John Redwood’s contribution to the budget debate

Mr. John Redwood (Wokingham) (Con): I remind the House that I have declared in the Register of Members’ Financial Interests that I provide business advice to an industrial group and an investment management company.

This was the go nowhere Budget-it was almost the do nothing Budget. It was also the dither and fiddle Budget. I sometimes think that Ministers have still not understood how big an economy they are seeking to influence and how much money and resources they command, now that about half the entire national income goes through the public accounts under their mismanagement. It is, for their information, a £1.4 trillion economy. This Budget provides, on their scoring, a stimulus of £1.4 billion for the first year and a small reduction in the amount of resource available from the public sector in the following two years. Even at the peak of the Chancellor’s proposed intervention this year, therefore, he is playing with 0.1 per cent. of the national income, so we can immediately see that this Budget is not serious. It is not trying to change anything real in this nearly moribund economy, nor is it trying to do anything big to stimulate growth or recovery.

Stewart Hosie: Have the Government’s horizons not shrunk even further, if one considers that the total managed expenditure for 2010-11 is £2.7 billion off what they forecast even in the pre-Budget report late last year?

Mr. Redwood: The hon. Gentleman is quite right.

I also agree with the hon. Member for Middlesbrough (Sir Stuart Bell) when he rather kindly said that he saw the Leader of the Opposition as a new manager coming in to take over an ailing football club. He was absolutely right that the UK Government football club, under its current management, has slipped down several divisions and is facing further relegation. He is absolutely right that there are no star players who can win matches. He is also absolutely right that the wage bill is bloated and gross, and that the club is facing bankruptcy. Indeed, the club has all the conditions, which the hon. Gentleman perhaps did not have in mind, for better and new management.

Sir Stuart Bell: And what will the right hon. Gentleman say when the club is relegated?

Mr. Redwood: What we need is new management to stop further relegation. The hon. Gentleman should understand how far this country has already been relegated, as my right hon. Friend the Leader of the Opposition said in his passionate and eloquent speech today, when he pointed out that a country that was fourth in the world for competitiveness-which means more jobs, more exports and more ability to make a decent living-has managed to sink to 84th in the world under this Government, with their too many taxes and their too many regulations.

To understand why our economy has suffered so badly and is not growing rapidly, we have to understand the nature of the national and public finances created by the disastrous mismanagement of this Government. It is now easiest to understand the national finances as being two rather large banks, under Government control and with substantial Government shareholdings, with a medium-sized Government attached. That is because the two banks that the Government partly or wholly nationalised are considerably bigger than the national income-or they were when they took them over-and we need to understand what is happening in those banks in order to understand the background to the Budget, what is happening in the national finances and why the recovery is so sluggish. Unbelievably, the Government proclaim that they have created sustainable and stabilised banking, in the Chancellor’s words, but in fact they have done exactly the opposite, by their blundering into owning so many bank shares and their inability to manage those banks properly.

Over the past year, to December 2009, the Royal Bank of Scotland slimmed its balance sheet by £700 billion. When it was taken over by the state, RBS started with a balance sheet of £2.2 trillion, or one and a half times the national income. However, at the end of last year that had fallen to £1.5 trillion only, just a little over the national income. When I asked the Prime Minister about that recently in Prime Minister’s questions, he seemed to be completely unaware of that fact. One would have thought that it was the dominant economic fact that might concern him and his colleagues. At a time when they say they want growth and expansion, their bank-the bank they took over and they say they have stabilised-has shrunk its balance sheet by £700 billion, or by the same amount as total public spending in the year.

Of course, the bank shrunk assets and liabilities and was reducing risk. Of course, some of that had to take place. Some of it involved withdrawing loans in overseas economies and not in the British economy, because RBS is a global bank. I put it to the Chancellor and to his representative, the Financial Secretary to the Treasury, who is left to hear the debate, that they will not have a vigorous and strong recovery if the biggest bank in the country, under regulatory and ministerial instructions, is all the time slimming its balance sheet that rapidly. Although a lot of that slimming took place through instruments other than loans and although some of it was not in the UK, all of it is withdrawing liquidity, risk management and financial instruments primarily from the business sector, which is bound to have an impact.

