Budget Resolutions and Economic Situation

John Redwood Excerpts

Wednesday 20th March 2013 Commons Chamber

[Mr John Redwood (Wokingham) (Con)]

It is important first to understand what the Government strategy is, because there have been a number of misleading interpretations of it. Some have said that the reason the economy did not grow last year and is still growing very slowly is that there have been massive public spending cuts that have reduced national output. There is a helpful table on page 53 of the Office for Budget Responsibility report which shows that growth was indeed only 0.2% in real terms last year. However, it shows that the Government sector made a positive contribution of 0.6%, which is far more than overall growth, and that growth was reduced by disappointment in private sector housing investment, changes in stocks in private sector companies, reflecting an absence of confidence, and a poor performance on trade. A similar position is reported in forecasts for the current year, in which it is assumed that the Government sector will still make a positive real contribution to a rather low rate of growth, while it is hoped that the private sector will not have as disappointing a performance this year as it did last year.

The strategy was never about massive cuts in public spending overall; it was about modest growth in public spending. The idea was to get the deficit down through some very large tax rises. Unfortunately, as the latest documents reveal, the 50p and the other income tax changes were especially damaging to revenue. A loss of more than £7 billion has been recorded by those on the Front Bench. The overall figures imply that it was probably even more than that. In the most recent year, tax revenues from income tax overall are down on the previous year, not up. The strategy has not miscarried because it cut too much or because the Government overspent compared with what was planned—they have done a rather better job this year of controlling spending. Rather, the strategy miscarried because the big increase in tax revenue that had been forecast did not come through. That was partly because tax rates were set that did not work, such as the high rate of income tax. Also, the capital gains tax rate is too high, so we will get less in capital gains tax receipts this year than in the previous year. The reason is also partly that growth in the economy was very disappointing.

[Charlie Elphicke (Dover) (Con)]

Does my right hon. Friend agree that it is important to have capital gains tax rates that are lower and more competitive, particularly for business assets?

[Mr Redwood]

I entirely agree. There would be much more activity if people could free some of those assets by taking profits and moving them on to people who could use them better and build on land, for example. I hope my right hon. Friend the Chancellor will think about that in due course, because it would make him revenue and help to grow the economy.

Nor has there been any lacking in flexibility by my right hon. Friend the Chancellor in applying his strategy. He has been flexible over the deficit; indeed, we see in the latest figures that he plans to borrow £48 billion more in 2013-14, £60 billion more in 2014-15 and £67 billion more in the following year than in the original plans. He has reflected the fact that the economy has not performed well in the way that the independent forecasters assumed and the fact that tax revenues had a big wobble because of wrong rates and low growth, and he is allowing the state to borrow more to try to pick up the slack. I therefore welcome the fact that in this Budget he is concentrating on things that he can do to promote growth in the areas that subtracted from our growth in the most recent year.

The Chancellor is right to look at ways of trying to promote more housing activity. Many of us represent constituents who would love the opportunity to buy their first flat or house. They have been priced out of the market by the boom and now they are kept out of the market by an inadequate supply of mortgage finance and tough conditions. We need to be careful, because we do not want to fuel another housing bubble, but we also need to recognise that the banking system is not delivering finance for many of our constituents at the moment, and there are people who could borrow prudently and sensibly to buy their first home. I do not want to live in a society where people have to be in their late 30s before they can own their first home. I think we need to do better than that.

[Mark Reckless (Rochester and Strood) (Con)]

My right hon. Friend says that we do not want to fuel another housing boom, but is it not the case that in this country, unlike the US, the boom was largely in prices and, to a degree, transactions? There was never a boom in supply. What we may see today are measures aimed at boosting the supply of new housing.

[Mr Redwood]

My hon. Friend is absolutely right. These measures are targeted with that in mind. We need to study their details, but they are clearly well intentioned and I wish them every success. I am sure that we shall look carefully at them in Committee and on the Floor of the House when they come before us in physical form.

The next area in which we need to help is promoting more industry and commerce to deal with the net trade deficit. I am glad that that Chancellor has recognised in his speech that one of the big drawbacks to doing business in Britain now is expensive energy pricing. This is something that we share with the European continent, compared with the American continent. The United States of America is playing a blinder with its very cheap gas and much cheaper energy generally. I welcome the idea that certain businesses and industries will be taken out of the climate change levy altogether.

[Caroline Lucas]

I do not expect the right hon. Gentleman to agree with me, but I must point out that experts ranging from Ofgem and BP to the International Energy Agency and the CBI have all pointed out that investment in shale gas in the UK will not result in lower energy prices. Why cannot he therefore agree that it makes no sense to go all out for shale gas through tax breaks in the Budget, and that the money would be much better spent on renewables, which would get emissions and fuel bills down?

