Budget Resolutions and Economic Situation
Debate between Kelvin Hopkins and Mark Field(9 years ago)
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Mark Field (Cities of London and Westminster) (Con)
As the City’s MP, it would be remiss of me not to touch on the issue of the bank levy. When it was introduced in the immediate aftermath of the financial crisis, it was specifically designed to reflect the cost to the public purse of the implicit insurance provided by the Government to the finance sector. The suspicion is that more recently the bank levy has become as much an instrument to assist in deficit reduction.
I understand why the Chancellor sought to outwit his political opponents in March’s coalition Budget—that close to an election, I guess there were few votes to be gained by siding with bankers—but now that we have political stability, I welcome his commitment to ensuring that in future the replacement surcharge does what was initially intended. I suspect that this will sufficiently impress HSBC to stay for now, although I appreciate that perhaps too much good will has been expended by the Government on the ring-fencing arrangement for much to change in that regard—despite the threat to the international competiveness of the UK financial services from elements of the Vickers regime.
The more significant medium-term threat to banks remaining headquartered here in London probably arises from the “reckless banking” legislation. Once this is properly tested in the courts, it will be instructive to see just how many senior executives in the largest global banking conglomerates regard London as a place where they will be happy to be domiciled. That is work in progress for most of the City and the Treasury.
I shall say a quick word on the infrastructure and airport capacity debate. My constituency will undoubtedly be adversely impacted by the enlarged flight paths that will accompany the proposed third runway at Heathrow. I am also deeply concerned about air quality, even before the prospect of additional aviation pollution. However, all of us west and central London MPs need to recognise the national interest. There were certainly only anti votes when I supported Crossrail, which has disruptively carved its way through several residential districts in my constituency, but this major infrastructure is essential. Similarly, the UK and London economies desperately require additional airport capacity.
I would have been keener had the Davies commission come out in favour of Gatwick, but it has unequivocally come out in favour of expansion to the north-west of the Heathrow site. It is a finely balanced judgment, and I think there will be some funding problems when we come to put this in place in the years to come, but with reluctance I now take the view that the Government should move ahead with minimal delay and implement the Davies commission’s clear conclusions.
The Government have been wise to raise their horizons in addressing the sustainability of the UK’s recovery in an ever-expanding sea of global debt. At the last emergency Budget, in June 2010 as the last Parliament began, the Chancellor assumed that the then £1.32 trillion of accumulated national debt would cost some £66.5 billion annually to service. The debt pile has now risen to £1.63 trillion, but here’s the rub: we are expecting that to cost only about £51 billion a year in debt interest.
At this point, it should be said that the Chancellor’s determined rhetoric of fiscal retrenchment has earned him the confidence of the capital markets, which I am sure would rapidly have deserted any Labour Finance Minister. However, there is a herd of investors in the capital markets pricing Government debt with a deceptive, even dangerous, sense of calm. Incidentally, it is worth noting that the record low global interest rates apply to Government bonds issued by all but the most basket-case economies, even in the eurozone. In large part, there is a fear that deflation might be here to stay and that a prolonged period of stagnant or very low growth could be in the offing.
Mark Field
I will not, if the hon. Gentleman will forgive me; we are under a strict time constraint.
In such uncertain circumstances, taking on Government debt often seems the safest bet in the markets. The impact of quantitative easing and the excess demand for bonds, driven largely by EU regulatory requirements to invest in safe havens, have both helped to reduce the cost of borrowing by Governments. At the same time, however, our own Office for Budget Responsibility, along with the International Monetary Fund, is projecting healthy growth for the UK economy in the years to come. They are both predicting not a period of Japanese-style deflationary stagnation implied by the pricing of Government debt but solid year-on-year growth at a rate of 2.5% to 3%. The trouble that lies ahead for the UK economy is that once the markets catch up to this reality, it is a racing certainty that the cost of servicing our debts will rise, and fast.
In short—and perhaps paradoxically—it is a sustained economic recovery that risks blowing a huge black hole in future years’ budgets as the UK continues to grapple with the vastly expanded debt that has been accumulated over the past decade. That is why the Government are absolutely right to say that drastic and determined Government action on deficit reduction is essential for the medium-term health of the economy. The Chancellor is right to tackle the debilitating impact of entitlement in much of our welfare system, and now is clearly the time to do that, while the sun is shining. Given all the difficulties in the markets, and all that is going on in Greece and China, our positive economic news might not be around for much longer.
