Amendment of the Law

Lord Johnson of Marylebone Excerpts

Wednesday 23rd March 2011 Commons Chamber

[Joseph Johnson (Orpington) (Con)]

It is an honour to follow in the slipstream of the new Member for Barnsley Central (Dan Jarvis), who has executed an elegant parachute jump into the Chamber. His forceful and powerful speech was a reminder of how important it is, at a time when the country is making ever greater demands on its armed forces, that we hear the voices of our servicemen and women from all parts of the Chamber.

Thus far we have touched several times on the critical role that the bond markets are playing in framing the budgetary policy of this coalition Government. The hon. Member for Middlesbrough (Sir Stuart Bell), who is no longer in the Chamber, asked when it was that bond markets acquired this pivotal role in our national economic policy making. If I may venture an answer, I think that the views of rating agencies became impossible to ignore when towards the middle of the previous decade—before the onset of the financial crisis—the British Government

“lost control of public spending”

in three key Government Departments: Health, Education and Defence. Those are not my words or views but those of Sir Nicholas Macpherson, the permanent secretary of Her Majesty’s Treasury, as expressed in a hearing of the Public Accounts Committee not so long ago; they are available in the Committee report if people wish to have a look.

It is also important for the hon. Member for Middlesbrough to realise that we live in a globalised financial market, and if one cannot fund one’s borrowing requirements from captive domestic sources, inevitably one is forced upon the mercies of the international capital markets, and that is exactly where we find ourselves today.

[Mr Kevan Jones]

I know that the Conservatives are peddling the line that we are in hock to foreign banks, but does the hon. Gentleman not realise that only about 35% of our gilts and debts are held abroad? Greece is always held up as the big pariah, and its figure is nearly 70%. The hon. Gentleman’s argument is frankly complete nonsense.

[Joseph Johnson]

I thank the hon. Gentleman for that elegantly expressed critique. It is a significant proportion of our borrowing. It is not the totality, and I never said that it was. However, if our marginal investor, whom we need to supply that additional pound of borrowing, is setting the price for our borrowing, that determines the rate at which we finance ourselves. It is as simple as that. That is straightforward marginal pricing through supply and demand.

[Mr Jones]

Will the hon. Gentleman give way?

[Joseph Johnson]

No, I will carry on for a little.

In my view, it is only thanks to the resolve and determination of this Government that we have sufficient credibility with the bond markets to have delivered a Budget for growth. The Budget includes an acceleration of the plans to cut corporation tax, which will give a much-needed boost to Britain’s international competitiveness. I am particularly pleased by that because at a time when countries need to compete ever more aggressively to attract highly skilled labour, the UK is increasingly being seen not just as a high-tax economy, but as one with a highly complex and unwieldy tax system. The World Economic Forum’s global competitiveness report for 2011 ranked the UK tax regime the 95th most competitive out of 135 countries—almost at the bottom of the world rankings. That sends out a terrible signal to global business.

The UK tax regime was once viewed as an asset and I am glad that the Government are proceeding with plans to make it an asset once again. I fully support the Chancellor’s plans to give Britain the most competitive business tax regime of any major western economy, and to reverse our slide down the global competitiveness rankings. Already, the coalition Government have reversed planned increases in payroll taxes and lowered small business rates. As we heard from the Chancellor this afternoon, they will accelerate reductions in corporation tax so that by 2014, the rate falls to 23%—the lowest ever rate in this country and the lowest in the G7. That is something that we should celebrate if we are serious about enterprise and entrepreneurialism in this country.

I also welcome the Chancellor’s decision to analyse closely whether the top rate of tax is yield positive or negative for the British economy. It is worth considering whether it is deterring investment, thereby losing us more revenue than it is bringing in. A more competitive, simpler and more stable tax regime is an essential precondition for growth and will ultimately be better for everybody in this country, rich and poor alike.

