European Summit

Sajid Javid Excerpts

Thursday 24th March 2011 Commons Chamber

[Mr Hoban]

The hon. Lady, who is very knowledgeable and well-versed in these matters, knows exactly the terms on which the EFSM was established. However, I do not believe that it is helpful to speculate on hypothetical situations.

[Sajid Javid (Bromsgrove) (Con)]

Portugal finds itself in this sorry state today because yesterday its Parliament failed to pass a budget that would have allowed foreign investors to continue investing in its sovereign bonds. Does my hon. Friend realise that had we not had a change of Government in our country 10 months ago, we could just as easily have found ourselves in a very similar situation?

Amendment of the Law

Sajid Javid Excerpts

Wednesday 23rd March 2011 Commons Chamber

[Sammy Wilson]

That is clearly not what the Chancellor intends, because he hopes to raise £1.4 billion. If the hon. Gentleman is saying that this is all about changing behaviour so that firms do not get the money, there is an immediate hole in the figures the Chancellor is presenting to the House today. I suspect that it is not all about that at all, but is another way of raising tax. What appears on the surface to be a good supply-side measure will be more than offset by some of the other measures undertaken. Of course, the kinds of firms that are most likely to be hit by this are the very firms that the Chancellor says he wishes to promote: those in manufacturing industry. The service industry will not be hit by those measures as much as manufacturing will, and, given Northern Ireland’s reliance on gas and oil to fuel and power manufacturing industry, and the fact that our energy costs are already higher than in other parts of the United Kingdom, that will gravely disadvantage manufacturing firms in Northern Ireland, at the very time when the Executive in Northern Ireland is trying to rebalance the economy.

[Sajid Javid (Bromsgrove) (Con)]

The hon. Gentleman started his speech by saying that he would provide a more objective analysis, and I was excited by that. In that vein, does he accept that the Chancellor’s announcement that, for the first time, as a major departure from corporation tax policy, he would consider a separate tax rate for Northern Ireland, making the whole Province an enterprise zone, is very welcome and could help with some of the things that the hon. Gentleman is pointing out?

[Sammy Wilson]

I wish to come to that point later, but I hope the hon. Gentleman will accept that my comments so far, at least, have been objective, because they are based on the figures that the Chancellor has provided.

The Chancellor talked about another measure today for encouraging growth, the enterprise zones that the hon. Gentleman mentions. When we look at the figures in the Red Book, however, we find that in the first year, 21 enterprise zones will eventually be in place but the money made available to businesses as a result of tax exemption will amount to £20 million. By the final year, the figure will be £80 million, and I do not know whether £4 million in each zone will generate a great deal in additional output.

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[Joseph Johnson]

I did not touch on it directly because the reply is obvious. Yes, other countries have large debts, but that does not mean that we do not have an urgent need to reduce the scope of our borrowing and our national interest payments.

[Sajid Javid]

The hon. Member for Rhondda (Chris Bryant) should recognise that every country’s situation is different. He mentions Japan, whose debt might be about 190% of GDP, but it is also the largest creditor nation in the world. Only about 5% of its total debt stock is held by foreign investors. The situation is quite different in our case.

[Joseph Johnson]

That is an excellent point.

As my right hon. Friend the Member for Wokingham (Mr Redwood) said earlier, Portugal’s position is particularly precarious at the moment because opposition parties there, much like here, have refused to back the austerity measures needed to help the country avoid a bail-out. That could force Portugal further down the international bail-out route that was first trodden by Greece last spring and then by Ireland at the end of last year. Portugal’s 10-year Government bond yields rose comfortably above 8% yesterday, for the first time since the start of the crisis, reflecting plunging market confidence in the resolve of that country’s political class. That cannot be said of the occupants of Nos. 10 and 11 Downing street.

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[Mr Jones]

I find that hard to stomach, coming from the right hon. Gentleman, because he is giving succour to the proposals before us, which could damage the north-east economy more severely than even those in Thatcher’s day. He is looking both ways, as a Liberal saying one thing in the region, and then coming here and supporting and voting for a Conservative Government who are putting the proposals forward. [Interruption.] I will tell him exactly why. What we would not have done is put forward his and his party’s ludicrous proposal to abolish the regional development agency, One North East.

The right hon. Gentleman now has to defend his ludicrous policy on local enterprise partnerships, which I shall come to later. He struggled to get re-elected this time; I doubt whether the voters of Berwick will re-elect him if he stands next time. It is important to remember that none of this could have happened without the Liberal Democrats blindly going along and supporting those savage cuts, which will have a terrible effect on a region I know he actually cares deeply about.

Another major aspect of the current economic situation is inflation. The Bank of England is stuck between a rock and hard place. Interest rates are as low as they can go, and quantitative easing is continuing, yet the inflation target is way above where it should be. It is difficult to know what the Bank will do.

We continue to hear, as we have heard several times this afternoon, that there is no alternative to this approach. I am sorry, but there is a definite alternative. We also hear that the fact that we are in this mess is all down to a Labour Government—that only Britain went through the recession in 2008, while the rest of the world did not, and that we got into the position we did only because of Labour’s reckless spending and financial management. I want to put some facts on the record. Conservative Members use a lot of rhetoric and soundbites; the famous one from the Prime Minister was that Labour did not mend the roof while the sun was shining. In fact, we did, because when we came to power in 1997, the level of debt was nearly 50% and we reduced it. I remember the tremendous debate within my party when we sold off the 3G licences. People said that we should use that money to fund public expenditure, but the then Chancellor took the very good decision to drive down the level of debt. That left us, going into the economic downturn, in the strong position of having the lowest debt, unemployment and inflation in the G7, and the highest investment from overseas.

Was it right to transform and invest in our public services over those 13 years? Yes, it was. They have been transformed in many parts of this country, certainly in my constituency. When I was first elected in 2001, the hospital in Chester-le-Street was in the old workhouse. We now have a brand-new hospital in Chester-le-street, as well as three others in the area. We have six or seven new primary care centres in County Durham. That is a direct result of public investment. When the economic crisis hit, did we have to respond to that by borrowing? Yes, we did. Was it the right thing to do? Yes, it was.

