Category: Debates

John Redwood (Wokingham): The Budget judgment before us, which we must think about in this Second Reading debate, is the Government’s judgment that they need to increase spending at a rapid rate, that they need to make some modest—as they see it—increases in tax revenue, not in the immediate year but in subsequent years, by raising rates for the rich, and that they need to bridge the rest of the gap by very substantial borrowing.

In the opening exchanges, we heard different positions being set up. I am firmly of the view that the Government are running undue risk with the huge gap between spending and revenue not just in the current year but in the years ahead, particularly in the subsequent year, about which the Budget makes a judgment. I would like to see that gap smaller, and I would wish to achieve that by controlling expenditure rather more than we are witnessing under this Government.

This is not primarily a debate about public spending. I have set out at least 17 ways that I immediately see of making reductions, some very big and some quite modest but illustrative. The culture in government needs to be changed so that more is delivered for considerably less. That is not difficult, because the inefficiencies are so gross and the overstaffing on the administrative side is so enormous: The Guardian jobs pages show us that there is no idea of imposing any kind of control on staff numbers and gaining proper value for money for taxpayers.

That is what I would address, but first let us look at the situation in the Government’s terms. They have invited us to support a Finance Bill based on two worrying propositions—first that they should spend that much, which I do not think they should, and secondly, that they should raise so little, given the amount of spending that they wish to do. In their own terms, if they wish to do all that spending and, unlike me, think that every pound of that is providing value and is much sought after by taxpayers, they should be prepared to be honest with the House and say, “That’s the bill, and we need to raise more in taxes, not next year, the year after or when there may be another Government in place. We need to be honest with the public and raise some more money in taxes this year to meet all those spending bills.”

So why, then, do the Government not do that? Obviously, because there is a general election coming up and they know as well as any other elected politician that increasing taxes is very unpopular. As their cover story, they claim that their spending is reflationary, and that it will be good news for jobs and for the economy if this year—by coincidence, a pre-election year—they spend so much more than they raise in taxes.

The economic effects of forcing savings from people are similar to the economic effects of taking taxes from them. If the Government are serious about borrowing all that money from individuals or from companies in the United Kingdom private sector, it has more or less the same effect as if that sum were taken off in tax, because for every pound that they borrow from the UK private sector for this so-called reflationary spending, the private sector has £1 less, so it cannot provide the jobs or buy the goods that it would otherwise use that money to do. It is, instead, providing it to the Government. In their own terms, their argument for under-financing their huge expenditure by such a big margin is unlikely to work.

That is not the only thing that the Government have done in their desperate and belated attempt to turn around the massive recession that their policies, allied to problems throughout the world, have undoubtedly created for Britain. I am strongly of the view that it was policies made in Britain that made the banking crisis so bad here, and that the manic and deliberately perverse monetary policy that the Government and the authorities followed first created a bubble, then created a crash, and is now desperately trying to find a way to reflate and inflate from the crash site rather late in the day.

Monetary policy is an extremely powerful weapon, however, so the heavy lifting to try to turn the economy around will be done not by the Budget, because it will not be nearly as reflationary as the Government suggest, but by having interest rates at almost zero and by gradually nursing the banking system back to strength. I am not a gloom-monger who says that we are going into a 10-year depression and never going to come out of it; monetary policy is very powerful. The reason why we are in crash mode is that the monetary authorities got their monetary policy completely wrong by being far too tight in 2007 and at the beginning of 2008. They are now trying to produce a much looser monetary policy, which started last autumn, and in due course that will definitely have a beneficial impact. It will start to lift some of the gloom, slow the rate of decline and in due course, if other things do not get in the way, turn things around from their current very bad position.

I do not believe that the Budget will turn the economy, but nor am I saying that it will always get worse at the current rate, because that argument would be quite obviously untrue and rather foolish. We all live in this country, we want it to do well, we wish to see more of our constituents with jobs and more businesses to flourish, and we wish monetary policy well. We are more worried about the impact of the Budget, because its tax measures will undermine competitiveness, enterprise and job creation at the margin—or in some cases more than at the margin—and that is not what the Government should be doing with a taxing Budget at this stage in a violent and unpleasant cycle.

My right hon. and hon. Friends are naturally very concerned that the Government will not be able to borrow all the money that they need in the next few months to bridge the gap, and my right hon. and hon. Friends therefore say that either taxes need to be higher or expenditure needs to be lower to secure a tighter Budget. They should bear in mind the fact that the Government are trying to load the dice in favour of their getting away with it for a few months, but that their Budget has a time horizon that stretches only until the next election. It is apparently set within the framework of wanting to get the next three or four years right, but nobody really believes the forecasts, and if we look carefully at the tax measures, we see that they take the form of a Tory tax trap. They are political taxes; they do not seriously try to fill the big void in the public accounts, even after the following election. They are in the Budget for illustration, and probably for spite. They are not there to deal with the colossal black hole in the figures.

Stephen Hammond (Wimbledon) (Con): Although my right hon. Friend describes those taxes as political taxes, their impact on our economy will be worse than that, for several of them will directly impact on the wealth-creating and private sectors that will generate wealth in the future. Although those measures may be Tory tax traps, they have the potential to make an underlying impact on future wealth creation in this country.

Mr. Redwood: I entirely agree, and I said that I would argue that I do not like some tax measures in the Budget, because they will make enterprise, jobs recovery and prosperity more elusive rather than easier to reach. Why, then, are the Government not more worried about the question posed—that the gap is too big and that that will be revealed by their not being able to borrow all the money? There are two reasons. The Government think that they will get away with it for a few months, because they have instructed the Bank of England to buy up to £150 billion of their own debt—debt that they are issuing.

We have this bizarre money-go-round whereby one group of people in the Treasury is desperately trying to issue £175 billion in gilts, or however much it might turn out to be this year, and another bunch of officials in the Bank of England is busily buying in £75 billion, rising to £150 billion if it uses the full permissions and carries on with the programme. I am sure that people in the gilt markets love that; they are pretty clever at these things, and understand that if they sell gilts to the Bank of England at price A and buy back similar gilts at the more advantageous price B, they will make a turn, and a living. That money-go-round, apparently, is the height of modern Treasury and Bank of England policy making.

It all means that if the full proposed quantitative easing plan is implemented, the Treasury and the Bank of England will be pretty relaxed about borrowing for the foreseeable future; they will not borrow anything net at all from other people, but will print the money or give it to themselves. They have another reason to be more confident than we might expect: their regulators are also instructing all the commercial banks to buy piles and piles of gilts, just to make sure. In the middle of this dreadful banking crisis and nasty credit crunch, the regulators have decided—now, of all times—to say that the banks need more cash for the amount of business that they are doing. If only they had thought of that rather good idea in 2005 or 2006, we would not have had to go through the whole grisly business of the crunch; there would not have been the “run on the Rock” or the uncertainties about some of the bigger banks. However, to implement the idea now—when the banking system is much weaker and extremely cautious, and the worry is that it will not finance enough transactions in the economy to get things going again—is rather perverse, to put it mildly.

Mr. Dunne: My right hon. Friend is making a powerful point. Does he agree that at the time, voices such as that of the Governor of the Bank of England were making themselves heard? The Governor made it clear that he felt that debt levels were getting out of control and that the banks needed to act. The problem was that the tripartite arrangement set up by the Prime Minister and the Chancellor did not allow that action to take place. No mechanism was in place to enforce such measures.

Mr. Redwood: That is exactly right. The tripartite mechanism was a dreadful failure, and it is the background to the Budget and these measures. The Government need to raise so much revenue now because the banking system went wrong; the banking system went wrong through a combination of foolish judgments by bankers—that is clearly true, as I am sure my hon. Friend will agree—and a catastrophic failure by the regulators, who were paid big salaries to sort out exactly that kind of problem. They were unable to control cash and capital in a way that smoothed the cycle. They were violently “pro-cyclical”, as the technical people now say; they reinforced the damage of the cycle by being far too easy on the banks in the good times and extremely tough on them in the bad times.