When countries that had public finances in a comparable state to ours last May are still fighting off the terrible spectre of sovereign debt default, it would be terrible folly to slow the pace of what is widely regarded as a necessary fiscal consolidation. Our policies are under intense scrutiny by the international bond markets, to which we are paying £120 million in interest daily. We cannot afford for our borrowing costs to rise, as they have elsewhere. We are paying 3.6% in the gilt markets on our staggering public debt. Other countries are paying rates closer to 8% or 9%, and Greece is paying a staggering 12.6%. We simply cannot afford to be complacent, as the Governor of the Bank of England made clear in a recent hearing of the Treasury Committee, at which he stated firmly that UK gilt rates would rise by three percentage points if we backtracked from the course of fiscal consolidation that we have outlined.

[Mr Jones]

I wish the hon. Gentleman would do some homework before he makes accusations, and not just swallow the central office lines on such things. He does not tell the House that less than 20% of our debt needs to be repaid in the next three years, whereas Greece and other countries need to repay 36% or 37% of their debt in the next three years. The idea that we have an instant crisis is wrong. Can he tell me when a UK Government have ever defaulted on a gilt payment?

[Joseph Johnson]

There are problems when a country has a stock of debt as massive as ours. Even with the Government’s plans for fiscal consolidation, it will not start declining for some years to come. Under the Labour Government our stock of debt would have peaked at about 80% of gross domestic product, but under the current Government’s plans it will peak somewhere below 70%—69%, I think I recall. [Hon. Members: “71%.”] Either 69% or 71%. Such a massive stock of debt means that every year, we have to refinance several hundred billion pounds of Government debt. Even if it is not all the debt, that is still a very substantial amount of money.

[Richard Fuller]

Perhaps my hon. Friend will be interested to read on page 25 of the debt and reserves management report issued today that the gap in the five-year forward rate on debt borrowing is at its highest point for 10 years. That reflects the fact that the market is buying only short-term debt. One of the few assets of this country that the last Government did not sell down the river was the long-dated debt that we have compared with other countries. If we had carried on with their policies, even that would have been lost as a result of their profligacy and waste.

[Joseph Johnson]

That is a very good point. Markets can turn on a dime if they detect backsliding, and that is not what they are getting from this Government.

[Chris Bryant (Rhondda) (Lab)]

The Conservatives spend all their time suggesting that this is just a national problem. The hon. Gentleman cited the possibility of our debt being 71% of GDP, but in Germany the figure is 79%, in France it is 75%, in Italy it is 116% and in Japan it is 194%. These problems came to every country in the world, and my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) was not responsible for all of them.

[Joseph Johnson]

Markets can turn on a dime if they detect backsliding. Recovering lost confidence would require much bigger cuts to public spending than the credible ones that the Government have outlined. Evidence for that is in abundant supply in countries on the periphery of the eurozone. Despite the agreement on the post-2013 European stability mechanism, concerns about the underlying solvency of the most vulnerable countries—Portugal, Ireland and Greece—are growing.

[Jim Fitzpatrick (Poplar and Limehouse) (Lab)]

I am terribly sorry to interrupt the hon. Gentleman, but will he respond later in his speech to the question that my hon. Friend the Member for Rhondda (Chris Bryant) asked him?

[Joseph Johnson]

I did not touch on it directly because the reply is obvious. Yes, other countries have large debts, but that does not mean that we do not have an urgent need to reduce the scope of our borrowing and our national interest payments.

[Sajid Javid]

The hon. Member for Rhondda (Chris Bryant) should recognise that every country’s situation is different. He mentions Japan, whose debt might be about 190% of GDP, but it is also the largest creditor nation in the world. Only about 5% of its total debt stock is held by foreign investors. The situation is quite different in our case.

[Joseph Johnson]

That is an excellent point.

As my right hon. Friend the Member for Wokingham (Mr Redwood) said earlier, Portugal’s position is particularly precarious at the moment because opposition parties there, much like here, have refused to back the austerity measures needed to help the country avoid a bail-out. That could force Portugal further down the international bail-out route that was first trodden by Greece last spring and then by Ireland at the end of last year. Portugal’s 10-year Government bond yields rose comfortably above 8% yesterday, for the first time since the start of the crisis, reflecting plunging market confidence in the resolve of that country’s political class. That cannot be said of the occupants of Nos. 10 and 11 Downing street.

