Mel Stride
Main Page: Mel Stride (Conservative - Central Devon)
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.
Mr Redwood
I shall not because we have to make progress. The £92 billion will go further if we can avoid high inflation. The Government should tell the Bank of England that the single objective is to get prices down, as it was asked to do, and to keep them down. More quantitative easing is not compatible with that aim.
My second point, which many colleagues will probably wish to address from their own, personal constituency experiences, concerns the lack of credit for business. Those two points are not contradictory, because while there has been a lot of money creation from which the public sector has benefited greatly by borrowing huge sums at very low prices, there has been a strict rationing of credit, particularly to smaller businesses, and a huge restriction on the balance sheets of the leading banks. One figure with which the House can never grapple is that the Royal Bank of Scotland—the state nationalised bank in all but name; we own most of the shares—has been on a drastic slimming course. It had a balance sheet of £2.2 trillion when it came into the public sector and by the end of this year, according to its plan, that figure will be down by £1 trillion—£1 trillion will have disappeared from the balance sheet. It is a global bank but quite a bit of that has an impact on the British economy.
It is not surprising in that climate that it is difficult for small businesses to get the money they want. So my second piece of policy advice to the Government is that they should tell the banking regulator that enough is enough. The bank balance sheets, which were trashed in 2007 by very lax regulation, are now in danger of being strangled by very tight regulation. The tier 1 capital ratios for example, which in some cases reached a scandalously low 4% in 2007 on Labour’s watch when it did not seem to care about these things, are now at about 10%. That is job done for the time being. We could, by all means, come back to it if we have rapid growth and if there are incipient signs that there is too much credit, but that is not the current situation. We should take the brakes off a bit, particularly for the small business sector.
My third point is that we need to get some of that credit into the big projects that the country needs. I hope that Ministers will make urgent moves to clear the ground on planning, regulation and general background so that the country can again get on with building power stations, transport links and the broadband links it needs to fuel growth. While I hope that all or most of those projects will be privately financed—another reason why we need to fix the banks more quickly—I hope that Ministers in this Government, unlike in the previous Government, will make rapid decisions so that the private sector can get on with that job.
Let me address two final issues. First, in order to collect £176 billion extra in tax in year five, from year zero in the plan, the Government need to optimise their tax rates. They accepted in their Budget statement that to go above 28% on capital gains tax would lead to a reduction in revenue. I welcome the development of wisdom in the Treasury on this important point, but I have bad news—28% is not the optimising rate for capital gains tax and 50% is not the optimising rate for income tax. I would like to tax the rich more—that will surprise colleagues and delight the Opposition—but the way to do that is to cut the rates. We need to do that to attract them here, keep them here and make them honest here, and we need to have rates that maximise the revenue from the rich—the sooner the better—to hit those targets.
Colleagues will be delighted to hear that I have come to my final point. We were promised deregulation and were told that there was going to be a mighty freedom Bill. The Deputy Prime Minister was supposedly toiling away in his enormous room in the Cabinet Office that was inherited from the Lord Mandelson regime and no expense was to be spared in making sure that we had a really big deregulation Bill. I now hear rumours that it is going to be a civil liberties Bill from the Home Office. Will the Minister, who has responsibility for small businesses, champion a proper deregulation Bill? Deregulation is the tax cut for business that does not cost the Treasury a penny. Indeed, it could be the tax cut for business that saved the Government money as well.
There is too much needless regulation and too much regulation that does not do the job. Labour introduced extremely complicated mortgage regulation and more of it is out there. It obviously failed. As soon as we had all the regulation, the mortgage banks went down—something that they had never done before—because the wrong thing was being regulated. I want to regulate the cash, capital and solvency of those banks, but to make it easier for people to borrow money. Does the Minister know that the mortgage market is seizing up through too much of the wrong kind of regulation? Will he get on and fix it? I hope colleagues have a great debate.