If Ministers foolishly think that I would want to take risks with banks in a way that might bring them down, I should like to disabuse them; I want my country to do well, and I know that it needs strong and stable banks. However, the banks do not have to be instructed today to put so much extra cash into gilts, when we need them to lend a bit more and see business over the worst of the crisis. We now know, I trust, that the Government and the Bank of England are standing behind the banks. People have no reason to take their deposits out because they know that the lender of last resort is there. The Government stand behind the banks, so there is no need for the dramatic requirement for so much more in gilts.

We must assume that the only reason for what is happening is that the Government and the Bank of England think that it would be handy to have another enforced buyer in the market at a time when so much gilt-edged security is being issued.

Some of the pension regulations achieve something similar from the now-rather-mature pension funds, thanks to the fact that the Government’s taxation on pension funds has led to most private sector schemes being closed. When a scheme moves from being active and growing to being closed, the regulators normally say that the scheme must hold much more in fixed income, rather than in growing assets or claims on such assets. That also serves the Government’s book rather well. Paradoxically, the effective wrecking of private sector pension funds in the past 11 or 12 years, through higher taxes and regulation, is now creating a demand for the very borrowing that the Government need to see themselves through to the election.

Let me turn specifically to the tax measures in the Budget. The Government belong to the school of thought that says, “Make us a bit more chaste—but not yet,” and takes the view that we can raise more revenue by putting rates up. I have already dealt with the first folly. We need to start to control spending much more immediately because of the longer-term strain on the accounts, but we also need to challenge the assumption that putting rates up in such conditions, or even in the conditions that will prevail in a year or so, will necessarily raise more revenue. The Treasury should be asked to do rather more work on what happens when there are increases and decreases in the rates on entrepreneurs and on people who earn significant salaries.

I remember that the Labour party was full of grief when a Conservative Government dared, in two stages, to lower the top rate of tax on earned income from 83 per cent. to 40 per cent. Labour said that the Conservatives were letting the rich off scot-free, that it was a disgrace, and that they were helping their rich friends. The net result of that big change was to make us competitive again in a world where, when we had those very penal rates, people thought that we were a complete joke and not a place to come and do business. As a result of those changes, two important things happened. First, the rich paid a lot more tax. I think that that is rather good news. I would like the rich to pay a lot more tax, but the way to achieve that is to impose realistic, not penal, tax rates on them. Secondly, and even better from the Labour point of view, the rich paid a bigger proportion of tax. Not only did the economy start to grow faster, but the rich had to pay more.

Mr. Newmark: There is a third lesson in what my right hon. Friend is talking about. The Laffer curve shows that when taxes are lower it is not just that the rich are paying a higher proportion of tax but that far more is collected from the country as a whole. That is what is important about lowering taxation.

Mr. Redwood: That is an extremely important and powerful point, which brings me to my next case study—the Republic of Ireland.

The Republic of Ireland has made some mistakes on monetary policy and control in the past few years, and it has had an equally bad, or perhaps even worse, version of the credit crunch. It was made worse partly by the Irish joining the euro, which meant that they did not have the flexibility on the exchange rate that the United Kingdom, mercifully, still has. However, what one cannot take away from Ireland is its phenomenal success in turning a country well below the European average in terms of income per head and general prosperity into one well ahead of the European average.

The prime reason for that was not EU subsidies—those were quite small and mainly went into agriculture, which did not do that well—but the low tax rates that the Irish bravely set. By setting very low rates on income and corporate profits, they issued a huge invitation. Many Irish people who had gone abroad to seek their living because they did not like the high tax rates decided to go back to their home country, and many businesses decided that Ireland was the right place to set up business within the European Union as a whole. Because the Irish had the courage to set those low rates, there was an explosion in tax revenues, which meant that they could spend more on public services, and an explosion in jobs and profitability.

In this Budget, the Government are inviting a future Government, perhaps, to go in exactly the opposite direction. They are saying that it is right to raise the marginal tax rate from 40 per cent. to 50 per cent. on higher-earning people, to change the tax arrangements on personal allowances in an adverse way, and to tamper with the pension reliefs which were put in place some time ago and which people thought indicated a stable framework for long-term saving. Pensions are, by definition, very long-term investment and savings projects, and it is very disruptive to make such changes. Taken together, those three things will clearly have a disincentive effect.

Treasury Ministers should tell us rather more about what work they have done. Why do they think that we are so different from Britain in the 1980s, which proved that the way to tax the rich is to make rates competitive? Why are we so different from Ireland in the ’90s and early noughties, which proved that when there are lower rates there are a lot more rich people, and that they are taxed rather more?

It is true that the figures that I have mentioned conceal two different trends. First, competitive rates mean that there are more rich people in the country, so in that sense there is a little trick in my figures. However, it is also the case that the rich people who are already in the country are more motivated to get richer. They make that extra commitment, work those extra hours and set up that new business, because they think it more worth while taking a risk with their money. They put their money to work rather more successfully and often, so, as my hon. Friend the Member for Braintree (Mr. Newmark) rightly reminded us, more activity is generated. I should like the Treasury to explore its rationale with us a little more.

My party is rightly saying that this is a tax trap. We have no wish to posture or go around saying that we want to be a soft touch on the rich at any time, and particularly not at this juncture in our fortunes.

Stephen Hammond: My right hon. Friend is making a very powerful point, and I understand his asking Treasury Ministers to explain their rationale to us. We have already seen huge parts of the Budget unravel, and dare I say to my right hon. Friend that Ministers will not be quite so keen to hear what he is saying? However, surely they must take notice of what the Treasury Committee said in its immediate report after the Budget. It used the words “considerable uncertainties” about the yield from the tax rise. The Budget is already unravelling from the Committee’s point of view, and surely the Government must address in this debate what it says.

Mr. Redwood: That is absolutely right. The Treasury Committee has come to a very sensible view and asked the right sort of questions. Private forecasters are now saying that such a tax increase could actually reduce the amount of revenue by driving some rich people out of the country altogether, and making others work less hard or put less money at risk.

Mr. Jeremy Browne: The right hon. Gentleman said that this was a “tax trap”. I do not understand this concept of a trap. The Government come up with tax policies and the principal Opposition party has to decide whether it believes in those policies. If this is a trap, every single tax policy put forward by the Government is a trap. Surely, to follow the logic of his argument, this is a straightforward opportunity to vote on a point of principle. If he believes that the rise is such a disincentive for people to become wealthier, be entrepreneurial and work harder, surely this is an opportunity to vote against the Government. I do not understand why it is a trap.

Mr. Redwood: I am sure that the hon. Gentleman does. He is a better politician than he is giving us to believe with that rather childish intervention.

The Government’s idea was crude and simple—“Let’s put this down for a future year. We don’t actually think it’s going to raise very much revenue.” Perhaps they did not believe it would raise any at all. They saw it as a win-win situation for Labour. If the Conservatives voted it down, Labour would spend the next year going around the country saying, “The only thing the Tories care about is rich people and their marginal tax rate.” If the Tories voted for it, Labour would go around the country saying to people who might otherwise vote Tory, “Look, the Tories are useless. They don’t even stand up for your kind of proposals, and they aren’t really the party of enterprise after all.”

We do not intend to play that game, which has turned out to be a lose-lose for Labour. It has pitted an important part of the business community against the Labour Government, because the business community is not impressed by their reneging on the clear promise that I remember them making at the last general election that they would make no changes to the overall rates of income tax at any level.

The change has also pitted Labour MP against Labour MP. We know that the Blairite faction is extremely unhappy with it. The Blairites thought that the fact that the previous Prime Minister had accepted the Conservative settlement on tax prior to 1997 was a very important part of winning over floating voters in middle Britain whom Labour needed to win over to form a Government again. They believe that it is disruptive and a clear tearing-up of that element of the new Labour settlement that the Government have now decided to go from 40p in the pound to 50p. Indeed, at the margin it is rather higher than that if we take into account the changes to allowances, pensions, national insurance and so forth. Far from being a trap for the Conservatives, it has been another factor in the growing civil war between Blairites and the supporters of the Prime Minister.

