Tax Avoidance (HSBC)

Steve Baker Excerpts

Monday 23rd February 2015 Commons Chamber

[Mr Osborne]

We have taken steps to deal with precisely the abuses to which the hon. Gentleman has alluded, such as the use of vehicles to avoid paying stamp duty, the creation of partnerships so that hedge funds do not pay the proper amounts, and the fact that foreigners did not pay capital gains tax. Disguised income is another abuse that we have sought to clamp down on—and, by the way, the Labour party voted against our action in that regard. As more abuses come to light and more contrived schemes are discovered, we take action to deal with them, but I have to say that we have had very little support from the Labour party.

[Steve Baker (Wycombe) (Con)]

When objective members of the public review these exchanges, they could be forgiven for thinking that there was little to choose between our parties. Will the Chancellor confirm that he has instituted not just the general anti-abuse rule, but follower notices and accelerated payments, and will he also confirm that our party has dealt with this issue far more robustly than the Labour party?

[Mr Osborne]

My hon. Friend is absolutely right. The accelerated payments scheme means that if tax is in dispute, we ask for it up front, and if people can prove that we have got it wrong, they get the money back. That is the rule with which the vast majority of our citizens must comply at present, but it was not complied with by those who were very well off. We introduced the accelerator, and as a result we are collecting hundreds of millions of pounds of tax that was previously not collected. As my hon. Friend says, that is further evidence of the gulf between what the Labour Government did during the 13 years for which the shadow Chancellor advised them, and what we have done in the last five years.

Tax Avoidance (HSBC)

Steve Baker Excerpts

Monday 9th February 2015 Commons Chamber

[Mr Gauke]

As I outlined in my remarks, the main focus for HMRC has been the use of civil penalties. That approach has been followed consistently under Governments of all colours. There has been one prosecution in respect of this evidence. It is worth pointing out that prosecutions as a whole are on course to increase fivefold in this Parliament.

[Steve Baker (Wycombe) (Con)]

Successive Governments have incentivised particular investments using tax inducements, only to be surprised when things are taken too far. Will my hon. Friend publish a report that shows the extent to which this debacle was created by tax inducements introduced by the Labour party?

[Mr Gauke]

There clearly have been issues with some tax inducements being used for avoidance purposes. To be fair, this matter relates more to tax evasion. None the less, it is important that legislation is tested and it is important that we now have a general anti-abuse rule, which we did not have in 2010, to ensure that reliefs and exemptions are not exploited in a way that is contrary to Parliament’s intention.

National Insurance Contributions Bill

Steve Baker Excerpts

Tuesday 3rd February 2015 Commons Chamber

[Mr Gauke]

The hon. Gentleman goes to the heart of the question asked by the hon. Member for Birmingham, Ladywood (Shabana Mahmood) about who will qualify for the relief. As I have remarked, we are taking a power to define apprenticeships. Given that this is a devolved matter, it is important that we discuss it with the devolved Administrations. We want to support apprenticeships and will seek to achieve a broad definition for the purposes of the relief. However, the apprenticeship system across the UK is complex and evolving. Education and training is a devolved matter. Apprenticeships operate slightly differently in England, Scotland, Wales and Northern Ireland, and there are differences between Government-funded apprenticeships and independent employer schemes. The Government will discuss the definition of “an apprentice” with the Skills Funding Agency and its devolved equivalents before committing ourselves to a final definition. It is important that the definition is robust, satisfying minimum compliance standards while achieving the objective of supporting the provision of apprenticeships to the under-25s.

In terms of overall support for apprenticeships, the Government have done a great deal. We spend about £1.5 billion annually to support apprenticeship training. In Budget 2014, £170 million of additional funding was made available for apprenticeship grants for employers in 2014-16, providing a grant of up to £1,500 per apprentice for small businesses. The new budget will fund more than 100,000 additional incentive payments for employers to take on young apprentices.

It is also worth pointing out that in 2012 the National Audit Office recognised the strengths of the Government’s apprenticeship programme, highlighting how it continued to be valued by learners and businesses. It concluded that public spending on apprenticeships offered a good return, estimated at £18 for each £1 of Government investment. Evidence from the Department for Business, Innovation and Skills suggests that returns may be higher, at £28 for every £1 of Government investment. I hope Members will resist the temptation to criticise the substantial progress that has been made on apprenticeships over the course of this Parliament. It has been significant.

On the definition of apprentices, which I touched on earlier, there will need to be discussion with the devolved Administrations and the Skills Funding Agency. We want a robust definition, but we have to bear in mind the complexities in this area.

On eligibility, for a business to be eligible to work with training providers to create an apprenticeship programme, the employer offering an apprenticeship needs to employ an apprentice for a minimum of 30 hours per week, pay at least the national minimum wage for apprentices, support on-the-job learning and be involved in reviewing their progress. On the question raised by the hon. Member for Birmingham, Ladywood regarding manipulation, I would make the point that those safeguards are in the system.

One further point I believe is important is that, as the Government are doing with employment allowance and under-21s from April this year and as we did when we came to office and increased the threshold before employer national insurance contributions is paid, we have done a great deal to reduce the burden on businesses of employer national insurance contributions. That has helped in creating the substantial progress in employment we have seen in recent years. Had we pursued the policy we inherited—an increase in the jobs tax—we would not have seen that progress.

[Steve Baker (Wycombe) (Con)]

On reducing the burden on business, the Government have previously considered the notion of merging national insurance. Has the Minister made any progress down that line? I am acutely aware that national insurance still creates the impression that people have contributed to a fund out of which benefits are paid, when of course they are mostly pay-as-you-go. Can we reduce the burden on business, simplifying national insurance by simplifying the overall tax system?

[Mr Gauke]

My hon. Friend raises an interesting point in this context. He is absolutely right that the Office of Tax Simplification recommended we looked at that. There is quite a lot going on in relation to payroll: devolution of income tax in Scotland, the auto-enrolment of pensions and the introduction of real-time information to the payroll system. They have caused considerable challenges—all for good reason; all are doing much to improve the tax system—and we have held off pursuing further integration of income tax and the national insurance contributions system.

My hon. Friend was right to raise a point about people’s understanding of the tax system and greater transparency. The Government have introduced tax summaries so that people can see how much they are paying in income tax and national insurance. That brings greater transparency to our tax system, so we have made progress on that front. On the integration of national insurance and income tax more widely, it remains a position we continue to review. Some evidence from internal reviews was that the benefits to business of bringing the two systems together were perhaps not as great as some outside commentators had anticipated. In those circumstances, we did not want to rush into this matter, but I assure my hon. Friend that we continue to keep it under review.

[Steve Baker]

Will the Minister remind me whether tax summaries include employers’ national insurance? I am always conscious that when we are employees we must generate an amount of value for our employer somewhat greater than even our gross pay, so is employers’ national insurance contribution also reflected in the summary? If not, could it be?

Charter for Budget Responsibility

Steve Baker Excerpts

Tuesday 13th January 2015 Commons Chamber

[Mr David Ruffley (Bury St Edmunds) (Con)]

I am rather excited by this debate on fiscal responsibility. This is not to say that I am an anorak who should get out more. My happiness resides more in the fact that those who support the motion will be committing to balanced budget economics. Anyone voting for the motion will not just be saying that they believe in balanced budgets; they will be voting for that.

In the new world of transparency the public will be watching who votes for what, and they will rightly hold everyone who votes for the motion to account for the two propositions contained in the charter. The first is the fiscal mandate. As the Chancellor spelled out—there is no confusion—we will balance the current budget by 2017-18. The second is the supplementary debt target, which means falling debt as a share of GDP by 2016-17.

How will we do this? The Conservatives are clear. It means that for the first full two years of the Parliament we will continue the public spending reductions, so that total managed expenditure will fall at roughly the rate that it has been falling in this Parliament—about 1% overall in real terms. That is equivalent to about an extra cut of £1 in every £100 being found in the next forecast period. Any business in my constituency asked to find a cut of £1 out of £100 would do it standing on its head, especially if it knew that that was vital to the survival of the business.

