Jobs and Growth

Debate between Richard Graham and Stewart Hosie

Wednesday 12th October 2011 Commons Chamber

[Stewart Hosie (Dundee East) (SNP)]

This Government’s refusal thus far to countenance a plan B will come back to haunt the Chancellor, the Chief Secretary and the Prime Minister. The current plan to remove the entire structural deficit in the fixed time scale of a single Parliament was incredibly risky to start with, and now appears almost impossible. It was dependent on export growth from a strong eurozone, which is not there. To be fair, the overall trade figures are a little better this year: the balance of trade is £9 billion in the red for the first quarter, but in the second quarter it stood at £24 billion in the red, and the aggregate for the first two quarters is almost as much as last year’s catastrophic £99 billion deficit in the trade in goods out-turn.

The Government’s plan depended on business investment growth of a rather heroic 8% to 11% each and every year, but that is not there either. Indeed, the gross fixed capital investment figures for this year show that investment fell by 2% in the first quarter and is lower than in the same quarter in 2010. Growth is now effectively flatlining, and although borrowing was down between April and August, it is up between August this year and August last year and is forecast to be as much as £46 billion greater. Therefore, something needs to change, not least because according to the National Institute of Economic and Social Research it is likely that the entire consolidation plan will cut almost an entire percentage point off GDP growth this year. It has said that

“it remains our view that in the short term fiscal policy is too tight, and a modest loosening would improve prospects for output and employment with little or no negative effect on fiscal credibility.”

If the Government are concerned, as they would be right to be, about the credibility of their plan and if others are saying that a modest loosening, which would help growth, would have no impact on the credibility of the plan, they should listen, not least because if they do not, the entire deficit reduction strategy is at risk, as the NIESR suggests.

On 2 August, the NIESR said that if things go on as they are:

“The Chancellor will miss his primary target of balancing the cyclically adjusted current budget by…around 1 per cent of GDP.”

Perhaps the Chancellor has listened and perhaps that is what he was alluding to in his statement on 11 August when he said that we should be “realistic” about the dangers in the global economy and “set our expectations accordingly.” I pressed him at the time on that and he was not very forthcoming. If he is to change his expectations, he is, as the previous Chancellor said, going to have to change his policy as well.

[Richard Graham]

The Opposition motion, which the hon. Gentleman presumably supports, focuses very much on a plan for jobs and growth. I would like to share with him some statistics that I found with the help of the Library. They show that between 1997 and 2010, when the shadow Chancellor was the previous Government’s chief economic adviser, the number of jobs in business in my constituency shrank by 5,600, or by 13% of the employment work force in the entire constituency. From what I have heard today, plan B really amounts to adding more mortgage costs for families and doing nothing for growth of jobs in the business sector. This Government are doing a lot to help that with structural change. Does he agree?

[Stewart Hosie]

We believe that there has to be a change because this plan is not working. That will involve: direct capital investment, which we know does work, and I shall come on to that; consumer confidence, which is vital; and access to bank finance. The Labour Opposition’s motion is a good tactic to debate this matter and we will back it, because in principle we want to see something done. However, if the hon. Gentleman does not mind, I will concentrate on my proposals.

I have said that there are problems with the Government’s plans. This has not just been about the absence of a strong eurozone to export to or of heroic rates of business investment; it has been about the fact that the forecast rates of growth for this and the next years of 2.3%, 2.8%, 2.9%, 2.7% and 2.7%, as set out in the 2010 Budget, will not be achieved. Indeed, Robert Chote, the head of the independent Office for Budget Responsibility, said that even to achieve a 1.7% growth rate now would require

“quarter-on-quarter growth rates of 1%...and there aren’t many people out there expecting that.”

I suspect that there are no people in here expecting that.

So the Chancellor needs to stimulate now, and the best way of doing so is through direct capital investment. As we know, the OBR has said that the impact multiplier for this is 1:1. It is the most effective form of stimulus that the Government have and they should use it. It is also the area where the Government can make the most damaging cut. I know that he wants to tell me that they are keeping £2 billion more in direct capital investment than Labour planned, but very large cuts are still being made. It was not just the OBR saying this, as the British Private Equity and Venture Capital Association was doing so too. On 23 September, it cited the OBR’s view that

“boosting capital spending is a far more effective way of boosting GDP than cutting VAT, tweaking welfare entitlements or increasing current spending. In fact, the OBR’s multiplier on capital spending is one-for-one…This means that the Government could increase capital spending and still deliver the planned reduction in net debt as a share of GDP.”

So again, there is no lack of credibility in changing policy and there is no impact in the planned reduction of net debt as a share of GDP in changing the policy.

The BVCA goes on to say:

“There are other good reasons for targeting infrastructure. The dramatic cuts to the investment budget that were pushed through last year will weigh substantially on private sector productivity in the years ahead. Capital spending is due to be cut by about a third in cash terms between FY09/10 and FY15/16, implying an even larger real decline.”

So if the UK Government really are serious about private sector growth in the medium and long term, they should be very concerned that a body such as the BVCA is prepared to say that cuts now will weigh substantially on private sector productivity in the years ahead. Of course, its key point is not even that. It states that

“in order to have an immediate impact on activity, the Government would need to start spending money straight away. That could mean dusting off some previously shelved plans, as there is no point in waiting 12 months”—

I think it is right—

“for any boost to be felt.”

That is good advice and I hope the Chancellor is listening.

The Chancellor does not need to focus only on capital investment. He needs to ensure proper access to business finance and that the £75 billion of quantitative and credit easing hits the real economy. Evidence from Japan suggests that bank lending fell during the whole quantitative easing exercise, and evidence here shows that between February 2009 and January 2010, when £200 billion of QE was issued, bank lending fell month on month and has remained below the starting point in every month since. That is extremely damaging. This time, the Chancellor must ensure that that money does not go through a pipe to the banks to pack balance sheets but touches the edges and hits the real economy.