There will be those on the left for whom the change does not go far enough. They think that this crisis is a good opportunity to increase the rate to 60p, 70p or 80p—the rates they were used to in previous periods of government. However, there are others on the Labour Benches who understand that in a globalised and footloose world economy—whether we like it or not, we have to live with it—it is all too easy for people with money, talent, capital or high incomes to say, “I won’t base my activity here any more, I’ll base it somewhere else—I’ll go to Dublin, the Bahamas or Asia,” because the Governments in those jurisdictions really want talented people and new businesses. There are jurisdictions that wish to give a home to businesses that might otherwise have been located in London or Britain. That is the danger that we now face.

In other respects, the Government claim to believe that putting a tax up means having less of something. For example, they are busily increasing the tax on gas-guzzling cars because they want fewer of them. They are also increasing the tax on drink, because they want people to drink less. Probably only the ministerial drinks cupboard will be well stocked at the new duty rates, because public spending is still in free flow, whereas other people are expected to reign back, which we are told is good for their health. The Government believe that increasing duty on tobacco means that people will smoke less and that fewer cigarettes will be sold.

Mrs. Jacqui Lait (Beckenham) (Con): I am paying careful attention to my right hon. Friend’s argument. I wonder whether he would like to think back to the introduction of the single market and to what happened to the UK, with wine and tobacco coming into this country through smuggling, and whether, despite the drop in the value of the pound, the change in duty may be yet another way of increasing smuggling.

Mr. Redwood: It could well be. As hon. Members will know, the drinks industry in particular is extremely unhappy about the change. At a time when the industry is struggling to maintain licensed premises and its general business, the Government are being far from helpful in their tax policy.

My point is about the consequences of tax changes. In all the areas that I have mentioned, the Government quite rightly say that if they increase tax on something, there will be less of it, so why do they not think that the same applies to working hard? If we increase the tax on working hard, will there not be less of it? Will people not either do less or go somewhere else to work hard where the Government do not take so much money? The Government’s proposed increases in taxes on doing things, such as drinking, smoking and so on, and on larger vehicles are in conflict with their wider statement about their wish to have a reflationary Budget.

If the Budget were genuinely about reflation, surely it would be best to lower taxes on things made in Britain that people might buy. We would not increase the costs of owning an expensive vehicle if we wanted to sell more expensive vehicles nor would we increase the taxes on drink if we wanted more people to work or even just survive in jobs in the drinks, entertainment or hospitality industry. There are contradictions at the heart of the Government’s policy.

Mr. Newmark: Another point that my right hon. Friend might want to address is the fact that the increases are regressive, because they hurt the poorest people in society, who spend a larger proportion of their wealth on things such as drinking, smoking and driving. A second point is that such increases do not really change behaviour, which is what the Government are trying to do, but are just an extra means for the Government to try to fill the black hole in their public balance sheet.

Mr. Redwood: That is absolutely right. Just as there is a contradiction between the Government’s tax policy on the one hand and their so-called reflationary policy on the other, because some of their taxes will clobber jobs and business, so there is a conflict between their reasonable wish that people on lower incomes should have a better deal and the tax policies that they are pursuing.

The most regressive tax in the Budget is the fuel escalator. A lot of people on modest incomes need to use a car. They need to buy fuel, but often they cannot afford to buy the more fuel-efficient vehicles that better-off people can afford. The Government are deliberately targeting people on low incomes to pay more tax as some kind of penalty.

At a meeting earlier today, I heard about some of the plans for the water industry that I think may have the Government’s approval. The implication was that we will have to pay more for our water because the Government want to raise revenue by selling off licences for extraction. We await the legislation enabling them to do that on a big scale, but they are doing it already on quite a big scale to pay the costs of the Environment Agency.

If that is a serious proposition, it is an even clearer example of what I and my hon. Friend the Member for Braintree have just described—that those on the lowest incomes will face the biggest proportional increase in the price of a basic requirement that the Government believe should be rationed by price.

The most obvious example of that involves motorists in London. Only extremely rich people are now able to drive regularly during the day in central London. Motorists have to pay £8 a day out of their taxed income to use the road, as well as meeting all the fuel duty, vehicle excise duty and other costs incurred in running a car. In addition, fuel use in London is especially high because the regimes of the Government and the previous Mayor have made travelling around London freely extremely difficult, which increased the amount of fuel burned and therefore the cost for Londoners.

There is a strange conflict in this Labour Budget—the party that wishes to be the party of the people is actually clobbering the people, and the poorer people are the more they get clobbered by specific taxes on things that they have to buy. The other dilemma is that a Budget that wishes to be reflationary contains a series of tax proposals that are anti-enterprise and anti-business, and which target specific sectors of the business community especially severely.

The Budget papers also reveal a further development in the Government’s surveillance and control activities that is far from welcome. One thing that is doing the most damage to the Government’s reputation among the wider electorate is their complete compulsion to control every aspect of our lives. They want to eavesdrop, carry out surveillance and impose cameras on us; they want to inspect and audit us, and they assume that everyone is doing wrong until they can prove otherwise. I am afraid that the Bill is another example of that.

The tendency is not confined to the Home Office and the hapless Home Secretary. What I have described is also being done by the Chancellor of the Exchequer and his junior Ministers. The Bill has some tough clauses strengthening the powers of Revenue and Customs to intrude on lives and business and individual records, even when they have no reason to suspect that the people involved are criminals. The proposals will give people a very nasty feeling: they will make the relationship between state and citizen that much more unpleasant and put everyone on edge. They will also create extra cost and harassment of a kind that is very unpleasant.

I believe that the Government, in their own interests, should revisit the proposals before the Bill is finalised. Opposition Members have drawn attention to the problem. We do not like the proposals, and think that many of our law-abiding constituents will find them very irksome and unpleasant. Above all, however, the proposals that I have described do damage to the Government, because they reinforce the view that the state is all-bossy and wishes to be all-knowing. The Government seem not to trust anyone at all, but to believe that every taxpayer will be up to no good unless they take extremely draconian control.

I suspect that the Government’s approach is the result of two things. First, it is the result of politics, because some Labour Members believe—quite wrongly—that all successful people are tax fiddlers who must be hounded out and purged. Secondly, it is the result of the Government’s theory that they will one day find the crock of gold containing all the billions that the rich have been hiding all these years. The fact that they have not got to grips with the cash before means that it will be an easy, soft option for filling the hole in the accounts.

I am afraid that I have news for the Government. I am sure that the intelligent Ministers realise that there is no such crock of gold—if there were, Governments over the generations would have found it by now. It does not exist: to get out of the colossal deficit that is the centrepiece of and background to the Budget the Government either have to impose a lot more tax on everyone, or exert much better control over public spending.

The Bill, like all too many of its predecessors over the past decade, is an enormous piece of work. It is 433 pages long, with 61 schedules and 126 clauses. This becomes a burden in itself. How can business people, who are worried by the recession, trying to preserve the jobs of their work force and desperately trying to sell a bit more product and raise the quality of their service, be expected to get their heads round 433 pages of changes to tax law, some of which are extremely complicated? If they do not do so, however, the Government will say, “There you are. These people aren’t serious. They are not good directors and managers of businesses. They did not understand page 417 and they should have done.” They will then use the new draconian powers to call people in for questioning, or worse. It is not fair to impose so much on people when they are desperately worried about the state of the markets and the state of their companies.

One problem that I fear the Government will have to revisit is that of revenue collapse. I said earlier that I was not a doom-monger. I do not think that we will stay in recession for ever; I think that, at some point, easier money works. However, I do think that this will be a very deep and long recession by post-war standards; it looks as though it is going to be the longest and deepest by quite a long way.

