Finance (No. 3) Bill

Matt Hancock Excerpts

Tuesday 26th April 2011 Commons Chamber

[Alec Shelbrooke]

But you cannot deny that your Government doubled income tax for the lowest paid in society and destroyed pensions—not you, Mr Deputy Speaker, but the previous Government. The previous Government destroyed pensions, leaving many people whom we would class as the most vulnerable in society to take their pensions with fear and trepidation. At least we have brought in the triple lock on pensions, meaning that people should never again get the 75p rise in their pension.

[Matthew Hancock (West Suffolk) (Con)]

In addition to the facts that my hon. Friend is bringing to bear in this debate, is it not shocking that the amount that the Government have borrowed only over the past year is equivalent to more than £2,000 for every family?

[Alec Shelbrooke]

Again, that illustrates my earlier point: when the figures are brought down to a smaller level, people can understand their full impact and the state of the nation’s finances. When I compare that to our personal finances, I say to people, “For every £1 we’ve spent, we’ve borrowed 25p. How long would your household finances survive with that sort of economics?” They simply would not. Indeed, the increase in private debt and in people’s credit card debts, with some even committing suicide because they used credit cards to pay off credit cards, is a lesson that Governments should learn.

Let us look at the growth and debt figures. Our debt is 10.4% of GDP, Spain’s is 9.2% and Portugal’s is 9.1%, but I do not see our interest rates on the gilt markets being as high as Portugal’s. My hon. Friend the Member for North East Somerset made an excellent point when he described the percentage rates being below RPI by 300 unit points, or 500 unit points below normal. That shows that a credible plan had to be put in place.

I find it distressing when we get into this argument with the Opposition, who say, “You don’t need to do all this.” I will give the House an analogy. For 13 years, the previous Government fed everybody chocolate and burgers, and every person in this country now weighs 35 stone. Along comes the doctor, in the form of this Government, who says, “I’m afraid if you don’t lose at least 20 stone you are going to die very young and it is going to be disastrous for you.”

--- Later in debate ---

[Matthew Hancock (West Suffolk) (Con)]

I am grateful for the chance to speak briefly at the end of this debate. This Finance Bill is but one part and but one significant change to the economic policy framework in the UK. The significance of some of the details in the Bill is matched only by the modesty of the amount of comment that they attract. We are debating many of the detailed changes, such as expanding gift aid, helping low earners, supporting motorists and improving the environment for enterprise. I support all those measures and will speak about them later, but I first want to address the context and background set for the Bill by changes to the economic policy framework.

One of the big changes has been referred to explicitly and implicitly throughout the debate. The hon. Member for Edinburgh South (Ian Murray) spoke about the Office for Budget Responsibility, and every Labour Member has referred to its figures. In that magnificent British way, we have managed to establish and accept a new tradition—the OBR—as if it were ever thus. I argue that that innovation in economic policy and others are significant and noteworthy for the long term. Over many years, evidence grew in the academic economic debate that economic policy is best set for the long term, and the short-term dash for growth became discredited. In the ’80s and ’90s a consensus grew that fiscal policy should be set for the long term, and that monetary policy should be set through an independent Bank of England and used to regulate demand in the shorter term—to keep inflation low and growth going. In fact, that became the cross-party consensus in the House. The shadow Chancellor even wrote a book on what a magnificent set-up that was.

The problem with that arrangement is that it stabilised only one part of the economy, and it was far too narrow. Where discretion was allowed, and within closely prescribed rules, policy worked reasonably well, and policy makers hit the inflation target with commendable accuracy. However, the success of that narrow area of economic policy making led its creators to believe—absurdly—that they had solved the problems of economic policy making. We know the phrases. They said that boom and bust had ended, but that hyperbole led them to ignore the growing signs that all was not well elsewhere, and to commit vast policy mistakes that led to the enormous crisis that we have gone through, and that Government Members are trying to help to clear up. The Labour Government admonished anybody who claimed that Britain’s economic policy framework was anything other than perfect, and that belittled debate.

The problem was that by aiming at one target only—inflation, and consumer price inflation specifically—everyone missed the huge and unsustainable growth in balance sheets throughout the economy. There was unsustainable public debt and unsustainable private debt—a classic debt bubble. The problem first became obvious in fiscal policy. The now discredited fiscal rules allowed the Labour Government to claim that all was rosy—indeed, the shadow Chancellor still claims that all was rosy. In fact, they were borrowing an unsustainable amount at the height of a boom. They then tried the classic trick of borrowing to fund their re-election. As the House knows, they fiddled the figures and moved the goalposts to keep on spending when the facts started to prove otherwise.