At the time of the crisis at Northern Rock, if we had followed what the Conservatives, including the current Chancellor of the Exchequer, wanted to do, which was basically to let it fold, we would have had a far worse situation, with a banking crisis that would have devastated not only Northern Rock but every other bank. The then Chancellor put in place a package to support banks, subsidise mortgages, cut VAT, fund apprenticeships, and give people money to buy new cars and stimulate the economy—and it worked. If people want to look for the evidence for that, there is the growth of the economy in the months prior to, and just after, the general election.

Contrast that with what we have now—a Government who do not have a growth strategy and are wedded to a strategy that they feel it would be politically weak to go away from, repeating time and again that there is no alternative. I ask Conservative Members to reflect on what they would have done at that time. Last weekend, the Chancellor said that we were in this financial state because of a decade of over-expenditure by the Labour party. Well, the Conservatives supported our spending targets right up until 2008, so they cannot have it both ways. I ask them to look at the facts rather than what central office spun during the election campaign, which, unfortunately, some of them are continuing to repeat.

[Sajid Javid]

I am glad that the hon. Gentleman said that one should look at the facts. Is he aware that the spending cuts over this parliamentary period are only 3.7%—0.9% a year—in real terms, which is lower than the spending cuts that were implemented by Denis Healey, a former Chancellor? On that basis, would he still describe them as swingeing, drastic or tough cuts?

[Mr Jones]

I am sorry, but yes I would. If hon. Members are going to make comparisons, they should compare like with like. Whoever writes the central office briefings does one thing all the time. They compare our economy with that of Greece or, as the hon. Gentleman just did, they compare the British economy today with that of the 1970s. That is complete nonsense.

The central point—some Liberal Democrats are starting to wake up to this, including the Deputy Prime Minister—is that although there is a need and a desire to reduce the deficit, there is also an ideological drive to have a smaller state and to put into practice the ideological prejudices that the Conservatives have yearned to implement for many years. The people of this country will suffer from that. Is there an alternative? Yes, there certainly is.

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[Sajid Javid (Bromsgrove) (Con)]

I congratulate the hon. and gallant Member for Barnsley Central (Dan Jarvis) on an excellent maiden speech.

I would describe this Budget as healthily underwhelming. I say “healthily” because it recognises that private sector growth is crucial to our future prosperity. I say “underwhelming” because it reiterates the need to continue our fiscal consolidation, and I congratulate the Chancellor on keeping on course with that. The Budget recognises the terrible economic inheritance that this Government were given. Our first Budget was a rescue mission, whereas this Budget is about a desire to build on the foundations for economic growth. Our budget deficit was 11% of GDP—it still is, because the cuts have not yet really begun—and the largest of any major country. Our national debt grew by 150% over the 13 years of the Labour Government to £893 billion by the time they left office. If we add the costs of the banking interventions to that, we find that our national debt is more than £2.1 trillion, according to the Office for National Statistics. That means that our debt as a percentage of GDP is on a par with that of both Lebanon and Jamaica. Our interest rate costs are £120 million a day and £43 billion in total this year, and they will rise each and every year in this Parliament to £66.8 billion. Although Labour Members may be in denial, I am glad to see that the International Monetary Fund, the OECD, the CBI and the Institute for Fiscal Studies are not.

What compounds our problems and the need for this continued fiscal consolidation is the very uncertain global outlook. The eurozone is still in trouble, as I found when I checked the bond market yields of some eurozone countries this morning. Despite the bail-outs, Greece’s yields are more than 13% and Ireland’s are more than 10%. Portugal is going through a parliamentary test today, and its yields are more than 7.85%. Our five-year bond yields are at 2.37%, despite our having the largest budget deficit of all the countries that I just mentioned. The emerging markets are also causing particular problems for our growth prospects, with things slowing down in China, India, Brazil and Russia—China has hiked rates twice in the past few months. We have relied on economic growth in that country to help our own export industry, so we need to keep an eye on the situation.

Lastly, as has been mentioned, in particular by the hon. Member for Wirral South (Alison McGovern), there is concern about global inflation. Clearly inflation has been caused primarily by rises in the price of oil, metals and food, but in the UK, in particular, devaluation has had an impact. It has had a positive impact on exports, but it tends to import inflation too. What has not been mentioned today is the potential impact of quantitative easing—the policy of buying up to £200 billion of both corporate bonds and gilts. That has an impact on the money supply in this country and it is doubtless having an impact on inflation.

With RPI inflation at 5.5%—the figure was published yesterday—and our gilt rate at 2.37%, the real rate of return is negative on our bond markets and that is a very fragile situation for the markets. To put that into context, the last time that RPI inflation was at that level was in 1991. At that time, our five-year gilt rate was at 10.09%. Clearly if the markets woke up one day and decided that they were not going to accept such low negative interest rates any more, we would be in a much worse predicament. That underlines the need for continued fiscal consolidation.

On the Budget itself, I note that the Red Book shows that spending continues to increase in cash terms from £694 billion to £744 billion by the end of this Parliament and that in real terms the actual fall in public spending is 3.7%. I do not want to belittle such a decline in real terms, but it is certainly not the type of savage cut that has been mentioned by certain commentators and by Opposition Members. In fact, it is about 0.9% a year, less than the cuts made by Denis Healey when he was Chancellor.

I particularly welcome the Chancellor’s announcement that he will consider merging the operation of national insurance and income tax. National insurance was introduced by David Lloyd George 100 years ago on the contributory principle, which hardly applies to national insurance today. It makes absolute sense to consider merging its operation with that of income tax so that we can reduce administration and compliance costs and increase transparency. Many times in the past, a Chancellor has stood at the Dispatch Box on Budget day and said that he is not increasing income taxes but has gone on to increase national insurance. That transparency will be welcome and in future it might lead to greater downward pressure from the general public on personal tax levels.

