The Rt Hon John Redwood MP pictured next to the Queen’s Diamond Jubilee stained glass window in Westminster Hall. (Click to enlarge photograph)
Parliament gave the Queen this window for her 6oth anniversary. The stained glass will be placed in the large north end window of Westminster Hall. It was paid for out of voluntary subscription by members of Parliament.
Mr John Redwood (Wokingham) (Con): It is important first to understand what the Government strategy is, because there have been a number of misleading interpretations of it. Some have said that the reason the economy did not grow last year and is still growing very slowly is that there have been massive public spending cuts that have reduced national output. There is a helpful table on page 53 of the Office for Budget Responsibility report which shows that growth was indeed only 0.2% in real terms last year. However, it shows that the Government sector made a positive contribution of 0.6%, which is far more than overall growth, and that growth was reduced by disappointment in private sector housing investment, changes in stocks in private sector companies, reflecting an absence of confidence, and a poor performance on trade. A similar position is reported in forecasts for the current year, in which it is assumed that the Government sector will still make a positive real contribution to a rather low rate of growth, while it is hoped that the private sector will not have as disappointing a performance this year as it did last year.
The strategy was never about massive cuts in public spending overall; it was about modest growth in public spending. The idea was to get the deficit down through some very large tax rises. Unfortunately, as the latest documents reveal, the 50p and the other income tax changes were especially damaging to revenue. A loss of more than £7 billion has been recorded by those on the Front Bench. The overall figures imply that it was probably even more than that. In the most recent year, tax revenues from income tax overall are down on the previous year, not up. The strategy has not miscarried because it cut too much or because the Government overspent compared with what was planned—they have done a rather better job this year of controlling spending. Rather, the strategy miscarried because the big increase in tax revenue that had been forecast did not come through. That was partly because tax rates were set that did not work, such as the high rate of income tax. Also, the capital gains tax rate is too high, so we will get less in capital gains tax receipts this year than in the previous year. The reason is also partly that growth in the economy was very disappointing.
Charlie Elphicke (Dover) (Con): Does my right hon. Friend agree that it is important to have capital gains tax rates that are lower and more competitive, particularly for business assets?
Mr Redwood: I entirely agree. There would be much more activity if people could free some of those assets by taking profits and moving them on to people who could use them better and build on land, for example. I hope my right hon. Friend the Chancellor will think about that in due course, because it would make him revenue and help to grow the economy.
Nor has there been any lacking in flexibility by my right hon. Friend the Chancellor in applying his strategy. He has been flexible over the deficit; indeed, we see in the latest figures that he plans to borrow £48 billion more in 2013-14, £60 billion more in 2014-15 and £67 billion more in the following year than in the original plans. He has reflected the fact that the economy has not performed well in the way that the independent forecasters assumed and the fact that tax revenues had a big wobble because of wrong rates and low growth, and he is allowing the state to borrow more to try to pick up the slack. I therefore welcome the fact that in this Budget he is concentrating on things that he can do to promote growth in the areas that subtracted from our growth in the most recent year.
The Chancellor is right to look at ways of trying to promote more housing activity. Many of us represent constituents who would love the opportunity to buy their first flat or house. They have been priced out of the market by the boom and now they are kept out of the market by an inadequate supply of mortgage finance and tough conditions. We need to be careful, because we do not want to fuel another housing bubble, but we also need to recognise that the banking system is not delivering finance for many of our constituents at the moment, and there are people who could borrow prudently and sensibly to buy their first home. I do not want to live in a society where people have to be in their late 30s before they can own their first home. I think we need to do better than that.
Mark Reckless (Rochester and Strood) (Con): My right hon. Friend says that we do not want to fuel another housing boom, but is it not the case that in this country, unlike the US, the boom was largely in prices and, to a degree, transactions? There was never a boom in supply. What we may see today are measures aimed at boosting the supply of new housing.
Mr Redwood: My hon. Friend is absolutely right. These measures are targeted with that in mind. We need to study their details, but they are clearly well intentioned and I wish them every success. I am sure that we shall look carefully at them in Committee and on the Floor of the House when they come before us in physical form.
