The Economy

Kwasi Kwarteng Excerpts

Tuesday 11th December 2012 Commons Chamber

[Rachel Reeves (Leeds West) (Lab)]

The Opposition welcome this opportunity to debate the state of the economy, the Chancellor’s record over the past two and a half years and the measures he has introduced in the autumn statement. Last Wednesday he came to the House and admitted that he had failed—failed to get the economy moving, failed to meet his borrowing targets and failed to listen to our advice and change course.

First, though, let us go back to the heady first months of this coalition Government—when they were still getting on, when they were fraternising in the rose garden. In the 2010 spending review, the Chancellor decided to implement a programme of unprecedented fiscal contraction. We said it was not the right time to cut demand, given that the economy was only just recovering from the global financial crisis, and that the cuts went too far and were being implemented too fast.

[Kwasi Kwarteng (Spelthorne) (Con)]

Is it not true that we are actually spending more than we were two years ago and that no real cuts have been made? What would the hon. Lady like to say about that?

[Rachel Reeves]

There is one particular area where the Government are spending more money, and that is welfare, on which they are spending £13.6 billion more during this Parliament, because more people are out of work or in part-time work and so receiving more tax credits. That is a sign of the Government’s failure, not of their success.

In the 24 months since the spending review, where have we got to? How much progress has been made? Is the Chancellor’s plan working? The verdict is in. We now know that borrowing and debt figures have been revised up for this year, for next year and for every year of this Parliament. The Government are borrowing £212 billion more than they planned. They said that five years of austerity would be difficult, but that it was necessary to support our economy, and they said that it might hurt, but that it would work. Well, it has not worked, but it has hurt, and we are no closer to clearing our deficit than we were two years ago. [Interruption.]

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[Kwasi Kwarteng (Spelthorne) (Con)]

Thank you, Mr Deputy Speaker. You have not been in the Chair for the whole of the afternoon, but I am pleased to see you there now.

Clearly, we have stated our positions at the beginning of this debate. The Labour Opposition have spoken eloquently about the need for growth and Government Members have commented on the mess in our public finances that we inherited in 2010. The gravity of the situation in 2010 should not be underestimated: our deficit to GDP ratio in 2010 was higher than it had ever been in peacetime conditions. That was a function of probably the worst management of public finances that this country ever had the misfortunate to live under.

I am very pleased to follow the right hon. Member for Edinburgh South West (Mr Darling), who served at the tail end of that Administration as Chancellor of the Exchequer. To use a cricketing metaphor, he was very much like the night-watchman who is sent in when the team has collapsed to 70-8 and the light is pretty dim. He did well in trying to steady the ship, but we have to look at the damage that had been caused in the public finances before he took over his post and at what the Labour Administration did not only from 1997, but in particular from 2001 to 2007, during which time they ran a deficit in each consecutive year for seven or eight years before the crisis happened. No academic textbook and no economic school of thought thinks that it is a good idea to run a deficit when the economy is growing. In 2004, the economy was growing at 3%; it was going at full rate, jobs were being created and investment was taking place. What was the deficit then? It was 3%; even under the Maastricht criteria, the previous Government would have failed. No Keynesian in his right mind, and certainly not John Maynard Keynes himself, would have ever contemplated running a deficit of more than 3% when the economy was growing at 3%.

[David Rutley]

Will my hon. Friend confirm that even former Prime Minister Tony Blair felt, on reflection, that Labour was spending too much when it was in office?

[Kwasi Kwarteng]

Absolutely. The former Prime Minister has said that on a number of occasions. I have been on record as saying that the first Labour Administration between 1997 and 2001 was, I freely admit, a very conservative fiscal Government. As the right hon. Member for Edinburgh South West well knows, during those four years the budget was never in deficit. We ran two years of surpluses and the budget in the other years was balanced. It was only after 2001 that the disaster occurred, that the wheels spun off the car and we suffered under a profligate traditional Labour tax and spend regime. I use the phrase “tax and spend” very gingerly, because the taxation never covered the spending.

That was precisely the reason why the Government ran those deficits—to pay for their projects, to pay for greater spending. They were required to borrow money. I remember that in 2001 one of their favourite columnists, Polly Toynbee, said that Labour would have to tax more in order to spend the money. At least that was an honest position. She was suggesting that Labour should try and balance the budget at a higher level of spending. I and my colleagues might want to balance the budget at a lower rate of spending, but both Polly Toynbee and those on the Government Benches would accept is that it is a road to disaster to borrow yet more money in order to spend on grand projects or whatever utopia the Government want to build in this country. We now have the consequence of this recklessness—of Government Ministers at the time spending more and more money and running 3% deficits.

