Policy for Growth

Kelvin Hopkins Excerpts

Thursday 11th November 2010 Commons Chamber

[Mr John Redwood (Wokingham) (Con)]

I beg to move,

That this House has considered the matter of policy for growth.

It gives me great pleasure to move the motion and I know that I speak for many others in this House when I say that we welcome the Backbench Business Committee’s decision to hold a debate on this crucial subject. I also remind the House that in the Register of Members’ Financial Interests I have pointed out that I am a business adviser to a couple of companies.

This is a crucial subject because the Government’s whole economic strategy rests on the assumption of above-trend growth starting next year and continuing for the rest of the Parliament. I am sure that every Member would like to see faster and sustained economic growth from this point after the trials, tribulations and difficulties that the economy has been through in recent years.

Knowing how popular this debate is and that about 50 Members would like to catch your eye, Mr Deputy Speaker, I shall not exercise the right of the mover of a motion to speak at great length. The House will be delighted to know that I shall not be giving my analyses of where the world and British economies are or of monetary and growth trends, as that would take a little longer. All those who are desperate to know my analysis can read it on johnredwood.com—a not-for-profit site that is full of wise advice and good analysis with a great deal of modesty. I am sure that colleagues will be delighted to know that. I shall stick to the headlines, based on my analyses, and the conclusions that I should like to put to the Minister and others.

The strategy over the five years in the Red Book, as amended in the Green Book, says that by the fifth year of the Parliament the Government hope to be spending £92 billion a year more on current public services than in the last Labour year, and that they wish at the same time to reduce the deficit. To do that, they assume that there will be an increase in tax revenue of £176 billion a year by that fifth year. We believe that it is assumed that most of that increase in tax revenue will come from increases in current tax rates through growth in the economy. So the Government have a great deal invested in the idea that growth is going to speed up and be sustained—we all do.

My first point is that the one thing we cannot afford over the next five years is rapid inflation. Currently, inflation is too high. The Bank of England, I am afraid, was disastrous in the era of the exchange rate mechanism when it lurched from boom to bust and advised the Government to take that course. It was again extremely bad over the past five years when the conduct of monetary policy also lurched from boom to bust. The Bank and the banking regulators allowed far too much credit up to 2007 and then starved the markets of money and kept rates too high in 2007-08 and into 2009, and we lurched from boom to bust. That was not a global crisis: those events were not happening in India, Australia, Canada or China, but they were Atlantic events—America did something similar. Britain did that and we must not do it again.

My policy recommendation to the Treasury is that I hope that the Chancellor will make it very clear in the next couple of weeks that we do not need any more money printing or quantitative easing in the current circumstances. The economy is growing, jobs are being created and inflation is still running at somewhere between 3% and 4.5%, depending on which index one relies. When we talk to business, we hear that there is a lot of inflation out there in the pipeline thanks to commodity price increases and increases in the world supply line prices now. Those increases are largely fuelled by the enormous quantitative easing under way in the United States of America and we do not need Britain to fuel them further with more quantitative easing.

[Kelvin Hopkins (Luton North) (Lab)]

Is not what is happening now simply the lagged effects of the Labour Government’s reflations out of the recession?

[Mr Redwood]

No, I do not think that is true at all. The reason we are now beginning to come off the bottom is that monetary policy lurched from being too tight to being too loose. Labour always said that that matter was decided by the Bank of England rather than by it, but we now need to think ahead. Monetary policy has been loosened somewhat and there is a bit more money around—indeed, there is a lot of money in the world as a whole—and it would be a disaster to fuel great inflation from here. If we can hold public sector pay and prices down—

[Kelvin Hopkins]

rose—

[Mr Redwood]

I shall not give way, because many colleagues want to join in. The hon. Gentleman knows that I normally give way generously, but too many people want to join in.

If we allow public sector inflation to take off, that £92 billion extra will be needed to pay for the extra costs and wages and will not be available for real increases in programmes that most colleagues would like.

--- Later in debate ---

[Kelvin Hopkins (Luton North) (Lab)]

It is a pleasure to follow the hon. Member for North West Leicestershire (Andrew Bridgen), although I think we have very little in common politically. My politics are almost identical to those of his predecessor, the great David Taylor, a fine parliamentarian and a true socialist.