Specifically, we know that £30 billion of fiscal consolidation is required to deliver the fiscal mandate. So Members who vote for the motion tonight are absolutely committed to finding £30 billion. The Conservative party thinks it can be done as follows: £13 billion of that £30 billion by cuts to departmental expenditure limits, excluding the protected budgets for schools, the Department for International Development and health, and a further £12 billion from annually managed expenditure—the welfare budget. I shall not speculate, as I am not in the Government, but we might be looking to find those £12 billion-worth of cuts by, yes, restricting child benefit, maybe to two children; yes, perhaps restricting the top-heavy housing benefit budget and consider saying that those under 21 or under 25 should have their housing benefit curtailed. Finally—one of the biggest exemplifications of social justice that the current Treasury has come up with—yes, tough anti-avoidance rules. The Labour party in 13 years never dared introduce a general anti-avoidance rule. We are saying that those who have the broadest backs cannot be allowed aggressively to exploit tax loopholes. That will find £5 billion.

Our numbers add up. After those first full two years of consolidation, we would have flat real-terms settlements—flat, not further cuts. The result of all this, as we know, is that we would run an overall surplus, not just a surplus in the third year on current budget. Why is that important? Why did the Chancellor say it? The Chancellor said it because he understands that we have to start paying down debt. If we do not pay down debt, it will mean further tax increases and inevitably spending cuts further down the road for the next generation.

This is an ethical proposition, not an ideological one, as the Chief Secretary—I hate to say it—has branded these Conservative plans, and the Labour party as well. We need not waste any time on the Orwellian invocations of “The Road to Wigan Pier”. That is childish point-scoring. This is not ideology. It is about paying down debt.

[Steve Baker (Wycombe) (Con)]

In the Red Book there is a chart showing debt interest in 2015-16 overtaking the education budget. Does my hon. Friend agree that there is an extremely practical problem of making sure that debt interest does not consume all the tax revenue that we might otherwise spend on services?

[Mr Ruffley]

My hon. Friend makes a trenchant point. Do we want burgeoning debt interest under the policies of the Opposition parties to eat away at front-line services? The money, as we know, has to come from somewhere.

I am not clear where the major Opposition party stands on this. The £30 billion is what anyone who votes for the motion today must account for. It was not clear whether the Leader of the Opposition acknowledged that figure on Sunday, but he made a stab at how the Labour party might fiscally consolidate. There was the reintroduction of the 50p tax rate for high earners; we know that that raises less than £1 billion. There has been reference today to restricting pensioner benefits to very well-off pensioners; we know that that raises less than £0.5 billion. Labour Members are not even remotely in the ballpark in coming up with a £30 billion consolidation in anything they have said today inside or outside the House.

This leaves us with two possibilities in relation to Labour Members who are going to vote for this proposition today. The first is that they are voting for it in the full knowledge that they have no intention of balancing the current budget in year 3. I am a kind and generous individual, and I do not think they would do anything as dishonourable as to vote for something they had no intention of honouring. They are not going to get the money from spending cuts most of which they admit they will not pursue, and they will not guarantee our spending reductions. That leaves us, I am afraid, to conclude that the iron law of modern British politics still obtains: dogs bark, cats miaow, and Labour puts up taxes.

--- Later in debate ---

[Steve Baker (Wycombe) (Con)]

This has been a fascinating debate in which we have learned a great deal. The Government have been accused variously of making savage cuts and of making no cuts at all. We have learned that the Labour party is a party of fiscal discipline; indeed, the shadow Chancellor could not have been any clearer that he intends to balance the books and cut the deficit in every year. I think, therefore, that something that has happened in Greece is beginning to happen here. As the mainstream left-wing party shows its fiscal credentials, talks tough and prepares to fight the election, it creates a hole on the left. Who fills that hole? The hard-left parties: the parties of nationalism and the green parties—parties that live in a fantasy world where it is possible to keep on borrowing and taxing and where the rich will pay. We have heard all that nonsense before. It is not too much to say, as my hon. Friend the Member for Ipswich (Ben Gummer) did, that down that path lies a situation similar to that in Venezuela.

The hon. Member for Rochester and Strood (Mark Reckless) suggested that we have not done anything like enough. Of course, not that long ago he was on the Conservative Benches, strongly supporting the Government.

We ought to consider what would happen if there was a change of Government. The Labour party would find that there was no low-hanging fruit. Labour would not cancel HS2, I think we can rely on it not to scrap the international aid budget, and it would not leave the European Union. Labour has suggested that it was reckless of us to protect the NHS, so perhaps it would cut the NHS. It might reduce the number of nuclear submarines in our deterrent. It would find that it is extremely difficult to cut spending.

There are, of course, three big taxes: income tax, national insurance and VAT. No one should want to put up VAT, because it is too high already.

[Graeme Morrice (Livingston) (Lab)]

You did!

[Steve Baker]

I am well aware of that, but it was necessary in the context of the hideous mess left by the hon. Gentleman’s party. It is always the same and this is the essence of the problem: there is no kindness whatsoever in making to those in need attractive promises that subsequently cannot be kept. That is not kind; it is cruel.

[Mark Garnier (Wyre Forest) (Con)]

My hon. Friend is making a powerful speech. Does he agree that the chaos that could be brought about by a lack of fiscal discipline would result in huge uncertainty for public sector workers, who will not be able to rely on their jobs if balanced books are not maintained, because they will lose them? More importantly, for the thousands—possibly millions—of households across the country who were encouraged to pick up an extra £1 trillion-worth of household debt in the Brown bubble in the lead-up to the financial crisis, the uncertainty of unbalanced books could result in much higher interest rates and imported inflation as a result of reduced currency. An enormous amount of pressure would be put on those households as a result of chaos through ill-discipline.

[Steve Baker]

My hon. Friend is, of course, right. He and I sit on the Treasury Committee and we have heard from the Debt Management Office about the factors propping up the current level of borrowing. Not only has borrowing been back-stopped by the Bank of England, but bond market traders are aware of the Chancellor’s and the Government’s intention to balance the books, have confidence in it and, therefore, will keep lending to us. The situation, however, is precarious and the Labour party would put it in danger.

VAT cannot really go up. If it went up further, it would hit the poorest hardest and that would be wrong. On income tax, perhaps Labour would reduce the personal allowance. The truth is that the top 1% already pay a quarter of income tax. How much further can we go? My right hon. and learned Friend the Member for Rushcliffe (Mr Clarke) said that the 50p rate was pointless, I think—I will have to check whether that is what he said, but it is pointless. It is an act of spite to pretend that the rich will pay through their income tax; all they will do is adjust their behaviour. We put up capital gains tax and the revenues from it went down. My right hon. Friend the Member for Wokingham (Mr Redwood) has explained that in detail on his blog.

The truth is that the evidence shows that in this country there is a hard limit to how much the public will pay in taxation. Depending on how we measure GDP, it is somewhere between 35% and 40% of GDP. If we are committed to balancing the books, we have to take overall Government spending down to the level that people will pay in tax, and there is a historical limit.

Labour Members have been rather hysterical about the Government consumption chart, which shows us going back to the 1930s. This is about balancing the books. I believe that Labour Members want to put up capital spending, and debt interest is already forecast to overtake education spending. There is a really tough problem here. The truth is that hysterics on either side of the argument will not do. For example, wealth taxes will not work. Opposition Members seem to think we will get the rich to pay, but Denis Healey said of a wealth tax:

“I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.”

The truth is that there is very little chance of getting out of the mess we are in without taking extremely difficult decisions. Unlike turning around a commercial company, we cannot cut to the bone once and then build back up; reducing the deficit has to be taken gently, and we have done it at an appropriate pace. The Chancellor has the right plan, and I shall certainly back him tonight.

--- Later in debate ---

[Guy Opperman]

Absolutely nothing whatever. My hon. Friend and I are leading lights in the all-party apprenticeships group, which has seen fantastic work. I should probably make a declaration that I am the first MP to hire, train and then retain an apprentice as an office manager—not as an MP, I hasten to add—because she was doing a fantastic job.

On what the Opposition intend to do, we have to address the deficit. The Chancellor eloquently put it that the Leader of the Opposition is practising Basil Fawlty politics by not mentioning the deficit at every opportunity. We also have to look at fiscal consolidation. We all heard what the shadow Chancellor said today, but what did the Leader of the Opposition say only on Sunday on “The Andrew Marr Show”? He said that

“if we…cut our way to getting rid of this deficit, it won’t work”.

So there goes fiscal tightening in any way whatever. To the clarification put to him that

“that requires a £30 billion fiscal tightening”,

he replied, “I don’t accept that.” Whatever the Opposition say today, the reality will always be that the Labour party will introduce greater taxes and greater borrowing, and greater difficulties for our children.