[Mr MacNeil]

Can the hon. Gentleman tell us for how many years since 2001 the UK has been able to pay its way?

[Kwasi Kwarteng]

I can answer the hon. Gentleman very directly. With reference to our public finances, we have been borrowing money every year—every single year. It is likely that even if we are able to eliminate the structural deficit by 2018, this country will have seen nearly 20 years of continual deficits. This is an appalling legacy that Labour has left the country. Since the end of the second world war, we have never run 20 years of continual deficits, which we will do as a consequence of Labour mismanagement and old-fashioned incompetence.

[Charlie Elphicke]

In his praise for the former Chancellor, has my hon. Friend noticed that the right hon. Gentleman said in his memoirs not only that the Labour Government overspent, but that they ran a parallel Treasury operation while he was Chancellor trying to sort it all out as a night-watchman, undermining his work while he was trying to stabilise the ship?

[Kwasi Kwarteng]

That is right. Many historians will be needed fully to plumb the depths of the goings-on of that Administration—the level of incompetence, the level of secrecy, the high spending, the culture of fear that prevailed in the Treasury for much of that time. It will need many people to investigate that.

It was always the function of the British Treasury, as my hon. Friend well knows, to have a very conservative approach to public finances. It was always the tradition that we in the British Treasury tried to match expenditure to income.

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

I am listening carefully to the hon. Gentleman, but I think his historical facts are a little distorted. There has been some sort of deficit in nearly every year that we have had a Conservative Government since the end of the second world war. If he looks at the period 10 years on from 1996-97, he will see that both the debt and the deficit were lower after 10 years of Labour government. What he is saying is simply not correct.

[Kwasi Kwarteng]

I appreciate the hon. Gentleman’s intervention, but if he looks at the deficit and the direction of travel and what happened in the 1980s, he will see that the deficit came down, again after a period of Labour mismanagement, every single year from 1979 to 1989, and that the budget was balanced in 1989. It was only as a consequence of the recession that we went back into deficit, as a Keynesian economist would tell him.

Let us look at what has happened over the past three years. The Government came into office when the eurozone was in crisis and there was a massive run on Greek sovereign bonds. The Chancellor’s approach, quite rightly, was to make the deficit our No. 1 priority. That, in effect, calmed the markets. Opposition Members might scoff at the bond markets, but they are very powerful. It was particularly interesting to note that in the six weeks before the general election British gilts were actually rising in value and yields were falling, because the markets rightly believed that Labour would be turfed out of office. In anticipation of that happy event, and before the quantitative easing, people started buying British gilts.

The Chancellor’s approach to dealing with the deficit is exactly the right one, because it followed the insight that we have to deal with spending. All countries in the western world have to do that. That is what the fiscal cliff debate in America is about, because it understands that spending has to be on the table; the issue is the degree to which revenue should be on the table. It has a mature approach to public spending. It is only the Labour party that lives in this Shangri-La world in which we can carry on spending and borrowing money with abandon and making the crisis even worse.

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

I think this is the most extraordinary rewriting of economic history I have ever heard in the Chamber. The hon. Gentleman has not once mentioned the banks and the financial crash. Does he not realise that the public sector deficit in 2007, just before the crash, was about 3%? It only rose—

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[Kwasi Kwarteng]

The right hon. Gentleman has talked me out and I must end my speech, but I am happy to discuss the banks with him at any time. My point today is looking at—

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Order.

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[Frank Dobson (Holborn and St Pancras) (Lab)]

As one of the ancients, I must say that I was heartened by the maiden speeches of my hon. Friends the Members for Middlesbrough (Andy McDonald), for Croydon North (Steve Reed) and for Rotherham (Sarah Champion), who brought a great deal of cogency and compassion to the debate. I look forward to their participating yet more.

I have been struck, yet again, by the extent to which the thinking of Conservative Members is utterly dominated by the myth of the Thatcher legacy: that she transformed the British economy and that it was saved from ruin through competition, deregulation and privatisation. One can expect Tories to think that, but a lot of commentators in the newspapers and on television and radio clearly take the same view. It is entirely erroneous. The annual economic growth under Mrs Thatcher was exactly the same as that under the Governments of Jim Callaghan and Harold Wilson who preceded her.

But Mrs Thatcher had no excuse. The windfall takings from privatisation and North sea oil amounted to £155 billion. Practically every other country in the world that had such a windfall established a sovereign wealth fund to be invested over a long period. Instead, these Tories who claim to be careful with money blew the lot.

