John Redwood’s contribution to the Policy for Growth Debate, 11 Nov

Mr John Redwood (Wokingham) (Con): I beg to move, that this House has considered the matter of policy for growth.

It gives me great pleasure to move the motion and I know that I speak for many others in this House when I say that we welcome the Backbench Business Committee’s decision to hold a debate on this crucial subject. I also remind the House that in the Register of Members’ Financial Interests I have pointed out that I am a business adviser to a couple of companies.

This is a crucial subject because the Government’s whole economic strategy rests on the assumption of above-trend growth starting next year and continuing for the rest of the Parliament. I am sure that every Member would like to see faster and sustained economic growth from this point after the trials, tribulations and difficulties that the economy has been through in recent years.

Knowing how popular this debate is and that about 50 Members would like to catch your eye, Mr Deputy Speaker, I shall not exercise the right of the mover of a motion to speak at great length. The House will be delighted to know that I shall not be giving my analyses of where the world and British economies are or of monetary and growth trends, as that would take a little longer. All those who are desperate to know my analysis can read it on johnredwood.com-a not-for-profit site that is full of wise advice and good analysis with a great deal of modesty. I am sure that colleagues will be delighted to know that. I shall stick to the headlines, based on my analyses, and the conclusions that I should like to put to the Minister and others.

The strategy over the five years in the Red Book, as amended in “The Green Book”, says that by the fifth year of the Parliament the Government hope to be spending £92 billion a year more on current public services than in the last Labour year, and that they wish at the same time to reduce the deficit. To do that, they assume that there will be an increase in tax revenue of £176 billion a year by that fifth year. We believe that it is assumed that most of that increase in tax revenue will come from increases in current tax rates through growth in the economy. So the Government have a great deal invested in the idea that growth is going to speed up and be sustained-we all do.

My first point is that the one thing we cannot afford over the next five years is rapid inflation. Currently, inflation is too high. The Bank of England, I am afraid, was disastrous in the era of the exchange rate mechanism when it lurched from boom to bust and advised the Government to take that course. It was again extremely bad over the past five years when the conduct of monetary policy also lurched from boom to bust. The Bank and the banking regulators allowed far too much credit up to 2007 and then starved the markets of money and kept rates too high in 2007-08 and into 2009, and we lurched from boom to bust. That was not a global crisis: those events were not happening in India, Australia, Canada or China, but they were Atlantic events-America did something similar. Britain did that and we must not do it again.

My policy recommendation to the Treasury is that I hope that the Chancellor will make it very clear in the next couple of weeks that we do not need any more money printing or quantitative easing in the current circumstances. The economy is growing, jobs are being created and inflation is still running at somewhere between 3% and 4.5%, depending on which index one relies. When we talk to business, we hear that there is a lot of inflation out there in the pipeline thanks to commodity price increases and increases in the world supply line prices now. Those increases are largely fuelled by the enormous quantitative easing under way in the United States of America and we do not need Britain to fuel them further with more quantitative easing.

Kelvin Hopkins (Luton North) (Lab): Is not what is happening now simply the lagged effects of the Labour Government’s reflations out of the recession?

Mr Redwood: No, I do not think that is true at all. The reason we are now beginning to come off the bottom is that monetary policy lurched from being too tight to being too loose. Labour always said that that matter was decided by the Bank of England rather than by it, but we now need to think ahead. Monetary policy has been loosened somewhat and there is a bit more money around-indeed, there is a lot of money in the world as a whole-and it would be a disaster to fuel great inflation from here. If we can hold public sector pay and prices down-

Kelvin Hopkins rose –

Mr Redwood: I shall not give way, because many colleagues want to join in. The hon. Gentleman knows that I normally give way generously, but too many people want to join in. If we allow public sector inflation to take off, that £92 billion extra will be needed to pay for the extra costs and wages and will not be available for real increases in programmes that most colleagues would like.

Mel Stride (Central Devon) (Con): Will my right hon. Friend give way?

Mr Redwood: I shall not because we have to make progress. The £92 billion will go further if we can avoid high inflation. The Government should tell the Bank of England that the single objective is to get prices down, as it was asked to do, and to keep them down. More quantitative easing is not compatible with that aim.

My second point, which many colleagues will probably wish to address from their own, personal constituency experiences, concerns the lack of credit for business. Those two points are not contradictory, because while there has been a lot of money creation from which the public sector has benefited greatly by borrowing huge sums at very low prices, there has been a strict rationing of credit, particularly to smaller businesses, and a huge restriction on the balance sheets of the leading banks. One figure with which the House can never grapple is that the Royal Bank of Scotland-the state nationalised bank in all but name; we own most of the shares-has been on a drastic slimming course. It had a balance sheet of £2.2 trillion when it came into the public sector and by the end of this year, according to its plan, that figure will be down by £1 trillion-£1 trillion will have disappeared from the balance sheet. It is a global bank but quite a bit of that has an impact on the British economy.