In my experience, the Treasury always gets the figures wrong both ways: it always underestimates the amount of revenue that will come in when the economy is growing a bit faster than it expects, and it always overestimates the amount of revenue that will come in when the economy underperforms. I fear that its models are not revealing just how big a drop in revenue there will be. There must, for example, have been a catastrophic drop in stamp duty, because there are so few housing transactions and because house prices are now 20 per cent. or more below the peak levels. There will also have been a very big drop in corporation tax. We know that some of the largest profit-makers of yesteryear were the banks, and that the biggest bank—now a state-owned entity—has managed to lose £24 billion instead of making billions. Corporation tax revenue must be well down.

We also need to factor in a big reduction in dividend tax revenue. The banks accounted for a high proportion of dividends being paid; I think that they paid about a quarter of all the dividends on the all-share index in 2007. Some will now be paying little or no dividend, while others will find themselves in straitened circumstances, so there will be nothing like as much dividend income coming in from one of the big sectors. I suspect that some of the other cyclical sectors will also suffer big reductions in pay-outs and, therefore, in tax revenue.

Mr. Syms: My right hon. Friend is right; there might be a reduction in dividends from banks, which is why manufacturing industry could be important. There is a story running on Sky at the moment that there are problems with Tata and the negotiations over Jaguar Land Rover. That will certainly be important for the west midlands and for much of British industry. Perhaps we ought to have a statement on that.

Mr. Redwood: That is a very helpful idea. Jaguar is another example of the conflicting attitudes in the Budget document, which contains tax increases that will hit people who buy those cars. Perhaps that will put some people off buying them. Perhaps that is a good thing; perhaps that is what the Government want. But why, then, should we consider subsidising a car maker to make vehicles that the Treasury is trying to prevent people in Britain from buying by taxing them off the road? That is another muddle that shows the conflict in the Budget between its reflationary intention to get people back to work and to retain jobs in companies such as Jaguar, and its spiteful intention to change behaviour and to increase revenues through tax increases.

My advice to the Government is that this should be a Budget about reflation, and this is therefore not the right Finance Bill before us today. In order to have a successful and well-based reflation, they need to be kinder to businesses, individuals, enterprise and jobs than they have been in these tax measures. Many of the proposed increases will make that recovery more difficult, and could drive people abroad and result in things happening that they do not wish to happen. They will also increase the amount of subsidy that they will have to pump into some of the companies that will suffer as a result of their tax measures.

I do not believe that the Government will get a big reflationary push out of the fact that they are raising so little revenue when considering their costs relative to their expenditure. Treasury Ministers and I will strongly disagree on how to do that: I would reduce spending, while they would increase taxes. The Government need to tell us this evening how they would fill this black hole if they were to stay in government, because it is quite obvious from this Finance Bill that they have not put in place the range of taxes and the right tax breaks necessary to do so. To make it a little more difficult for them—it is a very difficult problem, because they have created an enormously complex problem for themselves—I would say that simply putting tax rates up will not necessarily be the way to fill the hole, even if they wish to carry on spending at this rate, because they are reaching the point at which revenues could be reduced because of a disincentive effect.

Mr. William Cash (Stone) (Con): My right hon. Friend and others—I see in his place my hon. Friend the Member for Braintree (Mr. Newmark)—have pursued the level of public debt, about which my right hon. Friend has just made some very powerful points. Is he conscious of the fact that the Treasury Committee report, which came out only a short time ago as the minutes are dated Tuesday 6 May, does not appear to tackle the true level of our Budget problems, as the amounts specified appear to be largely geared to what the Government said, which at least the three of us are quite convinced are hugely less than they should be?

Mr. Redwood: I agree with my hon. Friend. In providing the background to my comments I stated why I believed this to be the wrong Finance Bill as it does not tackle the magnitude of the problem. It is not just about the gap between the revenues and the spending of this year and next year, which is the main background to the Bill, because as my hon. Friend implies, the stock of debt is also important.

If the Government had to account in the way they make large private companies account, they could not get away from the fact that the gross liabilities of the state are more than £4.5 trillion. Pensions have to be included, as do the debt obligations and risks of the banks, the private finance initiative and public-private partnerships, Network Rail and the mortgage banks. Indeed, the lot has to be included if we are to have honest and accurate treatment, and if a finance director of a large company fails to do that, he goes to prison. It is quite simple. I know that they operate under different rules, but the markets out there are adjusting and they do not believe the figures that the Government are providing them with, so we are not seeing the beneficial impact on market responses that the Government want. I think that the Government would have more credibility and instil more confidence—something we desperately need—if they came up with a more honest set of figures that we could all use and view as broadly right.

Mr. Brian Binley (Northampton, South) (Con): My right hon. Friend touches on a point of confidence, which seems not to be understood by members of the Government. The fact is that small businesses are all about survival nowadays, so they need their confidence improved in order to improve the position of the economy generally. However, their confidence will not be improved as long as the Government produce Budgets and Bills of this kind. Am I right in my thinking, and is there a way to get this through to the Government, who are so stubborn on this particular point as on so many others?

Mr. Redwood: I think that the answer to my hon. Friend’s first question is “Yes, he is absolutely right”, while the answer to his second question is “No, there is no chance of getting the message through to the Government”. That task proved too much for the Chief Secretary, who I believe has been the worst Chief Secretary on record because she has not for one minute during her time in the Treasury succeeded in controlling public expenditure. I wonder how she dares to draw her salary, frankly, as she makes no attempt to control public spending.

What I think we need in this Finance Bill—and I hope my right hon. and hon. Friends will seek to achieve it as the Bill makes progress in Committee—is this. We need a Finance Bill that says to the Revenue and Customs not “Toughen your powers”, but “Understand that these are very difficult times”, as businesses have other priorities. While crooks should not be allowed, there is a need to be understanding and to work sensibly with business; otherwise, more jobs will be lost and more orders will be cancelled.

I think we need the Finance Bill to be amended to say that we are going to try to optimise tax revenues by having competitive tax rates on business and incomes, not by plucking them out of the air for other reasons. We need to recognise that our corporation tax level is no longer competitive and that the Government now wish to set uncompetitive income tax rates. I think that we should try to tease out and clarify the Government’s thinking on what they are trying to do with their increased taxes on drinks, cars, fuel and so forth. Are they trying to tax the poor? That seems to be what they are doing. Are they trying to reduce activity in those areas? That seems to be what they are doing. How does it square with what we were told was meant to be a reflationary Finance Bill?

We need a lot of change in this Bill. I think that it is not a good Finance Bill for our current economic circumstances. The Government believe that they can get away with the borrowing in the short term, but if they were a decent Government—if they were interested in the long-term success, strength and stability of this country—they would realise that the gap between spending and revenue is simply too big.

Mr. John Redwood (Wokingham) (Con): I am a director of a couple of companies. I have declared my interests in the Register of Members’ Interests.

This is really the Damian McBride memorial Budget. It is a Budget of the spinners, by the spinners, for the spinners. It is a Budget with all the black arts around it. It is a Budget that wants people to believe that it will all be fine in a couple of years’ time. It is a Budget built around numbers that are entirely fantasyland economics. It is a Budget which pretends that there will be massive growth in two years’ time, and that that growth will miracle away the enormous deficit and the huge debts that will be the Government’s only legacy.
This is a Government who, just a few months ago, were in denial that there was even a recession on here in the United Kingdom. This is a Government who would not admit six months ago that they would preside over the worst collapse in any major western economy, as measured by the public finance figures. This is a Government who a year ago, at the time of the then Budget, said that there would be a little drop-off in the growth rate, but that Britain would come sailing through because they were married to Prudence and had abolished boom and bust.

The Government are not married to Prudence, Mr. Deputy Speaker. Indeed, the Prime Minister—the former Chancellor—divorced her many years ago. Now they are holding a drink and drugs party on the poor lady’s grave, inviting everyone to come along and spend as much borrowed money as possible. I do not think that the current Chancellor has ever met the lady Prudence. It is quite obvious from his figures and his representations today that he does not have a clue about the fact that it is necessary to balance the books at some point. He has no clue about how to balance the books, and, as my right hon. Friend the Leader of the Opposition so powerfully observed, it will take another team of Ministers to deal with the awful job of cleaning up the mess.