[Kwasi Kwarteng]

Will the right hon. Gentleman give way?

[Frank Dobson]

No, I shall not give way for the time being because I cannot make up my mind whether the hon. Gentleman is here or not.

The hon. Member for Burnley (Gordon Birtwistle) ought to remember that Mrs Thatcher abolished apprenticeships. She did not invest in research, improving engineering, infrastructure or retooling British industry. Her real legacy was to introduce the almost total dominance of banking and finance into our economy. What a decade and a decade and a decade we got out of that!

The bankers’ bonus has become one of the greatest scandals of all time. The British Bankers Association, the trade group of these respectable bankers, actually ran the LIBOR rate rigging so that people could make money. The payment protection insurance scams were intended to make money—they were not a charitable effort. Barclays was involved in the LIBOR scandal, in the PPI scandal and in sanctions busting, and it managed to lose £7 billion in the crash. Its auditors, PricewaterhouseCoopers, apparently did not notice any of that. It should have noticed, because the bank was not involved in those things as a charity; it was getting a percentage of every transaction and one would have thought its auditors might have spotted that.

The magnificent HSBC was involved in the LIBOR and PPI scandals, and we now know it was involved in sanctions busting in Iran, Burma and North Korea. It has been involved in the financing of gunrunners and in money laundering from drug barons in Mexico. To facilitate the Mexican drug barons it opened not six, 60, 600 or 6,000 but 60,000 secret accounts for Mexicans in the Cayman Islands, and it received a percentage from each. HSBC was not in it as a charity; it was in it to get money.

Presumably, some of the bankers were paid bonuses for the profits they made from sanctions busting, gunrunning and money laundering, yet HSBC, the former masters of the universe, lost £27 billion in the crash and its auditors, KPMG, did not get a sniff of it—not a thing. That is a disgrace and is damaging our economy and the reputation of British businesses trying to get work abroad. People say, “Have you got one of these dodgy auditors? Have you got a dodgy banker on your team? It’s not very helpful if you have.” That is a real problem.

To make up for the mess that the bankers caused—and continue to cause—ordinary people in this country are expected to skimp and save. My hon. Friend the Member for Islington South and Finsbury (Emily Thornberry) shares the problem I have in my constituency of housing benefit. She will, therefore, be familiar with stories such as that of the woman who came to my advice service on Friday and lives in a council flat that was sold under the right to buy. She is expected to pay £485 rent to the private landlord who now owns that flat, but has been told that her benefit will come down by £160 a week, meaning she can no longer live there. Perhaps more importantly—even to decent, what used to be one-nation Tories—her nine-year-old daughter who is doing well at primary school will not be able to live in that flat any more, and neither will her 19-year-old son who is doing an apprenticeship. They will be driven out under what I first described—I know the Deputy Prime Minister does not like this description—as a policy of social cleansing.

The chair of the Tory party—when he isn’t Mr Green—says that people should not be able to live in places they cannot afford, but what about the people in my constituency who sweep the streets, keep the hospitals clean, work as nurses, drive buses and make the city work and a civilised place? They are exactly the people who are being driven out by the benefit changes, and I hope to God my party will vote against them.

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[Mr Meacher]

I obviously made a mistake in giving way to the hon. Gentleman.

As the Chancellor acknowledged, he had two main objectives in his autumn statement/mini-Budget. One was to generate the growth that has certainly eluded him for the past two and a half years; the other was to rebalance the economy and lay the foundations for genuine, sustainable, long-term growth. He failed miserably on both counts. On the first test, the International Monetary Fund, the OECD, the Federation of European Employers, the CBI, the British Chambers of Commerce and the Federation of Small Businesses have all been telling him that he simply must inject growth into the economy and stop endlessly hacking away at public expenditure. Just how desperately such actions are needed is shown by the fact that the Chancellor’s own forecast in his 2010 Budget that cumulative public sector net borrowing over the next four years would be £322 billion has now been increased to a staggering £539 billion. That is an increase of £217 billion. The key point is that that increase is almost wholly attributable to the failure of the economy to grow. That is the significant point behind this debate.

[Kwasi Kwarteng]

Will the right hon. Gentleman give way?

[Mr Meacher]

I will give way to the hon. Gentleman, because he was kind enough to give way to me at the end of his speech.

[Kwasi Kwarteng]

I am glad to see that some courtesies are still observed in the House. Does the right hon. Gentleman accept that this country and this Government have a problem with current spending levels, or does he believe that we can carry on increasing spending indefinitely?