The new OBR will bring long-term independence to fiscal policy making, which will constrain not only the current Government, but—I hope—all Governments to come. Crucially, the OBR’s forecasts will define the discretion within which policy makers can operate, and will bring this constrained discretion, similar in structure to monetary policy, into fiscal policy. Different though the execution will be of course—because the policy levers will be different—the structure will be similar.

Although having an OBR in the past might have meant not entering the crisis with unsustainable public finances, what of those unsustainable private finances? No one can argue that the amount of debt in our economy—in our banks and households—was sustainable. Britain entered the crisis as the most indebted nation in the G7 ever, and also had the biggest banking bust in the world. Those are not unconnected, however, because household debt and the banking debt that supports it are a reflection of each other—one group lends to the other. That combination of unsustainable public and private debts means that Government Members have a huge mess to clear up.

The combination of targeting only narrow consumer prices inflation in one part of a tripartite system and the regulation of individual banks in another meant that the crucial piece of the jigsaw—looking at how bank balance sheets affected debt across the economy—was missed. It is a bit like a balloon: we pushed down on consumer prices and kept control of them, but all the extra liquidity shot out into prices of other assets, including, as we know from our personal lives and those of our constituents, the biggest asset of all—housing. We had a bonanza housing boom: equity withdrawal; get-rich, buy-to-let schemes; more than 100% mortgages. We all know about them. The bubble lasted all the longer, however, because it had a credible story behind it—of the extra savings being made in China and the rising Asian nations—and was harder still to argue against.

Nobody was there to pull the punch bowl away when the party got going. As we know to our cost, the power to do that was removed from the Bank of England in 1997. At the time, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) predicted it would cause problems. The link between looking at the sustainability of individual banks and looking at the macro-picture had been broken. Now that link is being restored. First, clause 72 and schedule 19 will introduce and increase the bank levy. It will be a levy on banks’ balance sheets, not bonuses, so will contribute to financial stability. Secondly, and crucially for the context in which we think about the Bill, the proposed financial policy committee, which will first operate in shadow form, will monitor that link. It will link the management of the country’s debt and balance sheets with the management of the macro-economy, linking fiscal policy and monetary policy through financial policy, and therefore allow for a holistic big picture of how we are managing our economy. Instead of allowing a bubble to build up by omission, the FPC’s job will be to look for it and act on it. Unlike under the former system, in which the Bank of England could complain and raise concerns but not act, the FPC will be empowered. Crucially, because the discretion is embedded in a respected institution, it will have the authority to exercise that discretion. For whereas discretion without rules gives us tyranny, rules without discretion give us futile bureaucracy.

The changes have been praised by the OECD and the IMF, and they represent a substantial and fundamental shift in how we run our economy. However, we should resist the hubris of saying that these reforms will ever be finished or that the ancient challenge of economic management, first recorded in Genesis, is complete. As we debate the details of the Bill today, we should consider how the context of those changes, in strengthening our economic framework, is about learning the lessons from the past and helping us to be stronger as we face the inevitable challenges ahead.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

If a week is a long time in politics, then a year—and perhaps some aspects of tonight’s debate—is an eternity. Yet a year ago, when we were all candidates and none of us was allowed to stand in this place, things were very different. The economy was beginning to recover, as unemployment was falling and growth was returning. Crucially for today’s debate and the provisions in the Bill, that meant that the deficit came in at £21 billion lower than was forecast. Well, here we all are, a year later, and just as the faces in the Chamber have changed, as have the sides that we are sitting on—some would say not for the better—so too has the economic picture. Given where we were last year, one would have expected the economy next year not simply to have recovered, but to have begun motoring; and yet now, thanks to snow it seems, it appears that the reverse is true. By cutting too fast and too deep, this Government are delivering slow growth and higher unemployment, which is why they will now have to borrow £46 billion more than they planned.

However, the question that this Bill raises is about not just whether to cut the deficit, but how we do so and who ultimately pays. Our national Exchequer certainly will: slower growth plus higher unemployment will make it harder to get the deficit down. As we pay out in jobseeker’s allowance, we will also lose out as families fear spending money that they do not have. That is what I want to highlight this evening. We have a duty to consider how the proposals will help or hinder the finances of families across this country, because it is not just the Chancellor who will have to go cap in hand for extra funds. Contrary to what the hon. Member for Elmet and Rothwell (Alec Shelbrooke) seems to think—I am sorry that he is not here; perhaps he is in the gym preparing for his wedding—public debt and private debt are linked. Although public debt is down by £43 billion, private household debt is up by £245 billion—five times as much.

