Global Economy

Ed Balls Excerpts

Thursday 11th August 2011 Commons Chamber

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

People will be concerned about the turmoil in the world’s financial markets and what it means for economies here and across the globe. I want to update the House on what we are doing to protect Britain from the storm and to help lead a more effective international response to the fundamental causes of this instability.

As of this morning, after heavy losses yesterday, markets in Asia and Europe are a little calmer, although some are still down. Over the past month, the Dow Jones index has fallen by more than 14%, the French market by 23% and the Nikkei by 11%, and it is striking that the German market has fallen by 24%. Even Chinese equities have fallen by 20% since November. Bank shares in all countries have been hit particularly hard. Many sovereign bond markets have also been exceptionally volatile, with market rates for Italian and Spanish debts soaring before falling back in the past three days.

Sadly, Britain is not immune to these market movements. In the past month, the FTSE 100 has fallen by 16% and British bank shares have been hit hard. However, while our stock market has fallen like others, there has been one striking difference from many of our European neighbours: the market for our Government bonds has benefited from the global flight to safety. UK gilt yields have come down to about 2.5%—the lowest interest rates in more than 100 years. Earlier this week, the UK’s credit default swap spread, or the price of insuring against a sovereign default, was lower than Germany’s. That is a huge vote of confidence in the credibility of British Government debt and a major source of stability for the British economy at a time of exceptional instability. It is a reminder of the reckless folly of those who said that we were going too far, too fast. We can all now see that their approach would have been too little, too late, with disastrous consequences for Britain.

It is not hard to identify the recent events that have triggered the latest market falls. There have been weak economic data from the US, including revisions to GDP figures, and the historic downgrade of that country’s credit rating. The crisis of confidence in the ability of eurozone countries to pay their debts has spread, as many feared, from the periphery to major economies such as Italy and Spain. Those events did not come out of the blue and they all have the same root cause—debt. In particular, there is a massive overhang of debt from a decade-long boom, when economic growth was based on unsustainable household borrowing, unrealistic house prices, dangerously high banking leverage and a failure of Governments to put their public finances in order. Unfortunately, the UK was perhaps the most eager participant in that boom, with the most indebted households, the biggest housing bubble, the most over-leveraged banks and the largest budget deficit of them all.

History teaches us that recoveries from such debt-driven, balance-sheet recessions will always be choppy and difficult, and we warned that that would be the case. The whole world now realises that the huge overhang of debt means that the recovery will take longer and be harder than had been hoped. Markets are waking up to that fact. That is what makes this the most dangerous time for the global economy since 2008. We should be realistic about that and set our expectations accordingly. As the Governor of the Bank of England said yesterday and as the head of the Office for Budget Responsibility has noted, the British economy is expected to continue to grow this year. Some 500,000 new private sector jobs have been created in the past 12 months. That is the second highest rate of net job creation in the G7. However, instability across the world and in our main export markets means that, in common with many countries, the expectations for this year’s growth have fallen.

This is what our response must be. First, we must continue to put our own house in order. I spoke again to Mervyn King yesterday and I confirm that the assessment of the Bank, the Financial Services Authority and the Treasury is that British banks are sufficiently well capitalised and are holding enough liquidity to cope with the current market turbulence. We have in place well developed and well rehearsed contingency plans. We must also continue to implement the fiscal consolidation plans that have brought stability to our bond markets.

I believe that the events around the world completely vindicate the decision of this coalition Government from the day we took office to get ahead of the curve and deal with this country’s record deficit. While other countries wrestled with paralysed political systems, our coalition Government united behind the swift and decisive action of in-year cuts and the emergency Budget. While other countries struggled to command confidence in their fiscal forecasts, we created the internationally admired and respected independent Office for Budget Responsibility. Those bold steps have made Britain a safe haven in this sovereign debt storm. Our market interest rates have fallen while those of other countries have soared. The very same rating agency that downgraded the United States has taken Britain off the negative watch that we inherited and reaffirmed our triple A status. That market credibility is not some abstract concept; it saves jobs and keeps families in their homes. Families are benefiting from the lowest ever mortgage rates and companies are able to borrow and refinance at historically low rates thanks to the decisions that we have taken.