Mr Virendra Sharma (Ealing, Southall) (Lab)
I am grateful for the opportunity to speak in this important debate. Economic growth in the UK in the months and years ahead is extremely uncertain for two reasons. First, the Government’s reckless gamble to eliminate the structural deficit in four years by reducing public spending by £81 billion is resulting in 500,000 public sector job losses and a further 500,000 private sector job losses are likely. This will impact on growth, causing a double-dip recession at worst and stagnation in the UK economy at best.
Mr Sharma
Let me make some progress and the hon. Gentleman can try again.
Secondly, having been caused by international factors, the current economic uncertainty and any prospects of growth are still going to be greatly determined by what happens in the international economic arena. Let me begin, then, with the international dimension.
Only yesterday, the Governor of the Bank of England warned:
“The outlook for growth is highly uncertain”,
explaining:
“The contribution of net trade to growth has so far been weaker than the Bank of England Monetary Committee had expected, and it is unclear how persistent that weakness will prove to be.”
In other words, Britain’s exports and trade with the world are not boosting our hopes for economic growth, despite a 25% reduction in sterling over the last three years.
Rachel Reeves (Leeds West) (Lab)
I thank the Backbench Business Committee and the right hon. Member for Wokingham (Mr Redwood) for organising the debate. On the eve of the G20 summit in Seoul, it is especially timely, because growth is the missing plank in the Government’s policy. Yes, we need to bring down the budget deficit, but if we deny the need to grow the economy, we will fail to create the jobs that we need, and a rising dole queue means a bigger welfare bill with less tax coming in, as the shadow Chancellor has put it.
History has taught us that economic recovery following a large-scale financial crisis is tough and that the wrong economic policies from the Government can make things worse. The USA saw signs of positive growth in the 1930s, and fiscal stimulus was withdrawn. The result was the great depression. In the UK during the 1980s, the Government maintained that there was no alternative and raised interest rates to tackle inflation. The result was recession, massive social disruption, huge unemployment, rising public spending and communities that have only recently begun to recover.
Mel Stride
Will the hon. Lady tell the House what the lesson was of 1976, when a former Labour Chancellor had to go cap in hand to the International Monetary Fund, because once again a Labour Government had spent the economy out into the long grass?
Rachel Reeves
When the hon. Gentleman makes his speech, perhaps he will explain the exchange rate mechanism crisis.
In 1990 Japan had a debt to GDP ratio of 50%. The Government failed to take the swift action necessary to help the economy recover from recession and the result is that, 20 years later, debt in Japan stands at 190% of GDP. Those are the facts. Concentrate too much on one economic variable and we have an unbalanced economy that fails to achieve our economic objectives.
Despite these facts, the Government say again that there is no alternative. Let me offer an alternative programme for growth in which the Government act strategically on the side of business and industry. What would that mean in practice? First, there is a real and pressing need for the UK to be at the forefront of businesses for the future, especially low-carbon industries. To make the most of Britain’s potential requires a Government who support businesses. Instead, we had the tragedy of the cancellation of the loan to Sheffield Forgemasters. That company is a UK success story. It is British-owned, high tech and high skill. The owners built the company up from scratch and it has become a leader in its field. The loan—I emphasise that it was a loan and not a grant—was signed off by civil servants in the Treasury and was a product of two years of careful negotiation. Lord Digby Jones said that the loan would have been paid back 100 times over in benefits to the economy. Before the election, the Deputy Prime Minister described the loan as
“just the sort of thing”
we should be doing, and I have to admit that, on this occasion, I agree with Nick. The loan would have created jobs in the low-carbon industry of the future and added greatly to Britain’s export capability. However, as we all know, the loan has been cancelled, so instead of exporting civil nuclear components, we are exporting jobs to Japan and South Korea. That is not a strategy for growth, but a strategy for undermining it.
