Mr Redwood’s contribution to the debate on the Charter for Budget Responsibility, 14 October 2015

John Redwood (Wokingham) (Con): I welcome the spirit of the shadow Chancellor’s remarks and the fact that he wants a serious debate. Government Members do not favour austerity; we favour prosperity. We believe that the way to create prosperity is to have sound money and sound state finances that we can afford so we have decent public services and money and so that credit is also available to expand the private sector, create the extra jobs we need to get people into work and create the higher paid jobs we need so that they can be more prosperous in work. I hope the shadow Chancellor will understand that.

I am afraid the shadow Chancellor did make a couple of mistakes in his remarks. First, he wrongly said that Conservative Members were calling for less banking regulation in the run-up to the crisis. I chaired the economic policy review for my right hon. Friend the Chancellor and there was strong advice that tougher regulation was needed on bank cash and capital. We expressly warned that the banks were over-borrowed and over-geared and that the whole system was very shaky, and I remember the Opposition constantly warning about excess debts in the system. The shadow Chancellor would be well advised to read what we wrote because the warnings were there although Labour and its regulators were not listening.

The shadow Chancellor should reread the Red Book, which set out a few weeks ago the five year spending and borrowing plans for this Parliament. It makes it very clear that there are going to be substantial cash increases in total public spending over the five years of this Parliament as all goes to plan, as we trust it will. As inflation is currently around 0%, that will mean real increases are possible, just as in the last Parliament when, despite all the noise from the Labour party, cash spending went up every year and real spending went up every year. It went up much more modestly than it did during the excesses of the pre-2007-08 period that helped to bring about the crash, but there was room for small real increases in public spending. That is because Government Members care about ensuring that disabled people are properly looked after, that schools have enough money and that there are real increases for the health service every year because there is greater demand and more treatments.

I welcome the charter, and I hope that this Government—which I hope will be re-elected—and any future Government will take it very seriously. The evidence is clear that during the first five years of the previous Labour Government, the economy worked pretty well. I give them credit for that. In three of those five years, they generated a public surplus. They inherited our prudent public finances and for the first few years they ran with them, which worked very well. I therefore refer Labour Members to their own excellent example from those early years. It was only when their Government let rip on spending, credit and borrowing for the state and the private sector that things got out of control and they showed that they could put the boom into the boom and the bust into the bust. They then took us through the biggest and deepest cycle of the post-war period, with awful consequences for the poor and for those who lost their jobs and businesses.

We need responsible finances. We want growth. We want prosperity, not austerity, and this charter will allow us to achieve that. Let us hope that future Governments stick to it. The debt was only £380 billion for the whole state at the point at which the Labour Government ceased to generate a surplus. It went up by almost £700 billion before they left office, and a lot of the increase occurred before the crash. It now stands at £1,600 billion, because getting it down is proving extremely difficult. I urge Labour Members to understand that they jeopardised the public finances, trashed the economy and destroyed jobs and businesses. We don’t want to go there.

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3 Comments

  1. Narrow Shoulders
    Posted October 19, 2015 at 1:40 pm | Permalink

    Was there any Labour response to this Mr Redwood or does it go against their soundbites so is to be ignored?

    I doubt the Chancellor was trumpeting the increases either.

  2. lojolondon
    Posted October 20, 2015 at 3:32 pm | Permalink

    The Labour party and BBC have consistently repeated the falsehood that the Conservatives were in favour of relaxing banking regulations. They caused the biggest boom and the biggest bust, and they will not accept they were entirely responsible.

  3. Posted October 21, 2015 at 2:57 am | Permalink

    “In three of those five years, they generated a public surplus. ”

    Yes, they (the Blair led Labour Government of the late 90’s) would, wouldn’t they? There was far too much private sector lending which gave rise to the dotcom boom and which overstimulated the economy . The economy looks superficially good in this state, taxation revenue is high, and deficits can turn to surpluses. We can all look make figures look superficially good if we wish! It’s the deeper problems that need the attention.

    You refer to the public sector surplus as though it was UK plc’s profit! Well, Mr Redwood you should know, as a former company director, that profits have to be redistributed to the shareholders. But what became of these surpluses? They couldn’t be returned to taxpayer because they’d then, of course, no longer be surpluses. A government surplus is, therefore, not at all analogous to a company’s profit. It is the same, to the penny, as the non government’s deficit. If a deficit is bad thing for the government sector, why is it a good thing for the non-government sector?

    The surpluses of the turn of the millennium, gave rise to the slump of the early 00’s. Curiously exactly the same thing was happening on the other side of the pond. The dotcom surpluses were known as the Clinton surpluses there, and were regarded as source of great pride by the Democratic administration. The slumps that we saw in both the UK and USA following the dotcom boom were relatively minor for the simple reason that both Governments replaced a credit bubble in the share market with a new credit bubble in the property market.

    By this time President Clinton had retired, to be replaced by President Bush. Both George Bush and Tony Blair made things look superficially good in the mid 00s and both easily won elections. But all the time private debt was growing in the US and UK economies. House prices were the topic of conversation at every social gathering. Houses were being sold over the phone with no inspection! It was a crazy economy and it was all too good to be true as we all found out after the 2008 GFC.

    There’s been a lot of discussion looking at the precise way banks failed at this time. They were indeed “over-borrowed and over-geared”, and I’d add under-regulated, but that was largely because they too had been consumed by the credit bubble. When a chain is stressed the weakest link will eventually break. It’s a mistake to say the chain broke because of that weak link. If the link had been slightly stronger another link would have broken. Likewise the system broke in 2008 due to the stresses that the credit bubble had created.

    “… over the five years of this Parliament as all goes to plan, as we trust it will”

    This sentence really sounds like it needs an “if” in there. It should be “if all goes to plan”. It won’t. There is no chance whatsoever of the government running a budget surplus in this Parliament unless , somehow, the government can turn the 5% GDP trade deficit into something close to a surplus. That’s just not possible IMO. If the economy is losing money to the tune of 5% of GDP to pay the net import bill, the Govt has to run a deficit of 5% of GDP too just to keep things all square in the economy and prevent it running out of cash and into recession.

    The economy is currently net losing about 1% of GDP. It can’t last. I’d expect another financial crash in 2016.

  • 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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