Cost of living debate

The full text of John Redwood’s speech and interventions in yesterday’s cost of living debate now follows:

(1) Mr. Redwood: The hon. Lady is making some good points about the impact of food prices on her constituents. Can she explain why no other Labour Members want to hear about that? Do they not understand it?

Mr. Graham Stuart: Where are they?

Ms Keeble: They probably decided to leave it to me, in the sure knowledge that I would make a good job of it. This issue of is of concern to me because it is of profound concern to my constituents, and I think it right for questions about it to be dealt with. There is also the impact on family households of the credit crunch, which, although it may not be immediately apparent to some of them, is felt through pressures on house prices and house building.

I have to say that I disagree with the detailed analysis presented by the right hon. Member for Wokingham. Having sat in the Select Committee and listened to explanations from the Governor of the Bank of England and others, I have not heard them blame the restructuring of the Bank in 1997 for the credit crunch, although there have been arguments about the tripartite arrangements. Most of my constituents probably realise that whatever mistakes were made in that regard, much more profound mistakes were made by the board of Northern Rock and much more substantial problems arose in the sub-prime market in the United States, which continue to affect our lives and those of our constituents.
What my constituents probably want to know, much more than they want to hear tit-for-tat arguments between the political parties, is what will happen in the years to come, and which party has the policies to take them through what everyone knows, and what the Governor of the Bank of England has said, will be a difficult time for quite a while. He said it would be difficult until next March or April, and I am sure he is right. This has to do not just with how much the cost of living goes up but with what happens to family incomes, and ours is the party that provided a safety net for family incomes through the minimum wage.
(2) Mr. John Redwood (Wokingham) (Con): The Chief Secretary to the Treasury and the Government make a pathetic case. They say that the rising inflation rate is entirely down to world events that they cannot control, although occasionally the Prime Minister, in his Canute-like mode, goes into embarrassing overseas meetings fatuously to lecture people who are not as guilty as he is over the price of petrol and diesel at the pump. The Government also seem to resent the fact that many millions of formerly very poor Asians—Indians, Chinese and others—are at last able to get some purchasing power in the world so that they can have a greater fraction of the standard of living that we take for granted, by buying more energy and better food products.

We are saying to the Government that it was eminently forecastable over the past 11 years that there would be a big increase in demand for food and energy from Asian sources. That is very welcome. We were all extremely grateful that the Asian economies did so well in supplying us with an ever-increasing volume of very competitively priced goods, which kept our inflation rate down despite the errors being made in inflation policy in this country. Now, however, the Government are saying that it is all the Asians’ fault for daring to buy all these other things with the money that they have earned buy selling us those cheaper goods, even though the Government did absolutely nothing for 10 years to increase our capacity in agriculture or energy, when they should have been making a contribution to the world situation.

Mr. Simon: The right hon. Gentleman is noted for being an intelligent and erudite Member of the House. If he has a case to make, surely he can do better than to use Aunt Sallies and say that the Government are blaming everything on the Indians and the Chinese. That is ridiculous. If he has a case, why does he not put forward a proper argument instead of all that sort of nonsense?

Mr. Redwood: If the hon. Gentleman had been here for the Chief Secretary’s speech, he would have heard her say that the increase in demand was all down to world circumstances, and that it had come not from Europe but from India and China and other much more successful, faster-growing economies in Asia. The hon. Gentleman has failed to make his case.

Over the past decade, the Government could have made the decision to allow the private sector to develop the marginal fields in the North sea instead of taxing it to the hilt and putting it off. They could also have made decisions on renewable energy, nuclear energy or other kinds of energy that do not require carbon. Instead of having to have the great debate now on new power, we could have had new power stations already up and running. We have had 10 wasted years under this Government, and we now have higher energy prices as a result.

On agriculture, instead of constantly agreeing with everything that comes from Brussels, the Government could have put some substance behind their rhetoric of reforming the common agricultural policy. Instead of having years and years of big subsidies for set-aside to prevent farmers from growing the grain that the world needs, we could have had a policy that actually promoted the growing of grain in order to make a contribution to the world scarcity of grain, both for direct eating by human beings and for eating via the animals that are increasingly in demand in the Asian countries.

That is where the Government have gone wrong, but they wish to take every credit for the cheap goods coming out of Asia, which they say is down to their economic management. Now, they wish to take no blame for the scarcity of basics that is driving prices up, and with which they have singularly failed to help.