To reinforce that process, Lloyds bank was doing something similar on a more modest scale. Lloyds was a £1.1 trillion bank and by the end of last year it had fallen to a £1 trillion bank-it had taken £100 billion out. Between the two banks that the Government owned, £800 billion was withdrawn. We know from the corporate plan and from the remarks of the chief executive of RBS-approved by the Government, who are the principal owners-that another £300 billion will be taken out of the balance sheet of RBS over the current year. Again, I put it to the Government that if that is the plan, although it might make business sense-I presume that the aim is to turn the thing round into a profit-making bank by getting rid of risk-it is not good news for the British corporate sector trying to use RBS as well as Lloyds. It will make it almost impossible to meet these ministerial exhortations and targets to increase lending.

The Lloyds reduction of £100 billion was more damaging in a way, because Lloyds does rather more lending and has rather more assets in the UK relative to the size of its balance sheets, and £50 billion of the £100 billion Lloyds slimming was a reduction in loans. It does not tell us in the figures that I saw how many of those were outside the UK, but clearly quite a bit of it was UK lending. At the very time when the Government told us they had nationalised the bank to stabilise it and to allow it to lend money, it was doing the opposite and going through a severe restructuring that entailed lending less.

That is the fundamental reason why this economy is not going anywhere: the banks have been broken and they are being nursed back to health in a way that contracts rather than expands activity. I do not know why the Government cannot see that, although I can understand why they never want to talk about it. They pretend that they are not responsible for this £2.5 trillion of assets at risk and that it is somehow nothing to do with them, yet come the Budget they say, “We stabilised the banks. Job done-no problem. All is well.”

Mr. Mark Todd (South Derbyshire) (Lab): I am intrigued by the right hon. Gentleman’s analysis. I share some of his thoughts, but by extension I assume that he is suggesting that we should have a much more directive role in running RBS and Lloyds, and should perhaps seek to foster an underpricing of credit to the business sector. Is that what he is really thinking?
Mr. Redwood: I would be very happy to make a positive recommendation because I would like my country to recover quicker and for there to be more jobs and prosperity. I suggest that instead of mouthing the words “countercyclical regulation” but doing the opposite, the Government should try some countercyclical regulation. I and a few others were telling them in 2006-07 that everything was overheating and that they should have tightened the regulation of the banks. They did not; they made a big mistake. What we are now saying-those of us who have got the cycle right-is the opposite. They are now tightening too much at the bottom of the cycle. We must be somewhere near the bottom of the cycle-I hope that we are through the bottom of the cycle and have just begun to turn up. This is the point at which they should be relaxing the regulatory controls on cash and capital, particularly for the two nationalised banks, which nobody is going to worry about because they know they will just print whatever it takes to meet the obligations of those banks.

The regulator should be told to think countercyclically. The cash and capital controls should be relaxed at this stage of the cycle and tightened in a couple of years’ time when the recovery is under way.

Mr. Todd: Perhaps the right hon. Gentleman could develop this point a little further and set out his view of our obligations to the shareholders who are not the taxpayer in the two institutions he is suggesting a direction for.