Let us look first at the economic forecasts. I am grateful that at last, after it had become obvious to everyone else in the country, the Government have accepted that there will be a very serious downturn this year. After all the lying, weaving and ducking outside this House and the funny figures given inside it, we now discover that even the Government admit that there is going to be the most severe recession since the war—not only the deepest, but also the longest. We now have a Government who admit that there is not about to be an upturn any time soon. According to the new forecast, the magic Ides of July will come and go without us seeing the green shoots, let alone the recovery.

As my right hon. Friend the Leader of the Opposition memorably said, the Government are forecasting a trampoline recovery some time later, with most of the benefits of this improbable gymnastics delayed until after the general election, because they do not want the electorate to be able to compare what actually happens with the ridiculous forecasts they are now coming up with.

Why is it that after 12 years of this Labour Government, who said they were married to Prudence and had learned the lessons of their trip to the International Monetary Fund and of previous economic crashes, we now see this Government in complete disarray, presiding over not just a big increase in debt, not just a whopping increase in debt, not just a colossal increase in debt, but a bigger increase in debt than all previous Governments from time immemorial over a millennium in this country had managed to borrow together? If someone had made that up for a BBC drama, I think that I would have been one of the first people moaning again that the BBC had overdone it and that the plot was preposterous. Yet that is what today’s figures tell us; they tell us that the Government are seriously suggesting that they should, and they can, and they will, borrow more money in a couple of years than all previous Governments added together over many centuries, including all the war debt that we still have, inherited from those earlier tragic and difficult times when different rules and priorities clearly applied on a cross-party basis.

How did the Government get into such a dreadful quagmire? There are three main reasons. First, they foolishly, rashly and needlessly committed this country’s public accounts to two extremely large banks—banks which, as my right hon. Friends on the Front Bench have again memorably said, were too big to fail and too big to bail. The Government were quite wrong to force those banks, at the fateful weekend in question, into trying to find capital that quickly, and they were quite wrong to say that the taxpayer would stand behind those banks and buy all those new shares at too high a share price, which they forced upon the poor reluctant taxpayer. There were many ways of sorting out and standing behind those banks without putting all that taxpayer cash on the line, and the last thing we needed to do in the parlous financial condition we already found ourselves in was put the taxpayer fully, squarely and completely behind the £3 trillion of liabilities on those two massive bank balance sheets, with all the consequences that followed.

I have not had a chance to read the detailed figures, which were not released to Members of Parliament until immediately after the Chancellor sat down, and of course, the Chancellor did not give us the actual cash figures for his current view of how much those banks are going to lose us. However, he did say in his statement that he now recognises that there will be material losses for the taxpayer. We have heard the figures in the press; as always, we could have learned most of the Budget in advance by listening to the media over the weekend preceding it, and in the days before we in this House are graced with some kind of statement—and then if we really want to know what is going on, we have to go away and read the documents, because they contain at least some of the bad figures that the Government wish to conceal.

We have gathered, however, that the debate is between the Chancellor and the IMF. We learn that the Chancellor thinks that the Government are going to lose £60 billion on the banks. I will be delighted if they only lose £60 billion on the banks, as I have always forecast that they will lose a lot more than that—but let us just think about this: that is £60 billion of needless losses subsidising rich bankers and foolish banks. Why do a Labour Government want to do that? Do they not realise that that is £1,000 for every man, woman and child in the country? What could my constituents do with £1,000 per head extra this year? Would it not have been better to have given them the money so they could have sorted their own lives out and bought a few more things to create some demand, rather than to tip that £60 billion down the drain by making the taxpayer stand behind the banks and pay for those losses?

The IMF, however, says it thinks the losses will be £200 billion, and I fear that it is nearer the mark. We understand that some of the very expensive spin doctors and Treasury officials employed at our expense have thought it a productive use of their time to try to get the IMF to calculate its figures again—in other words, “If there’s a problem, let’s try to spin our way out of it.” I urge the IMF not to be too lenient with these Ministers and this Treasury, because I fear the losses are, as the IMF has said, going to be all too large. It shows the Government’s priorities that when they nationalise the banks they will not accept that there is any possibility of loss at all, when they have the autumn statement they leave all the figures on the banks out of the borrowing because the borrowing looks too awful with the banking figures included, and when they finally get to the Budget they realise that none of the commentators and City experts are going to buy the idea that there will be no losses on those banks, so they come up with a figure rather smaller than those of the serious commentators and hope to get away with it, and when no less a body than the IMF rumbles them, they send the spin doctors out to deal with it and try to get the figures massaged in the right direction.
That is the first reason why we are so colossally in debt and so hugely at risk.

Never before have a British Government been stupid enough to nationalise banks that in aggregate are bigger than the national income. Never before has a group of Ministers blundered into such a colossal and risky financial commitment as this group of Ministers has. Given the questions I have asked over the months about this, I feel that when they took the decision they had no idea how big the thing they were taking on was, and they certainly had no idea that only £1 in every £7 on the RBS £2 trillion balance sheet was a loan to a British person or British company. Like them, I want to make sure that British companies and British people do not suffer because of the awful credit crunch. Of course I wish to see the creditors protected, and of course I wish to see lending resume at sensible levels in this country, but only £1 in every £7 on the RBS balance sheet was doing any of those things, yet this Government had to blunder into backing the whole balance sheet, and who knows how much they will lose.

How much do the Government reckon they will lose on the £500 billion casino bank within RBS that they have bought? What action have they taken to protect the taxpayer interest? Have they instructed those bankers to close down the dangerous positions? Have they asked them to calculate the losses and take the ones that could get bigger? Have they agreed with them that they will net out a lot of the positions so we can begin to see what we have got and start to reduce the total risk for the taxpayer? I do not think they have done any of these things. I do not think they have got a clue; I do not think that they care. They thought it was a great idea to nationalise a bank. They thought that would give them control over the economy. They will learn the hard way that they do not control the banks—the banks now control them.

The second reason why we are so deeply in debt—and, even worse, a reason why we will get increasingly into debt under this Government—is the very violent boom-bust cycle that they have unleashed upon our poor economy. This is a boom-bust cycle that was made particularly violent in Britain by wrong policy here in Britain. This is the Government that, when it was becoming obvious to many outside critics that a huge credit explosion was under way, instead of calming the flames by taking some of the material off the bonfire, decided to stoke it some more. This is the Government who, instead of saying to the private sector, “You’re overdoing the off-balance-sheet borrowing, boys and girls,” went out and said, “Do more off-balance-sheet borrowing. We’ll show you how to do it. We’re going to finance most of our public projects on the never-never on an off-balance-sheet basis so that people don’t realise that we’re building up extra public debt, don’t know that we have broken all our own rules, and don’t know that we are doing this on the never-never in the hope that some future Conservative Government are better at running the public books and are able to pay the interest and the debts off.”

Mr. Mark Field (Cities of London and Westminster) (Con): I agree with everything my right hon. Friend says about the appalling state of private finance initiatives, but unfortunately, I disagree with him in one small area: this debt is not on the never-never, as it will have to be repaid. Indeed, it will have to be repaid during the second half of the next decade and beyond, and will be a drag on any recovery that this economy could possibly hope for in that period.

