A great deal has happened politically since the March Budget and during the passage of the Finance Bill. Therefore, on Third Reading, when we are invited to consider the Bill in the round, we should ask ourselves how this set of composite tax measures and forecasts for revenues and budget deficits fits into what the Bank of England thinks is a rather revised picture today, although its gloom is probably exaggerated.
We also had a very significant event from the Government themselves over the summer recess, which has not been reported to this House or debated in this House, but which should not go without comment: the Chancellor of the Exchequer gave his consent for the creation of up to £170 billion of additional money and for the Bank of England to buy large quantities of Government debt and substantial quantities of corporate debt, making available a lot of cheaper money to the banks. As a result of that needless monetary relaxation—there was absolutely no evidence at the time that the economy had suffered an output or retail sales shock in the way that the Bank foolishly thought was happening—we see that interest rates have been driven down. In particular, longer-term interest rates, which are the Government’s price of borrowing, have been driven down, and so we now must imagine that the Budget arithmetic has changed quite a lot in a very favourable direction, as there is now presumably a substantial reduction in the forecast interest rate costs for Her Majesty’s Government over the balance of this year and into the next financial year, assuming that those programmes of aggressive bond buying continue to depress the rates in the way that is clearly planned.
At some point the Government need to explain why they endorsed the Bank of England’s very aberrant view. The Government’s forecasts for the economy, which are the thought behind this perfectly sensible Budget that we are in the process of approving, look forward to the UK economy growing by 2% this year and by 2.2% next year. The Bank of England now says that the British economy will grow by only 0.8% next year. I have no idea why the Bank thinks that, but it would of course change the arithmetic, and instead of us welcoming this Budget with an even smaller deficit, because of yield compression and cheaper borrowing, we should be worrying at this juncture about the shortfall in revenues next year on the back of a much-revised Bank of England forecast. Clearly revenues will be down by quite a lot next year if growth is to be only 0.8% rather than the 2.2% that was the premise of this Budget.
I fully support the Treasury’s March view. It is extremely likely that the British economy will grow by 2.2%. I do not have my own model but I understand how the Treasury model works and I do not think that the underlying assumptions behind the model for the March forecast were unrealistic. I do not think that they have fundamentally changed as a result of the events of the summer, with, perhaps, the one exception that if the Bank perseveres with injecting anything like £170 billion into the economy, growth could be even better than the Government were expecting, because that is a far bigger monetary stimulus than they clearly had in mind when they constructed the March Budget.
The Bank of England needs to be careful. One of the curious things about the timing of its decision was that it made that announcement before we saw the real economy figures for the first eight weeks after the Brexit vote. Those figures turned out to be perfectly reasonable. They were not negative in the way that the Bank had thought. The Bank also made the injection of money just after some very important figures came out, ones that it had obviously read in a different way from me.
If we read the money supply growth figures and credit growth figures for the second quarter of the current calendar year, we will see that they started to accelerate. We had pretty steady 5% growth for quite a long period, which was giving us a combination of low or no inflation and 2% or so growth, but then those figures suddenly accelerated to around 7% or 8%. It is therefore even more bizarre that, on the back of those numbers, the Bank of England should suddenly decide to try to pump so much money into the economy, at a point where it looked as if the commercial banking system was sufficiently strong and confidence had returned sufficiently to mean an even faster rate of money growth than the one that was achieving 2% growth overall.
I am not suggesting that we need to drop this Budget because of that very large monetary stimulus, but the House should be aware that a very large monetary stimulus has been added at exactly a point where we had a perfectly sensible Budget based on perfectly sensible assumptions. The Government also need to be very careful before authorising any further monetary stimulus given what look like perfectly satisfactory numbers.
How could the Bank be that wrong—it is quite difficult to understand—and why did the Government endorse its strange interpretation? It says two things. It says that a Brexit vote could damage trade. Well, the one thing we seem to know from the very relaxed timetable the Government are proposing for getting us out of the EU is that in all probability we are going to be trading under existing single market arrangements this year and next year. There will not, therefore, be any damage to trade. I do not think there will be any damage to trade when we are out, but we are going to be trading under the current arrangements for the forecast period, so it is very difficult to see why we would knock anything off GDP because of trade. Indeed, we should be adding quite a lot in relation to trade, because clearly exports will rise quite a lot on the back of a much weaker pound.
The other thing it says is that there will be an effect on confidence. We have seen from recent surveys that there was a very short term hit to the confidence of big business executives who did not like the result of the referendum, but there was no hit to the confidence of consumers. They went out and spent more in the shops immediately after the Brexit vote than they were spending before. We saw, in the following month, that many senior company executives regained a lot of their lost confidence because they saw they were wrong and that the customers were returning to, or staying in, the shops. They are buying cars and new houses.
Confidence has not collapsed, something the banks seemed to think would happen.
I urge those on the Treasury Bench to think about these matters extremely carefully. The very long procedure on the Finance Bill means that, in all probability, we are approving a Bill that was constructed in what the Bank of England thinks were very different economic times. I think the economic forecast and the economic times of March are very similar to the ones we should now accept, and I urge the Government to take that view. The House needs to note, if it is the view of the House, that on top of a Budget that has a reasonably relaxed fiscal stance compared with intentions a few years ago—something I am quite happy with—we now have a very large monetary injection. The Government need to be aware of what that might mean.
PS I have since seen the board money numbers for the 3 months to end July (just before the Bank’s stimulus) and they show an annualised rate of growth of a very rapid 15.9%. This makes the case against further monetary easing even stronger.