Finance Bill

Debate between Sammy Wilson and Gregg McClymont

Tuesday 6th July 2010 Commons Chamber

[Gregg McClymont (Cumbernauld, Kilsyth and Kirkintilloch East) (Lab)]

“Fair” and “unavoidable” are the two adjectives that have been attached to the Budget by the Government parties. It seems to me that the claim to fairness has been exploded, not just by Opposition Members and sometimes by Liberal Democrat Members but by the independent analysts who have established the regressive nature of many of the measures in the Budget. I want to concentrate on the claims that there is no alternative, that the markets are demanding deficit elimination on the scale and at the speed proposed in the Budget and that the Government are simply responding to economic facts.

Government Members talk about political economy as if it is a perfect science. The hon. Member for Bermondsey and Old Southwark (Simon Hughes), who is not in his place, suggested that the Office for Budget Responsibility was objective, the corollary being that it was reliable. The Government present the pronouncements of the OBR as gospel, at least when they are convenient for Ministers. They offer technocratic diktats. The Government claim the support of infallible markets and independent institutions. What they deny is that any Budget is inherently a political act as well as an economic one. Listening to the Chancellor deliver his Budget, I got a pretty good idea of what his new politics involved. He thinks that these vital political economy decisions are not a matter for him: he can absolve himself of responsibility. The OBR will provide the figures; the OECD is the supposed authority, the markets the excuses.

The issue of supply—the very reason this House came into existence—will be determined by what Ministers declare to be unavoidable. But political economy is not an exact science. It is a matter of priorities and judgment. It is almost always informed by ideology, self-interest and party interest. How could it be other otherwise when economists rarely agree on anything? Put two economists in a room and you will get three opinions. No, the Budget is deeply political. It embodies the long-held superstitions of the Conservative party, superstitions that come to the fore in times of economic stress—the 1920s, 1930s, 1970s, 1980s, and now again in 2010. However, these superstitions are not fully articulated by Conservative Members. They emerge almost accidentally through their rhetoric, but they are worth examining because they are the real motivation for the coalition Budget.

The first superstition is that debt, no matter what the circumstances, is unnatural and wrong for economic man or woman other than in the short term. This is a superstition since it denies the reality that many households and individuals balance their books only in the long term. They and we often have levels of debt that surpass our annual incomes for many years. Otherwise, no one would be able to afford a mortgage. The fact is that debt is a sensible mechanism for acquiring funds for responsible investments as long as repayments are manageable.

That first superstition encourages a second: states, like households, must not carry debt over the long term.

[Sammy Wilson (East Antrim) (DUP)]

The hon. Gentleman makes an important point. Does he accept that debt and the ability to borrow are not simply a function of one’s ability to pay, but of the perception of the exposure to debt and whether, in the long run, that debt will be manageable for borrowers? Our difficulty at present, looking at the evidence elsewhere, is that the markets are nervous about the ability of countries—even ones as stable as ours—to manage in the long run continuing increases in debt and to pay it back.

[Gregg McClymont]

Keynes famously said that, in the long run, we are all dead. To be fair to the hon. Gentleman, there is a serious point there, to which I was just coming.

As I said, the first superstition encourages a second: that states, like households, must not carry debt over the long term. But if that is untrue for households, it is even less relevant for states, because states are different from households. First, nations do not have to balance their payments over a life cycle as an individual does; unlike individuals, states are here for the long term. That is an important point. Secondly, states’ ability to borrow is much greater than that of any private citizen. States may borrow much more cheaply than any individual, simply because the amount of economic activity within any state’s borders is much greater than the economic activity to which any individual has access. I therefore disagree with the hon. Gentleman on that point.

More important, states have obligations to the societies they serve in a way that households do not. States can use their ability to borrow to support demand at a time of low private sector activity. Pull away that support for the economy and private sector firms are discouraged from investing, the tax take is reduced and spending and unemployment are pushed up; ultimately, the deficit is made worse. That is the paradox of Government thrift. We learned it in the 1930s. The Liberal Democrats warned us of its dangers up until 7 May. Now, that lesson seems to be totally lost on both elements in the Government.

Government Members claim that the fiscal deficit is crowding out private investment by pushing up interest rates and making investment more expensive. Crowding out is not an insignificant issue and it does have some relevance in conditions of full employment when an economy is at full capacity, but we are nowhere near that point. As the right hon. Member for Wokingham (Mr Redwood) pointed out, the private sector has taken a real battering in the past two or three years. Excess capacity is manifest. In my view, there is a much simpler explanation for low private sector investment: the private sector is not investing and banks are not lending because they fear that households will not have the confidence or the ability to buy goods.

What do we use to restore confidence? So far, we have used monetary policy, but it is not clear to me how much further we can take that. Interest rates are already at rock bottom. We cannot reduce them much further if this Budget tips the economy back into recession or, as my hon. Friend the Member for Telford (David Wright) suggested earlier, it has us bumping along the bottom. At that stage, if the recovery does not take place along the lines the Government that claim it will, the only instruments of monetary policy at our disposal would be further quantitative easing or a further devaluation of the pound to encourage exports. That could be dangerous, encouraging exactly the increased inflation and higher interest rates that Government Members fear. In my opinion, fiscal policy continues to have a role to play.

I mentioned two superstitions that I think underpin the Government’s attitude, but there is a third: the idea, repeated over and over, that our national debt is unprecedented historically and exceptional internationally. That is the basis on which the Government claim over and over again that public spending is out of control. They assert again and again that we have left the nation’s finances in a mess, and that is the context for the spectre of a sovereign debt crisis.