Budget Resolutions and Economic Situation

Debate between Nadhim Zahawi and John Redwood

Tuesday 22nd June 2010 Commons Chamber

[Mr Redwood]

I think that we now need to be positive, and I want to try to engage the Labour party in the process. I understand that the hon. Member for Leeds West (Rachel Reeves) used to work at the Bank of England, and we may have learnt from her speech why it is a good thing that her advice is no longer available to the Bank; I do not think that she would have helped to get us out of the mess. From now on, however, we need to ask ourselves what we should do about banking regulations, because I do not believe that the current system is right. It is all very well for us to say that it was wrong under the previous Government, as it clearly was, but it is our duty now to try to ensure that we do a better job. Unless we change the system, it will not be much better under the present Government.

I believe, and I think Treasury Ministers believe, that we should now have counter-cyclical rather than pro-cyclical regulation. What does that mean? It means that when times are tough and we are in recession, we should allow banks to lend more money on easier terms, and when times are really good—as in 2006-07—we should rein in the banks and say, “You cannot go on lending like this.” In the immortal words of the Governor of the Bank of England, we should remove the punchbowl before the party has everyone blind drunk. It is a pity that we did not do that in 2007.

Some of my critics say to me, “That is all very well, but how do we know where we are in the cycle?” We can never be sure where we are in the cycle, but I should have thought that it was fairly easy at the moment to agree that we are somewhere near the bottom of it. Heaven help us if this is not the bottom of it. I do not believe that all the figures in the Red Book about growth from this point are wrong, and I do not believe that all the independent forecasters are wrong. I think it quite likely that there will be some growth, but not as much as I would like and not as much as we will need.

The main reason that there will not be enough growth is that we do not have easy enough money for the private sector to refuel the recovery. The overall money supply figures are pretty dire, and we should bear in mind how much of the money is circulated around the system from the Bank of England to the Treasury to the spending Departments. Labour left a perfectly good money machine to put relatively low-cost money into the public sector, but at the cost of the private sector, which—particularly small and medium-sized enterprises—is still shivering in a world in which there is not enough sensible credit.

I do not want to stoke a new unsustainable boom, but there must be a judgment about whether the recovery is too fast or too slow, too hot or too cold. At present, it is most people’s judgment that in the private sector is too cold. It is not going quickly enough, and it is not easy enough. We need to make it easier for ordinary, run-of-the-mill entrepreneurs to succeed. It should not be necessary to be a complete genius who is prepared to take on all the odds in order to establish a company. We want people to be able to do that who have reasonable skills and do not want to have to fight the jungle all the time.

[Nadhim Zahawi (Stratford-on-Avon) (Con)]

I agree with my right hon. Friend. He has heard me speak passionately about start-ups, and I was pleased that my right hon. Friend the Chancellor provided some incentives for them today, but given the reality of where we are today in the economy, the recovery will be fuelled less by start-ups than by medium-sized businesses that are already exporting to countries such as China and Brazil, where our record is currently abysmal. We export more to Ireland than to those countries. It is those type of companies that have a more mature business that are not investing at present. They are not retrenching, but they are not investing. Banks need to send a message to them that there is money available to them to make that investment and to grow their business from medium to large.

[Mr Redwood]

I am grateful to my hon. Friend, and I agree exactly with what he said.

My conclusion on this is that to promote a proper recovery the Government need to have words with their financial regulators to say that at this stage of the cycle they should not be demanding more cash and capital from here. The banks are now perfectly solvent. They are perfectly liquid; they are lending huge sums of money to the Government, and that counts as liquid resources because they hold it in the form of Government bonds and Treasury bills. Job done, therefore, but by all means start to tighten things again in a year or two if we have a really good recovery going on and if credit is beginning to build up.

The economy is still anaemic, however; it is still short of credit. It does not have the oomph behind it that we need, and the answer lies in the banks. So my plea to the Chancellor is that in order to make his strategy successful he needs to do something about the way we approach banks, credit and money supply in this country.

The overall Budget strategy takes the risk of doing rather more by tax and rather less by public spending reductions than the Chancellor himself was suggesting when he first looked at this problem, but I wish it well. It is very important for all of us that it works. Every Member in this House wants their constituents to have more chance of a decent job, more chance of getting off benefit if they are unemployed, and more chance of keeping good-quality schools and hospitals.

We have seen what happens in extreme situations in countries that did not take their deficit seriously. They not only end up with a worse economy; they end up with much bigger slashes in public services because they literally run out of money. The previous Government very helpfully advised us that all the money had gone. We know where it went and who took it. The Red Book today gives a pathway to get back from that, so I hope that we will get behind it and try to make it work.