem to be getting into ever bigger difficulties the more money that is lent to the country on soft terms and the more that their Government fight to contain the deficit. We want to avoid getting into that vicious circle in which a Government raise taxes and cut spending, and the deficit grows because the economy plunges again and the revenues dry up even more. I think that hon. Members on both sides of the House now agree that it is most important that we undertake the work to ensure sustainable public finances.

When I listen to the debate in this House, I sometimes feel that very few people have read the numbers in the Red Book. The Government’s pathway is to borrow more than £480 billion extra over the five years for which they are planning. That is more than the total state debt 10 years ago; it is a massive sum. Some people think that we are going to be paying off the debt or paying off the deficit, but we are not.

This Government have, for understandable reasons, decided that they need to increase public spending in each of the five years of this Parliament so that the impact of their decisions on public services can be gentle—I hope that in many cases it will not be felt in any bad way. As a result of that understandable decision, this massive borrowing has to be undertaken and the public debt will be so much greater at the end of the period. That makes it very important that we stick to the pathway of getting the deficit down, so that each year we borrow a bit less extra than the year before. That is the aim of the strategy. Some people seem to describe it in rather different and more draconian or alarmist ways, but the Government are simply trying to cut the rate of increase in the debt. If all goes well over five years, we will still end up making a far bigger increase in the debt than the total state debt just 10 years ago.

I am delighted that the second aim given in this document is to

“support and improve the effectiveness of monetary policy in stabilising economic fluctuations.”

It is my view that the boom and bust were primarily created by a very badly managed monetary policy over the previous seven to eight years. We had the boom phase, when money was too easy, interest rates were too low and credit expanded too rapidly. Even worse, we had the bust phase, when the market was cleared of liquid funds, when interest rates were too high, and when the then Government were far too tight and jeopardised the financial system itself by pursuing a ridiculously tight money policy at the very point when it was obvious that banks were at risk and the system was in danger of collapse.

[Chris Ruane]

Will the right hon. Gentleman refresh the House’s memory on his advice to the previous Government on the regulation of the banks?

[Mr Redwood]

I can indeed and I am glad that the hon. Gentleman did not dare to repeat the normal falsehood that has often been put about. The advice we gave was that they did not have enough regulatory control over the cash and capital of the banks, that they needed tougher regulation of cash and capital and that their mortgage regulation of process and customer was worthless and would not prevent disasters in the mortgage market. I rest my case: that is exactly what happened. The mortgage banks were not protected by their regulation—it probably made things even worse—and the then Government failed to regulate the things that did matter that could have prevented the crisis. I hope that the hon. Gentleman is put right on that now and will no longer read out the stupid spin lines from the Labour party created by people who clearly had not read the economic report to which he is referring. I was trying to keep this non-partisan, but he has decided to spoil the tone—

[Chris Ruane]

So was I. I was giving the right hon. Gentleman an opportunity.

[Mr Redwood]

I am grateful then. I did not realise that the hon. Gentleman was being so generous.

If we are going to support and improve the effectiveness of monetary policy, I hope the Government will think through how that will work. It is one thing to have a charter to say that we will do this, which is something about which I am very relaxed—it is a laudable aim—but it is another to ask how it will occur. The problem with the conduct of monetary policy—this applied to the previous Government as well as to this Government—is that it is not entirely in the hands of the Treasury. I happen to believe that it is ultimately the responsibility of the Chancellor and the Treasury to conduct an honest money policy that avoids undue booms as well as bankruptcies and busts. That requires judgment.

The main elements of that policy, however, are conducted at the moment by the Financial Services Authority, which determines how much banks can lend and admits it got it wrong in the boom period. I think that the FSA also got it wrong in the bust period and managed to go with the cycle, thereby reinforcing it, rather than leaning against it as it should have done. We also have the Bank of England setting interest rates and having some involvement, but not sole control, over how much money is printed. The Chancellor and the Treasury do not run the whole policy and that could become a problem again in the future if the independent bodies make a mess again, as they clearly did in the boom and bust phases we have recently lived through.

I hope a little more thought will go into how the charter can be implemented. I am sure that my hon. Friend the Minister will agree that whatever the theory about independence might be, as far as the electorate is concerned the people responsible for the state of the economy and therefore the conduct of monetary policy are the elected officials—the Ministers. If Ministers wish to delegate that responsibility to an independent body, they are entitled to do so and the public will be happy with that all the time it works but extremely unhappy if the independent body gets it wrong.

That brings me to my third point. Although I am happy with the aims and principles of the charter, I would caution the Minister that we should not place too much confidence in independence as the only virtue that is needed to get these things right. We have had an experiment with a so-called independent Bank of England for more than a decade now and that has been our worst decade for boom and bust since the 1930s. That is not entirely the responsibility of the Bank of England but it was part of the team that managed to preside over too much boom, too much credit and too much inflation and then over too little credit, too little liquidity and bankruptcies on a scale that none of us in this House had ever seen before. That shows that independence is no guarantee of success.

We also see from the Bank of England that its inflation forecasts have been way out for quite some time—

[Chris Ruane]

What about the growth forecasts?

[Mr Redwood]

I am coming to the growth forecasts, if the hon. Gentleman will be patient. The Bank’s inflation forecasts might perhaps have helped to mislead the previous Government as well as the present one. Those forecasts assumed that we would be somewhere around 2% when of course we have reached 5% or more on the retail prices index and 4.4% on the consumer prices index. Today, we have had another revision to the inflation forecasts from the Bank of England saying that there might be more inflationary pain to come over the summer of this year before we start to see progress back to somewhere near the 2% target.

I wish the Office for Budget Responsibility every success and hope that it will be more successful in its forecasts than the Bank of England has been in recent years. Today, the Bank had to announce not only an upward revision to this year’s inflation but a downward revision to this year’s growth. The OBR has already had to revise down its near-term year’s growth forecast in March of this year compared with its autumn forecast last year.

My worry about the current forecasts is that the assumption that we are going to have three years of above-trend growth over the balance of this Parliament after next year could be optimistic if the world economic slow-down, which is likely next year, continues for any length of time. If the euro crisis gets worse and creates more financial and economic turmoil among our major industrial trading partners on the continent or if there are unforeseen problems with the rate of slow-down in the emerging market economies, which are currently applying tough monetary medicine to try to curb their inflation, it could be that much more difficult to hit those Budget targets. That is all important, because we have as a third aim the laudable idea of a forward-looking target to get the current balance or deficit down and to get a better balance between revenues and expenditure.

I have explained that the five-year strategy assumes a very substantial cash increase in total public spending—around £94 billion from memory—and higher public spending on current account in the last year, compared with Labour’s last year, over this five-year Parliament. The way in which the deficit comes down in the official forecasts is mainly through a big increase in tax revenue. That big increase partly reflects the higher VAT rate and other higher tax rates that have already been imposed, but it mainly reflects the very good growth prospect in which we have three years of well-above-trend growth in the last three years of the period, accelerating from now onwards to that good performance. If there is any disappointment or need for downward revision by the OBR, that is going to throw out the tax revenues and we will therefore be faced with a bigger deficit that will require handling. We hear much debate in the House and in the media about whether the Government are trying to reduce the deficit too quickly, but the House should understand that there are risks the other way as well. If growth and tax revenue do not come through at the scale anticipated, we will be faced with rather more invidious issues to resolve about how to get the deficit down without that great super-boost from the revenue.

The objective for debt management is to minimise over the long term the cost of meeting the Government’s financing needs, taking into account risk. This is exactly the point I am trying to stress in this short debate. So far, the markets like the Government’s strong stance. They are pleased that the Government have regarded deficit reduction as the No. 1 thing they have to do and they are pleased with the OBR’s independent forecast showing that the rate of increase in debt drops off quite nicely over the five-year period. However, they will not be pleased if there is major slippage or if the OBR has been too optimistic, so it is most important that we have the right people in the OBR, that it has good fortune with its forecasts and that it has taken into account the possibility, for example, of a deterioration in the international background, which could have an impact.