That measure would also add to the simplification of our tax code, which is critical, especially when it comes to helping businesses. Our tax code has doubled in size since 1997, with a guide almost 2,000 pages long, and it is equivalent to 10 copies of Tolstoy’s novel, “War and Peace”.

Last year, I welcomed the Chancellor’s commitment that the 50p income tax rate will not be a permanent feature of the tax system and I urge him, when he reviews the tax rate, to consider it in the same way as he considered capital gains tax when it was raised from 18% to 28%. A dynamic analysis was carried out at that time and perhaps such an analysis could be done of the 50p rate to show that it does not bring in any extra tax from richer members of society. Perhaps if it is cut back down to 40%, the rich will pay more in tax.

The Chancellor made a number of excellent announcements on growth. Time limits me from mentioning them all, but I want to highlight a few, particularly the moratorium for small businesses with fewer than 10 employees. I hope that we can consider ways to deal with regulations from the EU more constructively. I note that the EU agency workers directive, if and when it comes into force, will cost businesses in Britain almost £1.5 billion a year. Although the Government have a one-in, one-out policy, if that is successful it will only keep regulation at current levels. I hope that it will become a one-in, two-out policy. I welcome the enterprise zones and the decision to speed up planning decisions and ensure that they are made within one year. I also welcome the decision to increase the enterprise investment scheme allowance from 20% to 30% as well as the increase in entrepreneurs’ relief and the cut in corporation tax.

The policies that will truly promote growth are those that the Government have started to implement in some of their key plans in other Departments. In education, we will get young people to focus once again on core subjects and, in the context of reskilling our young people, I welcome the announcement that we will increase the number of apprenticeships and build on the good work done by the Minister for Further Education, Skills and Lifelong Learning by adding another 50,000 apprenticeship places by the end of the Parliament. So, 250,000 new apprenticeships will have been created by this Government by the end of the Parliament. I welcome the decision in the context of welfare to introduce the universal credit, which will ensure that it will always pay anyone on out-of-work benefits to be in work rather than out of work.

In conclusion, the Budget deals with our fiscal overstretch and promotes growth in tandem with other Government policies. I commend it to the House.

Oral Answers to Questions

Sajid Javid Excerpts

Tuesday 22nd March 2011 Commons Chamber

[Justine Greening]

My hon. Friend is right. The consequence of that economic mess is that Labour Governments always leave unemployment higher than when they came into office. It is always that that we seek to tackle. He is right that there is no alternative plan. We have heard about a defunct plan for VAT and petrol, but we have not heard from the Opposition any plan to tackle the deficit. They said they would have some thoughts. Clearly, they are totally thoughtless.

[Sajid Javid (Bromsgrove) (Con)]

The Government inherited the largest budget deficit of any major country, yet today the UK enjoys one of the lowest interest rates of any major country. Does the Minister have an explanation for that?

[Justine Greening]

My hon. Friend is right to point out that the previous Government maxed out the country’s credit card. Worse still, they want us to hand on those debts—their debts—to our children and grandchildren. The reason that we have been able to enjoy lower interest rates for our borrowing than countries such as Ireland is that the markets know that we have a plan to get our public finances back into shape. That is benefiting this country every day.

Fuel Prices and the Cost of Living

Sajid Javid Excerpts

Wednesday 16th March 2011 Commons Chamber

[Charlie Elphicke]

rose—

[Sajid Javid (Bromsgrove) (Con)]

rose—

[Ms Eagle]

I have given way to the hon. Member for Great Yarmouth (Brandon Lewis) already.

The Office for Budget Responsibility produced the assessment last September, and it failed to make the numbers stack up for the policy. It calculated that the overall effect on the public finances of a temporary oil price rise would be close to zero, and that a permanent rise would create a loss to the public finances. In other words, there is no windfall for the Treasury to redistribute using a so-called fuel duty stabiliser mechanism.

No one appears to have told the Prime Minister about that and he clearly has not bothered to read the OBR report, because at Prime Minister’s questions a couple of weeks ago, he promised a fuel duty stabiliser in the Budget:

“we will look at the fact that extra revenue comes to the Treasury when there is a higher oil price, and see if we can share some of the benefit of that with the motorist.”—[Official Report, 2 March 2011; Vol. 524, c. 300.]

The Daily Telegraph called that statement “misleading and economically illiterate”. I could not have put it better myself.

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[Charlie Elphicke]

rose—

[Sajid Javid]

rose—

[Ms Eagle]

I have given way to the hon. Member for Dover (Charlie Elphicke).

The House of Commons Library has estimated that that reduction would cost £700 million and take nearly 3p a litre off the price of petrol.

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[Sajid Javid]

One of the most important components of the cost of living is the interest rate, which in turn determines mortgage rates. Does my hon. Friend agree that, because of the action this Government have taken, Britain today has a lower interest rate than countries in Europe that have far higher deficits? That is the very action that the shadow Minister sought to criticise.

[Justine Greening]

One of the problems is that the Labour party and the shadow Chancellor do not even accept that there is a structural deficit. My hon. Friend is absolutely right to point out that the steps we are taking to tackle the deficit and bring our public finances back under control and into a sustainable shape, so that we can fund public services affordably for the long term, will give us a much better chance of keeping interest rates and inflation low. That is critical to ensuring that we can support our economy more broadly.

Budget Responsibility and National Audit Bill [Lords]

Sajid Javid Excerpts

Monday 14th February 2011 Commons Chamber

[Justine Greening]

I have just defined that flexibility. Although we want to balance the structural current deficit by the end of the rolling five-year forecast period, we are, as I have said, on track to meet the mandate one year early. We are clearly ensuring that we will achieve our overall objectives. By the end of the current Parliament we will have completely eliminated the structural current deficit, and the debt ratio will be falling. That is our four-year plan for restoring order and stability to our nation’s finances, which has been praised by the international community and welcomed by the financial markets.

