Budget Resolutions and Economic Situation

Steve Baker Excerpts

Friday 22nd March 2013 Commons Chamber

[Mr Byrne]

The words of the chief economist Olivier Blanchard are clear: the Government are on the wrong fiscal path, and we know that the Business Secretary agrees with us.

[Steve Baker (Wycombe) (Con)]

The right hon. Gentleman is telling a tale of catastrophe. I do not doubt that the country is awash with suffering, but may I draw his attention to UK industrial production, which is at a 20-year low? The point is that it collapsed under his watch: UK industrial production collapsed to a 20-year low under his watch. Will he not just admit that it was his Government who dropped us into this mess?

[Mr Byrne]

We have unemployment rising and debt that is £245 billion higher than forecast. The hon. Gentleman should be ashamed of that record.

We needed a Budget to get unemployment down and we did not get one. I hoped to see a Budget that delivered for those who are out of work, but what did we get instead? The conclusion of the OBR was clear that the impact of the Budget on growth would be so significant that it would amount to precisely zero. That is what the Secretary of State has managed to negotiate from the Chancellor. He has been turned over, stitched up and done like a kipper yet again.

Any sensible Secretary of State, faced with a collapsing Work programme and rising unemployment, would surely ask for more help today, not tomorrow. People out of work need help today, not in the years to come. What did we see instead? The OBR has weighed up the efforts of the Secretary of State and the Chancellor and it has concluded that what is in hand is going so well that unemployment will not go down next year, but up—and that is against the projections set out in the 2010 Budget. Next year the International Labour Organisation measure of unemployment is expected to rise from 7.9% to 8%, and the claimant count is set to rise by another 50,000. What is even worse is that the OBR says that the welfare bill will not go down either—it will go up, including for housing benefit. Spending on social security benefits will now be £21 billion higher than the Chancellor first planned.

--- Later in debate ---

[Steve Baker (Wycombe) (Con)]

I am glad to follow the hon. Member for Glasgow North East (Mr Bain), who talked about bad economics, which will be the central theme of my speech. He also asked why there has not been growth. I refer him to the report “Thinking the Unthinkable”, which has the unfortunate subtitle “Project Armageddon—the final report” by Tullett Prebon. It explains that three of the UK’s eight largest industries—real estate, financial services and construction—accounting for 39% of the economy, are incapable of growth now that net private borrowing has evaporated.

The report goes on to say that another three of the top sectors—health, education and public administration, plus defence—account for a further 19% and cannot expand now that growth in public spending is a thing of the past. That means that 58% of the economy is ex growth, a figure that could rise to 70% if, as seems probable, growth in retailing is precluded by falling real consumer incomes. That is why there is no growth, and it is important to understand properly why we are in this mess.

The Budget was one of two halves. I certainly welcome all the tax cuts—the £10,000 personal allowance and so on. I am sure that my constituents will be glad to know that fuel duty will be 13p lower per litre than it would have been under Labour’s plans. However, I want to talk mostly about credit market interventions and monetary activism. I am particularly reminded of the curious fact that the general disinclination to explain the past boom by monetary factors has been quickly replaced by an even greater readiness to hold the current working of our monetary organisation exclusively responsible for our current plight.

The same stabilisers who believed that nothing was wrong with the boom, and that it might last indefinitely because prices did not rise, now believe that everything could be set right again if only we would use the weapons of monetary policy to prevent prices from falling. The same superficial view sees no other harmful effect of a credit expansion but the rise of a price level now has it that our only difficulty is a fall in the price level caused by credit contraction. I thoroughly recommend the preface to “Monetary Theory and the Trade Cycle”, published in 1932, since which little has changed when it comes to the error of the monetary stabilisers.

We need to ask ourselves what is holding the economy back. I refer particularly to feedback from Stewart Linford chair makers in my constituency. Stewart Linford is a great man, and chair making is what made High Wycombe a great town. As costs rose in Britain, Stewart remained competitive by increasing the quality of his product and exporting. Yesterday, he said to me:

“What’s holding me back isn’t red tape. It’s not taxation. It’s not even foreign competition. It’s HSBC bank holding our money against an interest rate swap we didn’t need.”

That swap was originally sold to him by RBS. I fully support the Government’s efforts to change the culture of banking. Previously, they have talked about the need for a responsibility revolution and it is firms such as Stewart Linford’s in my constituency that demonstrate the great David and Goliath battle that is going on.