On attempts to address the deficit, other Members have made the point, including my right hon. and learned Friend the Member for Rushcliffe (Mr Clarke), that raising the tax rate to 50% will not increase the tax take by any margin and will actually decrease investment. On the minimum wage, tax credits from the coalition have already addressed that in a very successful form and we intend to raise it. I heard on the BBC “Daily Politics” today the hon. Member for Nottingham East (Chris Leslie) proposing that his plan for addressing the deficit was an increase in gun licences. That may be laudable, I do not know, and I am sure he has fiscally costed this matter in great detail, but if that is his plan to address the entirety of the deficit, we really are in more trouble than we thought.

We were indeed fortunate to hear from the hon. Member for Rochester and Strood (Mark Reckless). It is always a pleasure to comment on his speech. I will not cast aspersions on his honour, but I will attack his memory and grasp of economics. He supported the coalition as we did the tough work from 2010.

[Steve Baker]

Will my hon. Friend give way?

[Guy Opperman]

I will not. I am so sorry, but I have zero time. The hon. Gentleman supported us then, but he does not support us now.

--- Later in debate ---

[Chris Leslie]

No, I will not give way to the hon. Gentleman.

The trouble for the Chancellor is that this debate gives us an opportunity to draw attention to his colossal failure to fulfil his promise to tackle the deficit. In his eagerness to trip up the Opposition, he has caught himself in a series of contradictions and entangled himself in his own spin.

We should remember that it was only nine months ago that this charter was changed. It keeps changing because the Government desperately have to pretend that they have a grip on things and that they are somehow on top of the deficit issue. The deficit after the next general election, however, is predicted to be a massive £76 billion. Revenues have collapsed over the lifetime of this Parliament, and we have seen rising tax credits and rising levels of housing benefit to subsidise low pay and the high-rent economy that the Chancellor has been fashioning. The Government now find themselves with an extra £200 billion-worth of borrowing over what they originally set out.

The Tories love to talk tough. They publish their documents—[Interruption.] I am delighted to see the Chancellor back in his place. He loves to bang that Dispatch Box and was getting very shouty and loud in his earlier contributions, but the reality is that his strategy has failed. The Chancellor and the Chief Secretary do not have a clue about what they are doing.

The debate was revealing, however, and I would like to ask the Chancellor about it. He said in his opening remarks that his deficit plan had not gone any slower than he had planned. I have taken the opportunity to look at the Hansard record of what the Chancellor said. He said:

“What we have done is cut the deficit by a half. We have neither gone faster than we said we were going to go, nor gone slower than we said we were going to go.”

The Chancellor has got himself into a terrible muddle if he thinks that he did not promise to eradicate the deficit back in 2010. The Prime Minister himself said:

“In five years’ time, we will have balanced the books.”

That was the Prime Minister’s solemn promise to the country.

The Chancellor did become a little bit over-excited. Perhaps he found this rather a difficult occasion, given that the situation was blowing up in his face. Not only did he get into a tangle thinking that he had not changed his deficit reduction plan, but he got into a terrible muddle with the charter. That is quite embarrassing for the Prime Minister in particular. At 3.30 pm on 15 December, the Prime Minister said in a speech that targeting the current budget deficit would be

“a great, black, ominous cloud”

—that it would be a total disaster—but by 4.30 pm, the Chancellor had tabled a Charter for Budget Responsibility that actually supports a current budget process, which is, of course, the correct strategy.

Perhaps the Chancellor needs to be reminded what he said originally, in his 2010 Budget speech. He said that the mandate was current—[Interruption.] Does the Chancellor want to deny that he said, back in 2010, that the mandate was

“current, to protect… productive public investment”?—[Official Report, 22 June 2010; Vol. 512, c. 167.]

If so, let him correct the record now from the Dispatch Box. He will not do that, however, because he knows that targeting the current budget is the right thing to do.

At no point does the Charter for Budget Responsibility commit itself to a fixed deadline for 2017-18. The Treasury would like to pretend that it does, but it does not. Instead, it goes for a “rolling horizon” and year 3 of a five-year rolling forecast. The Chancellor needs to understand properly what that means; he did not quite get it earlier. It means that the target moves forward by a year each year. Perhaps the Chancellor does know that. Perhaps he did this because he wanted to wriggle out of any responsibility to which he might be held now, ahead of the approaching general election. However, if he feels that this is somehow a firm commitment to 2017-18, he is wrong. Labour Members believe that we shall need to get the current budget into surplus as soon as possible in the next Parliament, and nothing in the charter is inconsistent with that view. The Chancellor, incidentally, did not really talk about the charter at all.

[Steve Baker]

Will the hon. Gentleman give way?

[Chris Leslie]

No, I will not. We have only a few minutes left, and I must give the current Chief Secretary to the Treasury a chance to reply to some of my questions.

The Chancellor referred to an “aim” rather than a “target”. I should be grateful if the Chief Secretary could explain why he chose to allow the language in the charter to move away from the idea of a target and towards the idea of an aim.

It is not enough for the Government to explain in the charter how they will measure progress. They need to explain how they will make progress, and that requires a balanced and fair plan. Ministers simply do not understand that the health of the economy and rising living standards are a vital pillar in the process of tackling the deficit and securing healthier public finances. If only wages and living standards rose at the historic average level during the next Parliament, there would be an additional £12 billion in tax revenues.

Cuts alone do not cut it. We have seen where that road leads: it leads to failure. We need a balanced approach across the three routes to improvement in public finances. Yes, we need sensible reductions in public spending, but we also need fairer tax choices—which means not giving away £3 billion to the richest 1% in society—and, crucially, we need rising living standards and sustained growth. The Government have lost revenues of nearly £100 billion over the current Parliament, and if we repeat that, we will lose £100 billion again. Any proposals in our manifesto will be fully funded, and the IFS has said that we are taking “the most cautious approach”.

Before I end my speech, I want to ask the Chief Secretary two more questions.

[Steve Baker]

Will the hon. Gentleman give way?

[Chris Leslie]

No, I will not, because I do not have time.

First, I want to ask the Chief Secretary about whether we can have an elevated level of debate and discourse ahead of the general election. Does he agree that it would be preferable for the OBR to audit and validate the costings of the manifesto proposals of the main political parties properly? My understanding is that the Chief Secretary agrees with that, but I want to get on the record and make clear his view on that.

My second question for the Chief Secretary is about what happens after deficit eradication and the Chancellor’s lurch to the right—his wish to return to what the OBR has called the public expenditure situation of the late 1930s, when we did not have a national health service, there were only 1 million cars on the road and children left school at 14. We know that the Conservatives want to wage war on the public services, but the Chief Secretary signed off the spending assumptions in the official projections. We know from Robert Chote, chairman of the OBR, that these projections, all the way to 2020, were

“signed off by the quad”,

and so far as I understand it the Chief Secretary is a member of the quad, so why did he agree to allow the official projections to take that lurch to the right—to go down that particularly ideological route? [Interruption.] The Chancellor might give him some clues, but I want him to answer for himself. If it was a genuine mistake and he did not spot it, he should just say so and we will accept that; or did he for some reason actually think that, yes, he does want to go down that far right-wing position? If that is the case, did he get scared when he saw the public reaction to it? I want to get a sense from him of what is happening.

Going down to that consistent 35% of GDP or national income has severe consequences for our public services. The Government must realise that we need a sensible, moderate approach to tackling the deficit. The focus must be on eradicating the current budget deficit. That is what the charter says, but we will take a fairer and more balanced approach to clearing the deficit. Where the Government have failed during this Parliament, we will succeed in the next.

Oral Answers to Questions

Steve Baker Excerpts

Tuesday 9th December 2014 Commons Chamber

[Mr Gauke]

What is a fact is that the proportion of income tax paid by the top 1% for the years since the 50p rate was cut has in every year been higher than in any of the years in which the 50p rate was in operation. It is this Government who have made changes to stamp duty land tax—that was just last week—and to capital gains tax, and who have dealt with reliefs and exemptions, to ensure that the wealthiest play a greater share than they have in the past.

[Steve Baker (Wycombe) (Con)]

Is it not the truth that people are able to change their behaviours to reduce their tax liabilities, and is it not the case that if the Government want to raise more from the wealthiest, it is necessary to lower the rate to a point where it encourages them to earn and to pay?

[Mr Gauke]

As I said a moment or so ago, in the two years since the 50p rate was reduced to 45p, a greater share has come from the top 1% than in the previous three years. There is a lesson to be learned there. It is probably the reason why the previous Labour Government had a 50p rate for only 35 days out of their 4,758 days in office.