In conclusion, I welcome the aims but I hope that the Treasury will consider the following important points. First, we must understand that just because a body is independent, that does not mean it gets things right. The Treasury will have to operate its own scepticism about the forecasts. If the OBR were too optimistic, it would be wise of the Treasury, at least privately, to have done some work on what might happen if the forecasts were too optimistic. One should not always assume that the OBR forecast is the worst case and that life is likely to be better. The Treasury should be very careful about that.

Secondly, the Treasury should do some contingency planning in case the world economy is worse than anticipated and has an impact on growth rates. Thirdly, it should take the opportunity that will be presented by the new regime for controlling the banks, which will be introduced when many powers are passed to the Bank of England, to say that the Treasury and the Chancellor must have a role in all that because it was definitely the regulation of banks and the bad conduct in monetary policy that gave us the huge pain of the past six or seven years. We probably need more intervention from the Treasury and more accountability to the Treasury to try to get the system to work in the future.

The Opposition love to say that the crisis was a global crisis and that therefore one should not blame any particular part of the UK governing establishment. I do not take that view. It was a largely western crisis and there were some advanced economies that were not affected by it. Australia had a particularly good period, China had a pretty good period, and India sailed right through without any problems. There were small and big economies that were not affected by the world crisis, even though global activity was hit, because American, British, Spanish and Irish activity was hit in a very predictable way.

It was a rather limited number of countries that had gross mismanagement of their money supply and their banking systems. As the election is well behind us, we should, in a non-partisan spirit, analyse what went wrong, admit that things went wrong in Britain, and make sure that the new architecture, of which the charter is just part, functions much better than the old architecture. That means questioning the assumption that independent people always get it right. It means understanding the ultimate accountability of the senior elected officials, and it means understanding that sometimes we need to be more pessimistic, at least in our private forecasts, so that we do not discover that our plans do not work.

Finance (No. 3) Bill

Lord Redwood Excerpts

Tuesday 3rd May 2011 Commons Chamber

[Chris Leslie]

Of course, the Liberal Democrats advocated the opposite of that before the general election. Obviously they had good, sound reasons to change their view rapidly over a weekend.

[Mr John Redwood (Wokingham) (Con)]

Will the shadow Minister say how much tax he thinks should be imposed on the banks, and how he would go about doing it?

[Chris Leslie]

As I said, we would repeat the bank bonus tax that we instituted last year, and we think that the bank levy needs to be more substantial.

The Government’s original design suggested that it would yield £3.9 billion—that was reported in The Observer, I think, back in November. Of course, that was why they panicked and decided that they would have to go back down to the £2.5 billion or £2.6 billion level. They stepped away from that original yield level.

Of course, we are not the Government; we are the Opposition, and we are not even allowed under the rules of order to table our suggested variants of the rate of the levy or the design of the clause. All that we can do for now is advocate a fairly urgent review of the general levels of bank taxation in this country.

--- Later in debate ---

[Mr Redwood]

I listened carefully to the shadow Minister’s speech, and it is quite true that the public mood is one of wishing to see both a just return on its forced investment in the banking industry and the banking sector—particularly the state-owned and subsidised banking sector—making its contribution to the recovery, in view of what happened in 2008 and 2009.

I remember in 2007 and 2008 being in dispute with the then Government, because I felt they were setting up a banking crisis that we could have avoided, but unfortunately my voice was not listened to; they did not take action on interest rates and money market conditions to prevent the crisis. When it started, I think I was the only MP who said, “Do not give all this money to the banks.” I felt it was wrong to buy shares in the banks and to support the bondholders. I thought we had a duty to the depositors and individuals who were tied up with the banks, but not to those who had financed and run the banks in those conditions. Unfortunately, the decision was made to embark on a massive subsidisation and share-buying programme, which the previous Government did. So we are where we are, and I think that we all agree that what we wish to do now is get the maximum value we can out of the banks that are subsidised or in state ownership, because that would make the public feel better about it. Surely, now is the time when those state-owned and state-subsidised banks should make their fuller contribution to the recovery, after their role in the recent crash.

[Chris Bryant]

I apologise in advance to the right hon. Gentleman if what I am about to say is an inaccurate representation of what he said in the past, but my memory is that he produced a report in which he argued there should be much less regulation of the financial services industry—in fact almost none—[Interruption.] He is shaking his head. I am sure he will be able to enlighten us by correcting me.

[Mr Redwood]

How many times will I have to deal with this idiotic canard that Labour dreamt up? The report was very clear: it said the then Government were not regulating cash and capital strongly enough, and it was a cash and capital problem that the banks had that led to the crisis. If the then Government had taken our advice, the banks would have been made to have more cash and capital at a much earlier stage of the cycle, so we would not have gone into the period of banking weakness during the credit crunch.

We also said that the mortgage regulation introduced by the then Labour Government was not fit for purpose, was useless and might as well be scrapped. Our case was proved extremely well, because it was the mortgage banks that crashed—the very banks that were the object of the extra regulation. The extra regulation was clearly regulating the wrong things. We were not against regulation: we said mortgage banks and other banks should be regulated, but it was vital to understand what the problem was. It was very clear in ’06 and ’07 that the problem was an excess of lending of poor quality. It was also very clear that the answer was more cash and capital, and that was what we recommended. It is a great pity that the then Government did not follow our advice.

[Graham Stringer]

I agree that it is clear that there was something wrong with the previous regulation, although I would not go along with the right hon. Gentleman’s argument entirely, but does he agree that there is a villain in the piece who hardly ever gets mentioned: the credit rating agencies that allowed the banks to sell snake oil to each other? Does he agree that we in this House should do something about that?

[Mr Redwood]

I hold no brief for the credit rating agencies, but nor have I prepared a case against them. I am sure the hon. Gentleman can make his own case and come up with his own remedies. In my view, there have been many villains in this historic piece, including the regulators, the Bank of England for its misconduct in the money markets, and the commercial banks that took advantage of ridiculously lax conditions and got themselves into a great pickle, which we had to sort out.

[Helen Goodman]

I am interested in the right hon. Gentleman’s argument, but does he seriously think we could have made significant changes to the way we regulated banks in this country without international agreement on the way banks are regulated?

[Mr Redwood]

Yes, I think we could, which is why I made that recommendation well before the credit crunch occurred. In ’06 and ’07, it was obvious to me and to some other commentators that things were getting out of control—indeed, it was quite common for Opposition parties in this House to say they thought there was too much credit about. I went a bit further and said that could be remedied by changing the way we regulated the banks. It was quite wrong to allow a bank to extend more credit when it only had a 4% tier 1 capital ratio. I remember that when I was a financial regulator, we lived in an era when banks needed twice or three times that amount of capital to be acceptable to the regulator. There was a clear diminution in standards at a crucial time, which fuelled the credit binge.

[Mr Kevan Jones]

I know that the right hon. Gentleman sometimes speaks at odds with his party, and he talked earlier about historical references. Was it not his party’s Government under Margaret Thatcher who deregulated the mortgage market, and is it not the case that up until the recent banking crisis hit, his party’s Front Benchers were talking about lighter regulation of the banking sector, not more regulation?

[Mr Redwood]

The Front-Bench team and I were at one on this issue: we were saying that what was needed were better regulation and less regulation. The Government were regulating too many things badly. As I have just explained, they were regulating mortgage banks in a way that allowed all, or at least several, of them to be crippled and caused a great many problems. The hon. Gentleman is quite wrong about Baroness Thatcher: much stricter controls over cash and capital were imposed throughout her period in office, and, of course, no major bank went down during that period. The same cannot be said of 2007-10, when the requirements were much laxer, as I highlighted in the report, and when we ended up with banks going down.

We are not here to debate past regulation, however; we are here to debate taxation. My purpose in sketching the history of this tragic situation is to express solidarity with all those who agree with the public mood, which is that we want to get a bigger return out of the banks, whatever we may think are the reasons why they are in their present position, but it is also to remind the House of a very important and salient fact, which is that two of the biggest banks are wholly or partially in state ownership or control. We are therefore talking about taxing ourselves in no small measure.