Mr. Redwood: I think our prime requirement in this House is to look after the interests of the taxpayers who have funded these banks and who are principal shareholders in them. Of course, in company law there are responsibilities to minority shareholders not to oppress them. What I have suggested is to change regulation of all banks so that it does not favour or target nationalised banks in particular. That would help the banks and would be in the interests of the minority shareholders, as well as the majority shareholders, because it would be permissive and would allow the banks to have bigger balance sheets for a bit, which would allow them to make more money. This contractionary impact on the balance sheet must be bad news for the shareholders. Of course, the banks need to be more prudent than they were in 2007-08, when the Government helped force them into difficulties, but making them super-prudent now is not serving the interests of recovery or the national economy.
We were told by the Chancellor in the Budget statement that we were not going to be losing any money on these banks and that they had been a very wise investment. That is not what the Red Book says. It points out, quite accurately, that there have been £60 billion of losses so far and that when it was written-presumably very recently-we were sitting on a £12 billion loss on the shares in RBS and Lloyds. That is double the loss on the early gold sales and confirms the Prime Minister’s record as a rather bad investment manager, because he seems to sell at the wrong price and to buy at the wrong price.

Let us hope that we can work our way out of it, but there is no immediate sign of the Lloyds and RBS share prices getting to the point where they are not only above the taxpayers’ purchase price, but sufficiently above it and sufficiently robust to accept dumping all those shares back on to the market to find willing buyers. If we look at these banks’ profit and loss record, that is not at all surprising. Of course, since they have been under Government influence, we have had losses of £8 billion in 2008 and £2 billion in 2009 in RBS, and of £6.7 billion in 2008 and £6.3 billion in 2009 in Lloyds.

Again, we are not told this in any public statement by Ministers; we are not even told it properly in the Red Book. When we are the majority shareholder in RBS, those RBS losses are our losses. When we are the most important minority shareholder in Lloyds, a big chunk of those losses are our losses. Ministers should do rather better than just coming to the House and saying, “We have got these lovely bank shares and we are going to sell them one day at a profit.” Lots of investment managers would like to be able to claim that about their worst investments, but what we need is proper analysis of what has gone wrong with those bank shares so far, how the Government think they will start making decent returns on capital, and how that might provide a background for getting some of the taxpayer’s money back.

It was very fortunate for the Government that Lloyds decided to give an unusual interim update on its trading position very recently, before the Budget, and I believe it is giving another briefing today, at the very point at which we are debating the Budget. It would have been a courtesy to the House if Ministers had shared those very important statements with the House-both the one updating on profits, which was positive, and the one today, which I do not know about because I have been in the House listening to this debate. Given that we have such a huge financial interest on behalf of taxpayers in these banks, surely the Government should report to us in a detailed way on what is happening. It is a matter of great public interest. We are invited to debate £1.4 billion of petty cash, but we are not allowed to debate the changes worth hundreds of billions of pounds in the balance sheets of these very large banks.

The economy is not recovering at anything like the pace that any of us would want. Most private-sector forecasts say that the recovery will be very slow and drawn out. As my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) noted, Governments of both parties trying to get out of recession have cut public spending pretty early on, and that has fuelled and helped extra growth. That is what happened in the 1970s: a Government of the Labour disposition were reluctantly forced into cuts by international bodies, and that allowed growth to take place.

The same thing happened, winningly, in 1981 and 1992, when Conservative Governments realised that controlling the public-sector deficit was an important part of freeing resources, keeping interest rates down and creating more money in the private sector. It was literally from the day when the Government announced public expenditure controls that the economies at those dates took off. They grew far more positively on those three occasions than has been the case with the fitful recovery that started in the final quarter of last year.

The Government need to understand that they have a very serious problem that all their remedies are making worse. Taxing more undermines confidence: taxing rich and successful people more means that they go abroad, and taxing businesses more means that they work less hard, or that they close down in this country and take their activity elsewhere.
Ministers must know that this is happening. It is not a scare invented for the sake of the debate by someone who believes in free enterprise; it is what is actually happening in the £1.4 trillion economy that they are trying to influence. Ministers should get out more and understand what the threat to this country is.