Financial Conduct Authority Redress Scheme

Steve Baker Excerpts

Thursday 4th December 2014 Commons Chamber

[Paul Farrelly (Newcastle-under-Lyme) (Lab)]

I want to talk about one of my local businesses, DK Motorcycles, which has been badly let down not only by its former bank, the Royal Bank of Scotland, but by the Financial Conduct Authority and the partial scheme of redress over the mis-selling of interest rate products. Having finally escaped the clutches of RBS, this is the first time that the firm has felt confident enough to allow me to talk about its experiences in public, and its general manager, Ewan MacDonald, is sitting in the Gallery today, alongside many people from small businesses who feel bullied by their banks and let down by regulators.

DK Motorcycles entered into a 10-year LIBOR swap with RBS in August 2008, but there was nothing voluntary about it. The swap was an express condition of refinancing, but as interest rates fell, it later became clear how the enforced sale had exposed DK, like many other businesses, to a penal interest burden. By the time DK had extricated itself from RBS’s clutches at the end of last year, it had shelled out in interest and penalty charges more than a third of the original loan of just over £2.4 million.

In May last year, I wrote to the chief executive of the FCA with concerns about the grounds on which DK had been excluded from the redress scheme. At that time, the company was in the hands of the now infamous global restructuring—for which read “destruction”—group at RBS and was staving off a scenario where RBS would put in one of its pet consultancies, which was, as so often, an insolvency firm, and for which DK would inevitably pay to watch the vultures feast.

On the redress scheme, my concerns were about the so-called sophistication tests and the limited lessons that the FCA had learned in findings from its pilot review. The redress scheme has excluded 10,500 of the 30,000 sales of so-called hedging products, on the grounds that such firms were sophisticated and therefore either knew or should have known what they were doing, or that they would have the wherewithal to go to court if the banks failed to deal properly with their complaints. None of that, sadly, applies to a business like DK Motorcycles.

[Steve Baker (Wycombe) (Con)]

I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this debate. On the point raised by the hon. Member for Newcastle-under-Lyme (Paul Farrelly), businesses in my constituency have still not had explained to them how the charges are calculated. Does he agree that that is another area where the banks have failed, because it is clear that they have sold a product that even now is not well understood?

[Paul Farrelly]

Indeed, not only have the banks failed but the regulators have failed to show their teeth. Indeed, in the recent judgment on Crestsign the courts have only added to the uncertainty, and it behoves the Government to try to clear that up.

DK Motorcycles runs the largest motorcycle showroom in the country, selling high-value items from a single premises. It is a partnership, owned by father and son Derek and Kevin Neesam—hence the DK. At the time of the refinancing in 2008, it had a bookkeeper but not a specialist finance director. Ewan, the general manager, joined later and now looks after finance, as well as running the showroom. By no stretch of imagination could DK be called “financially sophisticated” in a world of complex derivative products. However, by dint of employing up to 75 people—both full and part time—and having a business turnover of £20 million, it failed two of the FCA’s tests. In response to the pilot, the FCA admittedly amended some of its tests, but no flexibility was applied to the turnover test. As I pointed out to the FCA, that caught different types of businesses indiscriminately and left businesses such as DK bracketed together with the likes of BP or BT as so-called sophisticated, and therefore with no help against predatory banks such as RBS.

There was a further iniquity in the redress scheme, as the campaigning group Bully-Banks has repeatedly pointed out, because under the scheme, banks have a get out. Notwithstanding the tests, if they can offer evidence that a business was financially sophisticated, it would be excluded from the review. However, there was no reciprocal ability for businesses like DK—a father and son partnership that just happened to be successful and passionate about selling motorbikes—to offer evidence suggesting the contrary.

I did not get a reply directly from the chief executive of the FCA. Instead, at the end of June 2013, a reply came from Christina Sinclair, then acting director of retail banking in the supervision division. The reply did not tell us any more than we already knew, and it still stressed DK’s ability to lodge a complaint with RBS directly. Ms Sinclair singularly missed the point made by DK and many other businesses that, given their experiences so far, they were frankly petrified of making a formal complaint for fear that the bank would pull the plug on the business. From what I have seen of RBS, they were right to be frightened.

In the interim, DK, like me and all hon. Members in the Chamber, had seen the Tomlinson report and all the stories about the global restructuring group into which DK had been shunted. At the end of last year, DK finally found alternative bankers who were willing to take a proper, unsullied credit decision, but as a parting shot, RBS, in the form of their so-called relationship manager, the inaptly named Vicky Smart of the global restructuring group, said it did not want any of DK’s business any more and withdrew crucial direct debit support for DK’s customer finance arm. Fortunately, DK managed to overcome that apparent act of spite and the new bank put alternatives in place. RBS has continued to deal with DK in that way, refusing any meetings about redress and insisting on communicating through lawyers.

Money Creation and Society

Steve Baker Excerpts

Thursday 20th November 2014 Commons Chamber

[Steve Baker (Wycombe) (Con)]

I beg to move,

That this House has considered money creation and society.

The methods of money production in society today are profoundly corrupting in ways that would matter to everyone if they were clearly understood. The essence of this debate is: who should be allowed to create money, how and at whose risk? It is no wonder that it has attracted support from across the political spectrum, although, looking around the Chamber, I think that the Rochester and Strood by-election has perhaps taken its toll. None the less, I am grateful to right hon. and hon. Friends from all political parties, including the hon. Members for Clacton (Douglas Carswell) and for Brighton, Pavilion (Caroline Lucas) and the right hon. Member for Oldham West and Royton (Mr Meacher), for their support in securing this debate.

One of the most memorable quotes about money and banking is usually attributed to Henry Ford:

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did I believe there would be a revolution before tomorrow morning.”

Let us hope we do not have a revolution, as I feel sure we are all conservatives on that issue.

How is it done? The process is so simple that the mind is repelled. It is this:

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

I have been told many times that this is ridiculous, even by one employee who had previously worked for the Federal Deposit Insurance Corporation of the United States. The explanation is taken from the Bank of England article “Money creation in the modern economy”, and it seems to me it is rather hard to dismiss.

Today, while the state maintains a monopoly on the creation of notes and coins in central bank reserves, that monopoly has been diluted to give us a hybrid system because private banks can create claims on money, and those claims are precisely equivalent to notes and coins in their economic function. It is a criminal offence to counterfeit bank notes or coins, but a banking licence is formal permission from the Government to create equivalent money at interest.

There is a wide range of perspectives on whether that is legitimate. The Spanish economist Jesús Huerta de Soto explains in his book “Money, Bank Credit and Economic Cycles” that it is positively a fraud—a fraud that causes the business cycle. Positive Money, a British campaign group, is campaigning for the complete nationalisation of money production. On the other hand, free banking scholars George Selgin, Kevin Dowd and others would argue that although the state might define money in terms of a commodity such as gold, banking should be conducted under the ordinary commercial law without legal privileges of any kind. They would allow the issue of claims on money proper, backed by other assets—provided that the issuer bore all the risk. Some want the complete denationalisation of money. Cryptocurrencies are now performing the task of showing us that that is possible.

The argument that banks should not be allowed to create money has an honourable history. The Bank Charter Act 1844 was enacted because banks’ issue of notes in excess of gold was causing economic chaos, particularly through reckless lending and imprudent speculation. I am once again reminded that the only thing we learn from history is that we learn nothing from history.

[Thomas Docherty (Dunfermline and West Fife) (Lab)]

I welcome today’s debate. The hon. Gentleman makes a valid point about learning from history. Does he agree with me that we should look seriously at putting this subject on the curriculum so that young people gain a better understanding of the history of this issue?

[Steve Baker]

That is absolutely right. It would be wonderful if the history curriculum covered the Bank Charter Act 1844. I would be full of joy about that, but we would of course need to cover economics, too, in order for people to really understand the issue. Since the hon. Gentleman raises the subject, there were ideas at the time of that Act that would be considered idiocy today, while some ideas rejected then are now part of the economic mainstream. Sir Robert Peel spent some considerable time emphasising that the definition of a pound was a specific quantity and quality of gold. The notion that anyone could reject that was considered ridiculous. How times change.

One problem with the Bank Charter Act 1844 was that it failed to recognise that bank deposits were functioning as equivalent to notes, so it did not succeed in its aim. There was a massive controversy at the time between the so-called currency school and the banking school. It appeared that the currency school had won; in fact, in practice, the banks went on to create deposits drawn by cheque and the ideas of the banking school went forward. The idea that one school or the other won should be rejected; the truth is that we have ended up with something of a mess.