The issue before Ministers is a little more complicated than the Labour spokesman has suggested, because there are two ways in which we can get cash out of the banks: one is to tax them now on their stream of revenue, or their assets and liabilities in the case of the bank levy tax; the other is to move more quickly to sell off those assets back into private sector ownership and, I hope, proper private sector risk taking. If we are to get the maximum receipt, we do not want to be taking too much money out of the banks in the short term by way of taxation, because for every £1 of tax we take out of them, we lose £5, £10 or £15, depending on the multiple we sell them on when we come to sell them.

[Barry Gardiner]

The right hon. Gentleman is making a very coherent presentation, but does he not agree that if we do not want to be taking money out of the banks by taxing them, equally we do not want to see that money going out of the banks by way of bonuses paid to their high-end staff?

[Mr Redwood]

I hasten to correct the hon. Gentleman: of course I think we have to tax banks. We have to tax ourselves, and we need to tax the other banks in the system, as well as the state-owned ones, but we must also consider the balance of effects and the impact on shareholder value. I entirely agree with those who say that if a bank is state subsidised or largely state owned and is therefore in receipt of state money, it is surprising that it should be paying very large bonuses. It is even more surprising if the bank is loss-making, because although an individual employee in that bank may be able to say, “I personally made a profit to offset some of the losses,” the senior people in the bank are corporately responsible for the overall results. It is at the very least surprising if a loss-making bank is making rather big pay-outs, because that is taxpayers’ money and taxpayers’ wealth being paid out to those individuals, which, as the hon. Gentleman rightly says, is not then available to sell as a stream of profits when the shares are returned to the private sector.

[Hugh Bayley]

The right hon. Gentleman seems to be saying that it is important that the taxpayer gets the maximum value when the publicly owned portions of banks are put back on the market and floated, and I agree. Does he agree with me that it is therefore important that the mechanism at that time should not provide incentives for would-be shareholders such as shares being valued below their real market rate in order to encourage popular capitalism, but that the shares should be sold in such a way as to maximise the return to the taxpayer?

[Mr Redwood]

No, I do not necessarily agree with that, because I think that another way of returning value to the taxpayers who have supported the bank is to make those sorts of offer. However, I will wait to see what Treasury Ministers come up with before judging whether a measure is too generous or not generous enough, and how appropriate it is.

[Hugh Bayley]

My point is that if we maximise the return to the taxpayer, everybody in the country—rich and poor—gets a share of the benefit. If we put some of the value into creating lower-priced shares to boost popular capitalism, we spend our public money on only a small percentage of the population. Surely that is less fair than maximising the return and spreading the benefits across all taxpayers.

[Mr Redwood]

The hon. Gentleman is right that there are those two sides to the argument, but this is probably not the time or place to argue that through. We may have an opportunity to argue through how the bank shares are sold and the balance in the sale process when we get nearer to that point. The issue before us now is a taxation one. We are discussing the taxation of bonuses and the bank levy—the subject of the clause—and I agree with those who say that if we take too much out in bonuses in a state-owned bank, that detracts from the value that is available to sell.

Of course, the bank levy is not the means by which we can have any impact on bonuses. Interestingly, it was the previous Government who nationalised or bought shares in banks and signed off on all the original agreements for the top directors and executives. I believe that they included generous bonus terms at the time because, they said, they had to in order to have the talent needed. The criticism being made of the coalition Government now is that they took over those inherited contracts and lived with them, rather than broke them and disrupted the management of the banks, which I regard as a lesser charge than the one against the former Government of setting up all those contracts in the first place.

This should not be a party political issue. I regret some of the contracts that were incorporated at the time of the purchase of shares, but I regretted the whole purchase of shares because I thought it neither a particularly good deal for the taxpayer, nor a necessary deal to sort out the banking problem. I would rather have sorted that out more rapidly at the time, with managed administration or something else, than adopt this expensive way of putting all that money in. We are now trying to maximise the returns because we are where we are.

[Lorely Burt]

My right hon. Friend has partly answered the point I was going to make, but I wonder whether he could help me. What did the Labour party do to control the bonuses paid to loss-making banks when it was in government?

[Mr Redwood]

Labour Members would say that they could speak for themselves and that they imposed a bonus tax. However, as the hon. Lady is suggesting, they did allow very generous bonus conditions into the contracts for their state-owned or partly state-owned banks. Perhaps some would have come to a tougher judgment at that time, had they been in a position of power to do so.

The point I wish to make in this debate is simple. I hope that when Ministers are deciding the right level of the levy, they will weigh very carefully the important fact that we are, in part, taxing ourselves. I hope that within a few years, if not within a matter of months, as I would prefer, we will return those assets and get the money back that the taxpayers deserve.

--- Later in debate ---

[Mr Redwood]

I, too, would find forecasts helpful, but I understand the uncertainties surrounding what bank shares might be worth in one or two years’ time. There may even still be considerable uncertainties about how much profit the banks will deliver. It would be much easier to get value for taxpayers if these banks deliver reasonable profits.

The second point I wish to make is that the other disadvantage of a bank levy tax is that it is a tax on exactly the kind of activities that we really want banks to perform at the moment to fuel the recovery: it is a tax on lending money to businesses and individuals. The loans that we probably most want, if we are to get the recovery going more quickly, will be the riskier ones, yet they are exactly the kind of assets that the banks will own that will score more heavily for the levy.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

Does the right hon. Gentleman agree that we might want to deal with the banks’ behaviour in a more general sense and their impact on the economy? Might it not be worth considering a third way of dealing with the banks, particularly re-mutualisation of some of them? Might that be a way of getting banks that are more focused on their stakeholders, particularly the people to whom we might want them to lend, than on paying bonuses to people all the time?

[Mr Redwood]

I am always very happy to see ownership extended in ways that include that type of mutual, although the history of the mutual banking movement in the past 20 years provides no evidence that such banks were particularly good at reading the cycle or dealing with the capital problems—indeed, many of those institutions went to the markets and decided to exploit market opportunities because they had a capital problem that they thought they could solve by that route. It may be that we could go back to more traditional mutually owned banks with much more constrained balance sheets and activities, and that might be part of getting back to a more healthy banking sector. That is something that the market should decide.

I am firmly of the view that we need more competition and choice in the marketplace. One of the big errors was allowing banks that were too big. As a competition hawk, I was publicly very strongly against the takeover of HBOS by Lloyds; it was a great tragedy for Lloyds and for the country that that merger went through. We should have dealt with HBOS in other ways, which would have been less expensive. I was also a critic of the Royal Bank of Scotland takeover of ABN AMRO. Although the competition issues that raised were not as clear as the competition issues raised in the case of the Lloyds takeover of HBOS, I would have liked to have seen a tougher line taken. I hope that this period of change and reflection on banking, including how we tax it, can lead to a much more competitive structure. One of the ways of doing that would be to sell off some of the assets currently owned through Lloyds and through RBS in ways that created more banking challenge in the market.

[Mr Robinson]

The right hon. Gentleman wants to ensure that we get the maximum return possible when we bring the banks back into the market, and the whole House would agree with that. He referred to the need not to reduce by too much our prospects for doing that by reducing through an excessive tax charge the multiple applied to earnings in realising the sale value, but his point about therefore moderating any tax that might be imposed is specious and certainly does not allow him to invest the seriousness that he wants, given that the multiple used is nearly always a profit-before-tax multiple—certainly, it will always be adjusted for that if exceptional items are involved. For that reason, some people, with whom I would not agree, even opt for an earnings before interest, taxes, depreciation and amortisation—EBITDA—calculation for these purposes. The fact is that the quality of the earnings is more important here than any considerations about tax levels at any one point in time.

