UK Economy

John Redwood Excerpts

Wednesday 29th June 2016 Commons Chamber

[John McDonnell]

To be frank, we need to move on now. I expressed my concerns about some of the over-exaggerated claims at the beginning of the campaign that turned people off. We now know, however, that many of the claims made on both sides are unfortunately coming true.

The leave vote in last week’s referendum has left us all with an immense series of tasks, and the economic situation is a major challenge for us all. Let me run through some of the headline items that we know about over these last few days: the UK’s triple A credit rating has been lost; the pound fell to a 31-year low; sterling markets have been in turmoil, as have stock markets here and abroad; the FTSE 100 index registered the biggest single-day fall since the bankruptcy of Lehman Brothers in 2008; employers, most notably in the financial services, are already looking to relocate jobs, with a quarter of all those employers saying that they have introduced a hiring freeze; and shares in UK banks have fallen dramatically. These are not comments, but realities, and this is just an outline of the situation that now obtains.

[John Redwood (Wokingham) (Con)]

Will the hon. Gentleman welcome the fact that the bond markets did the opposite of what the ratings agencies suggested? They said that the price of bonds should go down and the cost of state borrowing should go up, but I am very pleased to tell him that the opposite happened: bonds are at a new all-time high and, according to the market, we have record lows of borrowing costs. Does this not prove that the markets actually had a huge vote of confidence in respect of state debt and state creditworthiness?

[John McDonnell]

It proves the chaotic nature of the market at the moment.

Let me look ahead. Most major forecasters have revised their expectations of future growth sharply downwards. There is a major loss of capacity and the potential for permanent damage to the UK’s growth prospects cannot be ruled out. We await an official assessment from the Office for Budget Responsibility, as the Chancellor announced in his statement on Monday morning. I think that an initial assessment should be given sooner rather than later, but ongoing close monitoring would be welcome, with regular reports to Parliament to ensure that that is happening. There is a prospect that the OBR will report at least a serious worsening in the public finances.

--- Later in debate ---

[John McDonnell]

We are short of time and a lot of Members wish to speak.

Whenever aviation expansion takes place, it will be judged on the criteria that the Labour party has set, which include the environmental impact and the impact on the wider economy. We await the proposals from the Government and we will then take our decision.

The referendum vote has forced a debate on the best course for our economy and for economic policy. It is unlikely that a simple return to business as usual will be possible or even desirable, but there are immediate steps that can be taken to calm market volatility and to limit the shock to demand. It is incumbent on the Government to take those necessary measures and Labour, in the national interest, will support measures intended to stabilise the economy when they protect households and businesses.

On monetary policy, of course authority rests with the Bank of England to intervene to preserve the stability of banks and the wider economy. Governor Mark Carney’s Friday morning statement was important in helping to stabilise the immediate situation. However, some interventions by the Bank will require authorisation from the Government. To ensure the success of those interventions, it will be helpful if the House is kept as fully informed as practicable of those authorisations, with regular updates.

On fiscal policy, with the expected slump in demand, the Government’s present fiscal charter is, to say the least, increasingly anachronistic. With the Chancellor having missed two of his three targets—on debt and on the welfare cap—he will now have to suspend the deficit target. The charter’s restriction on investment spending in particular is impossible to defend. For the regions, a squeeze on Government investment could be especially damaging.

Last year—this was raised earlier at Question Time— over £10 billion was provided in regional development funding by the EU. That was concentrated on our most deprived regions and places that needed it the most. What steps are the Government taking to ensure that that essential funding will now be made good? What structures are being put in place to liaise with elected mayors, local government leaders and regional bodies to address the loss of EU funds?

The UK currently holds a 16% stake in the European Investment Bank, which last year disbursed a record £6 billion in investment for the UK. That includes £l billion for social housing. What steps are the Government taking to maintain current programme funding? What plans do the Government have for the UK’s stake in the European Investment Bank?

[John Redwood]

Will the hon. Gentleman give way?

[John McDonnell]

May I press on? I have taken a significant number of interventions and I am worried about time.

Significant uncertainties have been created for those trading with Europe, including manufacturers that are reliant on extended supply chains across the EU. What measures are the Government putting in place to support supply chains that are threatened by the severance of those ties and the falling value of the pound?

Exit from the EU threatens the UK’s continued status as a global financial centre. A number of major banks have already put in place plans to move jobs from the UK. They are fearful of the loss of their European Union passport that allows them to win business across the EU. We need to know soon from the Government how they will ensure that those passport rights are retained. I hear that one French negotiating position is to offer EEA status with some controls on freedom of movement, but the loss of bank passporting rights. Clearly that is a move to encourage bank migration from London and it is unacceptable. The resignation of Lord Hill as Finance Commissioner means that the UK currently has no voice at Commission level to argue the case for UK finance. What steps will the Government take to ensure that the voice of UK finance continues to be heard in Europe? May we propose to Government that, as a matter of urgency, they establish a working group to monitor the ongoing threat to the UK’s financial stability, working with representatives from across the financial services industry?

