Mr. Redwood: When the regulator decided to increase the capital requirement for each bank in the system, did it calculate how much lending that would take out of the system and, if so, was it happy with that?
Ian Pearson: I will answer the right hon. Gentleman’s question in a moment.
We recognise that it is tough out there, and getting tougher, for hard-working families and small businesses, so we are targeting support at those who need it most. We are supporting households that are facing higher food and fuel bills by raising the income tax personal allowance for 2008-09 by £600, which is worth £120 to the basic rate taxpayer. All basic rate taxpayers will have seen that in their take-home pay from September. We have delayed the fuel duty increase from April this year to April 2009, saving businesses and families nearly £100 million every month, as opposed to the Tories’ bungled policy, which would mean that people would now be facing a fuel duty escalator. We are making additional payments to the over-60s and over-80s of £50 and £100 respectively alongside the winter fuel payment, to the benefit of some 9 million households. We have announced a £1 billion package of energy efficiency measures, which means that all households will be able to save at least 50 per cent. on a range of practical energy-saving devices, for which 11 million of the most vulnerable households will qualify free of charge. We are offering financial support through the winter fuel payment, the Warm Front scheme and the expanded carbon emissions reduction target.
Despite the global credit crunch, we need to ensure that the small firms that are vital to our economy have access to the loans and capital they need to let their businesses grow and develop. An announcement from the Chancellor at the end of last month means that Britain’s small and medium-sized enterprises stand to benefit from up to £4 billion in loans from the European Investment Bank over the next four years. Based on the UK’s shareholding in the EIB, British small businesses should be able to benefit substantially between 2008 and 2011. As a first step, UK banks have already signalled their interest in securing around £1 billion a year from the EIB.
Mr. Redwood: Will the hon. Gentleman tell us how much more tax somebody on ÂŁ50,000 a year should be paying, according to Liberal Democrat theories?
Mr. Browne: The right hon. Gentleman can be assured that they would pay less. Let me get to the party political dimension, because I know how much he enjoys that aspect of things.
Mr. Redwood: My hon. Friend is making some important points. Has he seen the work of our hon. Friend the Member for Braintree (Mr. Newmark), who believes that true Government indebtedness, including pension liabilities, is now £1.8 trillion—120 per cent. of gross national product—which is why some of us are worried about the country’s financial position?
John Howell: I am grateful to my right hon. Friend for making that point. He is absolutely right: a number of factors have not been taken into account—the pensions element is one, and the whole business of private finance initiatives is another. That is why it is crucial, as I said, to recognise that although the rules are too vague and flaky, it is not the rules themselves that cause the problems but their underlying assumptions. We can all make nice big rules, but if the assumptions and the data behind them are not accurate, there is no point in having them.
Mr. John Redwood (Wokingham) (Con): The right hon. Member for Airdrie and Shotts (John Reid) has made an important speech, and his idea is worthy of longer consideration, although some of the details would need to be fleshed out in order to see whether it was practical or could work. What motivates it is a sense shared on some parts of the Labour Back Benches, and certainly on the Opposition side of the House, that the twin crises that we are living through—the financial crisis and the recession—are not yet responding to treatment as quickly as we would like, and that the Government would be well advised to listen to friends on their side of the House, and to people on my side of the House who wish them well in trying to tackle the crisis, when we offer them advice on the other things that they could do to head off some of the worst disasters that might still lie ahead.
Listening to the Exchequer Secretary, I felt that she was being very complacent. She wanted everyone to believe that this was a global, rather than a British, crisis. Let us go back to August and September 2007, however. Northern Rock was a very British bank, lending too much money to British mortgage holders to pay too much for their houses, and getting into difficulties because it and its customers were greatly over-extended. It was regulated by British regulators, and they let it down very badly. They allowed it to expand too fast, and then starved the money markets of money in August and September. The Chancellor and the Governor of the Bank of England then lectured Northern Rock on how it had to live with its own mistakes. They brought the bank down and, afterwards, decided that the taxpayer should stand treat. That was not good management, or good regulatory practice, and I hope that the Government will learn from that and not do it to another bank.