[Mr Redwood]

I do not agree with the hon. Gentleman about that. It is true that in the venture capital world EBITDA multiples are more common, although people would not give the same value or the same multiple to a highly taxed business as they would to a more lowly taxed business; but in the open share market in the major stock exchanges, it is more normal to look at price earnings multiples based on earnings net of taxation. There is no doubt that if more tax is taken out of a business, it is less valuable to its private owners—of course that must be true. The private owners are trying to buy a stream of profit or revenue and if some of that is taken in tax, the business will be less valuable.

I had just moved on to my final point, which is about the impact everything we are discussing has on economic recovery. I urge the Minister to bear in mind that the kind of tax proposed, if carried too far, can be damaging. It impedes banks making the sorts of loan and building up the sort of asset base that we want them to at a time of recovery. In addition, any given jurisdiction going too far could become a trigger for the bank’s moving some or more of its activities offshore or changing its arrangements in a way that it thinks would allow it to get around some or all of the tax impost. I would prefer that this tax had not been invented—there are better ways of taxing banks—but if we are to have such a tax, let us ensure that we have thought about two very important consequences of setting it too high: it might damage our own share values and it might damage lending for the recovery.

[Ian Lavery (Wansbeck) (Lab)]

The general public are outraged at the levels of bankers’ bonuses, which remain very high indeed. The Government were forced, as we are all aware, into multi-billion pound bank bail-outs during the financial crisis. Quite simply, people cannot understand why bankers and people employed in the financial institutions have been given billions and billions of pounds of taxpayers’ money at a time of great austerity.

To pay massive bonuses in the midst of a financial crisis is a national disgrace, as it is to pay massive bonuses at a time when public sector services are being destroyed and young people face an unprecedented attack via tuition fees, the abolition of the education maintenance allowance and changes in Sure Start. Last year, Barclays boss Bob Diamond and his two replacements at the head of the investment bank were paid an obscene amount of money: £28 million. The trio also received shares worth £40 million for past performance. That must have been some performance!

I have just done some calculations. The people who are now receiving redundancy notices in the public services—many council workers, nurses, doctors, police officers and the rest—would be lucky to have a bonus of £50 a week. That is £2,500 a year, £25,000 over 10 years and £125,000 over 100 years. So to make £1 million, they would have to live until they were 400. To make the £28 million that the Barclays heads were given, they would have to live to 11,200. That is highly unlikely—I am merely accentuating the point—but those figures are an absolute disgrace.

Amendment of the Law

Lord Redwood Excerpts

Monday 28th March 2011 Commons Chamber

[Mr Pickles]

We will certainly look at that, but may I remind the hon. Lady that Labour councils are of the view that it would be “barmy” not to have the freeze, and that the freeze itself is “great news”? She should really get with the programme.

[Mr John Redwood (Wokingham) (Con)]

That is great news on the council tax—fantastic. Will my right hon. Friend confirm that, every year of this Parliament, total spending goes up in cash terms, so, if the public sector can control costs and inflation, the situation need not be nearly as bad as the Opposition say?

Amendment of the Law

Lord Redwood Excerpts

Wednesday 23rd March 2011 Commons Chamber

[Sir Stuart Bell (Middlesbrough) (Lab)]

I am grateful for the opportunity to speak early and to follow the hon. Member for Chichester (Mr Tyrie). He made three points that I would like to take up. First, he referred to the reduction in the deficit over the next four to five years and said that he thought that that would cause grave concern and bring great pressure to bear on the Government not to continue with the programme. He is perfectly right: £146 billion will be reduced to £122 billion, which will be reduced to £70 billion, which will be reduced to £26 billion in the years 2015-16. That is a massive and steep drop and will have serious consequences for the public sector, which the hon. Gentleman acknowledged.

In his Budget speech, the Chancellor did not mention the welfare state or the point on which the hon. Member for Chichester finished his speech, which is the balance between the public and private sectors. We will see a clear imbalance between the public and private sectors as regards the question of whether the public sector can shed jobs and whether they can go into the private sector. That is an interesting point that will be followed closely in the north-east of England, where some 47% of employment is in the public sector. We will then see the difficulties and dangers of moving quickly and rapidly with such a massive debt reduction over four to five years.

Harold Wilson once said that one man’s pay rise was another man’s ticket to the dole queue, but the deficit reduction we are talking about today involves one man’s job passing from the public sector to the dole queue. I must tell the hon. Member for Chichester, since he made the point, that he must remember that those who work in the public sector are producers who pay taxes and consume and to remove them from that sector with such a drastic and rapid reduction in the deficit will not add to the prosperity or standard of living of our people.

[Mr John Redwood (Wokingham) (Con)]

The hon. Gentleman should remember that the Chancellor has announced today that over five years, this Government plan to borrow an additional £485 billion—or a 50% increase in official state debt. They are not paying down the deficit or paying off the debt—they are just trying to borrow a little less each year, but it is still adding a huge amount to the national mortgage.

[Sir Stuart Bell]

I was much amused when statements were made about how the debt was reduced, how much we had to pay off and how much the Labour Government borrowed. In the month of February, the Government borrowed £11 billion when they should have borrowed £8 billion. It is perfectly correct that we have mixed up the structural deficit with the overall deficit, but public spending will continue to go up. There was a certain sleight of hand from the Chancellor when he made his Budget speech.

--- Later in debate ---

[Mr John Redwood (Wokingham) (Con)]

I remind the House that I offer industrial business advice to a Swedish, quoted international industrial group and investment advice to a British investment company.

Some Opposition Members have expressed displeasure that Government Members should have mentioned the circumstances in Greece and Portugal. The Opposition rightly remind us that we have a much bigger economy than those of Greece and Portugal and I am pleased to say that ours is also currently better managed. Those points are important because our public deficit was larger even than theirs, as a proportion of national income, when the big deficit reduction programme started. I praise my right hon. Friend the Chancellor for seeing that his single, central task, day in, day out, month in, month out, year in, year out—indeed, the five-year burden for all of us in the House—is to get that deficit down before it kills our public finances and our economy.

If anyone thinks there is no risk, I invite them to visit Greece, Portugal or Ireland and see what happens when a country ignores a deficit for the best of reasons and says, “I do want to spend a little more on a good public cause so I will borrow it to spend it.” Of course, we all have great causes on which we would like to spend more money. Borrowing is so often the easy option, but when a country gets to the point at which it is borrowing too much, it does not just destroy the general economy and place too big a burden on those who have to pay the taxes and interest charges—in the end, it brings down the public sector as well, with far bigger cuts and far less favourable choices than we have when we take matters into our own hands by planning a steady deficit reduction.

We are debating, in a relatively civilised atmosphere and in a relatively sane and sensible way, an economic position about which there are strong disagreements. However, there is no overall disagreement about the imperative to avoid big rises in bond rates and interest rates and to get on with some kind of deficit reduction. It is particularly poignant that we are having this debate on the same day that the Portuguese Parliament is meeting to discuss not its first, second or third, but fourth package of emergency, deep, damaging public spending cuts and unaffordable tax increases. Such is the plight that its economy has been driven into by reckless overspending and too much borrowing and, of course, by being in the euro area.

[Jesse Norman]

Does my right hon. Friend agree that to answer the question of the hon. Member for Middlesbrough (Sir Stuart Bell), who asked when the rating agencies took over, one need go no further back than 1949, 1969, and 1976 to 1979, when there were runs on the foreign exchange markets under Labour Governments?

[Mr Redwood]

My hon. Friend is quite right, but the Labour party could point to one or two examples under Conservative Governments, so I do not want to be drawn too far down that historical path. We can see what we need to see by looking at the modern reality. As my right hon. Friend the Chancellor said, fortunately, British bond rates—the rate that we have to pay to borrow money for public purposes—are much closer to those in Germany than those in many other countries in Europe. They are under half the level of those in troubled Portugal. The Portuguese 10-year rates went above 8% today. I stress to beleaguered Portuguese parliamentarians, who are battling over whether a general election is the answer to their problems, that if they do not take dire and immediate action, their country simply will not be able to borrow at an affordable rate of interest. They cannot go on spending the extra 10% of national income that we are spending, which is borrowed, to tide us through and get us to better-managed times.