We are in a debt crisis of historic proportions because for far too long profit-maximising banks have been lending money into existence as debt with too few effective restraints on their conduct and all the risks of doing so forced on the taxpayer by the power of the state. A blend of legal privilege, private interest and political necessity has created, over the centuries, a system that today lawfully promotes the excesses for which capitalism is so frequently condemned. It is undermining faith in the market economy on which we rely not merely for our prosperity, but for our lives.

Thankfully, the institution of money is a human, social institution and it can be changed. It has been changed and I believe it should be changed further. The timing of today’s debate is serendipitous, with the Prime Minister explaining that the warning lights are flashing on the dashboard of the world economy, and it looks like quantitative easing is going to be stepped up in Europe and Japan, just as it is being ramped out in America—and, of course, it has stopped in the UK. If anything, we are not at the end of a great experiment in monetary policy; we are at some mid point of it. The experiment will not be over until all the quantitative easing has been unwound, if it ever is.

We cannot really understand the effect of money production on society without remembering that our society is founded on the division of labour. We have to share the burden of providing for one another, and we must therefore have money as a means of exchange and final payment of debts, and also as a store of value and unit of account. It is through the price system that money allows us to reckon profit and loss, guiding entrepreneurs and investors to allocate resources in the way that best meets the needs of society. That is why every party in the House now accepts the market economy. The question is whether our society is vulnerable to false signals through that price system, and I believe that it is. That is why any flaws in our monetary arrangements feed into the price system and permeate the whole of society. In their own ways, Keynes and Mises—two economists who never particularly agreed with one another—were both able to say that currency debasement was the best way in which to overturn the existing basis of society.

Even before quantitative easing began, we lived in an era of chronic monetary inflation, unprecedented in the industrial age. Between 1991 and 2009, the money supply increased fourfold. It tripled between 1997 and 2010, from £700 billion to £2.2 trillion, and that accelerated into the crisis. It is simply not possible to increase the money supply at such a rate without profound consequences, and they are the consequences that are with us today, but it goes back further. The House of Commons Library and the Office for National Statistics produced a paper tracing consumer price inflation back to 1750. It shows that there was a flat line until about the 20th century, when there was some inflation over the wars, but from 1971 onwards, the value of money collapsed. What had happened? The Bretton Woods agreement had come to an end. The last link to gold had been severed, and that removed one of the most effective restraints on credit expansion. Perhaps in another debate we might consider why.

[Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP)]

Does the hon. Gentleman agree that the end of the gold standard and the increased supply of money enabled business, enterprise and the economy to grow? Once we were no longer tied to the supply of gold, other avenues could be used for the growth of the economy.

[Steve Baker]

The hon. Gentleman has made an important point, which has pre-empted some of the questions that I intended to raise later in my speech. There is no doubt that the period of our lives has been a time of enormous economic, social and political transformation, but so was the 19th century, and during that century there was a secular decline in prices overall.

The truth is that any reasonable amount of money is adequate if prices are allowed to adjust. We are all aware of the phenomenon whereby the prices of computers, cars, and more or less anything else whose production is not determined by the state become gently lower as productivity increases. That is a rise in real living standards. We want prices to become lower in real terms compared with wages, which is why we argue about living standards.

[Sir William Cash (Stone) (Con)]

My hon. Friend is making an incredibly important speech. I only wish that more people were here to listen to it. I wonder whether he has read Nicholas Wapshott’s book about Hayek and Keynes, which deals very carefully with the question that he has raised. Does he agree that the unpleasantness of the Weimar republic and the inflationary increase at that time led to the troubles with Germany later on, but that we are now in a new cycle which also needs to be addressed along the lines that he has just been describing?

[Steve Baker]

I am grateful to my hon. Friend. What he has said emphasises that the subject that is at issue today goes to the heart of the survival of a free civilisation. That is something that Hayek wrote about, and I think it is absolutely true.

If I were allowed props in the Chamber, I might wave this 100 trillion Zimbabwe dollar note. You can hold bad politics in your hand: that is the truth of the matter. People try to explain that hyperinflation has never happened just through technocratic error, and that it happens in the context of, for example, extremely high debt levels and the inability of politicians to constrain them. In what circumstances do we find ourselves today, when we are still borrowing broadly triple what Labour was borrowing?

[Ann McKechin (Glasgow North) (Lab)]

I am interested to hear what the hon. Gentleman is saying. He will be aware that the balance between wages and capital has shifted significantly in favour of capital over the past 30 years. Does he agree that the way in which we tax and provide reliefs to capital is key to controlling that balance? Does he also agree that we need to do more to increase wage levels, which have historically been going down in relation to capital over a long period of time?

[Steve Baker]

I think I hear the echoes of a particularly fashionable economist there. If the hon. Lady is saying that she would like rising real wage levels, of course I agree with her. Who wouldn’t? I want rising real wage levels, but something about which I get incredibly frustrated is the use of that word “capital”. I have heard economists talk about capital when what they really mean is money, and typically what they mean by money is new bank credit, because 97% of the money supply is bank credit. That is not capital; capital is the means of production. There is a lengthy conversation to be had on this subject, but if the hon. Lady will forgive me, I do not want to go into that today. I fear that we have started to label as capital money that has been loaned into existence without any real backing. That might explain why our capital stock has been undermined as we have de-industrialised, and why real wages have dropped. In the end, real wages can rise only if productivity increases, and that means an increase in the real stock of capital.

To return to where I wanted to go: where did all the money that was created as debt go? The sectoral lending figures show that while some of it went into commercial property, and some into personal loans, credit cards and so on, the rise of lending into real productive businesses excluding the financial sector was relatively moderate. Overwhelmingly, the new debt went into mortgages and the financial sector. Exchange and the distribution of wealth are part of the same social process. If I buy an apple, the distribution of apples and money will change. Money is used to buy houses, and we should not be at all surprised that an increased supply of money into house-buying will boost the price of those homes.

[Mr Ronnie Campbell (Blyth Valley) (Lab)]

This is a great debate, but let us talk about ordinary people and their labour, because that involves money as well. To those people, talking about how capitalism works is like talking about something at the end of the universe. They simply need money to survive, and anything else might as well be at the end of the universe.

[Steve Baker]

The hon. Gentleman is quite right, and I welcome the spirit in which he asks that question. The vast majority of us, on both sides of the House, live on our labour. We work in order to obtain money so that we can obtain the things we need to survive.

The hon. Gentleman pre-empts another remark that I was going to make, which is that there is a categorical difference between earning money through the sweat of one’s brow and making money by just creating it when lending it to someone in exchange for a claim on the deeds to their house. Those two concepts are fundamentally, categorically different, and this goes to the heart of how capitalism works. I appreciate that very little of this would find its way on to an election leaflet, but it matters a great deal nevertheless. Perhaps I shall need to ask my opponent if he has followed this debate.

My point is that if a great fountain of new money gushes up into the financial sector, we should not be surprised to find that the banking system is far wealthier than anyone else. We should not be surprised if financing and housing in London and the south-east are far wealthier than anywhere else. Indeed, I remember that when quantitative easing began, house prices started rising in Chiswick and Islington. Money is not neutral. It redistributes real income from later to earlier owners—that is, from the poor to the rich, on the whole. That distribution effect is key to understanding the effect of new money on society. It is the primary cause of almost all conflicts revolving around the production of money and around the relations between creditors and debtors.

[Sir William Cash]

My hon. Friend might be aware that, before the last general election, my right hon. Friend the Member for Wokingham (Mr Redwood) and I and one or two others attacked the Labour party for the lack of growth and expressed our concern about the level of debt. If we add in all the debts from Network Rail, nuclear decommissioning, unfunded pension liabilities and so on, the actual debt is reaching extremely high levels. According to the Government’s own statements, it could now be between £3.5 trillion and £4 trillion. Does my hon. Friend agree that that is extremely dangerous?

[Steve Baker]

It is extremely dangerous and it has been repeated around the world. An extremely good book by economist and writer Philip Coggan, of The Economist, sets out just how dangerous it is. In “Paper Promises: Money, Debt and the New World Order”, a journalist from The Economist seriously suggests that this huge pile of debt created as money will lead to a wholly new monetary system.