[Mr Meacher]

Of course I believe that there is a problem with the level of debt and the level of the public sector deficit; everyone accepts that. The issue is how it should be dealt with. I believe that the way this Government are dealing with it is profoundly self-defeating.

The Chancellor has failed in the sense that, according to the OBR, despite an output gap that remains incredibly high at 3.7%, the net effect of all his measures in the autumn statement will be to raise the general growth rate by a footling 0.1%. That is an extraordinary judgment on the Chancellor.

The Chancellor also failed his second test, which was to shift the economy on to a more sustainable long-term footing, moving away from his over-dependence on finance—a move we all agree with—and towards a much stronger industrial and manufacturing base. Eighteen months ago, he announced with great fanfare the march of the makers. That never happened, however. He has now promised a £40 billion guarantee for private infrastructure investment, but the problem is not one of too little credit; it is one of too little demand for credit. The latest figures show construction plummeting ominously, largely because of its great dependence on the public sector, which the Chancellor is shrinking. Moreover, UK manufacturing will this year suffer the biggest deficit in traded goods in its entire history—a deficit of roughly £110 billion, or 7.5% of gross domestic product. That is utterly unsustainable, and if that trend is not reversed, it will inevitably lead to an almighty crash in British living standards before long.

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[George Freeman]

I am grateful for that intervention. If the previous Labour Government paid down the debt, why have we inherited this historic debt legacy—a legacy, it is worth reminding the House, that sees us paying debt interest payments that are set to rise to £76 billion a year, which is more than the amount spent on more than three Departments? This is a historic legacy, for which the Labour party should be ashamed.

[Kwasi Kwarteng]

I was wondering what my hon. Friend thought about the fact that the previous Labour Government ran consistent deficits from 2001 to 2007—even while the economy was growing.

[George Freeman]

My hon. Friend makes an excellent point, principally about the structural deficit. The public are not daft: they know the difference between a Government who spend more each year than they receive and one who wilfully disregard the underlying causes of the deficit, which were and still remain for us to tackle—the problem of an ageing society for the NHS, the public sector pensions bill and the out-of-control welfare state. I shall say something shortly about the Government’s important reforms in that regard.

I welcome this autumn statement, which begins the process of tackling once again the toxic debt legacy left to us by the Labour party. I welcome the fact that a Conservative Chancellor in a coalition Government has been able to deliver substantial savings—£33 billion in the welfare budget, £60 billion savings in interest repayments and £70 billion savings on the cost of government in Whitehall—allowing us to create the incentives for work, taking a million of the lowest-paid employees out of tax altogether, raising the tax threshold and abolishing Labour’s planned fuel duty rise, with the net result that over the last two years we have seen the creation of more than 1.2 million net new jobs in the private sector.

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[The Exchequer Secretary to the Treasury (Mr David Gauke)]

This has been a passionate and thoughtful debate. I begin by congratulating the three hon. Members who made their maiden speeches this afternoon—all three were of the highest standards. The hon. Member for Rotherham (Sarah Champion) spoke with great pride and passion for her constituency. The hon. Member for Croydon North (Steve Reed) brought his local government expertise to the debate, and his understanding of the area he represents was most impressive. He also spoke movingly about his predecessor, Malcolm Wicks. The hon. Member for Middlesbrough (Andy McDonald), who is the first Middlesbrough-born Labour MP, spoke with great pride about his constituency. I imagine that being the MP for one’s home town must bring a particular pleasure to delivering a maiden speech and representing one’s constituency. He also spoke warmly of his predecessor, Sir Stuart Bell. I congratulate them all and wish them well in the House of Commons. I am sure they will make many further eloquent and passionate speeches from the Opposition Benches over the years ahead.

I also thank a number of my hon. Friends for their contributions. My hon. Friend the Member for Macclesfield (David Rutley) spoke about how it is necessary to get growth in the economy and discussed ways of achieving that. My hon. Friend the Member for Spelthorne (Kwasi Kwarteng) made a strong and persuasive critique of the previous Government’s record and, indeed, of the level of borrowing under them.

My hon. Friend the Member for Dudley South (Chris Kelly) set out some of the benefits for businesses in the autumn statement, highlighting in particular the corporation tax cuts and the annual investment allowance, which will benefit many west midlands businesses. My hon. Friend the Member for Bristol West (Stephen Williams) made the point that it is right to reduce the deficit, even though it is taking longer than we had envisaged.