[Mr Redwood]

I am delighted that the hon. Lady has made her own case. She is the cause of the problem. She is pricing people out of the market. She is destroying jobs. She is the reason that people cannot heat their homes at a sensible price. She is the deliberate architect of dear and scarce energy, and now she presumes to lecture us and to say that if we generate more energy, it will be dearer and not cheaper. I suggest that she consult her constituents to find out how angry they are about the cost of heating their homes and their inability to get jobs in industry. She might also like to consult a reputable economist to find out what happens to prices when we produce more of something. I think she will discover that the price normally falls.

[Dr Huppert]

Will the right hon. Gentleman give way?

[Mr Redwood]

I am sorry; I have no more injury time left, and I have more to say. I am sure the Government will be delighted about that.

The Government need to look at the problem of electricity generation. I would like them to go to our partners in the European Union and say that there is no way in which we can close down all our coal-powered stations and still produce enough sensibly priced power in the near future, and that we need a stay of execution and longer transitional arrangements. I believe that the Germans are going to generate a lot more electricity from coal, and they seem to have found a way around the European regulations. I would urge my right hon. and hon. Friends on the Front Bench to do the same, because we need to keep our homes warm, keep the machinery of industry turning and keep the lights on in the offices and shops of this country. We are pricing ourselves out of our ability to do that. We are also running the risk of not having enough electricity, full stop, because of the delays and the problems that the previous Government had in coming up with an energy policy, and because of the present Government’s problems in trying to get an energy policy through, given all the European Union restrictions and complications that are placed in their way.

The most important thing that the Chancellor will need to do in the weeks ahead, in addition to the Budget, is ensure that the banks can now create sensible amounts of credit to power the recovery. This is not just about mortgages for homes, important though they are; it is also about loans for bigger items such as cars and domestic appliances. People need to be able to renew their stock of capital, or get their first capital items when setting up a new home, using finance that is available and affordable.

Above all, this is about ensuring that much better finance is available for stock, work in progress and capital equipment in our small and medium-sized enterprises. The banks say that there is no demand for loans from the SMEs—or, at least, no demand that they are not meeting. We all know that our constituents do not think that that is the case, and we have seen many cases that imply the opposite. Let us be charitable to the banks, however. I know that most of my colleagues here are not, but I wish to be, because I think that banking is an important source of export earnings and income. Many good people work in banks, and we need to support them as well. We need to understand that the banks are now charging so much and imposing such tough terms on loans—they are doing so because they are under a regulatory cosh to lend less and hold more capital, relative to the amount of their lending—that people are simply not bothering to ask their bank manager for a loan because they assume that none will be available. Also, businesses sometimes do not foresee increases in demand ahead and, wrongly, lack the confidence to go out and borrow money.

Of course it is not easy for the United Kingdom Government to rebuild confidence when we are part of the European Union and live close to the continent of Europe, and when we can see the spectacular crash that the EU is designing, thanks to the way in which it is mishandling its single currency and common banking arrangements. I can scarcely believe that we are meeting today against a background of part of the European Union having its banks closed for days on end and unable to carry out transactions to give the business life in Cyprus an air of normality or allow the people in Cyprus to withdraw their hard-earned money.

This is happening within the European Union because it has got its system of bank management wrong and it cannot decide who should pick up the bill when there is a crisis in one part of the eurozone. The Germans say that it is not their problem and they are not going to lend more money. They think that Cyprus ought to be taught a lesson. Cyprus says that it is under EU and eurozone control and that it built a big banking sector that now needs recapitalising. It requires money on a scale well beyond the ability of the Cyprus people to pay, so we have an impasse.

I shall give the House a flavour of the numbers involved. We have heard from a Minister in a recent statement that the proposed bank deposit tax represents 33% of Cypriot national output and income. In UK terms, that would be like saying that we had to impose a one-off levy of £500 billion on people’s bank accounts to put the position right. [Laughter.] Everyone here is laughing nervously. I do not think that many of us would be up for voting that kind of thing through, and I am not surprised that the Cypriot MPs did not vote their measure through.

We are now seeing a desperate idiocy in part of the European Union. Germany thinks that it can ring-fence the situation, and I hope it can, but if we are not careful, it will spread. That would undermine confidence in banking deposits in other parts of the eurozone and drive them deeper into recession. It would do more damage to our export market and, yes, there could even be a little collateral damage to our much better funded banks because of their relationships with EU banks. We need to be in there saying, “For goodness’ sake, sort it out and come up with a fair way of recapitalising those banks, so that the Cypriot people can to return to a normal economic life.” Meanwhile, our Government are right to say that we need to export more and more outside the European Union. With all this going on, and with a forecast of a deep and long recession on the continent, there will be no relief from the European markets through our exports.