I have not yet touched on quantitative easing, and I will try to shorten my remarks, but the point is this: having lived through this era where the money supply tripled through new lending, the whole system, of course, blew up—the real world caught up with this fiction of a monetary policy—and so QE was engaged in. A paper from the Bank of England on the distributional effects of monetary policy explains that people would have been worse off if the Bank had not engaged in QE—it was, of course, an emergency measure. But one thing the paper says is that asset purchases by the Bank

“have pushed up the price of equities by as least as much as they have pushed up the price of gilts.”

The Bank’s Andy Haldane said, “We have deliberately inflated the biggest bond market bubble in history.”

[Mr Jim Cunningham (Coventry South) (Lab)]

What is the hon. Gentleman’s view of QE? How does he see it fitting into the great scheme of things?

[Steve Baker]

As I am explaining, QE is a great evil; it is a substitute for proper reform of the banking system. But this is the point: if the greatest bubble has been blown in the bond markets and equities have been pushed up by broadly the same amount, that is a terrible risk to the financial system.

[Mr MacNeil]

Surely there is a difference depending on where the QE goes. In an economy that has a demand deficit and needs demand to be stimulated, if QE goes into the pockets of those who are going to spend the money, surely QE can create some more motion in the economy, but if QE goes into already deep pockets and makes them larger and deeper, that is a very different thing.

[Steve Baker]

Again, the hon. Gentleman touches on an interesting issue. Once the Bank legitimises the idea of money creation and giving it to people in order to get the economy going, the question then arises: if you are going to create it and give it away, why not give it to other people? That then goes to the question: what is money? I think it is the basis of a moral existence, because in our lives we should be exchanging value for value. One problem with the current system is that we are not doing that; something is being created in vast quantities out of nothing and given away. The Bank explains that 40% of the assets that have been inflated are held by 5% of households, with 80% held by people over 45. It seems clear that QE—a policy of the state to intervene deeply in money—is a deliberate policy of increasing the wealth of people who are older and wealthier.

[Mr MacNeil]

One word the hon. Gentleman used was “moral”, and he touches on what the economist Paul Krugman will say: some on the right see the recession and so on as a morality play, and confuse economics and morals. Sometimes getting things going economically is not about the straightforward “morality” money the hon. Gentleman has touched on. That could be one reason why the recovery is taking so long.

[Steve Baker]

I am conscious that I have already used slightly more time than I intended, and I have a little more to say because of these interventions. All these subjects, as my bookshelves attest, are easily capable of being explained over hundreds of pages. My bottom line on this is: I want to live in a society where even the most selfish person is compelled by our institutions to serve the needs of other people. The institution in question is called a free market economy, because in a free market economy people do not get any bail-outs and do not get to live at somebody else’s expense; they have to produce what other people want. One thing that has gone wrong is that those on the right have ended up defending institutions that are fundamentally statist.

[Douglas Carswell (Clacton) (UKIP)]

I congratulate the hon. Gentleman on bringing this important subject to the attention of the House. Does he agree that, far from shoring up free market capitalism, the candy floss credit system the state is presiding over replaces it with a system of crony corporatism that gives capitalism a bad name and undermines its very foundations?

[Steve Baker]

I am delighted to agree with my hon. Friend—he is that, despite the fact I will not be seeing Nigel later. We have ended up pretending that the banking system and the financial system is a free market when the truth is that it is the most hideous corporatist mess. What I want is a free market banking system, and I will come on to discuss that.

I wanted to make some remarks about price signals, but I will shorten them, and try to cover the issue as briskly as I can—it was the subject of my maiden speech. Interest rates are a price signal like any other. They should be telling markets about people’s preferences for goods now compared with goods later. If they are deliberately manipulated, they will tell entrepreneurs the wrong thing and will therefore corrupt people’s investment decisions. The bond and equity markets are there to allocate capital. If interest rates are manipulated and if new money is thrown into the system, prices get detached from the real world values they are supposed to be connected to—what resources are available, what technology is available, what people prefer. The problem is that these prices, which have been detached from reality, continue to guide entrepreneurs and investors, but if they are now guiding entrepreneurs and investors in a direction that takes them away from the real desires of the public and the available resources and the technology, we should not then be surprised if we end up with a later disaster.

In short, after prices have been bid up by a credit expansion, they are bound to fall when later the real world catches up with it. That is why economies are now suffering this wrecking ball of inflation followed by deflation, and here is the rub: throughout most of my life, the monetary policy authorities have responded to these corrections by pumping in more new money—previously through ever cheaper credit, and now through QE. This raises the question of where this all goes, and brings me back to the point my hon. Friend the Member for Stone (Sir William Cash) provoked from me: that this might be pointing towards an end of this monetary order. That is not necessarily something to be feared, because the monetary order changed several times in the 20th century.

We have ended up in something of a mess. The Governor said about the transition once interest rates normalise:

“The orderliness of that transition is an open question.”

I believe the Governor is demonstrating the optimism appropriate to his role, because I think it is extremely unlikely that we will have an orderly transition once interest rates start to normalise. The problem is basically that Governments want to spend too much money. That has always been the case throughout history. Governments used to want to fund wars. Now, for all good, moral, decent, humanitarian reasons, we want to fund health, welfare and education well beyond what the public will pay in taxes. That has meant we needed easy money to support the borrowing.

What is to be done? A range of remedies are being proposed. Positive Money proposes the complete nationalisation of the production of money, some want variations on a return to gold, perhaps with free banking, and some want a spontaneous emergence of alternative moneys like Bitcoin.

I would just point out that Walter Bagehot is often prayed in aid of central banking policy, but his book “Lombard Street” shows that he did not support central banking; he thought it was useless to try to propose any change. What we see today is that, with alternative currencies such as Bitcoin spontaneously emerging, it is now possible through technology that, within a generation, we will not all be putting our money in a few big mega-banks, held as liabilities, issued out of nothing.

I want to propose three things the Government can practically do. First, the present trajectory of reform should be continued with. After 15 years of studying these matters, and now having made it to the Treasury Committee, I am ever more convinced that there is no way to change the present monetary order until the ideas behind it have been tested to destruction—and I do mean tested to destruction. This is an extremely serious issue. It will not change until it becomes apparent that the ideas behind the system are untenable.

Secondly, and very much with that in mind, we should strongly welcome proposals from the Bank’s chief economist, Andy Haldane, that it will commission “anti-orthodox research”, and it will

“put into the public domain research and analysis which as often challenges as supports the prevailing policy orthodoxy on certain key issues.”

That research could make possible fundamental monetary reform in the event of another major calamity.

Thirdly, we should welcome the Chancellor’s recent interest in crypto-currencies and his commitment to make Britain a “centre of financial innovation.” Imperfect and possibly doomed as it may be, Bitcoin shows us that peer-to-peer, non-state money is practical and effective. I have used it to buy an accessory for a camera; it is a perfectly ordinary legal product and it was easier to use than a credit card and it showed me the price in pounds or any other currency I liked. It is becoming possible for people to move away from state money.

Every obstacle to the creation of alternative currencies within ordinary commercial law should be removed. We should expand the range of commodities and instruments related to those commodities that are treated like money, such as gold. That should include exempting VAT and capital gains tax and it should be possible to pay tax on those new moneys. We must not fall into the same trap as the United States of obstructing innovation. In the case of the Liberty Dollar and Bernard von NotHaus, it seems that a man may spend the rest of his life in prison simply for committing the supposed crime of creating reliable money.

Finally, we are in the midst of an unprecedented global experiment in monetary policy and debt. It is likely, as Philip Coggan set out, that this will result in a new global monetary order. Whether it will be for good or ill, I do not know, but as technology and debt advance, I am sure that we should be ready for a transformation. Society has suffered too much already under the present monetary orthodoxy; free enterprise should now be allowed to change it.

--- Later in debate ---

[Mr Meacher]

I very much agree with that argument. Again, I assure the hon. Gentleman that I will return to that matter later in my speech. He is absolutely right that the reason is the greater returns that the banks can get from the housing and rental sector. Our rental sector, which is different from that in Germany and other countries, is the cause of that.

It is only this last 16%—the 8% lent to businesses and the 8% to consumer credit—that has a real impact on GDP and economic growth. The conclusion is unavoidable: we cannot continue with a system in which so little of the money created by banks is used for the purposes of economic growth and value creation and in which, instead, to pick up on the point made by the hon. Member for Na h-Eileanan an Iar (Mr MacNeil), the overwhelming majority of the money created inflates property prices, pushing up the cost of living.