The next area in which we need to help is promoting more industry and commerce to deal with the net trade deficit. I am glad that that Chancellor has recognised in his speech that one of the big drawbacks to doing business in Britain now is expensive energy pricing. This is something that we share with the European continent, compared with the American continent. The United States of America is playing a blinder with its very cheap gas and much cheaper energy generally. I welcome the idea that certain businesses and industries will be taken out of the climate change levy altogether.
Caroline Lucas (Brighton, Pavilion) (Green): I do not expect the right hon. Gentleman to agree with me, but I must point out that experts ranging from Ofgem and BP to the International Energy Agency and the CBI have all pointed out that investment in shale gas in the UK will not result in lower energy prices. Why cannot he therefore agree that it makes no sense to go all out for shale gas through tax breaks in the Budget, and that the money would be much better spent on renewables, which would get emissions and fuel bills down?
Mr Redwood: I am delighted that the hon. Lady has made her own case. She is the cause of the problem. She is pricing people out of the market. She is destroying jobs. She is the reason that people cannot heat their homes at a sensible price. She is the deliberate architect of dear and scarce energy, and now she presumes to lecture us and to say that if we generate more energy, it will be dearer and not cheaper. I suggest that she consult her constituents to find out how angry they are about the cost of heating their homes and their inability to get jobs in industry. She might also like to consult a reputable economist to find out what happens to prices when we produce more of something. I think she will discover that the price normally falls.
Dr Julian Huppert (Cambridge) (LD): Will the right hon. Gentleman give way?
Mr Redwood: I am sorry; I have no more injury time left, and I have more to say. I am sure the Government will be delighted about that.
The Government need to look at the problem of electricity generation. I would like them to go to our partners in the European Union and say that there is no way in which we can close down all our coal-powered stations and still produce enough sensibly priced power in the near future, and that we need a stay of execution and longer transitional arrangements. I believe that the Germans are going to generate a lot more electricity from coal, and they seem to have found a way around the European regulations. I would urge my right hon. and hon. Friends on the Front Bench to do the same, because we need to keep our homes warm, keep the machinery of industry turning and keep the lights on in the offices and shops of this country. We are pricing ourselves out of our ability to do that. We are also running the risk of not having enough electricity, full stop, because of the delays and the problems that the previous Government had in coming up with an energy policy, and because of the present Government’s problems in trying to get an energy policy through, given all the European Union restrictions and complications that are placed in their way.
The most important thing that the Chancellor will need to do in the weeks ahead, in addition to the Budget, is ensure that the banks can now create sensible amounts of credit to power the recovery. This is not just about mortgages for homes, important though they are; it is also about loans for bigger items such as cars and domestic appliances. People need to be able to renew their stock of capital, or get their first capital items when setting up a new home, using finance that is available and affordable.
Above all, this is about ensuring that much better finance is available for stock, work in progress and capital equipment in our small and medium-sized enterprises. The banks say that there is no demand for loans from the SMEs—or, at least, no demand that they are not meeting. We all know that our constituents do not think that that is the case, and we have seen many cases that imply the opposite. Let us be charitable to the banks, however. I know that most of my colleagues here are not, but I wish to be, because I think that banking is an important source of export earnings and income. Many good people work in banks, and we need to support them as well. We need to understand that the banks are now charging so much and imposing such tough terms on loans—they are doing so because they are under a regulatory cosh to lend less and hold more capital, relative to the amount of their lending—that people are simply not bothering to ask their bank manager for a loan because they assume that none will be available. Also, businesses sometimes do not foresee increases in demand ahead and, wrongly, lack the confidence to go out and borrow money.
Of course it is not easy for the United Kingdom Government to rebuild confidence when we are part of the European Union and live close to the continent of Europe, and when we can see the spectacular crash that the EU is designing, thanks to the way in which it is mishandling its single currency and common banking arrangements. I can scarcely believe that we are meeting today against a background of part of the European Union having its banks closed for days on end and unable to carry out transactions to give the business life in Cyprus an air of normality or allow the people in Cyprus to withdraw their hard-earned money.
