Section 5 of the European Communities (Amendment) Act 1993

Steve Baker Excerpts

Wednesday 27th April 2011 Commons Chamber

[Kelvin Hopkins]

In the end Governments can print money if they wish to, but the idea that we can squeeze those economies into growth is complete nonsense. We could debate these matters at great length—I would be happy to do so on another occasion—but that is not what this debate is about. I want to focus on the Government’s economic policy, which I think is profoundly mistaken.

Another point in the document is the emphasis on fiscal neutrality. The Government do not seem to appreciate that fiscal neutrality can be achieved in various ways. If we cut public spending and taxation at the same time, that is, in a sense, fiscally neutral. If we raise public spending and taxation, that is also fiscally neutral. We can also achieve fiscal neutrality by raising taxes on the rich and reducing them on the poor. Fiscal neutrality can have all sorts of different effects. If we cut taxes on the rich and raise them on the less well-off, we will drive the economy into recession, because poor people will spend less money. The marginal propensity of the poor to consume is higher, so if we tax the rich and give more to the poor, they will spend. If we give pensioners a rise in their pensions, for example, they will spend more, but if we give a wealthy person a tax cut, they will not spend.

Those are marginal changes, but my general point is that fiscal neutrality can be achieved in various ways. In fact, it is nonsense to have fiscal neutrality when growth is flatlining. We ought to have an expansionary fiscal strategy, not a neutral fiscal strategy. I might add that this is my view, not necessarily the view of my hon. Friends on the Opposition Front Bench. They are perhaps more cautious than me, but in the end I would like to think that I and others will be proved right. We have to generate growth, but it will not happen if the Government continue to operate in the way that they are at the moment.

[Steve Baker (Wycombe) (Con)]

As the hon. Gentleman knows, I have great admiration for him on many subjects, but does he realise that when Keynes was suggesting those fiscal stimulus packages, the state accounted for only about a quarter of GDP, whereas now the figure is up to 45% and getting on for 50%? The capacity is just not there. I would suggest to the hon. Gentleman that even Keynes would be horrified at the notion of Governments spending more from present levels?

[Kelvin Hopkins]

The role of the state is much larger than it was even in Keynes’s day; therefore, the state has to generate more demand. The state has a bigger role in the economy—I think that is a good thing—but we cannot withdraw from the idea of managing economies in the way that we did after the second world war. Between 1945 and the 1970s, we had a world that actually worked. We had rising living standards and the highest rate of growth in our history. We had full employment, we developed a welfare state and the national health service, and we had free tuition at universities. Since then, the neo-liberals and the monetarists have got hold of economic policy again and we have gone back to something like the early 1930s, albeit with higher living standards, at the moment, but that could so easily be destroyed if the current mistakes continue to be made.

--- Later in debate ---

[Steve Baker (Wycombe) (Con)]

I shall try to confine my remarks to three points on the report. First, the report rightly talks about imbalances in the economy. The hon. Member for Nottingham East (Chris Leslie) talked about serious systemic problems in the economy, and I agree that there are such serious systemic problems, albeit not, perhaps, those that the hon. Gentleman thinks there are.

On the first page of section 2, the report talks about debt and unsustainable levels of private sector debt. It is estimated that the UK has become the most indebted country in the world, and one sentence stands out:

“the spending plans set out in the 2007 Comprehensive Spending Review were based on unsustainable revenue streams from the property boom and the financial sector.”

The report also talks about geographical and sectoral imbalances. Given the limited time available, I will be very brief, but let me say that I feel that far too little effort has been made to explain some of these imbalances through monetary factors. Printing money has been mentioned. The problem with printing money is that it creates patterns of economic activity that can last only as long as that supply of new money. When the new money comes to an end—[Interruption.] From a sedentary position, the hon. Member for Luton North (Kelvin Hopkins) talks about the multiplier effect, and, again, he has appealed to Keynes. I have to say to him that one thing I have learned over the past few years in setting up a think-tank and talking to economists is that it is really no good at all appealing to the authority of economists. There are always several schools of thought, and one of the things they are no good at is making accurate predictions—or, indeed, agreeing with one another. I am therefore afraid that that leads us to thinking for ourselves.

One of the most important factors to do with money is something long known, called the Cantillon effect: the fact that when money is created, it always arrives in one place in the economy first. So when banks are lending money into existence and into the housing sector, of course house prices rise, the financial sector is better off and the economy reorients itself to the south-east, where the banking sector is based. Although the report diagnoses the problem very satisfactorily, I am disappointed that the monetary policy framework consists of one short paragraph. We have learned tonight that there is an appetite in this House for a serious debate about monetary policy, and the monetary framework and how it has an impact on the real economy.

Secondly, and further to my point about new money creating unsustainable patterns of economic activity, sustainable investment requires prior production and real saving. That involves individuals, families and businesses consuming less than they produce to make real savings and invest them. Easy money will not create sustainable development and sustainable growth.

I wish to allow other hon. Members to speak, so I shall make one final point. I must ask to what end we are making this report. The lexicon has suddenly developed the term “convergence programme” and I am not sure where it came from. We have talked about Maastricht, but the term has certainly only just emerged into the public debate today. Why are we converging? With whom? To what end? I would be grateful for an answer.