John Hemming: The hon. Member for Edinburgh, South (Nigel Griffiths) did not seem concerned about the fact that families on lower incomes were more dependent on basics, or the fact that, while the consumer prices index shows a 10p in the pound spend on food and non-alcoholic beverages, and 12p in the pound on housing, water, gas, electricity and other fuels, it also shows a 14p in the pound spend on restaurants and hotels. Does the right hon. Gentleman share my view that we should examine how families on low incomes are affected by Government policy?

Mr. Redwood: That is what I and my party have been saying, and it is one of the reasons behind this debate. The hon. Member for Edinburgh, South (Nigel Griffiths) is as remote from the reality of modern Britain as those on his Front Bench clearly were during the Crewe by-election. They seemed to have no idea that the retail prices index basket—let alone the consumer prices index basket—does not reflect the reality of low-income households, which are spending a much bigger proportion of their income on food, energy, heating their homes and trying to get some transport. The Minister admitted that those costs had shot up, and those are the people whose incomes are being most tightly squeezed.

Nigel Griffiths: If the right hon. Gentleman is so sure of his case, why has he not persuaded those on his Front Bench to make a statement saying that they are going to cut duty on fuel?

Mr. Redwood: I am well known for believing that because there is such a rip-off at the pumps in this country and a rip-off on North sea production, we should be reducing the rates in order to keep the amount of tax coming in at the forecast level rather than over it. I suggest that the hon. Member for Edinburgh, South (Nigel Griffiths) contain himself; who knows, my Front Benchers may well come up with such a proposal in due course, but we are interested in the Government’s proposals. It is their problem; they created it. They have the power to say to the House today, “We are very sorry. We are collecting far more revenue at the pumps and from the North sea fields than we forecast we would in the Budget. This is a rip-off. We will give some of it back to the public.”

About £500 million of extra revenue came in from oil and petrol in the first six weeks of the financial year, but what are the Government doing with it? They have not told us how they are wasting that £500 million, but we know that they have wasted billions on computerisation, unneeded regional government in England, ID cards, too many officials and administrators and too many external consultants coming in to do the jobs that officials do not seem to be able to do so that we are paying twice for everything that goes on in the Government. That amounts to massive waste, which the Government’s own Gershon review admitted, as confirmed by Conservative party work.

At the core of the debate there should, I think, be a serious examination of one of the most misleading soundbites of the past 11 years—the soundbite that the Government created an independent Bank of England, which dealt with the inflation problem and gave us economic stability. The House should remember that the Government almost lost their Governor of the Bank of England when they shoved through their bodged reforms of the Bank in 1997-98. Far from making the Bank independent, they stripped it of its responsibility to manage public debt and its responsibility to have day-to-day supervision of the clearing banks.

When the credit crunch and the crisis hit, the Bank of England was blind and deaf to its own money markets and did not know minute by minute what the Government’s debt position was—crucial to the functioning of the money markets—and it did not know minute by minute what the clearing banks’ position was, when they were clearly extremely short of funds. That meant that at the crucial point where the Bank needed to be expert at running the money markets to enforce the rates laid down by the Monetary Policy Committee, it was not able to do so. There was a complete collapse of monetary control across the August through to October period as they lurched from boom to bust in their handling of the economy. It was a failure of the Treasury, as well as the Bank of England; it was the tripartite system, led by the Chancellor, that led to the run on the Bank—a disgrace in an advanced economy that makes its living primarily out of financial services through export markets. It was a disgrace that this Government presided over such an embarrassing situation when all previous Governments had been able to keep the banking system just about liquid enough, even in bad times, so that there was never a run on the banks for more than 100 years.

All that happened because of those bodged reforms. The Monetary Policy Committee is alleged to be independent. The Government’s best case is that the MPC was made a bit more independent; clearly, the Bank of England was very badly damaged by being made less independent, as it lost big functions. Even the MPC was not really made independent, however. Let us remember the record. Before the 2005 election, the Government clearly wanted lower interest rates, so they fiddled the target. They replaced the retail prices index target—the RPI is used in all the index contracts; the RPI is used for wages and indexed debt—and substituted the consumer prices index. Why did they do that? They did it because they knew it would go up less quickly, which would mean easier money and lower interest rates. I see the Economic Secretary shaking her head, but she is an intelligent woman and she knows that that is why they did it, and the adjustment to the target rate was not sufficient to take into account how big the gap was between the more truthful RPI and the less truthful CPI in respect of the prices that people were having to pay in our economy. We had that damage.