Our banking resolution, which is making progress, needs to be speeded up. I urge the Chancellor of the Exchequer to revisit the issue of RBS. I do not believe that RBS is a natural unified bank. It is far too big, and it has far too many businesses in it. We should split it up, sell it on and make it more competitive. We need more competitive banks on the British high street that are capable of financing our recovery. We are trying to build the private sector-led recovery with weak, broken banks in the state sector and not enough banks outside in the private sector. We are also trying to do it under European regulation, which does enormous damage to banking and energy costs, and therefore to industry. Britain is partly free of that regulation, but please, Government, make it freer and get on with the task of creating the jobs and the growth that the British people rightly expect.

--- Later in debate ---

[John Healey]

I have to say to my hon. Friend that there is sometimes a case for changing the historical land use, but that is a decision that very much needs to be taken locally. It will certainly not work if it is dictated by the Department for Communities and Local Government.

To deal with a deficit, which is what we face—whether it be for a country or a family—we must control spending, as the Chancellor said, but if we cut income at the same time, that makes it much harder to close that gap. That is why growth is so vital to a proper balanced plan for the country’s finances. That is why the Chancellor is now further from his fiscal targets than he was before the Budget.

The Prime Minister has tried to claim that the depressed growth has nothing to do with the Government. The independent Office for Budget Responsibility, he told us, is

“absolutely clear that the deficit reduction plan is not responsible; in fact, quite the opposite.”

Next day, a letter from the chairman of the OBR indeed confirmed the opposite, saying

“for the avoidance of doubt”

that the OBR operates

“the widely held assumption that tax increases and spending cuts reduce economic growth.”

In other words, the Chancellor has cut too far, too fast, killed the recovery and choked off growth.

There is good reason to believe that the OBR has underestimated and is underestimating the impact of fiscal policy on growth—the fiscal multipliers. Its estimates to date have been based on the International Monetary Fund figures, which estimate a 0.5% fiscal multiplier, 0.3% for changes in personal taxation and 1% for infrastructure and capital spending. The IMF has recently changed its estimates—up from 0.5% to a range between 0.9% and 1.7%. In other words, the impact of fiscal policy, the potential of the fiscal multiplier and of Government action and Government investment might be much greater than we have been led to believe.

At a time when consumer and business confidence is rock bottom and companies and households are cutting back and not spending, the Government must be ready to do more. They must be ready to invest alongside the private sector and they must, yes, be ready to borrow to help the country through tough times. Borrowing is bad when the repayments are not affordable or if it is done to cover day-to-day spending or indeed a shortfall between income and expenditure. That is why the Government’s planned borrowing bill has been ballooning, but borrowing can be good. It is good if it is for investment to improve infrastructure or the productive capacity of the economy or if it is to create jobs, revive growth and generate the tax revenue that is so sorely lacking.

Companies would borrow to take advantage of an opportunity to increase their earnings and profitability. Companies would never say, “We can borrow to invest only if we can cover the cost entirely by cutting the cost of our operations.” Households would do the same thing if, for example, borrowing to buy a car meant that it was possible to take up better-paid work, or if taking out a mortgage was cheaper than paying a private rent. In those circumstances, households would be daft not to borrow.

[Mr Redwood]

Given that this Government are planning to borrow £120 billion a year for each of three years, or £10 billion a month, how much extra does the right hon. Gentleman think it would be a good idea to add to that amount?

[John Healey]

There is an interesting example of a proposal, which I have backed, to allow local government to borrow more by removing the cap from the newly localised housing revenue account. We have heard about families borrowing prudently, but local government does borrow prudently, as its average level of debt is less than 5%. The Chancellor told us that the national Government’s net debt is 75%. We are talking about £7 billion, loosening the cap, and 15,000 new council homes—not just for this year, as the Chancellor has announced, but every year for the next five years. That is the sort of borrowing we could do to invest, to promote jobs, to promote growth and to bring in tax revenues, helping to deal with the deficit in a proper and balanced way.

If we want to move the dial on GDP growth when the economy is weak, it is Government investment—not simply private sector investment—that is needed. When the economy is weak, we need more public investment; yes, it will increase debt, but it will also increase output and growth. Even the Chancellor recognised, when he delivered his first Budget, that the last Tory Government had cut capital investment too far, yet the Office for Budget Responsibility has shown that for the first three years of this Parliament, capital spending fell year on year—it is now £12.8 billion lower than Labour planned. Even the £3.5 billion of extra investment that the Chancellor has announced today will not be for this year or next year, but in three years’ time—too little, too late.

I would argue that, after three years of economic policy failure, the balance of economic advantage lies decisively in Government borrowing to invest and build. Borrowing for those purposes can be good borrowing. There is a difference: not all borrowing is bad borrowing. Interest rates on public debt are at an historic low, so now is exactly the right time for government, both national and local, to borrow for that investment. An open advocacy of the means, not just the ends, is overdue.

The Chancellor has confirmed in his Budget that his economic plan is failing, but he has also confirmed that he is sticking to that plan. We need a change. We need a change of policy, we need a change of Chancellor, and yes, we need a change of Government.