My right hon. Friend the Chancellor, having set out a pathway for tackling the deficit, was right to turn to the question of how he can accelerate growth. The truth of the five-year deficit programme is simple: we need well-above-average growth in the last three or four years of the programme to deliver the numbers in the Red Book, which are similar to those in the Chancellor’s first edition of the Red Book last summer.

To remind the House of the scale of the task, the Government plan to spend £70 billion a year more, in cash terms, in the fifth year of the plan—2014-15—than in the last Labour year; that is not a big increase, but there will be pressures because of it. They plan to get the deficit down by increasing the tax revenue collected in the last year of the plan to an eye-watering £175 billion more than in the last Labour year. We believe that we have seen all the important tax rate rises that the Chancellor thinks are needed to do that; the rest depends on the above-average growth that is still in the official forecasts of the Office for Budget Responsibility.

[Mr Love]

As I understand it, the right hon. Gentleman is laying out why we need a credible reduction in our deficit in the light of the likely market reaction, but is he not concerned about the impact that any austerity programme might have? Although there has been only a limited impact so far in the United Kingdom, as in Greece and as is likely in Ireland, it may be too much, too soon.

[Mr Redwood]

That is absolutely right. The policies that Ireland, Greece and Portugal are being driven to may well not work because they are excessive, but that is the result of going into the euro and following the market pressures that that inevitably produces. I see some Labour Members trying to pretend that that is nothing to do with them, or looking the other way. I remember being a pretty lonely figure in the ’90s when I said that we should never join the euro. I am pleased that my party now seems to be very broadly of that view, and I believe that the other two principal parties in the House have come round to the view that we certainly should not join the euro any time yet, but we have still to receive apologies from them. Surely they must now accept that if Britain had been driven into the euro, as they wanted, we would have broken the euro and broken ourselves. The euro could scarcely contain small economies the size of Greece, Portugal and Ireland, with their amount of debt; it certainly could not have contained Britain comfortably with the level of debt that the previous Government started to incur. It would have found the British banks over-mighty subjects, just as it is finding the Spanish banks rather difficult to tackle.

[Sir Stuart Bell]

I am glad that the right hon. Gentleman added the words “any time yet” to his remarks about joining the euro, because it is inevitable that, over many years, we will join the euro. Tomorrow and the day after, 17 euro states will get together and put forward a proper plan for competitiveness within the euro. For the first time in our history, the United Kingdom is excluded.

[Mr Redwood]

If those countries come up with good ideas, we can adopt them, and if they come up with bad ideas, we would be wise to sidestep them; that is exactly the freedom that I and others have argued for passionately over many years, and that the Government wish to enjoy if all goes well.

The hon. Gentleman also said that the reductions could prove difficult. Believe it or not, I did not become a Member of Parliament to have teachers sacked from my schools or doctors sacked from my surgeries; I want them to be well paid and well funded, and I want sensible growth in numbers where there is extra demand. We are all of that view—it is quite misleading of the Opposition to suggest that some of us do not appreciate that and do not want that for our constituents—but it has to be affordable. It has to be within the power of the free enterprise part of the economy to pay for that out of reasonable taxation in a way that does not damage our growth; that is so important.

The Government have managed to find an extra £70 billion of cash spending for the fifth year of the plan, compared with in the start year. It is crucial that we keep public sector costs down, so that the maximum amount possible can go to improving service and quality, and, in some cases, to improving the amount of service, and the minimum goes on extra costs and extra inefficiencies. All parties will say in office that they want more efficiently run public services, but they have to will not only the end but the means. That is why the reforms on which the Government are embarking are so important. It is crucial that the Government listen, and that sensible criticisms be taken on board, but public services have to be reformed so that we can say to people in five years’ time, “You are getting more for that £70 billion. We haven’t had to cut things that really matter, because we have managed things better and have found a bit of extra money.”

[Jesse Norman]

Is my right hon. Friend aware of the enormous interest in the private finance initiative community in reform of the PFI? A succession of chief executives of PFI companies have asked me, “Why can we not be allowed to save money?” The reason is the enormously expensive procurement process. Not a single school has been built recently that does not have an atrium, and that is because it has been decided that schools, which have nothing to do with corporations, must have corporate atriums. Nothing could be sillier or more resistant to good Government spending.

[Mr Redwood]

My hon. Friend is quite right. Improving the quality and cost-effectiveness of our purchasing is crucial in Government. There are many opportunities; PFI and public-private partnerships provide some good examples, but so does general purchase. It would speed up the deficit reduction if there were a stronger moratorium on purchasing items and supplies where there are already stocks. Any company undertaking the kind of radical turnaround that the country is trying to achieve would immediately freeze all unnecessary purchases and make people run stocks down to save money.

Where I have had answers to my questions on this subject, I have found that the current rate of natural wastage of staff in core Departments is running at about 6% per annum; it was about 4% in the first eight months. Quite a number of those posts have been filled by taking on new people from outside. I urge my friends on the Front Bench to get more of a grip on that, because the easiest way of reducing the administrative overhead on the scale that they want—the least painful way for their staff, who need their morale to be up—is to not replace people who leave and not to make others redundant. We cannot afford the redundancies. If we make greater use of natural wastage, Ministers can say to their staff that it means better opportunities for promotion and a change of job. If the post vacated is not essential, it should be removed; if it is essential, we should appoint someone from inside and remove some other, less important, post. That surely is the civilised, sensible way to tackle the necessary task of cutting the administrative overhead. If the Government can cut their administrative overhead by the very large 30% that they are talking about, it takes the pressure off cuts in the areas where none of us wish to see them—in the schools and hospitals, the front-line services that matter so much.

The question that I was about to ask before the interventions was about the international context. How easy is it going to be for the Government to have the three or four years of above-average growth which are so crucial to the strategy? I must warn those on the Front Bench that I fear that the world background will get more difficult going into 2012 and 2013 than it is at present. There has been a prolonged boom in the emerging market world, and we now see China, India and Brazil lifting their interest rates to very high levels. They are desperately trying to squeeze inflation out of their system, so in a year or so we must anticipate some fall-off in demand and spending power growth rates in those big emerging market economies.

The United States economy will have a good year this year, by the looks of it, on the back of a lot of money printing, low interest rates and other matters. That comes to an end in the middle of this year, so by next year we will see a slower rate of growth in the United States of America as well. Were the situation in the middle east to get worse, and the damage from politics to spread into oilfields outside Libya, we could have another unpleasant external shock on the oil price, which would also serve to impede the growth of the world economy.

The conclusion that I take from this is that the world economy does not look as though it is going to go back into another deep recession—we are not going to have that kind of impossible situation—but the world economy is not going to provide the impetus that it is currently providing. It may not feel that great, but it is providing quite a bit of impetus at the moment. It will provide less impetus next year and beyond. That means that the Chancellor must intensify his pursuit of measures that make the UK that much more competitive and that much more successful.

[Andrea Leadsom (South Northamptonshire) (Con)]

Will my right hon. Friend comment on the importance of improving our export position vis-à-vis the BRIC countries in particular—Brazil, Russia, India and China—and how important a part that could play in our recovery?

--- Later in debate ---

[Mr Redwood]

It is a good point. We have heard figures from the Government indicating that we export less to the BRIC countries combined than we do to Ireland, but we have a close relationship with Ireland and we are close neighbours. It is understandable that we export a lot to Ireland and it to us. That figure conceals one important point, which is that British business has probably been a little more active than it suggests, but for various reasons the larger British companies tend to go into India, Brazil and China and set up joint ventures or factories of their own there to service the local market. It is easier to service those markets in that way, for reasons that we need not go into in detail today, but I agree that it would be good if we exported more, and it would be good if we helped small and medium-sized enterprises that do not have the capability to set up factories on the other side of the world to export in their turn.