The Government have racked up these enormous debts, and we have got into the incredible position where £1 of every £4 spent in the public sector is now borrowed, or borrowed and printed. As my hon. Friend the Member for Chichester (Mr. Tyrie) remarked, the printing has to stop some time. It may have stopped already; the Bank of England has certainly put it on pause.
When the markets believe that there will be no more printing, reality will come home and the impact will be very negative. The Government intend to borrow £150 billion or £200 billion, but the Red Book shows that this year’s gross gilt issue amounted to £227 billion. That is because the Government have to refinance expiring debt as well as finance the extra debt being built up. When the markets realise that the Bank of England is no longer around to buy £200 billion or £227 billion of debt to help things on their way, people will want a lower price at a higher interest rate for lending money to the British Government.

That is why we are so worried. If we allow that process to happen-as Greece, Ireland and Iceland did-the interest burden can spin out of control very quickly and become extremely expensive. The Red Book shows that interest on debt, at £43 billion in the current year, is already a more expensive programme than the defence budget, which is put at £40 billion. However, the cost of the debt interest will shoot way above that-first, because the debt is increasing too rapidly, and every extra bit of debt comes with an interest burden; and secondly, because the interest rate will rise if the Government do not do anything.
The hon. Member for Middlesbrough rightly said that we have not yet been through the embarrassment of a credit rating downgrade, and I hope that we do not go through that. Credit rating agencies know how difficult politics is, from their experiences through the crisis, and it would be very surprising if they decided to downgrade an important sovereign nation like Britain just ahead of a general election. That would clearly be a very political statement, and seen as such. However, the hon. Gentleman should not be too calm in thinking that everything is well, as the markets are downgrading British sovereign debt all the time. He must understand that we are paying 1 per cent., or 100 basis points, more than Germany to borrow money for the same length of time.

Why are we having to pay 1 per cent. more, and is it important? Yes, of course it is important, because 1 per cent. extra on 3 per cent. is a 33 per cent. extra charge on the cost of borrowing money. When one wants to borrow £150 billion-or £200 billion, £500 billion or £700 billion; whatever the total will be when it is all added up-the sums involved are absolutely colossal. In four years time, the defence budget will not be the one main budget smaller than the interest burden: much bigger budgets than that will be smaller than the interest burden, because compound arithmetic will catch up.

All previous recessions have ended when Governments have got a grip on the public finances. The Labour party is of course right to say that no one comes into politics to sack teachers and nurses and make hospitals worse. None of us on this side of the House has ever wanted that, and it is quite unfair to suggest that we do. However, the state employs 6 million people, and front-line teachers, nurses and doctors are only a very small minority. That means that we have to look at the whole panoply of the state’s administration and bureaucracy, and that we have to discover ways to do more for less, as we are running out of money.

Sir Stuart Bell: I am listening to the right hon. Gentleman with great interest. He speaks with great fluency and knowledge, but when he talks about nurses, doctors and all those in the public-sector professions, he reminds me of the words of Oliver Cromwell when looking at the corpse of King Charles I. Cromwell said that what had happened had been a “cruel necessity”: is that what the Conservatives are offering public-sector workers?

Mr. Redwood: I do wish the hon. Gentleman would try to follow the debate a little-he can do better than that. I had just made it clear that Conservative Members, like Labour Members, are proud of local hospitals and schools: they wish for them to be properly financed and do not wish to see a single nurse, teacher or doctor sacked for reasons of economy. That has always been true, and we never sacked teachers, nurses or doctors, whatever the hon. Gentleman may think.

Mr. Graham Stuart (Beverley and Holderness) (Con):
My right hon. Friend is coming to the nub of the point on the debt. Our point about the debt is not just about fiscal or other balances, but the fact that if the finances of this country are undermined, future public services and the jobs of teachers, nurses and doctors are put at risk. It is precisely to ensure that we can deliver sustainable public services, particularly for an ageing population, that Conservatives are so obsessed with ensuring that we behave responsibly on finances. This is not because of our fascination with finance, but because of our commitment to public services. We know that irresponsibility such as the Government’s leads to the very cuts that the hon. Member for Middlesbrough and we do not wish to see.