[Sajid Javid (Bromsgrove) (Con)]

The Minister refers to praise from the international community. If she was referring to the International Monetary Fund, I welcome that praise. She will also be aware that the IMF’s independent evaluation office reported last week that it had felt intimidated and bullied by the Treasury in which the current shadow Chancellor, the right hon. Member for Morley and Outwood (Ed Balls), and the Leader of the Opposition played a key role between 2004 and 2006, and that it had been forced to water down its criticism of United Kingdom fiscal policy. Will she reassure the House that, as the IMF has praised this Government’s plans for the OBR, it seems that we did not intimidate it as the last Government did?

[Justine Greening]

I hope that we will have an altogether more constructive relationship with the IMF. In fact, it has already commented on the background to the need for this Bill. In November last year, it stated that the recent crisis led the UK to suspend its two national fiscal rules—the golden rule and the sustainable investment rule—at the end of 2008, and that the credibility of the national rules as effective constraints of policy action was weakened well before the crisis. It went on to say that the rules failed to prevent a worsening of the fiscal balance in the years leading up to the crisis, leaving insufficient buffers as the economy entered the downturn, and that while in place the golden rule was often criticised becauseit provided insufficient monitoring, transparency and accountability of fiscal policy. That was the IMF’s assessment of the previous fiscal mandate, and I think that it demonstrates clearly why it was so ineffective in tackling the problems that our country experienced. In many respects, it provided the ground on which those problems were able to prosper and grow.

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[Ms Eagle]

It is important to see what the forecasts are and what they mean at this stage of economic recovery. Of course I want to see the economy recover and grow, unemployment coming down and inflation being controlled. Unfortunately, that is not what the signs that we have been picking up since the Government’s decision to cut so deep and so fast tell us about the real economy. We will see as time goes on how the OBR adjusts its forecasts to take account of the monthly and quarterly statistics from the Office for National Statistics.

The shock GDP figures before Christmas strongly imply that the Chancellor will suffer the embarrassment of his growth forecasts being downgraded by the OBR in his self-proclaimed Budget for growth, which is due to be unveiled next month. We will wait and see.

We on the Labour Benches support a genuinely independent OBR but, as I said, we will explore in Committee the practical extent of that independence and suggest amendments to the Bill to shore it up a little more. We will need to explore the viability of the arrangements to produce, rather than comment on, the fiscal forecasts, as many other fiscal councils do. We will need to explore the extent of the OBR’s remit and whether the close co-operation with civil servants required to produce the forecast will lead to behind-the-scenes negotiations that will compromise at least the perception of independence.

Let us be under no illusion that the existence of the OBR, which we support in principle, can in any way protect us from the misjudgments of the present Chancellor or any other. The OBR must assume, as the Minister said, that the Government’s plans are a given. It cannot comment on the fiscal mandate or on wider fiscal policy in general. It is prevented from doing so. All it can do is calculate the probability of the Government being able to achieve their stated plans. The OBR therefore cannot protect the country from the mistakes that the Chancellor makes, or from the mistakes that he has made already. It is no panacea and it should not be regarded as one. Our dispute—

[Sajid Javid]

Will the hon. Lady give way?

[Ms Eagle]

No, because I am about to finish. Our dispute is with the Government’s plans, not with the OBR’s forecasting. We look forward to closer examination of the Bill in Committee. We will subject it to detailed scrutiny.

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[Sajid Javid]

My hon. Friend will note that in her closing remarks the hon. Member for Wallasey (Ms Eagle) told the House not to see the OBR as a panacea. Did he notice the irony of that statement, because it was the previous Government who passed the Fiscal Responsibility Act 2010 and presented that as a panacea to the nation, pretending that it is possible to legislate and bring down the deficit without taking any tough decisions?

[Mr Field]

I do not want to go too far into the past, but my hon. Friend is absolutely right. We now recognise the hubristic foolishness of the notion of ending boom and bust and that the economic cycle had somehow been put to one side. We have all now learned that lesson, and this generation of Members will be much more sceptical about any such panacea that is proposed in future.

As I have said, no organisation, not even those without links to the Government, forecast the scale of the economic crisis. Ultimately, economic forecasts are just that, and if we place blind faith in the independent projections, potential risks might also be ignored. Therefore, part of the OBR’s continuing role must be constantly to remind us all of its own fallibility and advise on a range of possible outcomes, pointing out not only to politicians, but to financial markets, the longer-term threats to our economy in the event that the markets, in particular, prove too forgiving.

Putting aside those concerns, which are relatively minor in comparison with the entirety of what we are trying to achieve, there is a great deal to welcome, particularly with regard to transparency and accountability. Furthermore, if the OBR works as it should, it is likely that any unofficial tinkering by the Treasury will be flagged up early and properly scrutinised by Parliament, returning some long-lost gravitas to the Treasury Committee and to Parliament itself.

As I have said in this House before, the restoration of confidence to our economy was always going to depend largely on rebuilding trust. The establishment of the OBR marks an important milestone in encouraging us to place our faith once again in the financial and political systems of our nation. We must of course be alert to the potential pitfalls in its operation, but it also represents an important check against a hitherto unchecked Treasury, and as such the OBR must now be treated as a credible new fixture in this fresh financial landscape.

[Mr William Bain (Glasgow North East) (Lab)]

It is a pleasure to speak in this debate. In giving the Bill’s proposals qualified support, Opposition Members view the creation of the OBR as part of the direction of reform started by the previous Government, with the creation of the Monetary Policy Committee of the Bank of England to decide on monetary policy and the establishment of the Office for National Statistics. The International Monetary Fund has said that the OBR’s proposed mandate is

“broadly consistent with established best practice for independent fiscal councils.”

Placing the Office for Budget Responsibility on a statutory basis is an important stage both in its development and in securing its greater independence from the Treasury, but Opposition Members will continue to scrutinise the Bill’s provisions closely to ensure that the OBR is as genuinely independent from the Government as it can be, and sufficiently accountable to the House.

It would be unacceptable if the OBR’s independence were compromised by insufficient access to its own resources, or if it were subject to excessive intervention by the Treasury. The OBR is due to receive £1.75 million per year in funding until the end of the current spending review period, but higher than expected CPI inflation might see that financial support fall in real terms. The Institute for Fiscal Studies recommends, on page 56 of its green budget, that

“the OBR should be as transparent as possible about what meetings have been held, and when and how all key assumptions made in its forecasts were decided upon”.