The devaluation that happened more than a year ago has given us one nasty result, which is a much higher inflation rate than comparable economies, but it has given us one pleasant result, which is that it is very easy to export out of a British base now because British industry is so much more competitive at the current level of the pound. We should have that on our side. Paradoxically, quite a bit of British business in the manufacturing sector is close to capacity, and those businesses are tending to put the prices up a bit to collect a little more revenue and improve their balance sheets because it is not that easy to expand turnover. That is where the things that the Chancellor is talking about are vital and need to be done speedily.

Britain needs to be able to put up factories more quickly and get them into use more quickly. It needs to define the skilled engineers and the other skilled individuals who want to work in an industrial setting rather than in an advisory or City setting, and then expand the capability of their companies as a result. Modern manufacturing requires a very high degree of skills input, talented people and good management. It does not require so many people to operate machines because really good manufacturing now is highly automated. It needs the precision of expensive machinery. Indeed, the easiest way to compete out of a German or a British base is to have highly automated plant, so labour costs are a rather unimportant part of the total cost. The intellectual property content, the skill content and the plant and equipment content are much higher, but they are affordable with a quality product.

[Mr Graham Stuart (Beverley and Holderness) (Con)]

Further to my right hon. Friend’s points, a director from JCB gave evidence to the Select Committee on Education yesterday and said that he had 57 vacancies for engineers that he cannot fill order to ensure that JCB’s products remain globally competitive, reduce energy usage and so on. That, unfortunately, is a legacy of too many years in which we have not delivered the technical, vocational, practical education that is required. Is my right hon. Friend, like me, enthusiastic about the Government taking forward the programme from the Wolf review and supporting Lord Baker with his university technical colleges?

[Mr Redwood]

I am happy with those proposals. The Government are clearly on the right lines and I hope there will be cross-party agreement that we need to raise our game at skills, training and education, particularly in engineering, pharmaceuticals, chemistry and so forth, where we have an advantage and can have a much bigger advantage if we do more. Yes, we need to review how easy it is to buy or build a factory and how easy it is to equip it. Anything that can be done to lower the effect of tax rate on business will make Britain a much more attractive place to be.

As hon. Members know, I take the view that if we set lower rates, we normally collect a lot more revenue. If we want that kind of growth rate, the lower the realistic rate that we can set, the more revenue growth and the more overall growth we will have. It would be a great tragedy to abort the recovery in certain sectors because the tax rate was too high. I am pleased to see the progress on corporation tax. We need to see the details of some of the individual tax schemes and how the carbon tax rebate would work. If we went ahead as trailblazers in Britain and set a high carbon price, we would price our energy-intensive business out of Britain into a less clean or less acceptable venue. It is important that the rebates and discounts are properly thought through, so that at a time when the Government are trying to promote more industry, they are not taxing it too heavily.

[Margot James (Stourbridge) (Con)]

On the competitiveness of British industry, my right hon. Friend has in the past talked of a cut in regulation being equivalent to a free tax cut. Does he welcome the measures in the Budget to have a low level of regulation for new start-up companies and small companies? Does he share my hope that Europe will become more competitive by reducing the regulatory burden that it seeks to impose on British business and business in other member states?

[Mr Redwood]

Of course I welcome that. One of the big barriers to entry and to more effective competition for the large companies in Britain is the weight of regulation, which hits anyone who tries to start up a new business. I have done it in the past and I know what it feels like. One has to raise a lot more extra money because for six months to a year one is just trying to comply in many areas before one can trade. Yes, of course we want sensible regulation. We do not believe in an unregulated world. We believe in the law of contract. We believe that people should have a duty of care towards their staff and their customers, but if there are too many and too detailed competing types of prescriptive regulation, it puts people off and they say, “It’s too expensive. I can’t be bothered.”

[Geraint Davies (Swansea West) (Lab/Co-op)]

But does the right hon. Gentleman agree that the issue for small business today is not so much regulation as liquidity and lending to SMEs by the banks? A constituent of mine, Alun Richards, is on hunger strike. He had a business with net assets and a limited amount of debt, and Lloyds bank came along and withdrew the debt. Now he is going bankrupt because he has no working capital. Does the right hon. Gentleman agree that that is disgraceful, particularly from a bank that is owned by the taxpayer? Poor old Alun Richards wants to run his business, not to be undermined by the banks. What are the Government doing about that?

[Mr Redwood]

Of course I agree that if there is a solvent and enterprising business and it is not getting proper banking facilities, that is very bad indeed. It is particularly bad if it is a state-owned or state-influenced bank that is responsible.

My final points are about banking, as time presses and many others want to speak. Of equal importance to the weighty matters covered by the Chancellor today will be the Vickers report and the Government’s response to it. I believe that we will have interim conclusions from Sir John Vickers on 11 April. We are not going to have fast, sustained, above-average growth in this country unless we sort out the banks a little more than we have done so far. All colleagues in the House are united in having individual cases where they feel a company could have been saved or could have grown more rapidly if only there had been more sympathetic or understanding bank managers and facilities. There is a problem with British banking serving the SME sector town by town, county by county. There is a lot of talent in the banks, concentrated at the national level and in the big national accounts. Many hon. Members like to knock those people, but they made an important contribution to the growth rate under the previous Government and to our economy.

[Andrea Leadsom]

In the last quarter of 2010, lending to the SME sector dropped by 38% from the last quarter of 2008. One of my big concerns is that this reflects the incredible concentration of SME lending among the four or five largest banks, which are responsible for around 90% of all SME lending. Does my right hon. Friend agree that the work of the Vickers commission and the Treasury Committee should focus on breaking up the oligopolistic positions of some of those big banks?

[Mr Redwood]

I certainly hope that when we see the Vickers report and have a proper debate on it we will be able to find sensible ways of promoting much more competition in the domestic banking market. We need more competition on the high street for individuals and families and more competition in town centres for SMEs, which in previous generations probably had better and more direct relationships with local bank managers, who had a bit more authority to grant loans and make money available on judgment than is currently the case through the box-ticking, centralised computer systems.

[Geraint Davies]

In that case, and given the last intervention, does the right hon. Gentleman agree that perhaps the Budget should have introduced tax relief or tax credits for individuals wanting to invest in SMEs, because venture capitalists want too high a return and the banks are failing the small business sector? We want an inclusive economy. Surely there should have been some support for SMEs so that we could all invest in small businesses more effectively.

[Mr Redwood]

That is exactly what the Budget contained. I think there was a revamped and revised enterprise investment scheme and an improvement in the capital gains treatment for successful entrepreneurs. It is always nice for new people setting up small businesses to be able to dream, and why should those of them who are successful not keep the proceeds if they have created jobs and done so much?

The outcome of the Budget will depend on two important considerations: whether we can put enough measures in place along the lines that the Chancellor has laid out for promoting growth; and whether there is a happy and sensible resolution to the banking problems as they affect SMEs and the wider public in Britain. There has been much discussion of the big banks, the investment banks and all those sorts of issues, but we now need to laser in on how the banks serve local communities and the SME sector. We need a more pro-competitive answer. I have some thoughts on how we could do that, but will not detain the House with them because today is not the day for that. However, without such measures the Budget will find it difficult to deliver the very large figures for increased revenue on which the whole plan rests.

Oral Answers to Questions

Lord Redwood Excerpts

Tuesday 8th February 2011 Commons Chamber

[Mr Osborne]

The VAT increase, like the other measures we are taking, helps to deal with the record Budget deficit that we inherited from the Labour party. By dealing with that, we have provided financial stability for the British economy. That has also been made clear by the previous Chancellor, the right hon. Member for Edinburgh South West (Mr Darling), who would also have gone ahead with a VAT increase.

[Mr John Redwood (Wokingham) (Con)]

Given that the last quarter of last year saw a big real increase in public spending and a further big increase in debt, does that not show that there is no necessary connection between those things and growth and that it would be quite wrong to think that spending and borrowing more would solve the problem?