Mr. Redwood: I was using “never-never” in the common sense—I meant as a way of financing oneself—but we all know that, as my hon. Friend rightly says in correcting me, the never-never is the ever-ever; it is ever-ever with us, and we will have to repay it. These Ministers thought that they could get the glory for the spending and leave the bills with the British taxpayers. These Ministers thought that they could do the borrowing round the corner and leave it off the balance sheet, and that would stimulate the economy. These Ministers thought that if they are having a drink and drugs party on Prudence’s grave, why not let the public sector lead the way and buy more of the drinks, while the private sector is encouraged to do exactly the same thing.
Far from being the surprised moral Government who did not quite understand how things were out of control, and who can now condemn bankers for getting it wrong, this was the Government who were leading the never-never society, were leading the charge and were leading the off-balance-sheet movement, and who were urging the financial markets of Britain to come up with ever cleverer and, unfortunately, dearer ways of feeding the public monster that they were creating—this huge debt machine in which they were revelling—so that they could have more press releases and more initiatives, and try to give people the impression that they were investing. If only they had been investing, it might have been a good idea—but they were not investing. They were squandering and wasting, and they were not getting the efficiencies, improvements and extra services that we would have liked. There needed to be some extra spending—Governments always have to spend extra on services to improve them—but they were blowing the money in all sorts of ways, not just on nationalising banks, but in ways that I shall examine briefly in the third part of my comments, which will deal with public spending.

The Government made the cycle worse by the lack of spending discipline and by the over-borrowing in the public sector, and by rigging the inflation target at the end of 2003—a little before the 2005 election. They saw that the Bank of England’s Monetary Policy Committee was likely to have to put interest rates up, because it could see that inflation was perhaps going to get out of control and credit was a bit too lively. So what did the then Chancellor do? He changed the target to one that was performing much more modestly than the retail prices index, and I am sure that he knew, because he is a clever man who studies these things, that by changing that target, interest rates would have to be kept lower for longer. That fateful decision—that decision to encourage the borrowing binge in the private sector by keeping rates too low for too long—stoked up the private sector half of the violent cycle.

By 2007, when it was becoming clear even to the Government that they had overdone it, they allowed or encouraged the monetary authorities to put the brakes on. We lurched from careering up the motorway at 140 miles an hour to trying to do a complete stop—an emergency brake—by putting interest rates up and withdrawing funds from the market. They overdid it, so we lurched from excessive boom to excessive bust, and we, the passengers in the car, were hurled towards the windscreen by the effort to bring the vehicle to a grinding halt. It was a disgraceful piece of bad driving for which the Government will not be forgiven for a very long time by the electorate, who can see that British actions—actions by the authorities here in the United Kingdom—made the cycle more violent and worse. China, India and Germany did not have this sort of cycle, but we had it here, because our authorities were uniquely incompetent and uniquely unable to see how they were overdoing it in both directions.

The third reason why we are so massively in debt is that Labour has blown it with its public sector spending programmes. Contrary to the constant rumours from the Labour party, none of us came into politics to fire teachers, nurses or doctors; Labour Members should accept that all of us, from all parties, come into politics because we want better schools, better hospitals, better public services and better standards. If they were to examine the record of past Governments, they would see that every Government, be it Labour, Liberal or Conservative, have every year, or nearly every year, increased expenditure on those vital front-line services and the people who deliver them.

Anne Main (St. Albans) (Con): The Chancellor should be thanking the good people of St. Albans, who pay the most into his coffers but get the least back in terms of being able to deliver front-line services. My area rattles around at the bottom of the league table in what we get back, so we struggle. I am sure that the good people of St. Albans will wonder how on earth they are going to manage with the new cuts that the Government will be putting in place, given that they have been struggling in the good times. All the things that I heard in the Budget to do with the stamp duty holiday for homes worth up to £175,000 do not help St. Albans. I heard nothing about small business rate relief for my local small businesses; in St. Albans that relief does not even kick in. I am sure that my right hon. Friend will agree that the Chancellor seems to have abandoned places such as St. Albans, merely seeing them as cash cows: he just spends the money.

Mr. Redwood: For St. Albans read Wokingham; my hon. Friend has spoken powerfully for me, for herself and for many of our right hon. and hon. Friends. Our constituents, by and large, pay the bills, go to work, work hard, are prudent and save—they do all the things that, we hope, Governments of all persuasions wish them to do—but we are the ones who get socked with the tax bills, and we do not get any of the extra money if the Government are thinking of money for better schools or hospitals. It is very noticeable how unfair the system has been. The Conservative Government to whom I belonged always gave more to areas with greater needs—and of course that is fair, and a common-sense approach—but the situation has now become extreme. Our areas have needs too, and, as my hon. Friend rightly says, the distribution system is very unfair.

I wish to draw attention to the two economies out there: the huge divide in modern Britain is between those of us who work in the public sector and those who work in the private sector. The big divide is between those who are trying to run small and medium-sized entrepreneurial businesses and their staff, and those who are in the large bureaucracies of the public sector—those in the quangos, the councils and the Whitehall Departments. There is a monumental sense of injustice, because when we talk here about tough choices we are talking about whether we increase public spending at 2 per cent. or 1 per cent. in real terms—above the inflation level—or about whether we are going to have three nice extra things or one nice extra thing in our budgets, but what people in private sector companies are talking about during this awful recession is whether they close one factory or two factories out of their three or four, and whether they get rid of 20 per cent. of the work force today or whether they may have to fire 25 per cent. of the work force in two months’ time because demand is so low. They also talk about how they can halve their stock levels because they cannot afford to maintain them and they cannot get the borrowing for the stock, and they discuss what impact that has on all the people who would like to carry on in their jobs making things.
I do not think that these Ministers have a clue how tough it is out there for private sector businesses. I do not think that they have any idea what it is like for businesses of just four or five people, where those running the business are personal friends with the individuals whom they are employing, but at some point one they are going to have to say to one or two of their employees, “Either you go, or we all go.” That is the tough choice that such people are facing; that is the reality. They are the people who are facing this huge rash of extra bureaucracy, extra regulation and changed tax rules that makes their lives even more difficult at a time when they need to concentrate on sorting out their business, when they need a break from their banks and when they need a break in terms of improved demand and improved economic prospects.

It is this huge divide in Britain that is so unfair and that is causing so much anger, and it is one of the main reasons why the governing party is so low in the opinion polls—about which it must be extremely worried. When listening to the Chancellor and hearing about his many schemes for people who, sadly, lose their jobs, one wondered whether there was at last some forethought about the colleagues of his whose jobs are going to be destroyed by his very bad economic management, and who may well be feeling that pain in a year. They will then discover that it is very brutal out there and things are very different when one loses the protection of the indexed pension, the decent salary, the expenses and all the rest of it.

The public expect us to do everything we can to try to reduce the length, depth and severity of the recession, and to make the tax changes or produce the schemes that might make a difference to those who are struggling to keep going potentially good businesses that have been very badly damaged by the current climate. But they also expect us, above all now, to treat their money seriously and to spend it wisely. They do not believe for one minute that all this extra money that has been tipped in, so much of it borrowed, is buying them a better school, a better hospital, safer streets or stronger border controls. They think that a lot of it is wasted.

I called this Budget the Damian McBride memorial Budget, but I now wish to say something nice about the Government. I know that I will upset my right hon. and hon. Friends by saying so, but I think that the Government did a very good thing in sacking Mr. McBride. I think that the Labour party would agree. However, I have some advice for the Government. They still have dozens of McBrides left in their organisation—spin doctors spinning in favour of their bosses and the Government—although I hope that none is doing all the things that Mr. McBride was doing, at least not any more.

The Government do not need those spin doctors—indeed, I fear that I am doing the Government a good turn by giving them this advice. One reason why they are getting such a dreadful press at the moment is that those spin doctors—and their bosses—are turning on each other, fighting for power and the ear of the current incumbent, and positioning themselves for the leadership race. If the Government got rid of more of their spin doctors, I could say nicer things about them. It would be a good saving, because many are supernumerary. They are letting the Labour party and the Government down, so some savings could be made there.
A much bigger saving in cash terms could be made by cancelling the ID card scheme and the national computer database. It is hugely expensive and will be deeply intrusive, without making our country any safer. Burglars will not take their ID cards to the scene of the crime and leave them on the mat when they leave. We already have identity documents that people have to show when they arrive at our borders; they are called passports. Instead of ID cards, we should have a border authority that wants to inspect passports properly and make sensible decisions about those visiting our shores. These people do not come across in rowboats; they are not sneaking into the country. They come in through the front door—through Gatwick, Heathrow and Dover. Let us do the job at the port of entry with the proper documents. We do not need to make everyone else live in fear that they will be caught without their ID card when digging at the bottom of the garden. If the Government do not scrap the ID computer scheme, they are not serious about civil liberties, and they are certainly not serious about saving money. It is a no-brainer, because it would be a popular public spending cut.