The second part of a strategy for growth must include promoting bank lending. The Prime Minister met business people in Watford last week who talked to him about the reluctance of banks to lend and how it was stifling job creation, and the Prime Minister admitted that it was difficult to know which levers to pull to get banks to lend more. His confusion does not surprise me, because I have read the Government’s Green Paper on bank lending. I read it once and assumed that I had missed the section on the action the Government plan to take, so I read it again. But it was not me; it was the Green Paper—a very green paper indeed. There was nothing there! The Government are not taking action. The review of the structure of the banking sector is still a year away, and in the meantime businesses are being denied the chance to grow.
The third component of a growth strategy is investment in the skills of the future. As the Prime Minister has just led a delegation to China, it is timely to reflect that in China and India last year 8 million people graduated from university. In contrast, on investment in higher education, the Government have reduced the university teaching grant by 80% and are making students bear the full cost of a university education. This is no way to grow the British economy.
The fourth component in a strategy for growth must be investment in our regional economies. In my region of Yorkshire, we take huge pride in our industrial heritage, and we want to build a future we are proud of as well. However, while the Leeds local enterprise partnership has been given the chance to go ahead, I have not found a single business leader in Leeds who would not prefer to continue with our successful regional development agency, Yorkshire Forward. A quarter of Yorkshire will not even be covered by a local enterprise partnership, and in the north-east that rises to more than 70%. Support for RDAs is strong not just in Yorkshire. John Cridland, the policy director at the CBI, likened the Government’s regional and economic strategy to throwing the baby out with the bathwater.
Where does this leave us? Investment in Sheffield Forgemasters will not go ahead, the banks continue to rein in lending, university funding is cut to the bone, and powers are being taken away from our regions to determine their own economic future. We all agree that the budget deficit needs to be cut, but the Government must match their ambitions for cuts with an ambition for growth that British businesses and workers can be proud of. Britain could be a world leader in the jobs and technologies of the future, but only if the Government put in the policies to make this a reality.
Ian Murray (Edinburgh South) (Lab)
Let me start by congratulating the right hon. Member for Wokingham (Mr Redwood) on securing this important debate. I must confess that I could listen to him all day, for two reasons: first, he is one of the most engaging speakers in the Chamber; and secondly, if he were to speak all day, I am sure he would eventually say something that I might agree with.
The international financial crisis has affected every Government the world over, and getting back to sustained economic growth is the only real way to reduce the deficit and clear the financial crisis for good. The problem with this Government is that their Budget and comprehensive spending review have resulted in a set of conditions that harm growth. I would like to mention a few aspects of that which I am seeing locally in my constituency. As someone who runs his own small business—I have done so since I left university—I should say that many of the points that I will make concern things that I have experienced myself.
The first aspect is business confidence, particularly the small business confidence which, as many Members have said, is so important to economic growth. Many small business owners in my constituency currently see a quadruple whammy coming from the Government, which is not just stopping potential growth but risks causing contraction in the economy, with a real danger of pushing us back into recession.
First, there is a greater degree of nervousness among small businesses’ customers, who are concerned for their jobs and those of their families. They are therefore spending less and see no light at the end of that particular tunnel. In fact, the Government’s own figures, published by the Office for Budget Responsibility, show that 500,000 public sector jobs will go as a result of decisions made by the Government, and of course PricewaterhouseCoopers has projected another 500,000 job losses in the private sector. Many commentators are saying that that may be slightly on the low side.
Ian Murray
I will make some progress, if I may.
The instability of the job market is causing customers great uncertainty. All in all, they do not see the Government doing anything to assist in the job sector.
Secondly, such problems are always compounded by personal finance, which undoubtedly affects confidence in the small business sector. Products and services will be hit hard by any increase in VAT in January. I am disappointed that the hon. Member for East Surrey (Mr Gyimah) is no longer in his place, because he mentioned cash flow for small businesses, which is a critical factor in how they operate. Many of them go under not because they are not profitable but because of cash-flow issues. One of the main effects on cash flow of what this Government have put in place will come from the increase in VAT in January.
Many people have forgotten the other hidden increase that the Government have imposed on people, which will hit confidence even further. They say that they are not introducing a jobs tax, but they are keeping the national insurance increase for employees, which will compound the problem of confidence in personal finances even further. Individual families see job insecurity, significant job cuts, increasing VAT and less pay in their pay packets, so bottom-up growth through the small business sector, and particularly the service sector, will be sluggish at best.