Let me make it clear not only to the House of Commons but to the whole world that ours is an absolutely unwavering commitment to fiscal responsibility and deficit reduction. Abandoning that commitment would plunge Britain into the financial whirlpool of a sovereign debt crisis and cost many thousands of jobs. We will not make that mistake.

Secondly, we need to continue to lead the international response in Europe and beyond. In the G7 statement agreed between Finance Ministers and central bank governors this week, we said that we would

“take all necessary measures to support financial stability and growth”.

In the eurozone, there is a growing acceptance of what the UK Government have been saying, first in private and now in public, for the last year—it too needs to get ahead of the curve. Individual countries must deal with their deficits, make their economies more competitive and strengthen their banking systems. Existing eurozone institutions need to do whatever is necessary to maintain stability. We welcome the interventions of the European Central Bank this week through its securities markets programme to do just that.

However, that can only ever be a bridge to a permanent solution. I have said many times before that the eurozone countries need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration. Many people made exactly that argument more than a decade ago as a reason for Britain staying out of the single currency, and thank God we did. Solutions such as eurobonds and other forms of guarantees now require serious consideration. That must be matched by much more effective economic governance in the eurozone to ensure fiscal responsibility is hard-wired into the system.

The break-up of the euro would be economically disastrous, including for Britain, so we should accept the need for greater fiscal integration in the eurozone, while ensuring we are not part of it and that our national interests are protected. That is the message the Prime Minister has communicated clearly in his calls with Chancellor Merkel, President Sarkozy and others this week. I have done likewise with individual Finance Ministers, in ECOFIN and in the G7 call at the weekend, and will do so again at the September ECOFIN and G7 meetings.

This is a global as well as a European crisis. At this autumn’s meetings of the IMF and the G20 we need far greater progress on global imbalances. We need an international framework that allows creditor countries such as China to increase demand and debtor countries to make the difficult adjustments necessary to repay them. Everyone knows what needs to be done, but progress so far has been frustratingly slow, with lengthy disagreements on technical definitions, let alone any concrete actions. The barriers are political not economic, so it is up to the world’s politicians to overcome them. There are no excuses left.

The UK, like the rest of the developed world, needs a new model of growth. Surely we have learned now that growth cannot come from yet more debt and more Government spending. Those who spent the whole of the past year telling us to follow the American example, with yet more fiscal stimulus, need to answer this simple question: why has the US economy grown more slowly than the UK economy so far this year? More spending now, paid for by more Government borrowing and higher debt, would lead directly to rising interest rates and falling international confidence, which would kill off the recovery, not support it.

Instead we must work hard to have a private sector that competes, invests and exports. In today’s world, that is the only route to high-quality jobs and lasting prosperity. In the developed countries, especially in Europe, that means making the difficult structural reforms needed to restore competitiveness and improve the underlying performance of our economies. The EU should cut red tape, not add to it. Internationally, we have the greatest stimulus of all on the table in the form of the Doha round—a renewed commitment to free trade across the world, which should be taken up now.

Here in Britain, the Plan for Growth that we announced in the Budget set out an ambitious path—23 measures have already been implemented and another 80 are being implemented now. On controversial issues, such as planning reform, we will overcome the opposition that stands in the way of prosperity. On tax, we have already cut our corporation tax by 2p, with three more cuts to come in the next three years. We will continue to pursue a radical agenda in welfare and education reform.

However, there is much more we can and must do if we are to create a new model of sustainable growth. All of us in the House must rise to that challenge in the months ahead and confront the vested interests—the forces of stagnation that stand in the way of growth.

In these turbulent times for world markets, we will continue to lead the international response. We will redouble our efforts to remove the obstacles to growth and stick to our plan, which has made Britain a safe haven in the global debt storm. I commend the statement to the House.

[Ed Balls (Morley and Outwood) (Lab/Co-op)]

The shocking and inexcusable events of recent days in our cities are today rightly the Government’s first and immediate priority. However, looking ahead, the global economic events of recent days are an equal and perhaps even graver threat to our stability and cohesion, putting small businesses, jobs and mortgages at risk throughout our country. It is therefore right that the Chancellor is today updating the House and the country on the parlous state of the global economy and, I am afraid to say, the parlous state of the British economy.

