Budget Resolutions and Economic Situation

Michael Connarty Excerpts

Tuesday 22nd June 2010 Commons Chamber

[Mr Tyrie]

I thank my hon. Friend for reminding me about that, as I had completely forgotten it. The whole House has heard the point he made.

The central judgment in the Budget is about the scale and speed of the fiscal adjustment. Whatever the Chancellor does, there are risks. If he shows lack of resolve on the deficit, the Greek experience beckons, as markets lose confidence in our ability to service our debts. The Chancellor was right to emphasise sovereign debt risk in his speech. That is not a fanciful risk, but a clear and present danger for Britain and he was right to flag it up. If we show too much zeal, too early, on the deficit, some people fear that the Japanese experience awaits us—being caught in a heavily indebted deflationary trap.

[Michael Connarty (Linlithgow and East Falkirk) (Lab)]

I voted for the hon. Gentleman to hold his new position and even told his opponent that I had done so, but I am deeply concerned that today he is making the same mistake as the Chancellor. He said that the greatest problem facing economies is sovereign debt, when in fact analysis shows that it is bank indebtedness. Greece has a sovereign debt problem, but other countries of Europe have a problem with bank debt. That is the problem, so we are looking at the wrong target.

[Mr Tyrie]

I agree that both are extremely important. I do not think I said that the greatest threat is necessarily sovereign debt, although Hansard will show whether I did. I said that I agreed with the Chancellor that it was an extremely grave risk. That is supported by the overwhelming majority of commentators—the International Monetary Fund, the OECD and a large number of independent commentators.

From the remarks made by the Leader of the Opposition, I presume that she is more fearful of the recovery being snuffed out by further tightening than of the risk of a downgrade in the bond markets. I shall not form an instant judgment now. I shall want my Committee to take a look at the situation and report to the House. None the less I noted a couple of relevant points. With the benefit of hindsight—looking historically—most fiscal retrenchments in this country have erred on the side of too little, too late, rather than too much, too soon.

My other general comment is that although the Japanese parallel is well worth examining, it should be borne in mind that the Japanese banking system was in a shocking state even by comparison with ours, and it has remained in grave difficulties. The revival of our banking system is crucial if we are to have sustained recovery. In some degree, that answers the point made by the hon. Member for Linlithgow and East Falkirk (Michael Connarty), and agrees with it.

Whether the Chancellor’s judgment turns out to be right or wrong, there are a couple of points on which I should like to hear more from him over the coming days and weeks. First, although he must be resolute in his judgment his policy framework could, and I think should, signal that if the facts change, he will change his mind—he hinted at that in his speech. The global economic situation is fluid and fragile, so if we were to find ourselves in another global downturn, possibly triggered by global fiscal contraction, we need to know that he would deploy whatever tools were required to avoid deflation. There must be some risk of that. It is not just a matter of Governments around the world, and particularly in Europe, beginning to address their deficits after their bail-outs. The banking system, too, will remain under strain. Banks will be subjected to a levy and will be required to secure major increases in capital and liquid assets, both of which will reduce lending. On top of that, there is the risk that household saving might sharply increase at the expense of consumption.

However, looking at things from an international perspective, I am heartened by the global growth forecasts of the IMF, which suggest that global growth for the next two years will be running in excess of 4%. I have not yet had a chance to see what the Office for Budget Responsibility has written in, but I suspect it will probably be in line, which would appear to buttress the Chancellor’s judgment that the cuts are sustainable.

My second question to the Chancellor relates to the first: what is the overall macro-economic framework for the Budget judgment? I should like more information about that. In previous squeezes on fiscal policy, it has been reasonable to argue that tight policy has created room for a compensating looser monetary policy through short-term interest rates. This time, however, interest rates are already very low, so the only offset comes in long-term bond rates. Interestingly, the OBR has already published a second estimate for gross debt interest, which takes account of the tighter fiscal policy that has just been announced. On its forecast, the figures show a reduction in central Government gross debt interest of £7 billion over the planning period, so there is a long-term bond yield dividend to be had from the tighter fiscal policy.

In any case, the Chancellor may have spelt out his macro-economic framework in more detail in the Red Book. None of us has yet had a chance to read it, although some people may be taking that opportunity while I am speaking. It would be worth hearing more about the policy framework, because it must leave the Chancellor with enough room to alter course if circumstances change, otherwise credibility could collapse in the face of unforeseen events. The one thing I can predict is that there will be quite a few of those.

Whatever else people conclude about the Budget, it is fair to say that it shows extraordinary political courage by the Chancellor and by the coalition Government. There will be rumblings in the undergrowth in both coalition parties. The vested interest groups will cause enormous trouble, just as they would have done if a Labour Government had been implementing their cuts. It will take sustained resolution by the Prime Minister, his Deputy and the Chancellor to stick to their course. The relationship between No. 10 and No. 11 will be absolutely crucial in the months ahead.

I have concentrated on the deficit and the macro-economic framework, but the Budget will be judged on more than just accountancy. There are a number of other important issues. Does the Budget pave the way for providing better economic performance in the long run? Does it adequately protect the poorest and the most vulnerable in our society? I hope the Treasury Committee will look at that issue. Does it take enough account of both regional and structural imbalances in the economy? What role will Britain play in addressing the large global imbalances that still remain? Those are some of the questions that I very much hope my colleagues on the Treasury Committee will agree should be looked at in the months and years ahead.

I look forward to the formation of the Committee, the first-ever Treasury Committee that will benefit from a democratic mandate. Our task now is to get on with the job. I am open to suggestions from both sides of the House about what exactly we should look at; indeed I am already being inundated with proposals and suggestions, so we shall need to prioritise. Of course, I shall await the views of my Committee colleagues, but it would surprise no one—certainly not me—if we concluded that the central fiscal judgment of the Budget, and both the structure and early output of the new Office for Budget Responsibility, should be high on our agenda.

--- Later in debate ---

[Malcolm Bruce]

Well, it was not viable and it did not add up, because it was not local. That was the problem. It was a central measure. Indeed, the hon. Gentleman might also want to listen to the fact that the centralisation of business rates is one reason why north-east Scotland is so underfunded. The city of Aberdeen pays £150 million a year in business rates to Edinburgh—to the SNP Government—and gets £75 million back. That is a pretty bad deal for a city that supports the economy and has severe financial difficulties, so I do not think that we need to hear any more from the SNP.

[Michael Connarty]

Will the right hon. Gentleman give way?