The Economy

Gordon Banks Excerpts

Tuesday 6th December 2011 Commons Chamber

[Mr Osborne]

The Merlin deal was for this year, and it was a commitment to increase gross lending to small businesses, which is what the banks have done. Of course, the previous Government, having tried net lending targets, then had gross lending targets with just two banks. The Merlin deal extended that to all the main high street banks. It was a one-year-only deal; the credit easing package that I have set out is, I think, what is required—not least in view of the tightening credit conditions across the continent of Europe and, indeed, across the world at the moment. The Government are using the credibility they have in the financial markets to borrow at low interest rates and passing those rates on to small businesses. As I said at Treasury questions, we are seeking state aid clearance and hope to have the national loan guarantee scheme operational by early next year.

At a time like this, we also have to be alert to risks across the financial system. One of the weaknesses of the tripartite regime is that no one felt they had a particular responsibility for monitoring the overall health of the financial system or felt they had the tools to do anything about it. We have created a Financial Policy Committee to do just that. We have established it on an interim basis to get it operating as soon as possible, instead of waiting for next year’s primary legislation. The FPC reported last week. Let me put it on the record that it is absolutely the job of the Governor of the Bank of England to be frank with the country about the challenges we face.

As the Financial Policy Committee warned very starkly:

“Sovereign and banking risks emanating from the euro area remain the most significant and immediate threat to UK financial stability.”

The committee encouraged banks to improve the resilience of their balance sheets in a way that does not exacerbate market fragility or reduce lending to the real economy. Given what it calls

“the current exceptionally threatening environment, the Committee recommends that, if bank earnings were insufficient to build capital levels further, banks should limit distributions and give serious consideration to raising external capital in the coming months.”

That is the point put to me by the Chairman of the Treasury Select Committee just an hour ago at Treasury questions. Limiting distribution includes restricting bonuses. Excessive pay in the financial sector is a concern at any time because of the perverse incentives it creates.

When it comes to linking pay to performance and being transparent, we are implementing the most comprehensive regime of any financial centre anywhere in the world. Today the Treasury launches a consultation that will extend transparency arrangements at large banks by requiring the eight highest-paid non-board executives to disclose their pay and bonus arrangements. This will cover an estimated 15 banks, including the largest UK banks and the UK banking operations of large foreign banks.

[Gordon Banks (Ochil and South Perthshire) (Lab)]

rose—

[Mr Osborne]

I will certainly give way; I hope the hon. Gentleman will welcome this change.

[Gordon Banks]

Will the Chancellor tell us how transparency will actually reduce the income of those to whom he refers?

[Mr Osborne]

Transparency should make it clear to the owners of these banks—the shareholders—what the pay and bonus levels and the remuneration levels are; it will then be for them to take action. I am aware of our responsibilities as a shareholder in some banks. As I mentioned at Treasury questions, an encouraging statement was made this morning by the Association of British Insurers, which represents the shareholders who own many of these banks, saying clearly that it does not accept current levels of pay in the financial sector and that it expects reform. As I said, we had a very clear warning from the Financial Policy Committee to the financial system that it should be limiting its distributions at a time like this.

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[Gordon Banks (Ochil and South Perthshire) (Lab)]

I draw the House’s attention to my declared interests.

The Government’s economic plan is not working—if it were, we would not have heard much of what we were subject to in last week’s autumn statement. The Chancellor has choked off recovery and in turn raised unemployment. I acknowledge that the eurozone crisis is having an impact on the economy now, but growth in our economy was choked off well over a year ago.

I want to spend a little time looking at economic growth and the role the construction industry can play. Labour has set out measures designed to create jobs and growth, and many of these would help the construction industry: 25,000 affordable homes, 100,000 jobs for young people and cutting VAT to 5% for home improvements. Having started my own business in 1986, I believe that without a vibrant small business sector, economic recovery is impossible, and without a vibrant construction industry, such recovery is equally impossible. The construction industry is of the private sector, but it needs both a vibrant private and public sector to survive. It is also a cash-consuming industry and as such needs the support of the UK finance industry. It is an industry that can create jobs fairly quickly and can train people in skills that will last them a lifetime. However, in recent years more than 300,000 construction sector jobs have been lost, 63,000 of those in the first three months of this year. Private sector job creation is not keeping up with job losses from the public sector. If it were to do that, the Government would need the construction industry to be significantly more active than it is.