In a nutshell, the banks have too much power and they have greatly abused it. First, they have been granted enormous privileges since they can create wealth simply by writing an accounting entry on a register. They decide who uses that wealth and for what purpose and they have used their power of credit creation hugely to favour property and consumption lending over business investment because the returns are higher and more secure. Thus the banks maximise their own interests but not the national interest.

Secondly, if they fail to meet their liabilities, the banks are not penalised. Someone else pays up for them. The first £85,000 of deposits are covered by a guarantee underwritten by the state and in the event of a major financial crash they are bailed out by the implicit taxpayer guarantee—

[Steve Baker]

rose—

[Mr Meacher]

Let me finish, and I will of course give way.

The banks have been encouraged by that provision into much more risky, even reckless, investment, especially in the case of exotic financial derivatives—

[Mr Meacher]

Members are beginning to queue up to intervene, but let me finish my point first.

The banks have been encouraged even to the point at which after the financial crash of 2008-09 the state was obliged to undertake the direct bail-out costs of nearly £70 billion as well as to provide a mere £1 trillion in support of loan guarantees, liquidity schemes and asset protection arrangements.

[Steve Baker]

I wholly agree with the right hon. Gentleman. The moral hazard problem is absolutely enormous and one of the most fundamental problems. However, the British Bankers Association picked me up when I said it was a state-funded deposit insurance scheme and told me it was industry-funded. I think the issue now is that nobody really believes for a moment that the scheme will not be back-stopped by the taxpayer.

[Mr Meacher]

As always, I am grateful for the intervention from the hon. Gentleman—let me call him my hon. Friend, as I think that on this issue he probably is.

--- Later in debate ---

[Austin Mitchell]

The hon. Gentleman often asks tricky questions, but this one is perfectly clear-cut. The credit supply for the peripheral and old industrial parts of the economy, which include Scotland, but also Grimsby, has been totally inadequate, and the banks have been totally reluctant to invest there. I once argued for helicopter money, as Simon Jenkins has proposed, whereby we stimulate the economy by putting money into helicopters and dropping it all over the country so that people will spend it. I would agree to that, provided that the helicopters hover over Grimsby, but I would have them go to Scotland as well, because it certainly deserves its share, as does the north of England. However, I do not want to get involved in a geographical dispute over where credit should be created.

The only long-term plan has been that of the Bank of England, which has kept interest rates flat to the floor for six years or so—an economy in that situation is bound to grow—and has supplemented that with quantitative easing. We have created £375 billion of money through quantitative easing. It has been stashed away in the banks, unfortunately, so it has served no great useful purpose. If that supply of money can be created for the purpose of saving the banks and building up their reserve ratios, it can be used for more important purposes—the development of investment and expansion in the economy. This is literally about printing money. Those of us with a glimmering of social credit in our economics have been told for decades, “You can’t print money—it would be terrible. It would be disastrous for the economy to print money because it leads to inflation.” Well, we have printed £375 billion of money, and it has not produced inflation. Inflation is falling.

[Steve Baker]

rose—

[Austin Mitchell]

I am sorry—I am mid-diatribe and do not want to be interrupted.

It has proved possible to print money. The Americans have done it—there has been well over $1 trillion of quantitative easing in the United States. The European Central Bank is now contemplating it, as Mr Draghi casts around for desperate solutions to the stagnation that has hit the eurozone. The Japanese, surprisingly, did it only last week. If all can do it, and if it has been successful here and has not led to inflation, we should be able to use it for more useful and productive economic purposes than shoring up the banks.

If we go on creating more money through quantitative easing, we should channel it through a national investment bank into productive investment such as contracts for house building and new town generation. Through massive infrastructure work—although I would not include HS2 in that—we can stimulate the economy, stimulate growth, and achieve useful purposes that we have not been able to achieve. This is a solution to a lot of the problems that have bedevilled the Labour party. How do we get investment without the private finance initiative and the heavy burden that that imposes on health services, schools, and all kinds of activities? Why not, through quantitative easing, create contracts for housing or other infrastructure work that have a pay-off point and produce assets for the state?

I mentioned the article in which Martin Wolf advocates the approach of the Monetary Policy Committee. That is how we should approach this. I welcome this debate because it has to be the beginning of a wider debate in which we open our minds to the possibilities of managing credit more effectively for the better building of the strength of the British economy.

--- Later in debate ---

[Zac Goldsmith]

My hon. Friend makes a valuable point that I will come to later.

If Members of Parliament do not really understand how money is created—I believe that that is the majority position, based on discussions that I have been having—how on earth can we be confident that the reforms that we have brought in over the past few years are going to work in preventing repeated collapses of the sort that we saw before the last election? In my view, we cannot be confident of that. The problem is the impulsive position taken by ignorant Members. I do not intend to be rude; as I said, I include myself in that bracket. For too many people, the impulse has been simply to call for more regulation, as though that is going to magic away these problems. As my hon. Friend the Member for Wycombe said, there are 8,000 pages of guidance in relation to one aspect of banking that he discussed. The problem is not a lack of regulation; it is the fact that the existing regulations miss the goal in so many respects. Banking has become so complex and convoluted that we need an entirely different approach.

When we talk to people outside Parliament about banking, the majority have a fairly simple view—the bank takes deposits and then lends, and that is the way it has always been. Of course, there is an element of truth in that, but it is so far removed from where we are today that it is only a very tiny element.

[Steve Baker]

My hon. Friend mentions the idea of straightforward, carry-through lending. When people talk about shadow banking, they are usually talking about asset managers who are lending and are passing funds straight through—similarly with peer-to-peer lenders. I am encouraged by the fact that when people are freely choosing to get involved with lending, they are not using the expansionary process but lending directly. Whereas the banks are seen simultaneously to fail savers and borrowers, things like peer-to-peer lending are simultaneously serving them both.

[Zac Goldsmith]

That is a really important point. There is a move towards such lending, but unfortunately it is only a fringe move that we see in the credit unions, for example. It is much closer to what original banking—pure banking or traditional banking—might have looked like. We even see it in some of the new start-ups such as Metro bank; I hesitate to call it a start-up because it is appearing on every high street. Those banks have much more conservative policies than the household-name banks that we have been discussing.

Most people understand the concept of fractional reserve banking even if they do not know the term—it is the idea that banks lend more than they can back up with the reserves they hold.

--- Later in debate ---

[The Economic Secretary to the Treasury (Andrea Leadsom)]

I too congratulate hon. Members on securing this fascinating debate. It is long overdue and has allowed us to consider not just what more we can do to improve what we have but whether we should be throwing it away and starting again. I genuinely welcome the debate and hope that many more will follow. In particular, I pay tribute to my hon. Friend the Member for Wycombe (Steve Baker), who now sits on the Treasury Committee on which I had the great honour to serve for four years. I am sure that his challenge to orthodoxy will have been extremely welcomed by the Committee and by many others. I wish him good luck on that.

[Steve Baker]

May I just say how much I am enjoying my hon. Friend’s place on the Committee? I congratulate her on her promotion once again.

[Andrea Leadsom]

I am grateful to my hon. Friend.

My right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) gave a fantastic explanation that I would commend to anybody who wants to understand how money is created. He might consider delivering it under the financial education curriculum in schools. It was very enlightening, not least because it highlighted the appalling failure of regulation in the run-up to the financial crisis that is still reverberating in our economy today. All hon. Members made interesting points on what we can do better and whether we should be thinking again. I pay tribute to the right hon. Member for Oldham West and Royton (Mr Meacher) for his good explanation of the Positive Money agenda, which is certainly an idea worthy of thought and I will come on to it.

Money creation is an important and complex aspect of our economy that I agree is often misunderstood. I would therefore like quickly to set out how the system works. The money held by households and companies takes two forms: currency, which is banknotes and coins, and bank deposits. The vast majority, as my hon. Friend pointed out, is in the form of bank deposits. He is absolutely right to say that bank deposits are primarily created by commercial banks themselves each time they make a loan. Whenever a bank makes a loan, it credits the borrower’s bank account with a new deposit and that creates “new money”. However, there are limits to how much new money is created at any point in time. When a bank makes a loan, it does so in the expectation that the loan will be repaid in the future—households repay their mortgages out of their salaries; businesses repay their loans out of income from their investments. In other words, banks will not create new money unless they think that new value will also in due course be created, enabling that loan to be paid back.

Ultimately, money creation depends on the policies of the Bank of England. Changes to the bank rate affect market interest rates and, in turn, the saving and borrowing decisions of households and businesses. Prudential regulation is used if excessive risk-taking or asset price bubbles are creating excessive lending. Those checks and balances are an integral part of the system.