This is happening within the European Union because it has got its system of bank management wrong and it cannot decide who should pick up the bill when there is a crisis in one part of the eurozone. The Germans say that it is not their problem and they are not going to lend more money. They think that Cyprus ought to be taught a lesson. Cyprus says that it is under EU and eurozone control and that it built a big banking sector that now needs recapitalising. It requires money on a scale well beyond the ability of the Cyprus people to pay, so we have an impasse.
I shall give the House a flavour of the numbers involved. We have heard from a Minister in a recent statement that the proposed bank deposit tax represents 33% of Cypriot national output and income. In UK terms, that would be like saying that we had to impose a one-off levy of £500 billion on people’s bank accounts to put the position right. [Laughter.] Everyone here is laughing nervously. I do not think that many of us would be up for voting that kind of thing through, and I am not surprised that the Cypriot MPs did not vote their measure through.
We are now seeing a desperate idiocy in part of the European Union. Germany thinks that it can ring-fence the situation, and I hope it can, but if we are not careful, it will spread. That would undermine confidence in banking deposits in other parts of the eurozone and drive them deeper into recession. It would do more damage to our export market and, yes, there could even be a little collateral damage to our much better funded banks because of their relationships with EU banks. We need to be in there saying, “For goodness’ sake, sort it out and come up with a fair way of recapitalising those banks, so that the Cypriot people can to return to a normal economic life.” Meanwhile, our Government are right to say that we need to export more and more outside the European Union. With all this going on, and with a forecast of a deep and long recession on the continent, there will be no relief from the European markets through our exports.
Our banking resolution, which is making progress, needs to be speeded up. I urge the Chancellor of the Exchequer to revisit the issue of RBS. I do not believe that RBS is a natural unified bank. It is far too big, and it has far too many businesses in it. We should split it up, sell it on and make it more competitive. We need more competitive banks on the British high street that are capable of financing our recovery. We are trying to build the private sector-led recovery with weak, broken banks in the state sector and not enough banks outside in the private sector. We are also trying to do it under European regulation, which does enormous damage to banking and energy costs, and therefore to industry. Britain is partly free of that regulation, but please, Government, make it freer and get on with the task of creating the jobs and the growth that the British people rightly expect.
Budget 2013
In June 2010 the Office of Budget Responsibility forecast 2.9% growth in 2012-13, 2.8% in 2013-14 and 2.7% in 2014-15. In the 2013 budget they forecast 0.2%, 0.8% and 2% for those years. The total growth of 8.6% has fallen to just 3%.
The original strategy rested on increases in total public spending in cash and real terms for the first two years, followed by a small real decline in the second half of the Parliament. They have kept more or less to budget, with a modest underspend recorded for 2012-13. The structural deficit was to be eliminated by 2015 by a large increase in tax revenue.
This budget confirms that tax revenue has fallen well short. In areas like higher end Income Tax and CGT the higher rates of tax have done damage. The government estimates that the 50p tax rate has lost the Exchequer £7bn a year as a result of very high earners leaving the country. Tax revenues generally are below forecast owing to slower economic growth.
By 2014-15 tax receipts are estimated to be £62 billion lower in 2014-15 than the June 2010 forecast. Borrowing will be considerably higher as a result.
The budget seeks to speed growth to achieve the delayed increases in growth rate the government is seeking. They propose to do this by a combination of targeted tax cuts, monetary expansion, improved flows of finance for the mortgage market and a general income tax cut to boost family incomes. Petrol and beer duty area protected from further rises, and 1p is taken off beer duty per pint. The tax cuts are financed by additional public spending reductions, to avoid making the deficits worse.
The budget in itself is modestly positive for the economy. The numbers involved in the tax reductions are small, reflecting the Chancellor’s limited scope to offer changes given the poor overall fiscal arithmetic.