It would be wrong not to mention the threats that have been made to community cohesion following the vote to leave. I was very concerned to hear about the attacks on the Polish community. Any such attacks must be condemned outright by the whole House. I have a Polish community in my constituency. The Polish War Memorial nearby at Northolt stands testimony to the sacrifices of Polish pilots during the second world war. I have attended many meetings at the Polish centre in Hammersmith, which was disgracefully attacked. I send my message of solidarity to that community and to anyone else suffering from the rise in racism. What mechanisms will the Government put in place with local government leaders and city mayors to protect these communities, to help to overcome these divisive actions and to resource the programmes that will be brought forward?

We will get through this period of uncertainty, as Britain has done many times in the past. There are real strengths in our economy, not least our talented and dedicated workforce. None the less, volatility continues and grave uncertainties remain about the UK’s future relationship with our European partners and the wider world. The future direction of Government strategy is not yet determined, but Labour is prepared, in the national interest, to work with the Government and our parliamentary colleagues on both sides of the House to ensure that the best interests of the British people are secured. I commend the motion to the House.

[The First Secretary of State and Chancellor of the Exchequer (Mr George Osborne)]

I very much welcome this opportunity to update Parliament and the country on some of the economic challenges that we now face. I welcome the hon. Member for Salford and Eccles (Rebecca Long Bailey) to her new position as shadow Chief Secretary. I will not welcome all the new members of the Labour Front Bench because it would be a bit like the presentation of the Bills that we just saw, but it is very good that the shadow Chancellor is still in place, and he has 80% of the support of the Conservative parliamentary party to remain there.

May I respond to this sober debate with a message of reassurance and realism? I say at the outset that because this is a challenging time and this is a good opportunity for the House to discuss these issues, we are not going to seek to divide the House on the motion today.

That message begins with the reality that I have never shied away from telling the country the truth, as I have seen it, about our economic challenges, and we do now face very significant economic challenges as a result of the referendum decision last week. I do not resile from any of the concerns that I pointed to before the referendum, but I want to provide reassurance that we are about as well placed as we could possibly be to meet the challenges that lie ahead. The shadow Chancellor was correct to raise problems such as low productivity growth, which bedevil many western economies, but the British economy has been the strongest advanced economy in the world in recent years. We have the highest employment rate in our history. The capital requirements for our banks are 10 times higher than they were before the financial crisis. Inflation is low and stable, and real wages and household disposable incomes have been growing. These things did not happen by accident—they happened because over the last six years we took difficult, sometimes painful decisions in order to rebuild our economy, to strengthen our banks and to put our public finances in better order. We said we would fix the roof—and thank goodness we made the progress that we did.

While I personally gave everything to campaigning for a different outcome, we saw a clear result in the referendum. I accept that result and the Government accept that result. Now we need to implement that decision and deliver for the British people on the instructions they have given us.

[John Redwood]

As the 10-year cost of borrowing has fallen from 1.4% to under 1% and the rate for 30-year money is now under 2%—record lows—does that not mean that there will a windfall element from lower interest charges? Will the Government consider funding the debt longer at this advantageous time for borrowing?

[Mr Osborne]

My right hon. Friend is right to point to the fall in UK gilt yields, but there has been something of a flight to safety. In the last six years, we have made UK Government debt a safe haven in stormy waters, and on this side collectively we can take enormous pride in the fact that we have done that. It is very different of course from the situation six years ago when yields were increasing in the face of economic difficulties, whereas here they have come in.

In terms of the financing of the debt, I have already on a number of occasions over the last six years changed the skew of the Debt Management Office’s debt plan and made sure we have more longer-dated debt than we would otherwise have had. One of the reasons why international investors and others have confidence in the UK gilt market is that we do not chop and change all the time every week, so while my right hon. Friend makes a very good point, I do not think we should immediately respond to the events of the last week by changing our financing remit. Indeed, the message we need to be sending very clearly is one of stability and reassurance. That brings me to the plan I believe we should now follow.

First, it involves ensuring financial stability, and that is precisely what we have been doing in the past few days. In the run-up to the referendum, the Treasury worked closely with the Bank of England and the Financial Conduct Authority to put in place robust contingency plans for the immediate impact of a leave vote. I met the Governor of the Bank of England to discuss it on a number of occasions, and the Financial Policy Committee and the Monetary Policy Committee both had special meetings to discuss those contingency plans. The Prudential Regulation Authority—essentially, our bank regulator—worked systematically with each major financial institution to make sure they were financially sound and prepared for whatever the outcome of the referendum was going to be. The Bank of England pre-announced additional liquidity auctions to support the banking sector. People will have seen this week from the result of those auctions that that liquidity has been provided. Over the last few days, we have been working closely alongside Finance Ministers and central bank governors across the G7 nations and the nations of the European Union to make sure that we are monitoring developments closely and are ready to respond. The president of the European Central Bank updated the European Council yesterday—the Prime Minister reported on that to the House earlier—but it has to be said that the update was not particularly rosy. Let us be clear: these contingency plans were designed to prevent disorder in markets; they were not designed to stop markets adjusting to the new economic reality.

I can reassure the House today that our major banks are resilient. Capital and liquidity remain strong, and this morning we have seen greater stability in the major banks’ share prices, and the currency markets are continuing to function effectively. But there have been significant adjustments, and we have to be realistic about the impact of the referendum on the financial markets.