The major banks will not lend enough to the industry. They have seen the sector weakened by Government decisions, and by their actions the banks add further to that decline. The benefits of a strong construction industry are, however, great and should mean one thing: more jobs for Britain, and more jobs for Britain means more tax revenue.

An obvious indicator of a country’s economic well-being is its construction industry. Every business needs this sector in order to expand—whether it is through bigger offices, bigger factories, better high-tech communications, or better road and rail infrastructure. However, let me make this point about infrastructure to both Front-Bench teams: major projects are very important, but I would argue for lower-cost, more local investments throughout the country, as well, as they would have an impact throughout the UK in both their development and post-development stages. Only “shovel-ready” proposals will have an immediate impact on our flatlining economy.

[Mr William Bain (Glasgow North East) (Lab)]

My hon. Friend will have noted that in Scotland recently, construction output has fallen by 2.3%. What contribution does he think the cut by John Swinney, the Scottish Government’s Finance Minister—a reduction in capital spending that is two and a half times faster than this Chancellor’s—has made to that slump?

[Gordon Banks]

The Scottish Minister’s decision is responsible for the cuts that could also impact on investment and delivery in the construction industry. The flipside is that if we are prepared to invest in the construction industry, it will deliver; if we cut public spending, it will destroy the industry and with it the economy.

For businesses to grow, they need access to affordable funding. Historically, most small business funding has been generated from our banks, but the Institute for Family Business and the Federation of Small Businesses tell us that, due to the actions of the banks and small businesses’ distrust of them, many such businesses are seeking funding from family members or not seeking it at all. To do the latter damages the business and the economy; to do the former may place limitations on the business, with the same impacts.

However, what is clear is that small and medium-sized enterprises are not at ease with the banking sector. The much-hailed Project Merlin has been a resounding failure. The British Bankers Association has declared that lending targets have been met; however, the FSB and the Federation of Master Builders have other ideas. I have been told of banks meeting their Merlin targets by re-signing existing, unexpired deals. But the truth is, we will never know how much of Merlin is re-signed and regurgitated arrangements. Indeed, this is smoke and mirrors that the Merlin of folklore would be proud of, but I suppose we should not be surprised: the clue is in the name.

I know of financing arrangements that have long been in place being removed with immediate effect, leaving a business in turmoil. Then, the bank returns to the business a few days later with the offer of a term loan that is new business for the bank to write—no doubt adding to the Merlin figures—at increased rates and with arrangement fees, all paid for by the business and with less capital provision for the lender, but leaving the business without any long-term funding in place.

Small businesses in the construction sector have been victimised on two fronts: for being small, and for being in the construction sector, which is deemed toxic by many lenders.

When considering finance, however, we should not forget first-time buyers and the crisis in mortgage lending. In 2007, there were 357,000 first-time buyers in the UK, and as a result the British high street was boosted by some £2.1 billion when these people kitted out their homes. However, today, young people, who are the majority of would-be first-time buyers, are unable to purchase their own home. Now, the average age of a first-time buyer without parental support is 38. With 25 or 30-year mortgages, these first-time buyers could still be paying off their mortgages as they approach their 70s. Surely, pensioners paying mortgages is not something we want to see in Britain in years to come.

In my business, where investment in vehicles can cost up to £130,000 each, and where forklifts and loading shovels cost tens of thousands of pounds, the real driver for investment is the footfall of customers and the profit margin. Both have taken a tumble in recent years, and nothing that I have seen this Government do or promise to do will result in more customers or a rise in profit margins.

[Angela Smith]

My hon. Friend is making a very strong case against the Government’s economic policy. Does he agree with Will Hutton’s comments in The Observer on Sunday? He said that the Chancellor

“is operating within a framework that permits no vision for how the British economy can be re-energised and reimagined.”

[Gordon Banks]

I agree with that, and I would add to that the comments of my hon. Friend the Member for Glasgow North East (Mr Bain) in his intervention a moment ago: there is a lack of vision in both Scotland and No. 11.

Falling business opportunities equals reducing margins and cuts to investment and employee numbers, which add further to the decline in the economy. Businesses in my constituency and in the construction sector want to know whether this Government see themselves as a driver for growth, or not.

It is all about priorities. As far as the SMEs in the construction sector are concerned, the comments on the report card, sadly, are not “could do better” but more like “shows no interest in the subject”.