Internationally, it has been established that fiscal councils can undertake four main roles in connection with economic policy: first, provide objective macro-economic forecasts on which Government budget proposals can be based, as carried out by the Centraal Planbureau—CPB—in the Netherlands and by the Economic Council in Denmark; secondly, cost various Government policy initiatives, as performed by the Congressional Budget Office in the United States, the CPB in the Netherlands and the Parliamentary Budget Office in Canada; thirdly, evaluate whether fiscal policy is likely to meet its medium-term targets, as the Fiscal Council does in Hungary; and fourthly, analyse the long-term sustainability of fiscal policy, with examples being the CPB in the Netherlands, the CBO in the US, the Government Debt Committee in Austria, the Fiscal Council in Hungary and the Fiscal Policy Council in Sweden.

Of those functions, the OBR appears to cover only the first and third. Fiscal councils are less likely to engage in normative analysis of economic policy; only the Austrian Government Debt Committee, the Danish Economic Council and the Swedish Fiscal Policy Council appear to carry out that role.

The OBR’s role includes responsibility for preparing the Government’s economic and fiscal forecasts and issuing them alongside fiscal forecasts with the Budget. That is clearly helpful to the Government, but it means that Ministers are able to prepare in detail for any consequences of a Budget before the OBR makes its assessments public. Without safeguards, that could lead to concerns about the extent of private consultations between Ministers and the OBR prior to publication—the perceived problem during the release of unemployment data last summer.

As Lars Calmfors, chair of the Swedish Fiscal Policy Council, wrote in The Guardian on 28 July last year:

“It might be better if the OBR provided a post-evaluation of the budget as an input into the work of parliament (in addition to a forecast before the budget).”

The IFS also concludes in its green budget that there is a case for the OBR

“to take as much advantage as possible of the required end-of-year fiscal report to conduct and communicate detailed analysis of how and why outcomes deviated from the forecast.”

As my hon. Friend the Member for Wallasey (Ms Eagle) said, there are also questions about the use of different forecasts by the Treasury, the OBR and the Bank of England. The Bank already produces macro-economic forecasts. As the IFS again concludes:

“Those produced by the OBR will be used when deciding fiscal policy, while those produced by the Bank of England will be used by the MPC”—

the Monetary Policy Committee—

“when deciding on monetary policy.”

That might lead to a situation in which fiscal and monetary policy is not sufficiently well co-ordinated.

On fiscal forecasts, progress has been made to underline the OBR’s independence in reaching its conclusions, but it needs to make as much data as possible, as well as the details of its financial models, available to the public. In evidence to the Treasury Committee recently, Professor Tim Besley recommended that the OBR should be able to communicate with key international bodies such as the International Monetary Fund, the EU and the OECD.

The OBR’s mandate will not in itself generate higher growth, and that brings us to the proposed charter of fiscal responsibility to be created through clause 1. The aim of the charter as stated is to create

“objectives in relation to fiscal policy and policy for the management of the National Debt,”

and to establish the Government’s “fiscal mandate”. Opposition Members have no problems with that concept; indeed this House legislated for similar goals in the Fiscal Responsibility Act 2010, but the real difficulty is with the Government’s proposed fiscal mandate of attempting to eliminate the deficit over a four-year period—and the effects that that is already having, as the country can see, on growth.

The OBR has already revised down its growth forecast for 2011, from 2.6% when the Government took office last May to 2.3% after the emergency Budget in June; and it did so once more, to 2.1%, after the comprehensive spending review in November. We will see on 23 March whether those figures have to be downgraded again in the light of growing evidence that the Government’s decisions on the economy have seen it take a turn for the worse this winter.

When Labour left office, the recovery was picking up, with growth of 1.1% in the second quarter of 2010, and, according the OBR’s own analysis, the deficit for 2009-10 came in more than £20 billion lower than forecast. The Office for National Statistics was clear that, even once the effects of December’s inclement weather were taken into account, there would have been no growth at all in the last quarter of 2010.

The Government should adopt a fiscal mandate in the Bill to put jobs and growth first in order to ensure that cutting the deficit does not harm the productive capacity of the economy, and they should end their complacent argument that the economy is “out of the danger zone”. With the country facing 20% youth unemployment, rising prices and stagnant growth, that is not a claim that either the Prime Minister or the Chancellor can credibly make.

[Sajid Javid]

The hon. Gentleman will know that Government debt stands at £1 trillion. According to a recent ONS report, if we add on the bank debt that the country inherited from the previous Government’s policies, we find that the figure is about £2.3 trillion—equal to 160% of GDP. Does he consider that to be a good legacy with which to engender growth?

Fuel Costs

Sajid Javid Excerpts

Monday 7th February 2011 Commons Chamber

[Stewart Hosie]

That is absolutely right. The price is hugely inflationary in rural areas. It is also a problem in some of the poorer parts of our cities, where car ownership is remarkably low. It means that some people with modest means do not even have the ability to travel to a supermarket, where there may be discounted goods. Instead, they are forced to pay higher prices in certain urban centres. That should not happen.

[Sajid Javid (Bromsgrove) (Con)]

The hon. Gentleman is right to raise this issue and to talk about the impact of high fuel prices on hard-pressed families, but he will know that fuel duty raises about £30 billion for the Exchequer, and that a 1p increase in duty raises about £500 million. His case would be far more powerful if he could outline the public spending he wants to cut so that fuel duty can be cut, because that money must be made up somehow.

[Stewart Hosie]

The hon. Gentleman makes the same point that the Labour party used to make—something must be cut to fund the Scottish National party proposal. However, the SNP argues that when the price at the pump increases, there is a VAT windfall. In any circumstances, we know that there is likely to be a windfall in excess of £1 billion from the North sea. We believe that that should be used to temper duty increases and to lower the duty level, so that the yield anticipated by the Government does not decrease, and to smooth the effects of the spiking at the pumps.