Unelected regional government is widely loathed and hated in England. The Government can no longer say that it is hated only in parts of England with Conservative local government administrations, because they decided to test the popularity of regional government in what they thought was the Labour heartland of the north-east. At the time, it had mainly Labour MPs and mainly Labour councils—more recently elected than some of the MPs—but the Government lost that vote not by 55 to 45 or 60 to 40 but by four to one against. If they want to repeat the experiment in my part of the world, we can make it five to one or six to one against.
Regional government is widely hated. It is a huge cost burden and involves unnecessary administration, bureaucracy and regulation. If something needs spending on or regulating, it should be done nationally by the Departments or locally by the county or unitary authority. We do not need the middle men and women—let us sweep them away. Again, I fear that that would make the Government popular, but I can recommend it because I know that there is no chance of their listening to the people of Britain. The Government will go back to the north-east, where they still hope to win some seats in the general election, and they will have to explain why they rode roughshod over the freely expressed and sensible views of the people there.
The people have rumbled the Government. We do not need European government, national government, regional government, county government, district government and parish government. That is six layers of government and too many people bossing us around, too many people on expense accounts and fancy salaries and with public sector company cars. Get rid of some of them. The obvious place to start is the regional level, and it should go.

Let me mention something that I have not mentioned for a very long time in this House—my hon. Friends will be very disappointed—and that is the subject of the European Union. Tony Blair, in the good days, thought that we had so much money that he would like generously to give some of Baroness Thatcher’s rebate back to our partners. The Government always tell us that they have a lot of influence in Brussels and that they get on well with our partners. I think that the Prime Minister should go back there next week and say that his predecessor made a huge mistake.
When Tony Blair generously decided to give all that extra money to the rest of the EU, he thought that Britain was strong, prosperous and well run. The present Prime Minister now realises that it was not, it is nearly bankrupt and borrowing too much money. We cannot afford to borrow extra billions of pounds—and it will need to be borrowed—to give to other countries, some of which are in a stronger financial position than we are. It is a little challenge for the Prime Minister after the triumph of saving the world: to go back to Brussels, say that his predecessor wrongly and stupidly gave away the good deal that Baroness Thatcher had negotiated with great skill, and tell them that the British people now need that money, because it will all be on our overdraft as the public accounts are out of control.

I come to the public sector rich list. I pay tribute to the Taxpayers Alliance for the work that it has done in getting to the truth about some of the waste and grotesque excess that has substituted for proper public spending under this Government. Up and down the country, there are hundreds and thousands of senior officials in posts in quangos, in Whitehall and in local councils who are earning mega salaries. Those salaries do not respond to market pressures. In the cold and hard private sector world of which I have reminded the Government, people on high salaries in companies under pressure are not only losing their bonus, but will have to take a pay cut—if they are lucky, because otherwise they will lose their job. When they get another job, if they manage to do so, it is at a much lower rate of pay than prevailed a year or two ago.

I am all in favour of people being highly paid if they earn it and the taxpayer does not have to pay the bill. Good luck to them; I want more and more of my constituents to have well paid jobs. But we cannot afford to replicate the high pay of the successful in the competitive sector—freely, out of the money that customers make available—in the public sector, where most of our staff are motivated by a sense of public duty and think that, say, £63,000 a year is a decent rate of pay. They should not need £160,000, £260,000 or £400,000 a year, which now seems to be the going rate for some of these quango jobs.

The Labour Government are rediscovering their socialist roots in a big way in this Budget, but I suggest that they could do themselves a favour by having a new rule in quangoland and throughout the public sector: not to give people salaries above the Prime Minister’s level of pay, and to go back to those already on mega-deals and ask them to make a contribution by taking a pay cut or accepting really tough performance criteria so that they have to earn it. We all know that most of those jobs in the public sector have been a joke so far and performance pay has been granted too readily.

Mr. Nigel Evans (Ribble Valley) (Con): I fully endorse my right hon. Friend’s suggestion, but should salaries not be pro rata? Some of the chief executives and senior officials of these quangos not only earn more than the Prime Minister, but work only two or three days a week.

Mr. Redwood: My hon. Friend is tougher than I am, but he makes a good suggestion. I hope that Ministers have got the point that the situation is out of control. There are too many of these jobs—many of them are non-jobs—and too many are too highly paid. At this time when we need some restraint, we should try to reduce them.

We in this place also have to make a contribution. My worry about the Prime Minister’s YouTube discovery yesterday—I do not know why we could not have been told first, because it is after all a House of Commons matter—is that we are being offered a scheme that on the face of it, although no numbers have been given, will lead to an increase in the total cost of MPs’ expenses. That is completely wrong in this climate. The idea that people should be able to get more money just by turning up than they did by handing in proper invoices for things on which they were spending money is for the birds, and I hope that Ministers back off from it as quickly as possible. If they do not, they will find that the public, far from being impressed by the Prime Minister’s action, will feel extremely let down that he has discovered another way to pump more money to Labour Back Benchers without any proper accountability.
I guess that the proposal would get more hon. Members turning up at the House of Commons, and that could be a good thing—although, given that we are locked out for much of the time because the Government do not want us to meet, they may decide to lock us out for even more days in the year to try to keep the costs down. That would not be a very welcome development either, so I hope that we can look again at the proposal. We need to show leadership on our costs and expenses, just as we do throughout the public sector.

I do not know about you, Mr. Deputy Speaker, but I feel that we have had a surfeit of glossy brochures under this Government. Day after day, a great pile of them is put on the table in my office. I look at some of them, but most get thrown away. Many are worthless and, if I needed it, I could get most of the information from a simpler source or from a website. All the glossy brochures that Members of Parliament throughout the Commons get day after day are paid for by the public sector. Could we not have a glossy brochure sabbatical, or amnesty? That would be a modest saving, but it would show willing. For example, we could have no more glossy brochures until Christmas, which would mean that the Government could save them up and then issue only the ones that really mattered. If they really do have a wish to tell us what they are doing, websites are so much cheaper, and it would be rather good if they were kept updated.

David Davis (Haltemprice and Howden) (Con): My right hon. Friend is talking about cancelling glossy brochures. May I volunteer the piece of fiction that is this year’s Red Book as the first option for cancellation?

Mr. Redwood: My right hon. Friend makes a very good point. There are lots of useless glossy brochures, but even the ones that we want have got glossier, bigger and more unreliable. We need to show a little common sense: the information that we need should be timely and accurate, not produced in this extremely elaborate way.

I have many more ideas, but many colleagues wish to speak in this debate so I will not go on at any greater length. My conclusion is that there are three major reasons why this country has been landed in such massive debt. The first is the huge mistake that has been made over the banks. My advice to the Government is to get out from under the bank assets and liabilities as quickly as possible. We cannot afford them, and they will only lose us a bigger fortune.

The Government still do not seem to know what risks they are running, so will they please take action today to start limiting the risks and selling off the assets that they have acquired? Will they also please tell people in the publicly owned banks that they will not be earning £300,000, £400,000 or £500,000 a year or getting mega-pensions as long as those banks are making losses? They are public sector bodies and we are responsible for the money. It is a waste of money to spend those sorts of sums on such banks unless they are going to go back to the private sector immediately and earn their living sensibly. If they do that, and the sort of salaries that I have mentioned can be paid for from private means, I have no problem with them.

The second reason is the violent cycle. We desperately need proper welfare reform from this Government. We went into the downturn with more than 5 million people of working age out of work. That was a disgrace, and it shows what a dear mistake it was to sack the man who was Minister for Welfare Reform at the beginning of this Government, the right hon. Member for Birkenhead (Mr. Field). I think that he would probably have done a rather good job in improving incentives for work and limiting the welfare bills. Instead, we have gone on for years with no proper welfare reform.