If we look at the problems that the Government now have with Northern Rock, we can see what a bad so-called solution that was. Taxpayers were put on risk for more than ÂŁ100 billion, and they have lost ÂŁ580 million in the first half year in owning 100 per cent. of the equity. That was the stated interim loss. The second half losses might be bigger; there will certainly be such losses. Extra capital amounting to ÂŁ3 billion has had to be sunk into the bank, and I do not think that we shall see a return on that any time soon. Half the staff are being sacked, ÂŁ14 billion-worth of mortgages have now been repaid, and the bank is unable to make new advances. It is crippled, higgled and gravely damaged, and the taxpayer is going to have to pay all the costs involved in winding up a lot of the business, getting rid of the staff and shrinking the thing that was once a flourishing institution.
I invite hon. Members to cast their minds back to what the directors and owners of Northern Rock were debating in the spring and summer of 2007, as recorded in their annual report, which came out just before the crunch. They were discussing their response to the regulatory signals that were being sent out. The British and global regulators, but particularly the British regulators for Northern Rock, were telling them that they had too much capital for the volume of loans that they were making, and the discussion within the Northern Rock boardroom related to how it could get its capital down, or its loans up, in order to get nearer to the ratio that the regulator said was needed.
More recently, the British regulators have said to all the banks in Britain that the ratios to which they used to manage are no longer sufficient for the current circumstances, and they are making all banks have more capital, relative to the amount of lending that they do. So in the good times, when there was too much credit, the regulator was saying, “Don’t worry. Lend some more. You don’t need to have a very high ratio.” In the dreadful times, when there is very little credit available for anyone, the Government and the regulators have decided to send the alternative message that banks in the middle of this crisis have to raise a lot more capital, relative to their lending. That does not strike me as wise regulation on either score, but once the regulators have taken such action it becomes the new hurdle or standard, and every other organisation must do the same, not just to meet the regulatory requirements but in an effort to rebuild confidence. The Government need to understand the important point made by my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond), who observed that the £250 billion package of guarantees was not being taken up to a great extent. That is a sign that the package was not properly constructed.
I fully support the action of Government and the Bank of England in standing behind any major bank that is in trouble, and have always done so. Only a lunatic would want to see a major bank go down, and in view of the impact of Lehman’s going down, I would think that even someone who was a lunatic before that event might now understand that it is better to manage institutions through crises such as this rather than precipitate a major crash on the back of a very large institution’s biting the dust. That is why I supported the Government’s £200 billion of extra loans; and it is why I supported all the extra money that they flushed into the money markets, and the £250 billion guarantee scheme.
I think that that guarantee scheme should be revisited. It is not the case that the lending rates in the market between the banks have fallen to the extent that they have returned to their normal relationship with the rates that the Bank of England is signalling, and it is not the case that there is now a fluid and functioning inter-bank market. The best chance that the Government have of getting that market going again is to tweak, or change, the guarantee scheme in the short term, so that more money can flow between the banks. They should be warned, however, that it will never function as well as it did before the crunch, because the regulators—perhaps for good reasons—are now requiring much more capital relative to the amount of lending. All the banks are now fighting to reduce, rather than increase, their loan books, because that is what the regulator and the Government are asking them to do. The inter-bank markets cannot be expected to be as fluid and successful as they were in June 2007, because the regulatory mood—along with the confidence mood—has changed in the banking market.
An additional problem is that the twin difficulties of the financial crunch and the banking crisis are reinforcing each other. While we have lived through some of the worst parts of the financial crunch—let us hope that we now have more stability, because there is a clear understanding in the markets that Governments around the world stand behind their banks in one way or another—we are only on the edge of the serious recession that is now being widely forecast by independent bodies as well as by most Governments. I suspect that this Government will soon be forecasting one, when they get around to revising their figures.