[Sajid Javid]

rose—

Bank Bonuses

Sajid Javid Excerpts

Tuesday 11th January 2011 Commons Chamber

[Mr Osborne]

As I said, we are looking for greater disclosure. We are also seeking agreement at European level, because this is an international industry. These are perfectly sensible steps to take, and we have introduced in this country the toughest financial code on bonuses of any financial centre of any size anywhere in the world.

[Sajid Javid (Bromsgrove) (Con)]

The UK financial industry will pay £54 billion in taxes this year—more than any other industry—and its 1 million employees will pay a further £25 billion in income tax. Does the Chancellor agree that those tax revenues will help to pay for our schools and hospitals, and to cut the record budget deficit left by the Labour party?

[Mr Osborne]

It is, of course, important—I said this in my statement—that we have a successful but properly regulated financial services industry, which employs hundreds of thousands of people, including thousands of people in many constituencies represented in the Chamber. It used to be the case—although perhaps it is not the case any more—that senior Labour politicians would at least acknowledge that. That is why I would much rather reach a settlement with the banks, and that is what we are seeking to do. We want a successful industry that pays a proper contribution to the Exchequer and lends more to British business, and that is my objective.

Oral Answers to Questions

Sajid Javid Excerpts

Tuesday 21st December 2010 Commons Chamber

[Sajid Javid (Bromsgrove) (Con)]

The Prime Minister of Luxembourg recently proposed that the EU should start issuing common EU bonds, jointly and severally guaranteed by all member states. Although the eurozone countries can do what they want on bond issuance, will the Chancellor reassure the House that Britain will play no role in an EU common bond?

[Mr Osborne]

I can indeed give my hon. Friend that assurance. This is an issue that the eurozone is publicly considering, as well as other potential routes forward for the eurozone. My efforts are concentrated on getting our gilt auctions away, and I can reassure him that, thanks to the measures we have taken, that is going well at the moment.

Loans to Ireland Bill

Sajid Javid Excerpts

Wednesday 15th December 2010 Commons Chamber

[Mr Tyrie]

I have no doubt that the Government are listening to my hon. Friend and others, who will put pressure on them to resist the pressure from other quarters. I agree with his point.

It seems to me that very little work is being done on the possibility of the euro crisis leading to more general examples of the no bail-out clause’s bluff being called. I would be surprised if there had been any such work. I cannot be sure, but it strikes me as highly unlikely. It is the Ark of the Covenant that the eurozone will continue indefinitely.

When the Chancellor came before the Treasury Committee, he assured us that eurozone members were

“having a discussion about the permanent eurozone bail-out mechanism.”

[Sajid Javid (Bromsgrove) (Con)]

Will my hon. Friend give way?

[Mr Tyrie]

I will not, because I am about to conclude.

Any new bail-out mechanism, however, may itself lack credibility in the absence of a common European fiscal policy. That is why the discovery that the no bail-out clause is a paper tiger will remain an enduring problem for the eurozone’s stability, a problem from whose consequences the UK will certainly not be immune.

--- Later in debate ---

[Sajid Javid]

The shadow Chancellor made the rather incredible statement in his opening remarks that he believes that Ireland’s euro membership has absolutely nothing to do with the predicament in which it finds itself. Does the right hon. Gentleman agree?

[Mr Darling]

The circumstances in which Ireland finds itself are complex, but there is no doubt that one problem is that a common interest rate right across Europe is perhaps inappropriate for an economy that is rapidly investing in an asset bubble. However, I do not have the same phobia about the euro that many Conservative Members still have, 20 years on.

--- Later in debate ---

[Mr Peter Bone (Wellingborough) (Con)]

It is a great pleasure to follow the right hon. Member for Belfast North (Mr Dodds). He made many powerful points, especially his last one. I note that the Bill is called the Loans to Ireland Bill, not the Loans to the Irish Republic Bill. I wonder whether the Government have had some foresight, and whether some of the loans will actually be provided to Northern Ireland, to help to reduce corporation tax there. Perhaps there is some hope in that regard.

I want to start by saying that we have an excellent Chancellor of the Exchequer and a first-class Treasury team, including my hon. Friend the Financial Secretary, who has the misfortune to be at the Dispatch Box to listen to my remarks. On this particular issue, however, I think that they have got it wrong for a number of reasons. Everyone in the House wants to see the Irish Republic prosper, but the question is: which is the best way to help it? Its problem is that it is part of the euro. Government Members have always argued that the United Kingdom should not be part of the euro, because it cannot possibly work. It is not possible to have one fixed interest rate and one fixed currency covering a number of different countries. What we are witnessing is a crisis in which that problem has come to light.

If Ireland were not part of the eurozone—if it had its own currency—it could change its interest rate, but more importantly, its currency could depreciate, which would make it more expensive for exports to come into Ireland and cheaper for exports to go out. It is a market mechanism for self-righting an economic collapse, and because Ireland is part of the eurozone, it cannot do that.

I take the view that in the next few months the euro will collapse. It will not just be Ireland and Greece; it will be Spain, Portugal and possibly Italy. At that stage, it will be necessary to abandon the euro entirely or have two eurozones. If I am right in that assumption, it is a mistake to give £3.25 billion to the Irish at a time when it will do no good at all and that money will never be repaid. If we were paving the way for the Irish to have their own currency again, which would be part of the sterling area, we would be more of a help to Ireland. My argument is that we are sending the money in the wrong direction.

The second issue we have—to be fair to the shadow Chancellor, I think he was on to it—is that we do not know how the figure has been arrived at. Nobody has explained—at least, I have not heard anyone do so—why we have settled on £3.25 billion, but I think the Chancellor was arguing that that is the sort of amount we would have had to provide through the European financial stability facility if we had been part of the eurozone. Well, we are not part of the eurozone, so why should we be contributing to something that eurozone countries should be providing on their own?

[Sajid Javid]

Is my hon. Friend aware that recently the Prime Minister of Luxembourg made a proposal that the EU should issue EU-wide bonds, and does he agree that Britain should have nothing to do with such a proposal?