Two items that did not get fully dealt with in the Budget matter more. One is the future ability of the banks to finance recovery, and the other is the question of energy prices and supply. The Chancellor says he will improve and extend the Funding for Lending Scheme, as well as introducing his plans to help people buy new homes on mortgage. There are welcome signs the housing and mortgage markets are beginning to improve, and this could help further.
The second is the high cost of energy to industry, offices and homes. The Chancellor has promised to remove the carbon levy from the big energy using businesses, for fear of losing them from the UK if he perseveres with it. He sounds as if he wants to do more, but EU rules and Parliamentary opinion in the Lib Dems and Labour constrain his room for action. The UK needs immediately to extend the useful lives of its coal burning power stations, but the Chancellor was silent on this matter in the Budget.
This post is tomorrow’s post, put up early. I will post my Budget debate speech in the Commons tomorrow when the Hansard is available. It includes the figures showing real public spending has risen so far under this government.
Mr John Redwood (Wokingham) (Con): Given the importance of the euro’s stability to the London banking system and the wider world, will the British Government be lobbying the European Central Bank to ensure that it provides sufficient liquidity at all times should a run develop in a weaker bank or a weaker country, given the invitation to people to withdraw their deposits from any difficult institution?
The Financial Secretary to the Treasury (Greg Clark): The pace of negotiations, thanks to the fact that today is a bank holiday in Cyprus and that that could potentially be extended, is meant to resolve the matter before a run on the banks is possible. My right hon. Friend is right that the situation is unsatisfactory and it is necessary to establish a more orderly system for anticipating or managing potential bank failures in the future. It is in everyone’s interest to ensure that there is no such collapse of the banking system in Cyprus.
The story of Cyprus is a cautionary tale for those who like the Euro and think the EU is getting it right. The EU is now demanding that Cyprus finds Euro 5.8bn or 33% of her National Output as her contribution to the rescue funding the state and its banks now needs. That would be like the EU telling the UK to find a one off tax revenue of £500 billion, almost the total tax revenue each year which we collect.
Cyprus is asked to cut her budget deficit by 4.5% of GDP in four years, sell more than 8% of her GDP by privatisations, undertake a large gold swap and raise her Corporation tax rate from 10% to 12.5%.
It just shows what can happen when a country surrenders its monetary and budgetary sovereignty to the EU. In the good days of the Euro a large banking centre developed in Cyprus. EU rules and regulations did not prevent or control that at the time, despite it being within the ring fence of the Eurozone and therefore of common interest to fellow zone members. Now it appears the banks need a major injection of new capital, and the state has to slash its borrowing quickly, to persuade the EU/IMF bank managers to lend some more.
Cyprus is saying these measures are too extreme. The tax hit on deposits is large, though of course some of that is a hit on foreigners with deposits in Cyprus. The tax rises and the budget contraints are very large. Germany and her allies are saying that of course a country in such a financial difficulty needs to contribute to its own recovery. The row is over how much, and whether such a large demand might make matters worse.
Cyprus is to the Euro as a district area in the UK is to the sterling union in terms of size. You would normally expect the centre to bail it out whilst dictating future terms. Because the Euro area preserves the fiction of independent countries within the zone, the rest of the Euro area feel they do need to demand a bigger sacrifice from the offending country.
The battle of Cyprus is an important one in the war over the richer parts of the Union accepting their responsibilities for the poorer parts, and in the acceptance by the poorer parts that they do need to foll0w the discipline of the strong. Meanwhile, threatening depsoits in Cyprus is not a good idea from the wider perspective. It will undermine confidence in weak banks and weak countries elsewhere and complicate the ECB’s job of keeeping the banks liquid.
Cyprus’s banks remain closed. This is unacceptable. Normal economic activity ceases if banks cannot make money available and settle transactions. They need to reopen the banks quickly, with a clear statement of depositors’ positions. The ECB needs to supply ample liquidity to the Cyprus banks to prevent a major run. It is almost beyond belief that people living in an advanced EU country, part of their common currency, can get to the point where they cannot undertake normal transactions through their bank and do not know how much of their money in the bank they will one day be able to withdraw. It is even worse than the many arguments and forecasts some of us made when putting the case against the Euro.