That factor is particularly damaging to an economy such as that of the United Kingdom. The last 10 years in particular have seen very lopsided growth in Britain. Growth rates in London, with its financial services, professional services and business services, have far outpaced those in the rest of the country. Indeed, the growth rate in London has been more than double that in the north and west of the United Kingdom, reflecting the success of those financial institutions and the impact of the credit bubble on property-related and finance-related activity emanating from the very expensive districts in the centre of London. That concentration of effort makes the British economy doubly vulnerable to the downturn now hitting it. The epicentre of the crisis is the financial services and property sector, which is going to fall further—and we have more of it to fall than more balanced economies on the continent and in the Americas.
As the recession bites, the loan experience on all the bank books will deteriorate further. To date, we have been discussing the mortgage mess. The Government would like us to believe that the only mess that we really had to face was the sub-prime market in America, and it is true that some of our banks foolishly lost some money on that market, but we know that a far bigger crisis for the British banks was the mortgage crisis in Britain, where too much mortgage advance was made on house prices that were too inflated. There are big losses coming through as a result of that, which is why it was Northern Rock and Bradford & Bingley that needed special treatment in the United Kingdom. British banks under British regulators built a British property bubble.
The next phase of the crisis, unfortunately, will be a sharp deterioration in the loan experience that constitutes lending to everyone else, not just those involved in property and finance. The economy is now falling off a cliff, and activity is falling dramatically in sectors beyond finance and property. That means that there will be many more bad loans throughout the range of business activities and the industrial and commercial services sector, from here to John o’Groats. All around the country, the same pressures will be felt as the recession bites.
That is why I repeat my advice—it is heartfelt, as I love my country and wish it to do well—that when thinking about buying banks, the Government should be extremely careful about how much equity risk they take on. If they are really going to persist in taking major shareholdings in banks the size of RBS, which has an average balance sheet over the year of £2 trillion, a sum that is bigger than the national income and five times the tax revenue of the country, they should understand that it requires only a small mistake in terms of a bank’s assets and liabilities that falls on the wrong side for taxpayers for them to have very major losses on their hands.
That is why, in this period of relative tranquillity before all the deals go through, the Government should be looking again at the terms and the balance sheets that they will be taking over. They should be sending in the forensic accountants now. We all know they will stand behind the banks, so there will not be a confidence problem. There will, however, be a confidence problem in the Government, and in the amount of Government debt they will have to issue, if they do not behave sensibly by doing some basic accounting work and risk assessment on these huge banks that they are now thinking of nationalising or buying major shareholdings in. The Government should be warned by the fact that they lost £580 million in the first half on a very small bank—Northern Rock. They should remember that RBS is 20 times the size of Northern Rock, so if something goes wrong they will be playing not for a few billions of pounds, but for tens of billions. That is serious money, even for a rich country with a Government who collect as much in tax revenue as the current Government do.
If the Government press on, they must understand that where they are majority owners of a bank, they are responsible for everything. Ultimately, they are responsible for the lending policy, the bonuses and the number of highly paid staff, and for whether a loan is made to Mr. Snooks or Mrs. Smith. They will be made responsible by their electors—the people out there—who will not understand if they say, “This nationalised bank is not actually run by the Government. Yes, we the Government put in all the money on behalf of the taxpayers, but we have no control over how the money is spent.”
Kelvin Hopkins: I am following with great interest what the right hon. Gentleman is saying. He seems to be supporting my earlier contention that the Government ought to put in people to regulate the internal operation of the banks, to make sure that they act in the public interest.
Mr. Redwood: There is at least one difference between us, in that I would not nationalise a bank at all, as I think that would be too dangerous for the taxpayer. The hon. Gentleman is right, however, that if the Government persist in nationalising—taking a majority stake or complete control—they cannot avoid ultimately being responsible for the financial consequences of their actions. I think that Ministers are completely responsible for Northern Rock. They own 100 per cent. of it on behalf of the taxpayer, and I quite understand why people will want to make that an issue with Ministers.