There is also the problem that we were never told why some members of the independent MPC were reappointed and others were not. I tabled questions asking about the criteria for reappointment. I asked whether there was some external test for reappointment, whether the voting record was examined and whether only the dovish ones who would vote for lower rates before elections were reappointed. No answer was forthcoming from the Treasury. This Government, who introduced the Freedom of Information Act 2000, will not even tell a Member of this House of Commons why they reappointed some MPC members but not others. They will not even tell me what the criteria were for trying to create some independence for that committee.

When the crisis struck in August and September, the MPC was as much use as a bunch of people having a tea party but no control over the financial markets. There is no point in setting independent bank rates if we cannot enforce them in the market. The Bank needs to have enough control over the money markets and enough knowledge and skill within those markets that its rate is the crucial rate. It lost control and the damage was there for all to see.

We have a Government who mis-sold the proposition that they created an independent Bank. They have mis-sold the proposition that they created stability as they created instability. They have still not got a grip on this situation. We had the big lurch from too much liquidity and low interest rates between 2003 and 2006 to interest rates being too high and too little liquidity in 2007. We had the run on the Rock. We then had a welcome reduction in that illiquidity. Money was belatedly injected into the markets and interest rates were lowered a bit, because the Government suddenly realised that fighting slowdown or recession was more important than fighting the inflation that they had already created.

More recently, we have had a lurch the other way. The Bank and the Treasury seem to be worried again about the inflation, which they cannot control because it relates to their past mistakes. This lurch is happening at exactly the point where the housing market is in collapse, the property market is in collapse, there is a second phase to the credit crunch and there are problems with mortgage banks and others because of the extreme squeeze that the Government are putting through. The price of that lamentable failure of monetary policy, the botched reform of the Bank of England and the lurch from boom to bust and from boom to bust again in credit and money markets will be severe for people in this country to pay.

My hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond), the shadow Chief Secretary, valiantly tried to get the Chief Secretary to say something true from the Dispatch Box. He said to her that the adjustment to the credit crisis and the inflation crisis triggered by the Government must surely come through lower living standards. That is what the Chancellor’s policy is all about when he says that people cannot have RPI-matching pay awards. He has said that public sector pay should go up by considerably less than RPI and is now trying to talk the private sector into exactly the same position. Perhaps he has not realised that a lot of the private sector came to that conclusion a long time ago because it is struggling to remain competitive in an extremely competitive and difficult world.

I hope that the Economic Secretary will remedy the defect created by the Chief Secretary and admit to the House that, yes, it is now Government policy to squeeze individuals and families for at least a year to try to deal with the excesses that the Government have put into our economy. Looking at what the Government have been doing for the last couple of months, it is quite obvious that they have no intention whatever of the public sector making any contribution to reducing the excess spending and credit in our economy, which desperately needs to be sorted out after the boom years—the years of neglect, the years in which the Bank and the Treasury so singularly failed to stay married to prudence and to keep things under control.

I have often pointed it out in the House that I believe that the Government balance sheet—the nation’s balance sheet—has under this Administration seen a ballooning of debt, but not of £550 billion or £700 billion. If the unfunded pension liabilities, which would be on any company balance sheet, the private finance initiative, the public-private partnerships, Northern Rock and all the other promissory notes that they have issued, as well as all the debt that they are now adding to the balance sheet were all added in, the true figure would be about £1.5 trillion.

I am beginning to feel that I have underdone it, because on no occasion has a Minister rushed to the Dispatch Box to say, “The right hon. Gentleman is over the top. The actual figure is so and so.” The Government have never put out a press release countering my blog’s exposition of this. The Economic Secretary looks downwards, so I suspect she is saying, “Gosh, we’ve got away with it. He thinks it’s only £1.5 trillion.”

Let us say that the figure is about £1.5 trillion. That is colossal. It means that the IOU cupboard will be full to bursting by the time the new Conservative Government get in and try to sort things out. It means that we have no room for manoeuvre because the Government have been so wanton over the past few years, yet in the past few weeks they have found £2.7 billion of extra borrowing to try to impress the voters of Crewe. Didn’t they do well? They have found a lot of extra borrowing for transport systems in Manchester and the north-west, presumably because they are worried about their position in that region. They have found a lot of extra money to win the 42-day vote, and might have to find a lot more to win that vote all over again, assuming that their lordships disagree.

This Government are now on a rake’s progress—they have not merely divorced prudence but fallen in love with a much wilder lady who clearly believes that the public sector must have everything, however much has to be borrowed, putting more and more pressure on the individuals and families whom we all represent.

