The Economy

Denis MacShane Excerpts

Tuesday 6th December 2011 Commons Chamber

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

I shall use the time available to make a couple of points about the economic challenge facing the country, and in particular about the era of the politics of less. All of us must look to achieve our political and economic aims in an era of lower growth than we have been used to in recent years.

The central feature of the autumn statement last week was the further downgrading of economic forecasts for the short term. The Office for Budget Responsibility downgraded its growth forecast for this year from 2.6% to 0.9% and for next year from 2.8% to 0.7%, and said that by 2015 the economy will be 3.5% or £65 billion smaller than previously forecast. The Financial Times has estimated that the gap between the economic growth trajectory had the recession not happened and where we will be in a few years’ time is 14% of GDP. We are therefore entering an era in which our economy is smaller—and by some projections significantly so—than it would otherwise be. Recovery will be weaker than expected, unemployment will be higher and the economy will be smaller for some years to come.

[Mr Denis MacShane (Rotherham) (Lab)]

Is my right hon. Friend aware that between 1997 and 2010 the British economy grew by 75%—in other words, that it almost doubled? It has now come to a shuddering stop and is going into reverse. Can he think of any previous historical period in the past 200 years, and not only in the 1970s, when a Conservative Government presided over such an astonishing, shrinking, no-growth economy?

[Mr McFadden]

I agree with my right hon. Friend that the economic times that we are in should make us reassess what we think of as normal.

The human implications have been laid out by the Institute for Fiscal Studies in its analysis of the impact on households. As was mentioned earlier in the debate, the IFS has shown that the distributional impact of the measures is geared so that the greatest losses come in the lowest-income deciles, and that there are particularly harsh effects on families with children. The shadow Chancellor in his opening speech referred to the impact of the tax credit measures on individual constituencies. The most striking figure for me is that the IFS forecasts that between 2009-10 and 2012-13 there will be a 7.4% fall in real median net household income, which is about the same as the largest fall since records began.

--- Later in debate ---

[Richard Fuller (Bedford) (Con)]

I listened with great interest to the comments of the hon. Member for Penistone and Stocksbridge (Angela Smith), who spoke eloquently about the short-term pain that many families in her constituency and, I am sure, in mine are going through in these difficult economic circumstances. She also rightly pointed to the need for the Government to think about the long term. I hope that she will listen to my observations in the same spirit.

Under the previous Government, the United Kingdom became the most indebted major economy on earth. That was not the fault of the bankers alone, of Government borrowing alone or of companies alone; it was the fault of us all, although led by a Government who were at best asleep at the wheel and at worst systematically undermining our long-term finances for short-term political gain. These problems are so endemic that they cannot possibly be put right in one year, in one term or by one policy.

The absolute core policy that a massively indebted nation must pursue is the maintenance of low interest rates for as long as possible. The McKinsey Global Institute study on debt and deleveraging shows that the UK led the pack of the world’s largest economies in terms of its debt-to-GDP ratio and became increasingly more indebted from the mid-’90s and, in particular, from 2003. From 2000 to 2010, domestic, public and private debt as a percentage of our GDP rose by 182 percentage points to nearly 500% of GDP, making the UK the most indebted of all major economies—even more so than Japan at the end of the period.

[Mr MacShane]

In the 1930s, interest rates were close to zero, as they were in Japan in the 1990s. Arguably, that increases indebtedness because if people can borrow massively without having to pay serious interest rates, they might run up debts. I am just gently saying that the idea that one factor can explain the problem and that we should focus on that is wrong. We need a holistic approach.

[Richard Fuller]

The right hon. Gentleman makes a helpful point. It is precisely my point, although unfortunately the shadow Chancellor missed it when he seemed to think that the responsibility of the Government towards debt management was to do with Government debt alone. It is not. The responsibility of the Government is to look at the whole economy. The debt of a nation, whether taken on by the Government, households or companies, has to be repaid by the nation. That is what got so out of control over the past 10 years.