My hon. Friend the Member for North Swindon (Justin Tomlinson) welcomed the cancellation of the fuel duty rise, which was due in January, and set out the case for greater tax transparency. He was absolutely right to raise that and this Government are taking steps to ensure that people understand the tax they pay.

My hon. Friend the Member for Burnley (Gordon Birtwistle) spoke about apprenticeships, of which there are 1 million more as a consequence of the Government’s actions. He talked about help for businesses in the north-west, including in the aerospace industry. He also spoke about the annual investment allowance.

My hon. Friend the Member for South Dorset (Richard Drax) made a strong and passionate speech calling for lower taxes. My hon. Friend the Member for Mid Norfolk (George Freeman) set out the steps that the Government are taking to turn around the economy, and drew a parallel with the steps taken by Margaret Thatcher’s Government in the 1970s and 1980s.

I will not go through the list of all the right hon. and hon. Members who contributed to the debate, but I thank them all. In particular, I acknowledge the speech by the former Chancellor, the right hon. Member for Edinburgh South West (Mr Darling). As ever, he brought great expertise to these matters. I did not agree with everything he said, but I thought that his was a far better response to the autumn statement than some that we have heard from Opposition Members, not least the shadow Chancellor.

The right hon. Member for Edinburgh South West said that we live in difficult times. When there is clearly major disagreement between the parties in government and the Opposition about the correct response to the difficulties, we should all acknowledge that growth is lower than we would like it to be and lower than the independent Office for Budget Responsibility anticipated, but we should also acknowledge that there are encouraging factors in the economy. We should all welcome the fact that private sector employment has grown significantly in recent months. The fact that the deficit is falling in every year of this Parliament is to be welcomed. It would be regrettable if the Labour party sought to undermine the Office for Budget Responsibility in making its independent assessment of the public finances.

These are clearly difficult times, not just for the UK economy, but elsewhere. Growth in the UK economy next year has been revised down from where we had hoped it would be, but it is still likely to be greater than the growth in Germany, France and the eurozone. The key question is why growth is lower. The analysis of the Office for Budget Responsibility is very clear: it is because of the uncertainties created by the crisis in the eurozone, because commodity prices are rising more than we would have liked and because the damage done to the economy by the crash of 2007-08 was greater than had been realised.

The answer from the Labour party, essentially, is that we could solve all those problems simply by borrowing more. Very few Labour Members say that explicitly, although the hon. Member for Great Grimsby (Austin Mitchell) was happy to say that that is the right approach. The Labour party says that borrowing is higher than we would like, which it is, but its solution is to borrow more. That makes no sense at all.

It is also not the case that the high level of borrowing that we inherited—a record amount outside wartime—was purely to do with bailing out the banking sector. The shadow Chancellor may not accept this, but the International Monetary Fund tells us that the structural deficit before the crash was 5.2% of GDP—a hugely dangerous level. Any Government who ignored that and failed to address it would be taking the most enormous risk with the country. It is vital that we have fiscal credibility. We could not have gone on as we were. Had we not taken action and gone further than was set out in the plans of the right hon. Member for Edinburgh South West, we would have faced great difficulties. We could not dismiss the risk of the UK being sucked into a sovereign debt crisis, and it would have been complacent of us if we had done so.

The Government have acted to bring the deficit down, but at every step we have been opposed by the Labour party. Most of us did not come into politics to raise VAT, but it was necessary to do that and we also had to take steps to reduce departmental spending—again, that was opposed by the Labour party. We had to reform the welfare system and find £18 billion of cuts, including the introduction of a welfare cap, and we had to make changes to the child benefit system that hit the top 10% or 15% of households. The Labour party opposed all that and, as far as we can see, will not touch a penny of the welfare budget. That is not a great surprise given its record in office. In real terms, the welfare bill increased by 40% in 13 years. Before Labour Members say that that was a response to the crash in 2007-08, half of that increase—20%—occurred before the crash. In the good times the welfare bill was rising out of control.

[Kwasi Kwarteng]

What does my hon. Friend think about the fact that spending between 1997 and 2007 doubled in nominal terms—it went up more than 50% in real terms—and that the welfare bill more than doubled in that time?

[Mr Gauke]

My point is that we could not continue in that way. The difficulty with the Labour party’s record is that it believes most problems can be solved by throwing money at them. We have run out of money and cannot afford to do that. That is why we are taking difficult decisions and the welfare uprating will be 1%—we now know that the Labour party will oppose that. We must get welfare spending under control. That measure will save £2 billion, and if one looks at other measures introduced in the autumn statement, one sees that working households—including those in the lowest decile—will gain in 2013.