Mr. Redwood: I agree: a stitch in time saves nine. The policy of the hon. Member for Middlesbrough would take us in the direction that Greece followed. Instead of immediately making sensible adjustments to public spending that did not damage front-line services, that country ended up in a panic and a crisis. In the full glare of a market collapse, it had to put through hasty and perhaps ill-judged public spending reductions, probably on a bigger scale, because it was not prepared to take sensible action in advance.

The hon. Gentleman and the Government now believe that there are efficiency savings to be had, and that they can do more for less. I am glad that we have got to that point. For many years under this Government, the House was told that there were no efficiency gains to be had and that they were all will-o’-the-wisp proposals dreamt up by Conservatives; but now-at last-that is common ground. The good news is that incoming Ministers will find, in business terminology, lots of low-hanging fruit. There are many easy things to do to get more for less, because the public sector has not been through the kind of procedures and tests that the manufacturing sector in particular has been through in the past decade. Every year, manufacturing companies have to ask, “How can I get prices down and quality up? How can I serve my customers better and charge them less?” That is not impossible, but one must ask those questions to survive and have a successful and flourishing business in such a competitive business world.

It is now common ground that such things are achievable, but the public will judge who has their hearts in it more to deliver, and who is more likely to have the skills to do so. Not unreasonably, the public will ask, “Why have the Government been in office for 13 years and scattered all this money, often very wastefully, and not thought until now about treating efficiency and improvement seriously?”

Lynne Jones (Birmingham, Selly Oak) (Lab):
If there are so many easy ways in which to save money, would the right hon. Gentleman like to tell us a few that he has in mind? Will the Conservatives be spelling out all the cuts that they intend to make, and if so, when?

Mr. Redwood: There are so many of them to suggest, but I do not want to take up the whole afternoon. I would certainly start with identity cards and regional government, and the panoply of controls and restrictions placed on local councils, which create a bureaucracy in Whitehall and in each council. Many of the strategies, partnerships and those kinds of things are all bureaucracy and words. The Conservatives want to spend that money on the teachers in the schools and the nurses in the hospitals; we do not need such a vast army of people to deal with regional government and with instructions, monitoring and audit from one level of government to another. If the hon. Lady wishes to see more detail, she can find it in the economic policy review that I published for the Conservative party some time ago. She will find pages and pages of quangos to cull or slim, and areas of Government work that we do not need to do.

Things have simply got out of control. The Government have put 1 million extra public employees on the payroll, most of whom are not front-line workers. We welcome the ones who mean we get better schools and hospitals, but most are not in that category, and we need to look again at that. What do the Government need to do? If they were serious about value for money, they would have a comprehensive freeze on new recruits today, instead of advertising all those non-jobs in The Guardian every week. If they were serious about controlling public spending, they would understand that they have done the job of catch-up on public sector wages-indeed, those wages, on average, far surpass private sector wages-and so would impose the pay freeze today. Surely it is better to share the work around than to get into a position later where one has to sack people because one cannot afford the wage bill. If one takes on a football club where the wages are too high, it is better to keep some of the players on while one is looking around, but to pay them realistically because that wage bill is the reason why the thing is nearly bankrupt.

I fear that this is not a Budget that will be taken seriously. Most people who are looking at it know that it is a nowhere Budget from a dying Government, and they know that it contains no serious measures that are up to the task of pulling round this extremely damaged economy. More importantly, this Budget contains no measures to tackle the problem of damaged and difficult banks. If the Government really wanted an economic recovery, they would understand that the current imbalance between the public and private sectors-between the finance supplied to the public sector and the lack of finance supplied to the private sector-is their main problem. If they were serious about recovery, they would issue new instructions to the banks that they own. If they were serious about recovery, they would change the instructions through the banking regulator, because that is the main reason why we have gone from boom to bust.

