amendment of the law

Oliver Colvile Excerpts

Monday 25th March 2013 Commons Chamber

[Mr David Ruffley (Bury St Edmunds) (Con)]

The Chancellor is a fiscal Conservative and monetary activist, and as such he eschewed shock and awe measures in this Budget, opting instead for sensible targeted relief that is welcome on this side of the House. Cuts to income tax mean that by 2015 a large number of income tax payers will receive a £700 cut compared with their tax bill of 2010. On child care, average two-child families with working mothers and fathers will get £2,400. Fuel duty has been frozen, and it is the longest freeze for two decades. The national insurance contribution cut of £2,000 is equivalent to someone just under average median earnings being taken on at no national insurance cost to an employer.

I support the house building programme that we have heard about. As someone on the dry end of the Conservative party economically, I have heard the criticism that it is Fannie Mae all over again. People wonder whether there will be lots of defaults when the interest-free period runs out, and whether the policy could lead to higher house prices because of supply constraints. I am sure I will hear those concerns again, but the reality is that we need an injection of confidence into British households. There is no question but that the ability to get on the housing ladder, including the encouragement to spend money, because consumer spending frequently attends the purchase of a new house, is the kind of confidence that the British consumer wants at this stage of the economic cycle.

[Oliver Colvile (Plymouth, Sutton and Devonport) (Con)]

Does my hon. Friend recognise that the key issue is the blockage in getting money to people and giving them the ability to borrow it in the first place? We expect our banks to ensure that they not only rebuild their balance sheets, but lend money and make it available.

[Mr Ruffley]

My hon. Friend makes an interesting point.

There were no shock-and-awe measures in the Budget, because the Chancellor is probably right to believe that we are not approaching a lost Japanese decade. Nevertheless, I am concerned about the Office for Budget Responsibility growth projections; it forecasts growth of 2.3% in 2015, 2.7% in 2016 and 2.8% in 2017. The forecast turns on one central OBR assumption that might be wrong. The OBR assumes that there is quite a large negative output gap—that, in simple terms, there is a lot of slack in the economy. Forecasting or estimating the output gap is very difficult. If its assumption is wrong, and if the output gap is smaller than it says, a huge amount of the £120 billion a year last year and the coming year is structural rather than cyclical. If that is the case, we will need shock-and-awe measures—deeper cuts than those implied in the spending envelope and, yes, a fiscal stimulus in deeper tax cuts.

--- Later in debate ---

[Alun Cairns (Vale of Glamorgan) (Con)]

In the limited time available to me, I intend to explain why I welcome the measures in the Budget, and also why I consider the views of Opposition Members to be highly inconsistent.

Given the lack of growth in our largest trading nations, it is easy to understand why the Chancellor was left with so little room for manoeuvre. After all, growth projections in Germany and the United States—just two examples—have been downgraded. We need to recognise the context of the present position: the scale of debt inherited in 2010, the major issues that confront the eurozone, the local impact of the high prices of commodities such as oil, gas and food and the inflationary pressures that that involves, and the lack of growth in other nations.

[Oliver Colvile]

Did not the last Labour Government create a structural budget deficit as long ago as 2001?

[Alun Cairns]

My hon. Friend is absolutely right. I shall say more about Labour’s inconsistency later.

All the issues I have mentioned have had impacts on the living standards of families throughout the United Kingdom. Decisions such as these are difficult to take, but they must be seen in context.

What I welcome most is the Chancellor’s drive to create the most competitive of economic environments. That will attract investment, and will also continue to encourage the private sector in the UK to invest. The further reduction in corporation tax goes to the heart of a sustained economic recovery, and underlines the economic imbalance that we inherited. The 20% corporation tax rate means that we now compare exceptionally well with our major competitors. In Germany the rate is 29%, in France it is 33%, and in Italy it is 31%. Those are material considerations for anyone who is thinking about where to invest, and for any United Kingdom investor who is thinking of expanding. We should also bear in mind the uncompetitive position that we inherited. The increase in employers’ national insurance rates led to the term “jobs tax”, with which we are now familiar.

The ultimate judgment will come in the grades that the World Economic Forum confers on the competitiveness of the various nations. Having ranked fourth in 1997, we were dragged down to 13th by the Labour party. At last, however, we have recovered enough to rank eighth—and that happened before the announcement of the welcome changes in the Budget. Neither the 20% corporation tax rate nor the employers’ national insurance relief were taken into account.

Other Budget measures that I welcome include the “help to buy” mortgage guarantee schemes. That is an area of policy in which no Government would ideally become involved. However, bearing in mind the context I referred to earlier, the Chancellor had little choice other than to get involved. The scheme will provide a welcome boost to the construction and retail industries and various elements of the service sector, and it will make a significant difference to many families who want to buy their own home.

--- Later in debate ---

[Oliver Colvile (Plymouth, Sutton and Devonport) (Con)]

Before I go any further, I should like to declare that I retain an interest in a small communications company, which I set up before I was elected to this place, that gives advice to developers on how to manage planning procedures and the planning system. For the last 20 years, I have been following the whole issue of development and planning.

I very much welcome the Chancellor’s proposals to introduce “help to buy”, which I hope will stimulate our economy as well. To my mind, however, the planning process is not the issue that has created many of the problems for development. We need to unlock credit availability and make mortgages much more available, especially for those first-time buyers who cannot raid the bank of mum and dad.

I am not going to pretend that I am an economist or that I necessarily understand banking regulation or the complexities that go with it, but I think that we cannot ignore the reasons why we are in this mess. To my mind, it was Bill Clinton and the American Administration who, wanting to encourage the less well off, especially among the Afro-Caribbean community in the United States, to buy their own homes, consequently created a sub-prime market in the 1990s. By weakening financial regulation, the US and British Governments created a new class of specialised mortgage lenders that subcontracted their liability. By failing to put up interest rates, the US Federal Reserve and the Bank of England allowed the housing market to overheat. That is why we created this major crash.

In 2001, when the Labour Government created a budget deficit, they continued to make our problems much more disastrous than they needed to be, and they failed to control public expenditure, adding to our financial woes. In addition, the Bank of England failed to manage our inflation target and our monetary framework. Not only the Treasury, but the Office for Budgetary Responsibility have some way to go because they have failed to get their forecasts right in the process.

As my hon. Friends know, the Bank of England is responsible for managing the inflation target, but it is the Treasury that actually sets that target in the first place. For the last two years, I have been banging on and asking how those criteria have been set, but I have failed to get a reply. Plainly, something has gone very wrong indeed. The Bank of England is consistently failing to hit its inflation target. In producing a Budget, monetary policy cannot be divorced from the economics. In the years before the credit crunch, monetary conditions were too loose. There was an asset price bubble, house prices rose very sharply and if the banking crises had not erupted, general inflation would have been an even more serious problem. The Bank of England accommodated a serious asset price bubble with a huge and unsustainable level of domestic household debt. People have rightly criticised bank and financial market regulation, but much less attention has been given to defective central banking and overly loose monetary conditions that made possible the household borrowing and financial leverage.

I believe that the time has now come when the role of the central banks should be scrutinised properly. We must learn the lessons, the limitations and the defects of the inflation target regime. There has been a serious lack of transparency in the way the Bank of England conducts monetary policy. The details of its forecasting model, the assumptions it uses and the forecasts it generates have not been publicly available. Its public documents have been disappointing in respect of their clarity and presentation, and I am afraid that the inflation report has failed. I am firmly of the view that we need a proper review of the inflation target, how it is set out and how the central bank conducts its business.