Why did the Government take this huge stake in Northern Rock? They presumably did so because they felt they could do a better job in the public interest by backing the bank than by enforcing a market solution. They did not seem to want a private sector bank to take over Northern Rock, and they did not want just to lend it some money to see whether it could then find ways of making more profit or raising capital in the normal way. I therefore think the hon. Gentleman has a point. When Ministers say they will not intervene, they do not really mean that, of course, because they have already told us they have views on bonus payments and on how much lending should be done. When Ministers try to enforce elements of those views, they will discover that they are trying to do so in respect of very complicated institutions that could lose the taxpayer a fortune if the wrong guidance is given, and which might lose them quite a lot of money even if they do not give any guidance at all. They will find this situation extremely difficult.
It is also crucial to offer people the hope that, in the process of settling the banking crisis in the way we have been debating, more will be done to try to offset the real damage being done to the rest of the economy. I welcome the new enthusiasm in all parts of the House for tax reductions. It is vital to put more spending power into people’s pockets as quickly as possible. Income tax cuts for those on lower and middle incomes would be extremely welcome, as it would be the quickest way of injecting more spending power into the economy.
Ruth Kelly: Does the right hon. Gentleman accept the proposition put from the Conservative Front Bench that those tax cuts should be fully funded, or is he arguing for a fiscal stimulus?
Mr. Redwood: I would not start from where the right hon. Lady and her Government start from. I would be running a much more prudent show than they are, because I would not want to spend all this money on bank shares; I would do it by short-term loans and in the other ways that have been identified, so I would have room for a fiscal stimulus in my Budget. My Front-Bench colleagues have backed the banking package in full, which was very generous of them. However, they are absolutely right: given that amount of borrowing—the banking package as well as the rest of the borrowing—it is too risky to borrow yet more for the fiscal stimulus. They are drawing attention to the fact that Britain is not well equipped to do what it should be doing, which is to give a fiscal stimulus by cutting taxes and borrowing in the short term to pay for that tax cut. Given where the national accounts are, it would be ruinous to add yet more to the borrowing.
The Labour Government seem to believe that there is a free lunch out there. They believe that because a recession is coming, they can say that they can borrow any amount they like, and the markets will miraculously supply it. They need to be very careful. Past history in this country shows that markets can be very forgiving for quite a long time. Of course, markets are just groups of people: they are all the people in the country and overseas counterparties, and they, like Ministers, want the economy to do well and would like all these packages to work. However, if the Government start to present markets with too big a burden of borrowing—if they say that they need to borrow such colossal sums that the markets say, “But we’re not sure we can find that money any more”—we will be in a far worse crisis than we are currently experiencing.
At the moment, the Government seem to think that the answer to too much borrowing and lending in the private sector is to transfer it to the public sector. That is not the answer. If the problem really is, as they described, too much borrowing and lending, we have to go through a process of reducing it. We can do that in a very sharp, quick, deep, damaging way; or we can try to manage it over a longer period, so that there is not such a sharp downturn, but a longer period of slow growth, no growth or modest reductions in activity. The Government seem to have lurched from wanting a very sharp reduction in private sector debt—that is what their regulators and the Monetary Policy Committee were saying last year, with the Chancellor saying that it would serve the private sector right—to wanting a much slower run-down. If they simply transfer it all to the Government sector and build up even more Government debt, they might have another problem on their hands: that of finding it very difficult to finance their borrowing at a sensible price.
The Government have already taken a big hit on the currency. We are about a quarter worse off against the dollar compared with a few months ago, there has been a very big slide against the yen, and against all the strong currencies of the world sterling is very weak. If the Government are not prudent enough, they could also have a further leg down on sterling, which would make us all a lot poorer and make it more difficult to raise the money that they need to carry out their tasks.