This Government’s epitaph will be that they were the Government of boom and bust. Their boom was created by incompetent banking regulation and their bust was created by even more incompetent banking regulation. They like to say that it is people like me favouring a more deregulated world in the 1980s that has caused their problems, but they should grow up and own up. They changed the entire financial regulation system in 1997 when they came into office. They heaped far more regulatory detail on to the banks and other financial companies over their 13 years in office. The problem was that it was all bureaucracy, bumf and box-ticking, and they missed exercising control of the main thing, which Conservative Governments had always controlled extremely well; we never had banks blowing up and going bust on our watch, because we had one very important set of strong regulations that controlled the banks’ cash and capital at prudent levels.

The Government thought that they knew best with their regulators. They allowed them to expand the bank balance sheets massively in a way that some of us warned against and which was clearly imprudent. Unbelievably, having done that, the Government did exactly the opposite at the wrong point. They brought on the banking collapse and they brought on the recession because they switched from allowing the banks to have far too little cash and capital to demanding that the banks had far too much cash and capital for the circumstances of the time. Even worse-this is the biggest sin of all for a regulator in such a sensitive area-was that all this was done through the media, in public, so that the banks had no opportunity to sort themselves out over any reasonable time period because they were under the pressure that comes from the Government of the day telling the media and the public that the banks were nearly bust. There could not be a more perfect way of creating a violent cycle than that. We are now into punk-monetarism, money printing and an attempt to keep the public sector afloat with cheap money by creating it for the public sector’s own uses. The other side of that coin has to be, I suppose, starving the private sector of money because that is not where the Government see their political interests lying.

If the public want to know why we have an extremely feeble recovery and a lot of worry about our economy, I can tell them that it is because the Government have completely mismanaged the banking cycle. If the public want to know the really big numbers that have mattered over the past year, they should look at what the Government have been doing to RBS and Lloyds-the Government’s policies have been very contractionary. If the public want to know what we need for recovery, I can tell them-they will understand this-that it is sorting out the public sector to give us value while protecting what matters and it is providing more incentive to the private sector through less tax and less regulation, so that we can attract and retain businesses in this country in order to grow again.

We have got to earn our way out of this mess. We have got to work our way out of this mess. This Budget does not do enough for people of enterprise and people in business. It will fall to the lot of a Conservative Government to understand that, after this big a mess. a lot of stimulus and incentive will need to go into the private sector, because the private sector needs to earn a lot more to pay this Government’s bills.

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3 Comments

  1. Kenneth Morton
    Posted March 25, 2010 at 1:29 pm | Permalink

    The Government obviously does not understand the problems that you so eloquently outlined. So we cannot expect any answers. It is a case of the blind ( the government ) leading the blind ( the electorate, for the most part ).

    By the time the truth of your arguement becomes apparent to the public we can only hope that the country has a Conservative Government to take the necessary action!

  2. Nick
    Posted March 25, 2010 at 1:53 pm | Permalink

    The problem is that the implication of counter cyclical regulation is that you want banks to take more risk on board, when the risk levels are huge.

    When the risks aren't there, you want them to stop lending.

    It's bonkers.

    The real solution is that the government has to stop spending, and allow the banks to recover there capital base.

    To force the banks to recover a capital base comensurate with risk, you up the capital adaquacy requirements.

    To allow them to obtain capital, you stop the government dominating the borrowing of the country.

    Once the capital is at the new level, they can start lending again.

  3. Andrew
    Posted March 26, 2010 at 7:56 pm | Permalink

    Thank you for this incisive analysis. However, I am very surprised to read that John did not mention, in his reply to the question of how he would save money, the obvious option of scrapping Trident.

    Since this is estimated to cost around £100 billion over the next thirty years and has questionable real value for the UK's long term security, it should certainly be included in the forthcoming Strategic Defence Review at the very least.

    It is a failing of both main parties that so far, this significant portion of military expenditure has not even been considered worth questioning in the public arena.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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