[Mr Kevan Jones]

The hon. Gentleman uses Greece, but my hon. Friend the Member for Rhondda (Chris Bryant) makes a very good point: we must look at countries individually. Our economy is larger than Portugal’s or Greece’s and completely different in other ways. In addition, countries such as those have a tradition of being unable to implement fiscal reductions, unlike ours. The basic, simple point is this: £5,000 is a lot to owe for someone earning £10,000, but it is a completely different thing for the hon. Member for Richmond Park (Zac Goldsmith) or other such people to owe that much.

--- Later in debate ---

[Joseph Johnson]

I am not sure which of those many points to focus on. Greece’s economy is of course very different from ours, and we have a history of repaying our creditors in full, on time and when we say we will. We do not want to lose that reputation, which is why it is so important that the Government stick to their plans to bring our public finances back on to a sustainable path. We cannot compromise or jeopardise our standing in the international financial markets.

[Jacob Rees-Mogg (North East Somerset) (Con)]

Does not the fact that £332 billion needs to be raised on the gilt market over the next two years, which at an extra 3% would be £9 billion a year of extra interest, show the utterly cavalier approach of Opposition Members in their recent interventions?

[Joseph Johnson]

Absolutely—their way of looking at our borrowing requirements is completely irresponsible. To think that we should pay more than £120 million a day in interest, which we are currently paying, is utterly absurd.

[Chris Bryant]

Incidentally, it is interesting to hear the hon. Member for North East Somerset (Jacob Rees-Mogg) condemn cavaliers. I thought he was one in the 17th century.

Many countries whose debt is a higher share of gross domestic product than the UK’s are not cutting anywhere near as fast as we are. Of all 29 major industrialised countries, only one is cutting faster than us: Greece.

[Joseph Johnson]

The hon. Gentleman may be a great economic expert, but he might find that the world’s foremost economists and international financial organisations, from the International Monetary Fund to the OECD—the entire gamut of respected economic thought—see this fiscal consolidation as necessary. There is no backsliding, which I applaud.

Before those interventions, I was saying that Portugal is moving ever closer to becoming the third eurozone periphery country to need a bail-out. Borrowing costs are again rising to a new euro-era high in Ireland, which desperately needs eurozone members at tomorrow’s summit to reach a political compromise on revised lending terms.

By contrast, Britain is a different story, thanks to the credible policies in the emergency Budget last June and the policies announced in October’s spending review. There is no sign whatever of any funding problems in the gilts market—quite the opposite—and we must prize that achievement. We have saved our triple A credit rating, which was under threat of downgrade in the last months of the previous Government, and kept our borrowing costs close to historic lows.

The coalition Government have earned the respect of the international capital markets and have their confidence, because the combination of a tight fiscal and a loose monetary policy remains the best chance of avoiding a sovereign debt crisis while ensuring acceptable increases in GDP. Britain simply could not for long run a budget deficit of 11% of GDP—the second highest in the OECD—without taking the unacceptable risk of losing the confidence of the bond markets. Almost a year on, the wisdom of taking decisive action to reduce the risk of sovereign debt crisis is obvious to all except perhaps Labour Members. Even Gavyn Davies, the Labour-supporting economist, conceded in yesterday’s Financial Times that getting the deficit down was a “defensible decision”.

A debt crisis would have been disastrous for growth and unemployment, as many European nations are now discovering. Furthermore, unlike those countries, Britain can, and is, using monetary and exchange rate policy to offset the fiscal tightening, as my right hon. Friend the Member for Wokingham said. I hope that that will keep the economy recovering.

As I have said, all manner of international bodies, from the IMF to the OECD, are unanimous in urging the Chancellor to stay the fiscal course that he has so consistently outlined for this country. Yes, real GDP growth may have dipped temporarily as consumers’ expenditure has been weakened, and today’s growth forecasts for 2011 from the Office for Budget Responsibility may be a little lower than we would have liked. However—

[Alison McGovern (Wirral South) (Lab)]

rose—

[Joseph Johnson]

I will continue, if I may.

However, business surveys have been much stronger than the official data, and the Institute for Fiscal Studies says that the chances of a double-dip recession are no more than 20%. Even Gavyn Davies, the great Labour-supporting economist, admits that this figure is

“not high enough to jettison the government’s main strategy, with the loss of credibility which that would imply.”

Mr Davies is, of course, completely right. Maintaining the current policy remains the best bet for Britain in the medium to long term, and that is what matters most.