Why is that battle going on? If we look at debt in the past 10 or 13 years, we find that the big story of banking and money is a great transformation in borrowing. In about 2002-03, under the previous Government, mortgage lending rose substantially. Eventually, the banking system blew itself up and mortgage lending collapsed and deficit spending by the Government took over.

If we look at the money supply back to 1997, we find that under the previous Government it tripled. In 1997, M4 was £693 billion; by 2010, it had risen to £2.2 trillion before stagnating. That chart, if well understood, is remarkable. It tells us that there was an accelerating rush to destruction in debt. Shortly, we will realise that while we were originally told that this was a banking crisis and then that it was a debt crisis, we will have to face up to the reality that what we use as money is debt—debt that was loaned into existence in response to incentives created by central bankers lowering interest rates.

[Mr Kevan Jones (North Durham) (Lab)]

Is it not a fact that when the Labour Government came into office in 1997, debt stood at 42% of GDP? When the banking crisis hit in 2008, it was down to 35%. The reason for its increasing was the fact that we had to bail out the banks and carry out the economic stimulus, which made the economy grow—all that, including the spending targets, was supported by the hon. Gentleman’s party when in opposition.

[Steve Baker]

I am grateful to the hon. Gentleman. I came here to speak today because I expected to have 20 to 30 minutes, and if I had, I would have given him a full explanation. In many ways, I am trying to help him. If he looked at price inflation going back to 1750, he would discover that for the whole of my lifetime, since 1971, we have been living in an inflationary era unprecedented in industrial times. That is why the banking system was broken. If money is pumped into the economy at that rate, that is bound to create asset price bubbles. An independent Bank of England therefore found itself controlling the money supply by looking at price inflation without looking at house prices, which were rushing away. That was bound to end in catastrophe.

Let me explain the problem with the Chancellor’s policy on credit market intervention. When we look across the range of things that were intended, we can see that there is a clear objective, which is to restart the process of credit expansion—credit creation—into the economy. In the short term, that is indeed bound to create an increase in trade and housing and to create a small housing boom. The problem is the damage it does to the rest of the economy. If I had more time, I would talk at some length about the problem being that for far too long people have persisted in believing that there is a simple mechanical linkage between aggregate demand and total employment, but unfortunately that is not true. What matters is the distribution of employment and the use of capital across the structure of the economy and through time.

[Jane Ellison]

I am enjoying my hon. Friend’s argument and would like to hear him expand it further to talk about the effect of the limit on the amount of time that this measure is being given.

[Steve Baker]

I am grateful to my hon. Friend. Time is crucial not only in this debate but in the economy.

When one looks at Mark Carney’s speech of February last year and at what the Government are doing, it is pretty clear what is going to be done. Inflationary expectations will be anchored to the 2% target, and the Bank will be given a more relaxed reporting regime. It is clear from Mark Carney’s remarks that he intends to use monetary instruments. Let us face it: this is about money creation. He is going to increase the supply of money in order to pump up the GDP figure and so manipulate people’s expectations. It is hoped that by manipulating people’s expectations the economy will come back just in time to deal with the money creation process and get inflation back on target. The whole thing is predicated on the Bank of England’s ability to manipulate the expectations of the 65 million people in the United Kingdom.

Somebody such as Stewart Linford, who has to live in the moment as an entrepreneur, keep employing people, and keep creating and exporting wonderful furniture, deserves better than to be deliberately and systematically misled by a big player such as the Bank of England knowingly manipulating expectations through monetary policy in order to produce particular outcomes—if it is lucky and expectations of inflation do not get out of control. Last time I spoke in the Budget debate, I explained that if the Bank loses control of inflationary expectations, the bond market bubble could burst and that could then lead to a very fast rise in interest rates, which it might then have to combat by further printing money.

Government Members know me well for always carrying on my person 1 ounce of fine silver and a $100 trillion dollar note from Zimbabwe. In the end, our society is based on money. One side of every transaction is money. If there is something wrong with money, there is something wrong with the entire economy. Right now, the reason we are in this mess is that we do not have good money—we have bad money. One can hold bad money—bad politics—in one’s hand. If we get into a position where we just borrow, borrow and borrow, with no ability to repay, creating credit out of thin air, as was done in 13 years—[Interruption.] The hon. Member for North Durham (Mr Jones) is smiling; I really do not know why, because 65 million people in this country are having a miserable time. [Interruption.] I was not in Parliament at that time. If he had listened to what I have said and read what I have written throughout all my time, he would find that I have consistently advocated this point: that the problem with the Keynesians and the monetarists is that they neglect the importance of time and the structure of capital. That is what is going on again, and it will end badly.