I believe in press freedom. There are laws of libel and laws against phone hacking to protect against press excess. All those of us who have suffered from false stories or have had our phones hacked know what it is like to be on the wrong end of it. In my case I would still rather than live in a society where the press can take on people and institutions in power, even if they sometimes get it wrong, than in a society where those in power regulate the press.
Savers are important people in a successful economy. We should want more people to make provision for their own future. We should welcome them providing finance for others to use intelligently to add to our national income and wealth.
The present government says it wants people to be more self reliant in the future. It welcomes the idea of people saving more for their retirement, putting aside more for bad fortune or ill health, buying their own homes and investing in their own business. A more self reliant enterprising society based on more personal ownership should be richer and happier, with more tax revenue to help those in need who cannot fend for themselves.
The problem is the inherited deficit and the planned way to reduce it are getting in the way of really helping actual and potential savers. The wish to raise more in tax revenue than people are prepared to pay, has already led to new raids on people’s pension funds. Whilst they have been mainly at the higher end, many more savers fear there could be further tax changes that will adversely affect them
Pension funds too have been undermined by the ultra low interest rates on government debts, thanks to Quantitative Easing. This has left funds with large deficits, and forced many companies to close their funds completely. Many people now in the private sector have no access to an employer fund anymore as a result.
The same ultra low interest rates hit the living standards of all those seeking to rely on or augment their income from interest on savings. People contemplating a cash ISA or a safe investment of a cash lump sum they have acquired face very poor returns.
Savers have then been hit by a higher rate of inflation than the Bank planned or promised. When inflation gets as high as 5% it eats away the money of the prudent at far too fast a rate.
The Chancellor would be well advised to make things a bit fairer for savers. Saving and making provision for your future is a good idea. Too many tax changes, too little return, too much inflation put people off saving or make it difficult.
We will need to study the small print of this late night agreement. Meanwhile I thought it would be useful to remind readers of some of the key calls made by all three main parties agreeing, before we celebrate too much:
Joining the EEC
Joining the Exchange Rate Mechanism
Setting up an independent Central Bank to ensure “no more boom and bust”
Various United Nations military interventions
Climate change policies
Some things most parties and politicians agree on. Most of the politicians I know want to eliminate or reduce poverty. The new Pope has decided he too will be an advocate of the poor, bringing further media attention to this perennial all consuming issue.
Most parties also agree with the obvious point that poverty is a shortage of money to spend on their own lives. The disagreement comes over how to supply the shortfall.
On the “caring” side of the argument are those who think the answer is simply for richer people through the state to give them more money. On the “tough” side of the argument are those who say we need to do mroe to promote better paid jobs for the poor which they should take to earn for themselves.
The divide comes down to the old adage – is it better to give a hungry man a regular supply of fish, or to give him a rod and teach him how to use it for himself?
Maybe the answer is you need to do a bit of both. You should not let the man starve when there is a spare fish available to give him. You should not want him to rely for the rest of his life on spare fish won from the sea by others.
Mr Osborne has a chance in his forthcoming budget to make tackling poverty a central issue. He needs to make it more worthwhile to save, to go to work and to take responsibility for your own life. He could start by pledging to do better at controlling inflation with his new Governor of the Bank. We do not need a relaxation of the already lax approach to price rises. He could make his own contribution by cutting energy and carbon taxes to make fuel more affordable. He should cut taxes on working , saving and venturing, so the message is clear. We will help those in need, but the best help is to assist them tAke care of themselves.
On Saturday morning I attended the official launch of the new Community Responder vehicle for Burghfield and Mortimer. I would like to thank all those who have raised money to buy the car, and all those volunteers who make the service possible. It means trained help can reach an accident or stroke victim in the local area much more quickly than the ambulance, and get on with helping and rescuing the patient whilst the ambulance is on its way. Lives can be saved by rapid response like this.