In the same spirit of bipartisan co-operation that we have just seen from the Prime Minister and the Leader of the Opposition, let me set out where Opposition Members agree with the Chancellor of the Exchequer as well as where we have grave concerns. First, the Chancellor is right: we made the right decision not to join the single currency in 2003. We agree with him that the crisis in the eurozone requires more decisive and radical action than we have seen so far. I welcome the fact that he is now, at last, involving himself in those discussions, and preparing contingency plans if British banks come under threat.

Tough fiscal decisions in Europe are vital, but is it not clear that the approach of European leaders so far—demanding ever more austerity from smaller countries—is not working because it does nothing to get those economies growing? Without that, countries find it harder and harder to convince the markets that they can repay their debts. Should not the Chancellor finally take a lead in brokering a plan in Europe for growth, alongside European-wide guarantees to reduce debt service costs, and stop the contagion?

I also agree with the Chancellor that months of political wrangling and uncertainty in the US about the pace of deficit reduction have depressed confidence and US growth. However, does the Chancellor agree with those wise heads who favour a balanced and sensible approach to deficit reduction, and fear that rapid US retrenchment could drive the world back into recession? Or does he agree with his friends—we know he has many in the Republican party and in the Tea party movement—who have urged deeper and faster cuts, and hailed the recent budget deal as delivering 98% of their demands? Is the Chancellor on the side of the Federal Reserve, former Treasury Secretaries and Nobel prize winners, or on that of, in the words of the Business Secretary, “right wing nutters”?

It is also right that G7 finance Ministers are finally discussing a co-ordinated response to a global crisis. However, listening to the Chancellor’s analysis, one would think that Britain was a bystander, watching public debt crises unfold in the eurozone and America that are best solved by individual countries taking their own actions to get debt down—on his analysis, the faster, the better. But the growth crisis is now global.

Does the Chancellor agree that the coming together of powerful negative forces in every continent, including in Britain—continued deleveraging by banks and the private sector, drastic tightening of consumer spending and fiscal retrenchment from Governments—now means that some commentators warn that the crisis could become as grave as that of the early 1930s, when Governments around the world ignored their collective responsibility to promote growth, ploughed on with austerity and retrenchment and ushered in a decade of depression, unemployment, protectionism and political instability? Here in Britain, families and businesses, deeply worried about their jobs and mortgages, will hear the Chancellor’s talk of safe havens and conclude that he is either deeply complacent or in complete denial about what is happening in our country.

Since the Chancellor’s economic policies have started to kick in, well before the latest bout of financial market instability, confidence has collapsed and our economy has flatlined for nine months, growing slower than that of the US and the eurozone. On the latest OBR figures, before growth forecasts—which the Chancellor today confirmed—were to be downgraded yet again, the borrowing forecast was £46 billion higher than the Chancellor planned.

We need a tough, medium-term plan to get our deficit down, but it is the Chancellor’s reckless—[Interruption.]

[Mr Speaker]

Order. The House must come to order. I repeat what I have said many times: if Members shout their heads off, then expect to be called, they are suffering from an element of self-delusion.

[Ed Balls]

The Chancellor’s reckless policies—too far, too fast—have ripped out the house’s foundation and left our economy deeply exposed to the brewing global hurricane. Yet, despite all the evidence and with our stock market falling 10% or more this week, the Chancellor still claims that his policies are working and that we are a safe haven. Despite the evidence of the past two years from credit default swaps and the fact that, in the past week, long-term interest rates have fallen in Britain and in the US, he still claims that falling UK long-term bond yields are a sign of enhanced credibility and not of stagnant growth in our economy. Does he not remember that the Japanese Ministry of Finance briefly took some comfort from low and falling bond yields in the early 1990s, at the beginning of a lost decade of no growth and stagnation? However many times he says that his plan is working, that does not make it true. However, many times he claims that he has restored confidence or delivered on deficit reduction, that does not make it true.

We know that the Chancellor has spent the past fortnight in Hollywood, but he cannot just write the script and watch it come to life. That is not how things work in the real world. If he will not take it from me, perhaps he should hear the words of Paul Krugman, the Nobel prize winner, who said:

“Britain’s experiment in austerity is going really, really badly. But the Chancellor of the Exchequer is finding solace in… fantasy… the wolf is at the door and Osborne thinks it’s the confidence fairy.”