[Mr Osborne]

My right hon. Friend is absolutely correct. Of course, in December, the Government were spending, in real terms, a record amount. I make the point again that we inherited a record Budget deficit. I believe that Labour’s plan, set out in its March Budget, was to start cuts in April this year. We have set out a credible plan and we are awaiting one from Labour.

Loans to Ireland Bill

Lord Redwood Excerpts

Wednesday 15th December 2010 Commons Chamber

[Mr Osborne]

It is merely an observation that the fact that Ireland is a member of the European Union is not why we are making this loan; it has nothing to do with that. It has to do with the fact that Ireland is deeply connected to us. Indeed, we have just made a loan agreement with Iceland, which of course is not a member of the European Union, in order to seek to recover moneys that were spent on savers in Icelandic banks here in the UK.

[Mr John Redwood (Wokingham) (Con)]

As this crisis was triggered by the withdrawal of European Central Bank support for Irish banks, will the Chancellor give us an assurance that we will not be involved in any further refinancing of ECB liabilities should it do the same to another country?

[Mr Osborne]

I had a very specific choice. I had the opportunity—of course, I would have had to seek the authority of the House—to introduce a general Bill to allow me to make bilateral loans to any number of countries. That legislation would have been very easy to draw up, and it would have been easy to ask the House for its support. I have explicitly restricted this to a Loans to Ireland Bill because of the specific connections between our two economies.

Loans to Ireland Bill

Lord Redwood Excerpts

Wednesday 15th December 2010 Commons Chamber

[Mr Cash]

I have just abstained on Second Reading for one simple reason. I had intended to vote for it, but I remain gravely dissatisfied by the answer that I received from the Chancellor regarding the increase in the amount specified in clause 1. I do not want in any way to misrepresent what he said, but as I understood it, it was that that was all right because it was about exchange rates. However, anybody who examines clause 1 carefully will notice that subsection (4) states:

“The Treasury may by order made by statutory instrument substitute a greater amount for the amount for the time being specified in subsection (3)”,

which is £3.25 billion.

The next two provisions simply determine whether any increase will be subject to affirmative or negative resolution. An order would be made under the negative resolution only if the increase is to do with exchange rates, but I can see nothing to say that an increase under subsection (4) would be affected by subsequent provisions. I was bound to take great exception to that. It is a serious matter, because we simply do not know what the greater amount would be. We are totally exposed, subject only to affirmative resolution, which cannot be amended. Such a measure would simply go through on a whipped vote, just as the rest of the Bill doubtless will. That is why I abstained on Second Reading.

Amendment 3 addresses the definition of “Irish loan”. I was staggered when I looked carefully at the Bill, because clause 1(2) states that “Irish loan” means simply

“a loan to Ireland by the United Kingdom.”

The background is the recent debates on economic governance, and the origins of the European financial stability mechanism and the alternative eurozone facility, which as someone pointed out is as much as €440 billion, which is easily enough to cope with the Irish situation. There is a very close interconnect at all points between the so-called bilateral loan proposed in the Bill and the mechanism that I described.

The difficulty is that there is an overall determination to do as much as possible by way of integrating with Europe when it is quite obvious to anybody that this is the time for us not only to step back, but to desegregate from the European venture. I believe very strongly that the technique that is consistently employed in all spheres of activity is to say, “We don’t like what goes on in the EU, but we can just go along with it. Alternatively, to satisfy the Eurosceptics or Eurorealists, as they prefer to be called, we can make parallel arrangements along the lines of what we would have done if we were in the eurozone.”

The research paper helpfully supplied by the Library states:

“It is worth noting that the bilateral element”—

assuming that that is what the Bill is—

“of the UK’s support is broadly equivalent to what the UK would have provided if it were part of the eurozone-only EFSF.”

In other words, we would have provided the loan anyway. The Minister may well say that that is not his intention, but that is what Library researchers believe, and they are often right.

[Mr Redwood]

A portion of the total loan package is contingent money for Irish banks—they may or may not need it. Is my hon. Friend worried that they could come back for even more, and that clause 1(4) could allow an extension of our loan for Irish banks?

[Mr Cash]

Yes I am. Treasury civil servants are exceedingly clever and may know of pitfalls, but they might not fully explain them to Ministers. Of course, the Minister takes ultimate responsibility, but the question is: what is the effect on the daily lives of the people whom we represent? That is the issue on which we have to concentrate.

Under the circumstances, I am extremely dubious about the way in which the whole thing has been put together. In particular, I would mention what I will call the mechanism, as compared with the facility. I had an exchange earlier about the mechanism with the former Chancellor of the Exchequer, the right hon. Member for Edinburgh South West (Mr Darling), who said, “This is all going to be done by qualified majority voting.” However, that is not the case. Within the mechanism as it is set out, the request comes from the member state; it is only the final arrangement that requires qualified majority voting. Indeed, the EU sent in the European Central Bank and the International Monetary Fund in flagrant contradiction of the provisions of article 3 of the regulation in question.

In fact, the EU was operating the provision as if it were already law, when it was not. That it is typical of the European Union. It keeps on telling us about the rule of law, but when it suits, it completely ignores the law. What happened was unlawful. I also believe that it was unlawful in respect of article 122, which was the legal basis used to create the mechanism. I do not need to go into detail, but article 122 concerns natural disasters, energy supply and things of that kind. Anyone who looks at article 3, article 122 and the other provisions that they mention would reasonably conclude that they should not be used for the purposes of sorting out an unmitigated mess that was created by banks, as well as by the Government of Ireland and other parts of the European Union. Therefore, I am afraid that the answer that I received from the former Chancellor—that there really was no alternative to what was done, because such decisions are reached by qualified majority voting—does not stack up. If what happened was unlawful, it should have been resisted and, because of the consequences, it should, if necessary, have been taken to the European Court.

[Mr Redwood]

My hon. Friend has great legal expertise. I understand that the European Union is trying to negotiate an amendment to article 122 of the treaty in order to put the matter beyond doubt. Would that be retrospective, or could that undermine the current position?

[Mr Cash]

That is a very good question. I doubt very much whether an attempt to make the provision retrospective would remedy the mischief.

I am afraid that the question of illegality taints the Government’s position as well, and I shall explain why—the Minister will know all the detail, because I think that he was the Minister responsible. There is provision for the European Scrutiny Committee under Standing Order No. 143 regarding scrutiny and scrutiny reserves. It so happens that the European Scrutiny Committee was not set up until November—a few weeks ago. However, I have here a table setting out the dates that shows that the date of deposit was 25 May 2010. The decision was taken on 9 May at ECOFIN, which happened to be 48 hours before the coalition was pushed through. In the case of ECOFIN’s decision on the financial stability mechanism, the table states unequivocally that there was an override of both the European Scrutiny Committee and the Lords. On both counts, the then Government and the current Government breached the scrutiny arrangements. Indeed, it is quite extraordinary that the explanatory memorandum that accompanies the documents in question, and which should have been presented much earlier, was presented on 15 July. I know that the Minister will not dispute that, because it comes from Government documents. There is a serious worry about the manner in which this matter has been manipulated.

Just before the proceedings began, we were presented with another document, which reinforces my concern. If my amendment 3 were accepted, the Bill would read: “In this Act, ‘Irish loan’ means a loan to Ireland by the United Kingdom other than a loan by virtue of any provision by or under the European Communities Act 1972.” I am very familiar with the way in which interweaving goes on, not only as Chairman of the European Scrutiny Committee but because, for the past 26 years, I have watched this process of integration and the manner in which, by extremely clever and adroit manoeuvring, we get further and further integrated into these arrangements. The mechanism is an open-ended invitation until 2013, as I ascertained during an exchange with the Chancellor of the Exchequer. Until 2013, we are stuck with the present arrangements.

I am sometimes a bit of a Cassandra, in that I make prophecies—more like predictions—about certain events, find out that I was right and then find out that nobody took any notice until they had happened. On this occasion, I am going to say that it is extremely likely that, if Portugal gets into really deep trouble—and perhaps Spain, too—that will happen before 2013. If this greater amount is interwoven into the stabilisation mechanism, or even if it is not, the mechanism itself will entrap us in the arrangements which, although not yet permanent, will go on until 2013.