I agree fully that the regulatory system was totally unfit in the run-up to the financial crisis. We saw risky behaviour, excessive lending and a general lack of restraint on all sides. The key problem was that the buck did not stop anywhere. When there were problems in the banking system, regulators looked at each other for who was responsible. We all know that the outcome was the financial crisis of 2008. I, too, see the financial crisis as a prime example of why we need not just change but a better banking culture: a culture where people do not spend their time thinking about how to get around the rules; a culture where there is no tension between what is good for the firm and what is good for the customer; and a culture where infringements of the rules are properly and seriously dealt with.

I will touch on what we are doing to change the regulations and the culture, but first I will set out why we do not believe that the right solution is the wholesale replacement of the current system by something else, such as a sovereign monetary system. Under a sovereign monetary system, it would be the state, not banks, that creates new money. The central bank, via a committee, would decide how much money is created and this money would mostly be transferred to the Government. Lending would come from the pool of customers’ investment account deposits held by commercial banks.

Such a system would raise a number of very important questions. How would that committee assess how much money should be created to meet the inflation target and support the economy? If the central bank had the power to finance the Government’s policies, what would the implications be for the credibility of the fiscal framework and the Government’s ability to borrow from the market if they needed to? What would be the impact on the availability of credit for businesses and households? Would not credit become pro-cyclical? Would we not incentivise financing households over businesses, because for businesses, banks would presumably expect the state to step in? Would we not be encouraging the emergence of an unregulated set of new shadow banks? Would not the introduction of a totally new system, untested across modern advanced economies, create unnecessary risk at a time when people need stability?

[Steve Baker]

I do not actually support Positive Money’s proposals, although I am glad to work with it because I support its diagnosis of the problem. Of course, this argument could have been advanced in 1844 and it was not. I have not proposed throwing away the system and doing something radically new; I have proposed getting rid of all the obstacles to the free market creating alternative currencies.

[Andrea Leadsom]

I am grateful to my hon. Friend for pointing that out. I must confess that before the debate I was puzzled that such an intelligent and extremely sensible person should be making the case for a sovereign monetary system, which I would consider to be an extraordinarily state-interventionist proposal. I am glad to hear that is not the case. In addition, of course, bearing in mind our current set of regulators, presumably we would then be looking at a committee of middle-aged, white men deciding what the economy needs, which would also be of significant concern to me.

--- Later in debate ---

[Steve Baker]

This debate has been a joy at times, and I am extremely grateful to right hon. and hon. Members who helped me to secure it. The right hon. Member for Oldham West and Royton (Mr Meacher) made clear his support for sovereign money. One of the great advantages of such a system is that it would make explicit what is currently hidden—that it is the state that is trying to steer the monetary system—and if such a system failed, it would at least be clear that it was a centrally planned monetary order that had failed.

The hon. Member for Clacton (Douglas Carswell) talked about the ownership of deposits, and I was glad to support his private Member’s Bill. I am reminded of the intervention from the hon. Member for Hackney North and Stoke Newington (Ms Abbott), who talked about deposit insurance. One of the problems, as seen in Cyprus in the context of depositor “bail-ins”, is that deposits are akin to a share in a risky investment vehicle, so a little more clarity about what a deposit means and what risks depositors take could go a long way.

My right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) highlighted one of the greatest controversies among free marketeers—whether or not fractional reserve deposit taking is legitimate.

The hon. Member for Great Grimsby (Austin Mitchell) mentioned Major Douglas, which he will have seen put a smile on my face. Major Douglas was dismissed as a crank, even by Keynes who dismissed him in his writing as a “private”. This highlights the fact that the possible range of debate is enormous.

I would like to leave my final words with Richard Cobden, the Member representing Stockport back in the time when this was also a big issue. He said:

“I hold all idea of regulating the currency to be an absurdity; the very terms of regulating the currency…I look upon to be an absurdity”.

The currency, for him,

“should be regulated by the trade and commerce of the world.”

I wholeheartedly agree.

Question put and agreed to.

Resolved,

That this House has considered money creation and society.

Oral Answers to Questions

Steve Baker Excerpts

Tuesday 4th November 2014 Commons Chamber

[Danny Alexander]

First, I would think that the hon. Gentleman would welcome the substantial increase in employment we have seen in the past two or three years—after all, it was his Front-Bench team who predicted that that would not happen under this Government. In fact, 80% of the jobs created in the past 12 months have been in full-time employment, not the part-time employment he is talking about, which is greater than the level in the economy as a whole.

[Steve Baker (Wycombe) (Con)]

Tax receipts and deficit closure are contingent on a strong economy, so does the Minister welcome the fact that the Legatum Institute’s prosperity index shows that the UK is now the most prosperous economy in all the major EU countries?

[Danny Alexander]

I agree with my hon. Friend that strong tax receipts require a strong economy, and the focus of this Government’s economic policy since the coalition was formed has been to rebuild the UK economy and clear up the mess left to us by the Labour party. We now have the strongest growth in the major world economies, and Government Members should be very proud of that.

Oral Answers to Questions

Steve Baker Excerpts

Thursday 3rd July 2014 Commons Chamber

[Nicky Morgan]

I entirely agree with the hon. Gentleman. I assume that he supports the EBacc and that he welcomes the work of the Under-Secretary of State for Education, my hon. Friend the Member for South West Norfolk (Elizabeth Truss), who I think has done more than anyone else in recent years to triumph and to talk about the importance of all students, particularly girls, studying science and maths. [Interruption.] I am glad to hear the hon. Gentleman was there supporting her, too.

[Steve Baker (Wycombe) (Con)]

4. What recent progress she has made on encouraging women to set up their own businesses.

[The Minister for Women (Nicky Morgan)]

The Government offer a wide range of support to women entrepreneurs—for example, the new enterprise allowance, mentoring, business advice and start-up loans. I also recently announced a £1 million challenge fund specifically to support women to move their businesses online and take advantage of superfast broadband. We know these measures are making a difference, with more women running their own businesses than ever before.

[Steve Baker]

Which particular areas have the Government identified where we can celebrate the success of women entrepreneurs?

[Nicky Morgan]

There are many different areas, but let me just pick one. The latest statistics from the Federation of Small Businesses show a dramatic increase in the number of women starting up businesses in the retail sector, and high streets across the country are seeing the benefit. Half of all small businesses established in retail in the past two years are primarily owned by women. That is in stark contrast with 20 years ago, when it was less than a quarter. That demonstrates the fundamental role that women are playing in helping the country to recover from recession. I hope that Members on all sides of the House will encourage retail businesses on their high streets to apply for the Future High Streets Forum’s Great British high streets awards.

Oral Answers to Questions

Steve Baker Excerpts

Tuesday 24th June 2014 Commons Chamber

[Mr Osborne]

We have put a huge effort—I pay tribute to the Exchequer Secretary who has led this work—into ensuring that we collect the taxes that are due. As a result, many billions of pounds more in taxes are collected. We are eliminating abuse that existed before we arrived, such as that involving stamp duty, and we set our tax rates fairly. We do not have a situation, as we did under the previous Government, where people in the City were paying lower tax rates than the people who cleaned for them.

[Steve Baker (Wycombe) (Con)]

4. What steps he is taking to ensure future stability in the housing market.

[The Chancellor of the Exchequer (Mr George Osborne)]

Our economic plan is about stability and security, so we are taking two steps on housing. First, we are building more homes, so that supply better matches demand. The Government’s reforms mean that housing starts are now at a six-year high. Secondly, we have given the Bank of England the responsibility and the tools to deal with any financial risk associated with the housing market, and I am clear that the banks should not hesitate to use those new powers if they think it is necessary to protect financial stability.

[Steve Baker]

On 19 May, The Telegraph reported that house prices jumped £10,000 in five weeks when the Bank of England threatened to cap mortgages. Will my right hon. Friend take steps to ensure that the Bank does not inadvertently promote financial instability when it exercises those powers?

[Mr Osborne]

I do not think that the Bank is doing that. We have taken a big step forward in this Parliament to give the Bank of England macro-prudential tools to intervene in areas such as housing if it thinks that there is a financial risk. Clearly, these things did not exist before, which is one of the reasons why the economy was in the mess that it was in when we came to office. At the Mansion House, I offered the Bank of England new direct powers to impose limits on loan-to-value and loan-to-income ratios. It is, of course, entirely up to the Financial Policy Committee, acting independently of the Government, to deploy any of its tools if it sees risks developing.