[Mr Bone]

Of course; I thank my hon. Friend for raising that.

I disagreed with the shadow Chancellor when he said that there were two extremes. One was to have a unified eurozone with central controls over taxation and spending. It is one option, and I accept that such a model would work, but I reject it completely. However, no one can pretend that the current system will ever work. We would just end up putting billions and billions more pounds into a system that will eventually collapse, and, in my view, that will happen earlier rather than later.

Let me return to how the €85 billion package is made up. We have €17.7 billion from the facility and €22.5 billion from the mechanism. The mechanism was designed for natural emergencies; it was never designed for this purpose, and yet we are taking more out of the mechanism, which has a total pot of €60 billion, than out of the one that has €440 billion. Why? The simple answer is that the United Kingdom has to contribute to the mechanism, but we do not contribute to the facility because it is all eurozone money. In my view we do not need to make this £3.25 billion loan; it should come entirely from the €440 billion that is available for exactly this reason. That is why the facility was set up.

I also did not follow the Chancellor’s argument when he said that because of qualified majority voting, we would not have voted against the use of the mechanism because we would have been overruled. I have to say to him that on a number of occasions I have voted on measures on which I know I will not win, but it does not mean that one should not vote that way; one should vote as one sees fit. I think on that small point the Chancellor has also made a mistake.

Many hon. Members will refer to the man on the Clapham omnibus, but in my case it is the man on the Wellingborough 46 bus, and such people make the following very simple point. My county council has announced that it will fire all its lollipop ladies and close a number of libraries, and those people say to me, “If we’re having to do that because we’re not allowed to increase the national debt, how on earth can you provide £3.25 billion to a country that is in the eurozone?” It is very difficult for me to give an answer. In fact, the answer I give is, “We shouldn’t be doing it.”

If the House divides on the Government’s proposal, I will, reluctantly, have to vote against it, not because I think the Government’s aim is wrong—because, yes, we want to have a prosperous Ireland—but because of the way this is being done and the way it is being funded. Nobody is suggesting that because we trade a lot with the United States of America, if there were a crisis there, we would suddenly lend it money. Ireland is a grown-up country. It decided to become part of the euro. The problem lies in the eurozone, and it should sort this out, not us.

Banking Reform

Sajid Javid Excerpts

Monday 29th November 2010 Commons Chamber

[Mr Meacher]

I mentioned light-touch regulation in the City of London, which we have had since the Thatcher era and through the Blair era. I believe that that needs to end. We want not excessive but adequate and proper regulation, and for the past three decades, in the so-called neo-liberal era, we have not had it.

Derivatives should be approved by the regulatory authority before they can be issued. At that stage, they can be either prohibited or accepted, perhaps with certain conditions attached. The key point is that transparency is essential. It is worth noting that the recent Dodd-Frank Wall Street Reform and Consumer Protection Act seeks to achieve that by requiring that all derivatives are traded on public exchanges.

Linked to that is the role—or perhaps the scandal—of the credit rating agencies in allocating a spurious status to some highly dubious securities. Light-touch regulation in this country has evaporated into virtual deregulation. Credit rating agencies were paid by the very institutions whose credit worthiness they were supposed to be assessing. By granting the highest rating, as they so often did, they made it easier for the banks that were securitising and further repackaging debt to create the greatest possible number of securities with the lowest possible regulatory cost. That practice should never have happened, and I believe that it should always be prohibited where there is a serious conflict of interest, as there was in that case.

[Sajid Javid (Bromsgrove) (Con)]

rose—

[Mr Meacher]

I know of the hon. Gentleman’s expertise in this matter, and I will give way to him, but I will not give way subsequently because I want to speak for only about a quarter of an hour.

--- Later in debate ---

[Sajid Javid]

Does the right hon. Gentleman realise that the price of credit derivatives over the past three or four years has been far more accurate as a predictor of default risk than the credit ratings given by rating agencies?

[Mr Meacher]

The hon. Gentleman makes a good point of which we need to take account, but I still think that the credit rating agencies potentially have an important role. They are listened to in the market, are the basis on which financial transactions take place, and should be trusted, but in the present circumstances they are certainly not. However, I am grateful for his question.

On bonuses, there is outrage among not just Opposition Members but, for example, right-wing Governments in Germany, France and Sweden, that a banking system that owes its continued existence to massive Government intervention should pay itself mega salaries and bonuses entirely out of line with the top of business, let alone ordinary taxpayers. There is outrage especially because those gigantic bonuses often drove the recklessness in the first place. The overweening power of the banks attracts almost universal hostility, especially given that 90% of investment bank profits, in an era of austerity, are directed not at strengthening balance sheets, at shareholders through dividends, at customers through lower fees or at taxpayers, but at bonuses.

France, among several others, has demanded a mandatory cap and that there should be no guaranteeing of bonuses, but Whitehall, as usual of course, argues that it would not be practical. However, if the G20 Governments insisted on limits and made continued liquidity provisions dependent on compliance, no bank could refuse. I believe that Her Majesty’s Government should now be taking the lead in the G20 not in succumbing to lobbying from the City of London and the British Bankers Association, but in reining back bonuses on a much greater scale than we have so far seen, and to much lower levels, and in ensuring that they be paid only in exceptional circumstances.

On the broader question of averting future financial crises, attention has so far largely focused on enhancing capital control, but that does not actually have a good record in this regard. At the outset of this latest crisis, virtually all financial institutions across the globe had capital adequacy of between one and two times the minimum Basel regulatory requirements—at least at that level, and in some cases twice as much. Basel III, which has just reached its provisional conclusions, is scarcely any improvement. The core top-tier capital requirement is only 4.5%, and the contingency capital requirement is only 2.5%. Of the EU’s top-50 banks, 45 already meet that standard, and Basel III is actually proposing that the requirement not be introduced until 2019. This is simply nowhere near good enough. A much better possibility might be counter-cyclical capital controls, enforcing different levels of bank capital at different stages in the economic cycle. I can see the point of that, but I suspect that it would leave open the problem of the degree of ratchet and the timing of it. I suspect that that would be far too problematic.