I also think that the Government are struggling a bit in relation to article 122, under which this measure was introduced—unlawfully, in my opinion—because the Commissioner responsible, a Mr Sefcovic, has stated that the Commission is still considering whether to use article 136 or article 122. Against that background, the Van Rompuy Committee is sitting and might already have concluded that it would be appropriate to have a permanent mechanism in place only under article 136, and therefore only by reference to the eurozone. That would be a plus, but it would not alter the fact that, between now and 2013, we are at risk.

I am concerned about the deficient wording in clause 1(2), because not excluding what might be done under the European Union effectively leaves it open to the European Union’s continuing to weave its way into the arrangements, despite the fact that they are described as a bilateral loan. Some people might say, “Ah, but you have to understand that when the explanatory notes talk about a bilateral loan, they mean that.” It does not say that in the Bill, however. Furthermore, we have had some unpleasant experiences with explanatory notes in the European Scrutiny Committee recently, as anyone who wants to read the report that we have just issued will see. The explanatory notes in question were positively misleading, and distorted the legal position. That is a matter that we will be pursuing in Committee, when we ask whether parliamentary sovereignty or judicial supremacy should prevail. I do not need to go into the detail of that now, but the fact that a bilateral loan is mentioned in the explanatory notes has been severely vitiated by our experience of the explanatory notes to the European Union Bill.

Autumn Forecast

Lord Redwood Excerpts

Monday 29th November 2010 Commons Chamber

[Mr Osborne]

I am not aware that the OBR makes that forecast, but obviously everything we are doing—whether increasing free nursery care provision for some of the poorest two-year-olds or introducing the pupil premium—is designed to encourage social mobility and to give those on lower incomes a chance to increase their incomes over this Parliament.

[Mr John Redwood (Wokingham) (Con)]

I thank the Chancellor for the guarantee of no bail-outs for other European countries. Does he think the European Central Bank will make available all liquidity needed by major banks in euroland, as it should do because it tells us they are all solvent?

[Mr Osborne]

Obviously, the ECB is independent so I will not speak for it. What I have said about the European financial stability mechanism is that we now have a verbal agreement—I will, of course, want to secure it over the coming weeks—that that mechanism will not form a permanent part of the bail-out mechanism that the eurozone wants to put in place from 2013, and we will not be part of that bail-out mechanism. Indeed, if it requires a treaty change, our consent to that change would, of course, be required.

Banking Reform

Lord Redwood Excerpts

Monday 29th November 2010 Commons Chamber

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

I beg to move,

That this House, concerned that no action has so far been taken which would prevent a recurrence of the financial crash, calls upon the Government to establish a clearing house for approval of all financial derivatives and to set in place alternative mechanisms to remove the implicit taxpayer guarantee, other than to purely deposit-taking banks, in the event of any future banking collapse.

The motion is on the Order Paper through the good offices of the Backbench Business Committee, and I take this opportunity to congratulate the Committee and its Chair on the way in which, in my view, they have already opened up Parliament to valuable new procedures and paved the way for important debates that might otherwise not have happened. I hope and believe that this might be one of them.

I begin with the words of the managing director of the International Monetary Fund, Dominic Strauss-Kahn, who a few weeks ago told Stern magazine that he thinks a second financial crisis is almost inevitable given the paucity of reform and the vulnerability of the financial system, and that next time round it may well be impossible to persuade taxpayers to fund bail-outs. I do not believe that is an exaggeration, and the latest travails of the eurozone serve only to underline those fears.

It is worth noting that we in the UK have more bank lending as a proportion of our gross domestic product than even the Irish—some £7 trillion, which is five times our GDP. If we are to prevent a repetition of the financial crash, it is clear that its causes must be identified and dealt with by appropriate means. I argue that those causes, in the main, include: an over-lax monetary policy that encouraged an excessive leveraging culture; extreme light-touch regulation that left too much to the markets; the development of a vast global market in credit derivatives, which were not well understood, and which Warren Buffet, the world’s second richest man, notably described as

“financial weapons of mass destruction”;

the role of enormous bonuses, which drove recklessness; a banking structure so over-concentrated in the lead banks that when disaster struck, they were judged to be too big to fail, with catastrophic consequences, as all hon. Members well know, for national debt and the budget deficit; and a banking model that linked speculative investment with retail deposit taking, both of which were protected by an implicit taxpayer guarantee. I hope that that description is accepted on both sides of the House.

All those causes need to be dealt with, and yet none has been. Given the limited time, of which I am very conscious, I want to concentrate on the most important. First, financial derivatives are a perennial candidate for causing the next crisis, because they add opacity and leveraging to the financial system. Credit default swaps, a £65 trillion market, and collateralised debt obligations, which are one of the most common derivatives, urgently need regulation.

[Mr John Redwood (Wokingham) (Con)]

rose—

[Mr Meacher]

I will give way to the right hon. Gentleman, but having heard what Mr Speaker said, I am reluctant to take more interventions, precisely because this is a very short debate—only three hours—and many wish to speak. We already have a six-minute limit, and I have too often been at the back of the queue, unsuccessfully waiting to be called at the end.

[Mr Redwood]

I am grateful to the right hon. Gentleman, and I shall refrain from intervening at great length for the very reason he gave. Will he explain to the House why over the past decade the UK banking regulator allowed the huge expansion of balance-sheet risks of all kinds, and why it did not demand more cash and capital?

[Mr Meacher]

I mentioned light-touch regulation in the City of London, which we have had since the Thatcher era and through the Blair era. I believe that that needs to end. We want not excessive but adequate and proper regulation, and for the past three decades, in the so-called neo-liberal era, we have not had it.

Derivatives should be approved by the regulatory authority before they can be issued. At that stage, they can be either prohibited or accepted, perhaps with certain conditions attached. The key point is that transparency is essential. It is worth noting that the recent Dodd-Frank Wall Street Reform and Consumer Protection Act seeks to achieve that by requiring that all derivatives are traded on public exchanges.

Linked to that is the role—or perhaps the scandal—of the credit rating agencies in allocating a spurious status to some highly dubious securities. Light-touch regulation in this country has evaporated into virtual deregulation. Credit rating agencies were paid by the very institutions whose credit worthiness they were supposed to be assessing. By granting the highest rating, as they so often did, they made it easier for the banks that were securitising and further repackaging debt to create the greatest possible number of securities with the lowest possible regulatory cost. That practice should never have happened, and I believe that it should always be prohibited where there is a serious conflict of interest, as there was in that case.

Financial Assistance (Ireland)

Lord Redwood Excerpts

Monday 22nd November 2010 Commons Chamber

[Mr Osborne]

I very much welcome what the right hon. Gentleman has said, and of course I agree that it is in our national interests, and indeed the interests of other European Union member states, that we bring some stability to Ireland. He is right, as his question implies, to focus on the banking system. The situation in Ireland is different from the situation that Greece found itself in earlier this year, with which he had to deal when he was Chancellor.

On the question of the breakdown between the amount of money going to the banking system and the amount going to fund the sovereign, I am afraid that I cannot give the right hon. Gentleman the exact figures, because they are still being negotiated, but I would say that most of the money will be used to take the sovereign out of the market for a period, and a substantial minority of the amount will be required for a fund to help the Irish banking system.

[Mr John Redwood (Wokingham) (Con)]

Given that the very large loan to Greece on 2 May did not stop the rolling euro crisis despite the promises from many of the participants at the time, will the Chancellor assure the House that Britain does not stand ready to lend more money to other eurozone members in the event that the Irish loan package does not mark the end of the crisis either?

[Mr Osborne]

I was very clear that the bilateral loan was given because of the very specific economic relationship between the UK and Ireland, the interconnectedness of our banking systems, the fact that we share a land border, and the importance of the Irish banks in Northern Ireland. Those specific reasons led me to believe that it was right to provide a bilateral loan in these circumstances.