The Chancellor finds the state of the British economy reassuring; we find it deeply worrying. He rejects our call for action now, including a temporary VAT cut, and vows to plough on regardless. We say that this approach is deeply incautious and reckless. The eurozone is in crisis. America is in political paralysis. The British economy is flatlining. Global markets are in turmoil. The world desperately needs strong and united leadership. Here in Britain, we need our Chancellor to get out of his complacent denial and get back to reality before it is too late.

[Mr Osborne]

I did meet Mickey Mouse in California, and he seems to be writing the Labour party’s economic policy at the moment.

Let me start with the areas where we agree. We agree that it is right for Britain not to join the euro—perhaps the shadow Chancellor will change the official policy of the Labour party in that respect. I would be very happy to offer him a briefing from the tripartite authorities on the contingency plans of the financial system. Obviously, they have to remain confidential, as he will understand, but I am very happy to give him that briefing.

On what the shadow Chancellor says about European countries being forced to reduce their deficits, I would ask him this question. Who is supposed to be lending those European countries the money that he talks about, in this imaginary world where they are not taking action to reduce their deficits? He voted against the decisions that we took to increase the resources of the IMF, and now he turns round and thinks that there is some magical body or some investors out there who are going to lend money to European countries that do not have credible deficit plans. It is completely for the fairies, as he puts it.

Let me talk about the US debate, which the right hon. Gentleman mentioned. He talked about deficit reduction in America and asked where I stand on the measured pace argument. Actually, I agree with the plan that President Obama set out at George Washington university. [Interruption.] Perhaps the Leader of the Opposition does not know what is going on in America at the moment, but actually, the President of the United States has set out a deficit reduction plan that is at the same pace and on the same scale as the one that we are pursuing in Britain. That is what the President has set out; it is his offer in the debate. Indeed, the composition of tax increases and spending reductions that he has put forward is the same as the spending consolidation that we announced last year, and is based on some of the ideas put forward by the bipartisan Bowles-Simpson commission, which we spoke to after the event. It said that it looked to the UK for inspiration for some of its ideas.

The shadow Chancellor says that there is a global economic crisis. He is right about that, and we agree, but it is caused by an enormous debt overhang. That is what all serious economists are saying at the moment. He is also right when he says that the Labour party needs a tough deficit reduction plan. I agree with him about that. Where is this tough deficit reduction plan? We have just spent two and a half hours listening to Labour MP after Labour MP getting up and complaining about spending cuts and the deficit reduction plan—they are all nodding their heads—but where is the tough deficit reduction plan that he promised? The shadow Chancellor is now almost alone in the world in making the argument that he makes. He talks about international leadership, but if he turned up at the G7, the IMF, the G20 or ECOFIN with his plans to borrow more and increase our deficit, he would be laughed out of that meeting. He is completely irrelevant to where the international debate has gone. I am afraid that he is living proof of why the public will never again trust the Labour party with their money.

--- Later in debate ---

[Mr Osborne]

As I have said, the British economy is growing and it is the assessment of the Bank of England and the Office for Budget Responsibility that it will continue to grow. The growth in the last six months has actually been stronger than in the United States, and half a million jobs have been created in the private sector in the last year—

[Ed Balls]

In the last nine months?

[Mr Osborne]

In the past 12 months. So that is all good news. Where does the right hon. Member for Oldham West and Royton (Mr Meacher) expect the money to come from for additional Government borrowing? Who in the world would lend to a country that abandoned its deficit reduction plan at a time like this, especially a country such as Britain which, unfortunately, has the highest budget deficit in the G20?

--- Later in debate ---

[Mr Osborne]

Of course, stock market falls affect pension investments and other equity investments. Our stock market has fallen—not as much as some, but it has nevertheless fallen—

[Ed Balls]

Why is that?

[Mr Osborne]

It is because of the global lack of confidence in Governments’ abilities to deal with their deficits. We have not seen turbulence in our bond markets precisely because we have in place a credible deficit reduction plan. I note that I have been answering questions for more than an hour and it has almost been an hour since the shadow Chancellor said that the Labour party needed a credible deficit reduction plan, but has a single Labour MP got up and proposed any component of that reduction plan? No, they have not.