At the beginning of this year, analysis by the McKinsey Global Institute revealed that global debt had risen by some 17% since the final quarter of 2007, when the collapse of Bear Stearns and Lehman Brothers was in the offing. The racking up of debt on this scale represents the biggest experiment we have ever conducted in the global economy. Short of the unleashing of a burst of unprecedentedly high levels of output and sector-wide productivity growth, or alternatively a programme of fiscal contraction hard to imagine in an era of welfare dependency and universal suffrage, it is impossible to see how the developed world will ever be able to repay these levels of debt properly.
Historically, Governments have dealt with debt piles by allowing a little inflation to develop. The other option is to introduce what the economists call fiscal retrenchment. The double whammy of the 1930s depression and the cost of fighting world war two in the following decade left all western economies with equivalent debt levels relative to national income. Between the 1950s and 1970s, yields from Government bonds were deliberately set at just below inflation. As a consequence of the alchemy that comes with compound interest, a lot of our debts were paid off.
That might seem to be a comforting parallel, but there are key differences today. One is that we live in an age of free cross-border capital flows, and much of our borrowing comes from international sources. The model of squeezing creditors by means of negative real interest rates and rising prices simply will not work when credit is denominated in a foreign currency or in a deflationary era. We need only look at the ongoing travails of the eurozone to see the limits of imposing financial repression when nation states are locked into a monetary straitjacket.
Much is made of the fact that one third of UK Government bonds have been mopped up by the Bank of England, which has helped to keep interest rates very low—we have now had 76 consecutive months at the emergency 0.5% rate. More distorting still is the fact that more than 40% of our gilts are owned by foreigners. In this uncertain world, those overseas creditors might take on the chin the impact of artificially low returns on their bonds, but they may be considerably less sanguine about the impact of currency risk. The market sentiment towards sterling is currently benign, despite record current account deficits, but if that were to change and if the pound were to fall, sterling-denominated gilts in the hands of foreign investors would rapidly lose their value. The prospect of such overseas creditors losing confidence in the UK economy would then be very real.
For that reason, the Government’s actions are of critical importance. They must persist in reducing the deficit as a matter of national urgency, to ensure that we collectively start to live within our means as rapidly as possible. What really concerns me, and what should concern policymakers, is that at the moment it is difficult to imagine the circumstances in which the cost of credit might be rapidly increased—as will be necessary in the years to come—without the economic roof falling in.
Finance (No. 2) Bill
Debate between Kelvin Hopkins and Mark Field(11 years, 3 months ago)
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Mark Field (Cities of London and Westminster) (Con)
If there is one small area where I would agree somewhat with the hon. Member for Nottingham East (Chris Leslie), it is that the Chancellor’s room for manoeuvre was incredibly limited as he delivered the Budget four weeks ago. There is no doubt that many of those constraints come as a result of global events. The latest stage in the eurozone debacle as Cypriot banks have been underpinned is a contemporary case in point, and we see ongoing problems in Portugal that I fear will deteriorate as the weeks and months go by.
However, it has become ever clearer that in the coalition Government’s first Budget in June 2010, they were, I accept, complacent about growth. The short pre-election boom following the 2009 VAT reduction and the very large early rounds of quantitative easing lulled the coalition, on assuming office, into believing that the growth that had come about in the two or three quarters before the 2010 election was baked into the system and would somehow do the heavy lifting when it came to deficit reduction. The coalition’s plans to eliminate the structural deficit required the gap between revenue and expenditure to be narrowed by some £159 billion by 2014-15. Tax rises were expected to contribute £31 billion and spending cuts £44 billion, and the remaining £84 billion was meant to come from compound growth of 2.7% throughout the Parliament.
Unfortunately, however, as we now know, the coalition ended up with possibly the worst of all worlds. It has received unwarrantedly relentless criticism from Labour Members for so-called harsh austerity measures when, in reality, it has too often lacked the political will to execute the levels of savings required. For all the rhetoric, we are still overspending by some £300 million every day. We are borrowing, not spending, that amount each and every day, and that means that we will continue to have to borrow to the tune of some £120 billion year on year.
Kelvin Hopkins
The hon. Gentleman seems to be saying that the Conservative coalition Government had the benefit of Labour’s reflationary strategy, which was implemented before the election, but then reversed it so that things have got worse ever since. Should they not simply have carried on with Labour’s strategy?