It is not surprising in that climate that it is difficult for small businesses to get the money they want. So, my second piece of policy advice to the Government is that they should tell the banking regulator that enough is enough. The bank balance sheets, which were trashed in 2007 by very lax regulation, are now in danger of being strangled by very tight regulation. The tier 1 capital ratios for example, which in some cases reached a scandalously low 4% in 2007 on Labour’s watch when it did not seem to care about these things, are now at about 10%. That is job done for the time being. We could, by all means, come back to it if we have rapid growth and if there are incipient signs that there is too much credit, but that is not the current situation. We should take the brakes off a bit, particularly for the small business sector.

My third point is that we need to get some of that credit into the big projects that the country needs. I hope that Ministers will make urgent moves to clear the ground on planning, regulation and general background so that the country can again get on with building power stations, transport links and the broadband links it needs to fuel growth. While I hope that all or most of those projects will be privately financed-another reason why we need to fix the banks more quickly-I hope that Ministers in this Government, unlike in the previous Government, will make rapid decisions so that the private sector can get on with that job.

Let me address two final issues. First, in order to collect £176 billion extra in tax in year five, from year zero in the plan, the Government need to optimise their tax rates. They accepted in their Budget statement that to go above 28% on capital gains tax would lead to a reduction in revenue. I welcome the development of wisdom in the Treasury on this important point, but I have bad news-28% is not the optimising rate for capital gains tax and 50% is not the optimising rate for income tax. I would like to tax the rich more-that will surprise colleagues and delight the Opposition-but the way to do that is to cut the rates. We need to do that to attract them here, keep them here and make them honest here, and we need to have rates that maximise the revenue from the rich-the sooner the better-to hit those targets.

Colleagues will be delighted to hear that I have come to my final point. We were promised deregulation and were told that there was going to be a mighty freedom Bill. The Deputy Prime Minister was supposedly toiling away in his enormous room in the Cabinet Office that was inherited from the Lord Mandelson regime and no expense was to be spared in making sure that we had a really big deregulation Bill. I now hear rumours that it is going to be a civil liberties Bill from the Home Office. Will the Minister, who has responsibility for small businesses, champion a proper deregulation Bill? Deregulation is the tax cut for business that does not cost the Treasury a penny. Indeed, it could be the tax cut for business that saved the Government money as well.

There is too much needless regulation and too much regulation that does not do the job. Labour introduced extremely complicated mortgage regulation and more of it is out there. It obviously failed. As soon as we had all the regulation, the mortgage banks went down-something that they had never done before-because the wrong thing was being regulated. I want to regulate the cash, capital and solvency of those banks, but to make it easier for people to borrow money. Does the Minister know that the mortgage market is seizing up through too much of the wrong kind of regulation? Will he get on and fix it? I hope colleagues have a great debate.

5.57 pm

Mr Redwood: I thank all who participated in this debate. It is a sign of the success of the Backbench Business Committee’s choice of topic that I do not have enough time to respond in detail to colleagues as I would like, having sat here patiently listening to some good contributions. I hope that the Minister recognises that my hon. Friends and I, as well as Opposition Members, are extremely worried about the position on bank credit. The hon. Member for Leeds West (Rachel Reeves), my hon. Friends the Members for Hove (Mike Weatherley) and for Northampton South (Mr Binley), the right hon. Member for Wolverhampton South East (Mr McFadden), the hon. Member for Edinburgh South (Ian Murray) and I made a number of points.

Although I am grateful for the measures that the Minister sketched for an economy of a few billion pounds, we are talking about a £1.5 trillion economy. A few billions will not make a big difference, and I urge him and his hon. Friends in the Treasury to look again at why the Bank of England is depressing the accelerator-printing money and telling people that the water is lovely-and the banking regulator is depressing the brake and saying that money cannot be lent to industries that need it, or for the big projects that are much needed throughout the country.

A Labour Member became excited when he thought he heard me say that we want a big public works programme paid for by the public sector. I clearly said that we need a big public works programme-paid for wholly or mainly by the private sector. That is what we need to release banking credit for longer-term projects. We need the power stations, the transport links and the broadband. Those are the things that could bring the House together.

This has been a well-tempered debate, and hon. Members have expressed their fears and worries for their constituencies, but all have come together to say, “Yes, growth is what we need; bring on the growth; all we love is growth, and we must do more to achieve it.” The Government must control their deficit, but they must also do rather more on infrastructure, regulation, taxation and a number of issues to get that growth assured faster. They must persevere throughout the whole four years that remain of this Parliament and the Government’s budget strategy, so that we get those jobs and the big increases in tax revenue that are much needed to deliver their plans.

A large number of Labour Members-too many to read out in the few seconds remaining-were very concerned that public spending cuts would have a depressing effect on the economy.

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  • About John Redwood


    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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