An alternative approach—many have talked about this—is the introduction in Britain of something like the Volcker rule, restricting banks from undertaking certain kinds of speculative trading, notably proprietary trading. Of course that would certainly stop banks doing what they are doing at the moment, which is trading on their own books with the money of depositors. The key point, however, is that it would not overcome the too big to fail problem when applied to investment banks. For example, I do not think it would prevent a repetition of the collapse of Lehman Brothers; neither would it address the interconnectedness—the Chancellor was speaking about this a few moments ago—of today’s banks, with counter-party relationships and exposure between commercial and investment banks, and insurance companies. That is the problem. I say this with regret, but any rule-based reform is almost certain to face the risk of regulatory arbitrage, because financial institutions invent ever more sophisticated products that are simply aimed at getting around regulatory controls. I therefore do not think that what I have described is an adequate answer. For all those reasons, the force of argument and the balance of advantage point strongly towards separating retail from investment banks, in establishing distinct, narrow banks that are conservative, transparent institutions with no financial instruments or incomprehensible balance sheets.

--- Later in debate ---

[Sajid Javid (Bromsgrove) (Con)]

I thank the right hon. Member for Oldham West and Royton (Mr Meacher) for securing this debate, which is a valuable one to be having in the House. I draw the attention of hon. Members to my entry in the Register of Members’ Financial Interest, which is a legacy of my spending 18 years in the banking industry. Before Labour Members get a bit too excited by that revelation, as many have unfortunately done in the past, I should say that for the past three or four years I felt that the profession of banker was possibly the worst to have in the eyes of the public, but that was before I became a Member of this illustrious House.

The motion states that we want to

“prevent a recurrence of the financial crash”.

Obviously we are all united on that, but it is important that we examine the causes of the crash, which we could debate for a long time and go round in circles. I am sure that many rational people will disagree on the responsibilities of banks and bankers. I may have misunderstood the motion, but it seems to suggest that banks are entirely responsible for the financial crash. That is wrong and it does not do justice to Members of this House or to our constituents in preventing something like this from happening again.

The financial crash happened because too much money was chasing too few assets—financial assets or real assets such as real estate. There are three principal reasons for that, the first of which was that world financial reserves, particularly in the east, were growing at a substantial rate. Indeed, they continue to do so, as more people in the west consume goods from the east. To give just one illustration, China’s financial reserves in 1990 were $165 billion but today they are $2.65 trillion. Those reserves needed to find a home.

The second reason is that commodity prices have grown substantially, partly as a result of the growth of the east and other emerging markets, and that has led to a substantial increase in sovereign wealth funds, both in the middle east and in other markets. Those funds also needed to find a home, and they created a colossal wall of money when combined with the financial reserves.

The third reason is something that bankers have called the “Greenspan put”. Alan Greenspan became chairman of the Federal Reserve in 1987, just before the Wall street crash, and one of the first things he did when he found a problem in the financial markets and a potential crisis brewing was to lower interest rates as quickly and as substantially as he could. That happened again when the US Federal Reserve led the way after the dotcom bubble burst in 1991, again when Russia had problems and there were problems in Asia, and it has just happened again. Bankers have got used to that approach and it results in what the markets call a “put”, whereby they feel they can sell assets if things go wrong. That has encouraged bad behaviour and a moral hazard: the idea among many bankers of “heads we win, tails the taxpayers lose.”

In addressing these issues, we must not forget those key facts about what caused the crisis. However, bankers did play a significant role and there are things about banks that we need to examine. Although there are issues to address in respect of financial derivatives, I would not make that the key priority. The first thing to examine is the idea of retail banks and commercial investment banks acting as one entity, because that seriously needs to be looked at.

I started working in the banking industry in New York in 1992. Under the Glass-Steagall Act, which was in place at the time, the bank I worked for had to have a completely arm’s length relationship with its retail banking division. That made a big difference to the risks the bank took or even contemplated taking. That situation changed in the late 1980s in Britain, when the big bang took place and the implied Glass-Steagall arrangement disappeared, and it formally changed in the United States in 1999 when that Act was removed. It is vital to examine that. The second thing to look at is, as has been mentioned, banking capital itself.

[Mr Chuka Umunna (Streatham) (Lab)]

Would the hon. Gentleman be prepared to share his thoughts on whether we should return to a Glass-Steagall model, which I understand the Clinton Administration did away with when in office?

[Sajid Javid]

There are some considerable merits in that model and given what has happened we should consider it seriously. I hope that the Vickers commission does that.

Secondly, we should consider the banks’ capital requirements. It is right that under Basel III capital requirements should be lifted. The core tier 1 capital requirement will be lifted from about 2% for banks to about 7%. Some points are still missed, however. The focus is far too narrowly on the default risk of assets and we have strange incidences even with default risk—for example, under the new proposals industrialised sovereigns are still considered to be risk free. As we speak, Ireland’s 10-year Government bonds are trading at more than 11%, Spain’s 10-year bonds are trading at more than 6% and Germany’s are trading at more than 2.5%, but they are all treated as zero-risk weighted and no risk capital will be set aside. No account is taken of liquidity, either. One of the largest problems for banks over the past three or four years was lack of liquidity, but the capital requirements do not take full account of that.

One of the biggest mistakes that made Britain’s situation far worse than that of other countries was the change in regulation when Tony Blair’s Government first took office. The jobs of people at the Bank of England, who knew what they were doing, were taken over by people at the Financial Services Authority, who did not know what they were doing. I remember an FSA audit where the chief auditor of my credit derivatives book, which had a market value of more than €100 billion, was a 27-year-old with a degree in biology. It is no wonder that problems started to happen. We do not necessarily need more regulation, just smarter regulation.

There are many issues to consider that we could debate for a long time. Banking regulation is one such issue, but we do no service to our constituents if we merely focus narrowly on it when we consider the lessons of the financial crisis.