This debate is essentially about growth, but the Government cuts strategy will have the opposite effect. It is acknowledged that the cuts will drive up unemployment by something like 1 million, but there is speculation that that could go up to 1.5 million, which would mean a total unemployment level of something like 4 million. That will mean a massive loss of confidence for consumers, lenders and corporations as we plunge into depression, and years—possibly decades—of deflation. That has been described as the Japanisation of the economy, which is defined as the

“deflationary trap of collapsed demand that occurs when consumers refuse to consume, corporations hold back on investments and banks sit on cash.”

That is what we face.

My views are perhaps best expressed by Paul Krugman, the Nobel prize-winning economist, who said that the Government’s plan for the economy

“boldly goes in exactly the wrong direction”

and that it

“appears to come straight from the desk of Andrew Mellon, the US Treasury secretary who told President Hoover to fight the Great Depression by liquidating the farmers, liquidating the workers, and driving down wages.”

Krugman further observes that

“the Government is using the financial crisis of 2008 as cover for advancing an ideological programme for downsizing the welfare state and that its plan has been sold to the public with an unprecedented and unwarranted degree of fear-mongering”.

I absolutely agree with that. He might not be to the taste of Government Members, but a Conservative Member of the upper House, Lord Skidelsky, says that the Chancellor of the Exchequer’s fiscal contraction will lead to a fall in growth. I will leave that with them.

There are historical precedents. In the 1920s, we had the Geddes axe, a massive programme of cuts that saw the economy shrink in 1920-21 and slow growth throughout the 1920s. Government debt actually increased during that time from 135% of GDP in 1919 to 180% of GDP in 1923. By 1929, Government debt was still higher than in 1919, immediately after the first world war.

Subsequently in 1931, we had the Snowden cuts, a shameful period when our former Labour leaders brought about a split in the party. I am pleased to say that today’s Labour party grew out of the opposition to those cuts. The national Government—a coalition Government that was essentially Tory—took us off the gold standard. Snowden said afterwards said that no one told us we could do that. They recovered only by devaluing, which has happened time and again. Even then, there was relatively feeble growth through the 1930s. Not until the massive expansion in public expenditure during the war did the economy begin to recover. After 1945, there was a period of full employment for at least 25 years—unemployment was half a million or less—and Government debt fell from about 250% of GDP to 50% of GDP. That was a period of high Government spending, and it saw the development of the welfare state and the national health service, among other things.

I commend the hon. Member for Brighton, Pavilion (Caroline Lucas), who is no longer in the Chamber, for what she said about growth. There are enormous areas in which we could invest additional spending now to reduce unemployment and, in effect, the deficit. I suggest that we have an enormous programme of green growth and targeted investment in construction. We could build energy-efficient buildings, insulate every building in the land, and put local energy generation into every site. We could have heavy investment in infrastructure, especially railways and rail freight, and in areas that are labour intensive. Of course, one of the most labour-intensive areas is the public services, which the Government propose to cut. I suggest that we should invest more in the public services and soak up unemployment, which would have beneficial effects in every way, including bringing down the deficit. The environment needs enormous amounts of investment to improve it, and we could also invest in energy—solar, geothermal, wind, wave and tidal.

[Andrew Bridgen]

Where would the money come from? Which bit of “There’s no money left” is the hon. Gentleman failing to understand?

--- Later in debate ---

[Kelvin Hopkins]

Indeed, in the short term, we would borrow it. Another factor that the Government constantly ignore is the tax gap of £120 billion a year in tax that is not collected. It is evaded, avoided or simply not collected. If we collected a fraction of that £120 billion, we would have plenty to spend.

In the short term, we should spend more and invest in labour-intensive areas to bring down unemployment, which would bring down the deficit and make life better for everybody. If we want growth, we have to spend more in the short term, not less, and that money can come initially from closing the tax gap. If we have to raise taxes on the better off, so be it, but we have to spend more, not less. The suggestion that Labour spent more than other countries is nonsense. For example, 10 years ago, public spending in Scandinavian countries was more than 50%, or 10% to 15% of GDP more than ours. We were not over-spenders. Indeed, I argued for a long time that we should follow the Scandinavians’ example. I was somewhat critical of the Labour Government in that respect, although they did infinitely better than this Government will do. I really fear for the future of this country, if the Government press ahead with this cuts programme. We face a period of mass unemployment and deflation, which is much harder to eradicate than inflation. Deflation—

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Order.