The hon. Member for West Suffolk (Matthew Hancock) is a man for whom I have tremendous respect—both him and his pullovers. He lauds the role of the Office for Budget Responsibility, but like Rosencrantz and Guildenstern, he is hoist by his own petard, because the OBR forecast last June that household debt would increase from an average of £58,000 in 2010 to £66,000 by 2015. The OBR now expects the figure to be £77,000. That is the downside of the Chancellor’s deficit reduction plan. As taxes increase and public spending squeezes households’ disposable income, they will be forced to take on more and more debt in an attempt to maintain their living standards. In fact, the OBR’s March forecast shows household debt rising from £1.6 trillion this year to £2.1 trillion in 2015—or, from 160% of disposable income to 175%. The OBR reports that households will have to borrow more money than forecast in order to maintain their living standards. With the planned cuts in public spending, the only way the Government will see an improvement in the OBR’s forecast for growth is for that ratio to increase.

I know that many Members will be sick of hearing me talk about credit and debt. Many may also argue that it does not matter, because we are a nation that is comfortable with debt—something the hon. Member for West Suffolk talked about. We have always had a different approach to personal debt from many other countries. We are a nation comfortable with borrowing in ways at which other cultures baulk. It is no surprise that we have the highest level of personal debt in the G7. That is not a problem if it can be managed. Much of the money that this country owes is housing related, which reflects a culture in which mortgages are routine. The truth is, however, that the debt that families are now getting into is not related to such investment in their future or about luxury living; it is about the money that they spend on everyday items. That is what is missing from their family finances.

In the current economic climate, UK adults face an average shortfall of £165 each month, with 26% unsure whether they can pay their bills on time. Recent research shows that more than 2 million people have used credit cards to pay their mortgage or their rent. That is an increase of almost 50% in a year. Since the recession, nearly a third of Britons are now spending more than they have coming in each month, and 22% of consumers will carry a credit card debt throughout 2011, with 7% of people saying that they will still be paying for Christmas 2010 after June 2011. It is estimated that 5 million people are now permanently overdrawn, and that 18 million have gone into the red at some point in the past 12 months. Nearly 8 million of us failed to pay at least one bill in the past year.

It is not just the poorest consumers in our society who are affected. According to Experian, the biggest rise in insolvencies in 2010 was among the people whom it calls “suburban mindsets”, a consumer group comprising married, middle-aged people. That situation has not come about by chance. It is a direct consequence of how this Government have chosen to address the deficit.

[Matthew Hancock]

I do not wish to extend the love-in much further, but the hon. Lady’s arguments, which are being passionately put, would carry much more weight and credence if she were to disappoint her Front-Bench team and accept Labour’s role in bringing about this situation.

[Stella Creasy]

I am sorry that the hon. Gentleman has not been listening closely. Let me make it very clear: the figures from the Office for Budget Responsibility that I cited refer to this past year. Forgive me, but as far as I am aware, his party has been in power during that time and it has presided over this increase in the private debt that households are now taking on.

Let us talk about some of the things that are causing that increase. VAT is costing a family with children an extra £450 this year, on average, due to the rocketing cost of buying basics such as telephones and clothes and of getting a boiler or a washing machine fixed. That is before they even consider getting out and about to spend money. Many Conservative Members have talked about fuel prices, but the increase in VAT is adding £1.35 to the cost of filling up a 50-litre tank with unleaded fuel. The cut in fuel duty gives back only 1p, but the VAT increase costs us almost 3p a litre.

Those who are in work are finding it even harder to make ends meet as a result of the Budget. Since 5 April, 750,000 more workers have been dragged into the higher rate of income tax, and benefit recipients have lost £2.7 billion-worth of payments. Cuts to child care support have taken £1,500 a year from families. The £48 that people will get through the personal allowance increase in the Budget is barely a tenth of the amount that families will have to pay back through increased VAT. In two years’ time, 1.5 million families—including many in places such as Walthamstow—will lose all their child benefit. Credit Action has pointed out that, of the 45 changes to the tax and benefit system made in the Budget, 26 will have a negative impact on households.

There will also be fewer chances of getting a better-paid job, or of getting back into work, because unemployment is set to be higher in every year of this Parliament as a result of this Government’s actions.