Thirdly, despite the warm words of the senior bankers whom we have all spoken to over the past few months, businesses and particularly small businesses are not able to borrow to enable growth. Not even in Edinburgh, which is at the forefront of financial services in Scotland and one of the biggest financial services centres in Europe, can small businesses access financial services.
To be slightly fair to the banks—I never thought I would say that in the Chamber—that may be partly a matter of perception. They tell Members that they have adequate funds to lend, but small businesses are not coming forward and creating demand. The Government and all Members have to do more to get rid of the perception that banks will not lend. While it still hangs around, small businesses will not approach banks and their business managers to access finance. Let us call the banks’ bluff. If they are telling us that the funding is there, let us all encourage small business to go and see their banks as soon as possible to have conversations about how they can borrow and therefore enable growth.
Fourthly, many businesses in my constituency rely on the public sector for contracts. If the public sector shrinks at the rate the Government wish, even though they want the private sector to take over, growth will be severely damaged by businesses not being able to access many billions of pounds of public sector contracts.
Mel Stride (Central Devon) (Con)
I welcome the opportunity to speak in this debate about growth. As my hon. Friend the Member for Mid Norfolk (George Freeman) pointed out, if the Government had not taken such prompt action on the deficit, kept our triple A credit rating status and ensured that our interest rates remained low so that our businesses could expand and consumer expenditure could be protected, there would be little point in talking about any form of growth.
I want to speak briefly about our fiscal consolidation. I am pleased that the Government have struck a balance between expenditure reductions and tax increases, with a weighting more towards the former. As my hon. Friend the Member for Bedford (Richard Fuller), who is sporting a splendid haircut, has pointed out, the importance of getting taxation on business down is absolutely key. I welcome the fact that tax will fall from 28% to 24% for larger corporates and to 20% for small businesses. That is important not only for growing our companies here but for attracting inward investment. In the Republic of Ireland, for example, the headline rate is just 12.5% and it has secured inward investment of about 2.5 times the EU average given the size of its economy.
The hon. Member for Copeland (Mr Reed) suggested that we on the Government Benches are anti-public sector. We are not, but we do recognise that productivity rates in the private sector are considerably greater than in the public sector. As the public sector slims down and the private sector expands, we can expect growth to come through that route.
Monetary policy and the dangers of quantitative easing formed a major part of the speech of my right hon. Friend the Member for Wokingham (Mr Redwood), and I fully subscribe to his concerns. Questions must be asked about injecting the economy in that way—by printing money, using electronic money to buy gilts, bonds and to some degree commercial paper—and the first of which is whether it works. We can look at the experience in Japan, where interest rates hit 0% in 2000-01 and a lot of quantitative easing was put into the system over the following six years. Although growth occurred, there was consensus among many economists that it was due to the approach of recapitalising the banks and getting them lending rather than to the money that had been put in and the creation of dishonest money in the system. When quantitative easing is being considered, almost by definition the economy is slowing down and there are deflationary and recessionary pressures on it. It is at such a moment that the banks are least likely to start lending the money that is being put into the system.
We need to be very careful about where we are in the cycle with inflation when we talk about quantitative easing. In the past two years, inflation has gone above 5% and down as low as 1.1%. It is now above 3% and, according to the Bank of England, is heading further north. We need to be absolutely certain that some of the temporary effects of low sterling and the costs of energy and oil coming through are not mistaken for a considerable rise in inflation going forward in the longer term. Other issues, such as the level of capacity in the economy and the low wage rate increases of about 2% that we have had recently, are equally important.
My final point on quantitative easing is that it would not be advisable to take away the authority of the Monetary Policy Committee to make such decisions. It should be exactly as it is with interest rate policy: the MPC should have the final say. I know that I differ from my right hon. Friend the Member for Wokingham on that, but I firmly believe it.