Jobs and Growth

John Hemming Excerpts

Wednesday 12th October 2011 Commons Chamber

[Ed Balls]

I have worked in Government and at the Financial Times. I have never run a business, but I respect people who run businesses and I understand why they are so worried at the moment. In the hon. Gentleman’s constituency, where unemployment has gone up by over 400 in the past 12 months, there will be some very worried businesses, and it is important that we listen to them and hear what they are saying.

That is why now is the time for our oh-so-political Chancellor to put politics aside and start to do the right thing. Protecting our economy and protecting valuable businesses and jobs is more important than trying to protect a failed plain. We do not have to wait for another month of unemployment rising, or for 46 more days until we finally get the economic and fiscal forecast from the Chancellor, to know what he is going to have to say. He is going to have to downgrade his growth forecast for this year for the fourth time in 18 months and downgrade his growth forecast for next year. As I have explained, we already have £46 billion more borrowing in the pipeline, and unemployment is now rising. He is going to have to admit that borrowing will be billions higher still than at the time of his last forecast. The Prime Minister says:

“You can’t borrow your way out of a debt crisis”,

but he just doesn’t get it. [Interruption.] No, he doesn’t get it. Because with growth flatlining, and with today’s bleak news of rising unemployment, the Chancellor’s failing plan is leading to not lower borrowing but higher borrowing than he planned.

[John Hemming (Birmingham, Yardley) (LD)]

Whatever the Government’s policy, the Opposition’s policy is to borrow more to increase demand. Is there a limit on the borrowing?

[Ed Balls]

I will return to the hon. Gentleman and his party in a moment. They gave the Government some very good advice 18 months ago, but unfortunately it was not heeded.

--- Later in debate ---

[John Hemming (Birmingham, Yardley) (LD)]

I will not take any interventions, as that would leave less time for others to speak.

The Opposition are complaining that the forecasts show that the Government will have to borrow £46 billion more than was previously forecast. Their solution is to borrow more money. They are proposing to borrow an additional £31 billion in any one year—I think that that is the precise figure. I asked the shadow Chancellor what he thought the limit on borrowing should be, but he did not answer the question. One presumes therefore that he has no idea what the limit is. Well, the limit on borrowing is called the International Monetary Fund, when it has to come to the rescue when the markets will not fund a country’s deficit.

The reality is that the interest rates on deficits matter, because they represent a perception of the risk of non-repayment, and of the possibility that a Government will become insolvent. The difficulty is that, as a country increases its deficit, it also increases that interest rate. Gradually, the interest rate increases on the whole of Government debt, not just that borrowed in one year. If the whole of Government debt is in the order of £1 trillion, 1% of that is £10 billion. That £10 billion has to be found either from additional taxes over time, or from additional cuts. Labour’s strategy would lead to greater cuts or greater taxes in the long term—probably greater cuts.

Let us look at how we have got into this situation. An interesting person to turn to for quotations on this is Lord Turnbull, who was the Cabinet Secretary at the start of the third Blair Government. He said that excessive borrowing started to be a problem from 2005. I quote him:

“It kind of crept up on us in 2005, 2006, 2007, and we were still expanding public spending at 4.5% a year”,

and he argued that the Treasury should have put more money aside. He said last year that the primary reason Britain was

“in the mess that we’re in”

was that

“public spending got too big relative to the productive resources of the economy, by error”.

He added that a loss of output caused by the financial crisis also contributed to the Budget deficit. The mistake is thinking that the problem is caused by one thing alone. There are a number of factors: one is the banking problem; another is overspending by the previous Labour Government.

What we have before us is a motion to deal with a problem caused partly by overspending, to which the proposed solution is yet more spending. In this instance, that means borrowing by the Government for private spending, to be fair, although a cut in VAT on a temporary basis does not generally feed into people’s pockets, but into those of the corporations that do not reduce their prices and do not have to pay so much tax.

In his memoirs, Tony Blair proposed what should have been done. On page 679, we can read him reflecting on what should have been done, consistent with his analysis of the economy:

“In my view, we should have taken a New Labour way out of the economic crisis: kept direct tax rates competitive, had a gradual rise in VAT and other indirect taxes to close the deficit, and used the crisis to push further and faster on reform.”

Tony Blair was clear that Labour should have put up VAT.

I kept my ballot paper for the Labour leadership election; I did not think it was right for me to fill it in. One interesting thing about that ballot paper was that it came along with the manifestos of the candidates. I looked at the entry for the shadow Chancellor, who said that he had been “leading the fight” against the VAT rise. Last year, he led the fight against the VAT rise; now he says, “Yes, we need the VAT in the long term”, as at least the hon. Member for Bassetlaw (John Mann) recognises; he must have managed to persuade him.

What question needs to be asked? The Government have a strategy, and the strategy is reducing the deficit. There are obviously difficulties, given that the solution must be worldwide. Is it therefore right to follow the Labour party’s example and borrow yet more money—another £31,000 million a year—increasing the debt and potentially increasing the need for rescue in the long term, or should we keep on with the strategy we have? My view is that we should keep to the strategy that we have got.