Mark Field
The hon. Gentleman makes a good case, I suppose, but we all know that the reality was that the short-term boost of VAT reduction and the early batches of QE was unsustainable. They were a pre-election boomlet, but, as I have said, the entire political class became rather complacent and thought, somehow, that the worst was behind us after the crash of 2008. We now know that that simply was not the case.
In 2010 the entire political class should have looked the electorate in the eye and been clear about the magnitude of the task that lay and, I am afraid, still lies ahead to rectify the public finances, but we are where we are. I personally take the view that talk of radical tax cuts from some on the Government Benches is perhaps unrealistic. I fear, for a start, that confidence is so low that until it is restored almost any tax give-aways are more likely to be squirreled away by individuals and companies than pumped back into the economy.
I also think we would run the serious risk of the markets losing faith if we were to play even faster and looser with public borrowing. In spite of the recent loss of our triple A rating from Moody’s, the Chancellor’s great achievement—it should not be underestimated—is that we are still able to borrow in international markets at such low interest rates. The lesson of both 1931 and 1976 is that once the markets turn, all is lost.
My main hope for the Budget and this Bill was that the coalition would take some of the longer-term decisions that the British economy requires. I am pleased that resource is being set aside for key, shovel-ready infrastructure projects. I had hoped that cash would be accompanied by decisions and leadership on aviation and energy infrastructure. We cannot let these sensitive political footballs be kicked once again into the next Parliament. I think that the UK, as a trading nation, requires certainty on those issues, not an endless parade of commissions and reviews.
I am pleased, however, that the Treasury has helped out small business. The march towards ever lower rates of corporation tax, as the Exchequer Secretary has pointed out, is highly welcome, as are assurances that small firms will be given a chance to bid for Government contracts under the small business research initiative.
The extent of capital gains tax relief to attract start-up capital for new limited companies is also very good news. Best of all, however, is the knocking off of the first £2,000 of employer national insurance contributions for small and micro-sized businesses. That will, I hope, begin to chip away at the worryingly high levels of youth unemployment by lifting some of the obvious disincentives to taking on new staff.
I am afraid that I am a little less sanguine about the Chancellor’s flagship Help to Buy plan. I appreciate its raw politics, underpinned as it is by a desire to help struggling younger people on to the housing ladder, many of whom are paying much more in rent than they would as part of a mortgage, if only they had a deposit. Nevertheless, I ask the Treasury to give considerable thought in the consultation period to what we are trying to achieve. Let us look carefully at supply rather than just finance, since I suspect that the latter will simply help keep prices out of the reach of the very people whom we wish to serve, as the hon. Member for Edmonton (Mr Love) has said. I do not wish the taxpayer to be on the hook for the consequences of a reinflated property bubble. Let us not forget the US experience that lay at the heart of the financial crisis.
I, like many other Members, am also disappointed that the Office for Budget Responsibility’s predictions for our economy as recently as the autumn statement on 10 December 2012 were proved, only 14 weeks later in the March Budget, to have been so considerably off beam. Few doubt that economic forecasting is an especially dismal science. However, the OBR’s intervention in December proved essential in buying the Chancellor crucial breathing space at a time when many commentators had assumed that we were about to flunk our plan to reduce the deficit year on year. To that extent I accept what the hon. Member for Nottingham East has said. Many even-handed people will regard that as a sleight of hand, but, more importantly, the scene was set for cynicism and deep disappointment when aggregate borrowing for the next four years was projected at some £49 billion higher only 14 weeks after the autumn statement.
It is worth saying, however, that that is part of a tradition during all my 12 years in this House. Every single Budget between 2001 and 2007 forecast that public finances would move back into surplus in about three or four years’ time. Instead, as the hon. Gentleman will remember, debt and the annual deficit rose inexorably while the Treasury conjured the illusion of fiscal stability. Similarly, at every autumn statement since June 2010, the OBR has, I fear, been forced to downgrade growth out-turns while continuing to hold somewhat optimistically to the notion that the public finances will be transformed by robust growth in two years’ time.
The establishment of the OBR was meant to herald a fresh era of forecasting credibility, but it now seems all too reminiscent of the previous Administration’s discredited financial projection. I think that observers are beginning to wonder whether we should have any regard for the OBR’s latest set of predictions or, indeed, take with anything more than a pinch of salt assurances that recovery is only around the corner.