The charge against the Government today is that their reforms of the banks failed; their monetary policy failed desperately badly in ’07 and is still wobbly today; they do not have a grip on the money markets and the interest rate structure, let alone the inflationary consequences; they have absolutely no grip on public spending, which is why all the pressure will be on individuals and families; and they do not seem to care about the way in which our constituents are having to suffer.

If the Government want to solve the long-term problems, as they always say in their rhetoric, will they please make some decisions, even at this late stage, to get some transport capacity and energy capacity in, and to move away from such a strong dependence on inefficient carbon-burning machinery in both sectors? That is the way to do something about energy costs. Will they please go to Brussels and get some change to the common agricultural policy, because we need a policy that promotes and generates much more agricultural activity? We need to see the plough moving up the hillsides out of the valley beds. We need much more land brought back into use. The world needs food, and we need to make our contribution; it is no good blaming the Chinese and the Indians.

(3) Mr. Redwood: Was the hon. Gentleman asleep when the Conservatives produced endless proposals for getting better value for money and having fewer administrators, fewer targets, fewer quangos, fewer ID cards and all the other claptrap that has wasted billions?

Dr. Cable: I was not asleep: I was assiduously reading “The Cost of Living Under Labour” and I shall address the seven-point plan that the Conservatives propose to deal with the situation. It is possible plausibly, and perhaps wisely, to argue for fiscal austerity and for crowd-pleasing tax cuts and spending measures, but to advance them at the same time completely lacks credibility. I will proceed through the seven points, and I hope that my argument will begin to stack up.

(4) Mr. Redwood: If people could still get petrol at £1.15 a litre, 70p of that would be Government taxes, which have been going up this year when the Government claim to be worried about the plight of the motorist. Why do they not simply get their tax down, because that is the dominant part of the price at the pump?

Yvette Cooper: As the right hon. Gentleman knows, we have delayed the fuel duty increase, and fuel duty has fallen in real terms over many years as a result of the decisions that we have taken. The issue that faces people at the petrol pump is not fuel duty, but the fact that we have seen such substantial increases in the price of oil, which is affecting countries right across the world.

(5) Mr. John Redwood (Wokingham) (Con): Does my hon. Friend remember that, far from creating an independent Bank of England, the Chancellor gutted and filleted it, taking away debt management and nationalising it into the Treasury, and taking away day-to-day banking supervision, so that the Bank was blind and deaf in the money markets when the credit crunch hit? Is not that a major problem?

Mr. Hammond: My right hon. Friend is absolutely right. As he will know, we have been arguing for some time that the responsibility for rescuing a failed bank under the proposed new system must lie with the Bank of England, not the regulator. We are delighted that the Chancellor appears at last to have come round to accepting the logic of that position.

The former Chancellor’s reputation is unravelling before his eyes. The man who rode the Asian tiger of imported deflation bleats that what is happening in Britain today is all someone else’s fault—from the credit crunch, to the fuel price at the pumps, to the soaring cost of food and spiralling home heating bills. He was the lucky Chancellor whose good fortune was to preside over the greater part of what the Governor of the Bank of England has called the NICE—non-inflationary, consistently expansionary—years, and whose misfortune is now to have his legacy exposed as a sham, because when the wind blew the economic house that Gordon built turned out to be made of straw.

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2 Comments

  1. anon
    Posted June 25, 2008 at 3:12 pm | Permalink

    Not much criticism of the banks by anyone in the debate (as reported by they work for you). See, it's the banks stupid 346.

    Nor, any criticism of the system of fiat currency. As a conservative, Mr Redwood, are you against fiat currency? I recall in the late 80s commentators were saying, 'the tories have ran out of things to privatize'; why did you never privatize the currency? Can you comment on this on a later post?

    I have conventional views on the virtues of a monopoly national currency.

  2. anon
    Posted June 26, 2008 at 11:09 am | Permalink

    Can you clarify what you understand by 'flation; as in, deflation and inflation?

    Phillip Hammond said, in the debate, "The former Chancellor's reputation is unravelling before his eyes. The man who rode the Asian tiger of imported deflation bleats that what is happening in Britain today is all someone else's fault …".

    As much as I may agree with the quote (using the appropriate construction); Mr Hammond seems to use 'flation (in this case deflation) as reflecting price decreases. While later in the speech he uses 'flation (as in, inflation) to express the idea of price increases.

    Do you share the opinion of the school that argues that inflation/deflation is simply about money supply. Hence, prices are consequent to the supply of money since, the greater the supply of money the less value it holds.

    Here's a link to someone who argues the point that 'flation is money supply Inflation: What the heck is it?. Do you see any fallacies in his article?

    Reply: Inflation is too much money chasing too few goods.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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