The Government have allowed many people to be out of work, for good reasons or bad, and they have not ensured that they were brought into the work force in the good times. We need proper welfare reform so that we can get people back into work more quickly. If the Government do not reform welfare, they will not solve the problem of unemployment and they certainly will not control the budgets.

The third big reason why we are too heavily in debt is wasteful, needless and unnecessary public spending. There are many examples of that, and I have listed some items to show Ministers that we would know what we were doing. They must understand that pretending that there are a few more efficiency savings to be made without naming them is not a good enough answer.

I therefore have one last proposal that would make a big impact on Government budgets over the next couple of years: a complete freeze should be placed today on all staff, throughout the public sector, who do not work on the front line, and that replacements should be allowed only where they are absolutely necessary. If that were done, the Government would soon start to make an impact on the huge increases in spending that they have presided over. There are 300,000 extra civil servants compared with the number under the previous Conservative Government. Why does it take so many more to do a worse job? Of course, that is exactly what happens: the more people who are employed, the more difficult it is to control them, the more things they do that do not need doing and the more money is wasted.
The message is simple: the Government cannot solve a crisis of over-borrowing by borrowing more, or get out of a credit explosion by going on a public sector credit binge. If they take too many chances with the public accounts, there will be a buyers’ strike on Government debt. There is already a dangerous bubble in Government bonds which has been brought on by quantitative easing and their monetary antics. That is very insecure for savers and our economy.

As the Leader of the Opposition said, the way out of this problem is through saving, investing and exporting. We have had the years of borrowing, importing and spending foolishly. We now have to pay the bills.

Thanks to the University of Manchester Conservative Future for transcribing the debate between John Redwood and Derek Draper from the Nolan Show last weekend. You can read the transcript or listen to the original exchange by clicking here.

Mr. John Redwood (Wokingham) (Con): Let us first of all get rid of some of the nonsensical soundbites that the Government offer in substitute for serious analysis and debate. I am glad that the Government no longer talk of “no more boom and bust”. Even they see how absurd that is, but it is disappointing that they still tell us that they made the Bank of England independent. As my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) explained, the Government did grave damage to the Bank of England, which we highlighted at the time and continue to highlight.

In the report by the group I chaired, which the Govt often misquote, we made a big thing about how the Bank of England was gravely damaged in 1997, which made it very likely that when a crisis struck the Bank would be unable to handle it properly. It was damaged not only by the removal of responsibility for financial regulation of the clearing banks—something that a central bank needs to do so that it knows the day-to-day positions and the true financial state of those banks—but by the removal of the responsibility to manage public debt. Anyone who understands money markets knows that public debt is the life and substance of the money market. The Bank of England was blind and deaf in its own money markets, because it was no longer in daily contact with clearing banks—one side of the equation—and nor was it handling minute by minute the Government debt requirements. No wonder it made an awful mess of the money markets in 2007 and 2008. No wonder it was not sighted in the massive credit explosion that the regulators allowed the banks to perpetrate, and that created this immediate crisis.

We now have two more soundbites substituting for serious policy and analysis. One is that this is a global crisis, as if in some way that excuses the Government of all responsibility. Their refusal to understand that we have a worse version of the crisis than others is extremely depressing. Their refusal to admit that the global recession is happening for different reasons in different places means that they will find it very difficult to tackle the problem here in Britain. They do not seem to understand that the crisis is very different in Japan, Germany and China—the successful saving and exporting countries—from the crisis in Britain, the US, Ireland and Spain, the over-borrowed, over-extended credit countries.

The exporting countries merely face the very serious problem that their export markets are temporarily very badly damaged, but they have strong fiscal positions and strong savings, while the heavily borrowed countries have a double crisis. We have the downturn in activity, like the successful exporting countries, but we also have extreme credit crunch problems, meaning that we do not have the financial flexibility to pump up our economies and return to previous levels of activity. The levels of activity reached in 2006 and 2007 were unrealistic, and were sustained on a sea of debt and those funny instruments that were allowed by the Government’s regulation.

The Government now say that the problem was created by deregulators, as if a deregulatory Government had been in charge in Britain for the past 11 years. However, never has more regulation been put on the statute book than in the past 11 years. Every feature of the financial regulatory system that they inherited was taken apart and recreated with far more cost, far more expense, many more regulators and far more complexity. Anything that has gone wrong on their regulatory watch is the result of their style and choice of regulation, and it certainly was not deregulatory.

What we said in our economic review, which Labour Members love to misquote, was that we needed stronger and tougher regulation of banking cash and capital, and that that had to be done by a reunited Bank of England, which saw all the business and the money markets and understood them. We said that we did not need the new regulation of mortgage process that the Government had introduced. If we needed proof of that, we need only consider that we have had more mortgage process regulation than this country has ever known at the same time as we have had more dodgy mortgages than this country has ever known.
Mortgage process regulation does not stop credit over-expansion. It does not tackle a credit crunch. I find it very odd that intelligent Ministers cannot understand that point; perhaps they deliberately misconstrue it. It seems so obvious to me that they were regulating the wrong things in the wrong way and that they were not doing what a regulator should do. When businesses can extend credit and lend lots of money to people and companies, we should control their cash and capital to ensure that they are prudent.
The massive expansion in bank balance sheets should have been ringing alarm bells by 2004-05 in the Treasury and with the Chancellor, let alone in the Financial Services Authority and the Bank of England. It was ringing alarm bells on the Opposition Benches, as we have learned today. I shall not treat the House to loads more quotes or say that we saw all this coming, as that does not matter. What does matter is that the Government did not see it coming. They were not listening, they were not watching and they were not carrying out their prudential activities sensibly and well.

What should the Government do now? They are making a worse crisis now than the one that they are talking about. We know about the over-expansion of credit, and they do not talk about how they brought that to a grinding halt in a very damaging way—that was the second part of the crisis. We might go into a third crisis if they do not control the public accounts and the public obligations sensibly.
There are huge disputes about what should be factual matters. It seems very clear to me that this country is massively indebted in the public sector, and that that debt has expanded many times in the past two years as a result of the policies that the Government have been pursuing, both through their running of large deficits and, more importantly, through their very expensive policies of support, subsidy and guarantee to the banking sector.

Let us look at the figures. The Government admit—I think—that there is public borrowing of about £700 billion. If we add in private finance initiatives, public-private partnerships, Network Rail and some other off balance sheet liabilities, that figure is about £1 trillion. I hope that they would accept that figure.
There are, too, about £1 trillion-worth of unfunded pension liabilities. The Government can say that it is not convention to put them on the balance sheet in state accounts, but it is convention to put them on the balance sheet in the corporate sector. Indeed, it is a legal requirement to do so—imposed by this Government and strictly enforced. The hon. Member for Twickenham (Dr. Cable) might think that I have made a mistake and I am misrepresenting those figures, but I assure him that pension liabilities are liabilities of the state. They represent money that we do not have and that we have to pay out.

On that basis, the figure is £2 trillion, but to get the Government’s true financial position we then have to add something for the banks. If we took on the Government’s private sector accounting rules, we would have to put on the balance sheet the gross liabilities of the banks that we have bought, in the proportions of the shareholdings that we have acquired. That would add another £2.5 trillion—for the banks, the liability is £3 trillion, and we own most of that. That adds up to £4.5 trillion.

Of course, those banks have some assets. I am pleased to say that we will not lose £2.5 trillion, but I fear that we will lose quite a lot of money on these banks. We have, after all, already lost £24 billion in about six weeks on the RBS shares that we bought, based on the losses that RBS has had to report after the shares were purchased. We have lost £10 billion on the HBOS shares that we have bought so far, based on the losses that HBOS has had to report through its profit and loss account. The losses on the shares, based on the current share prices, are similarly very large figures. We can lose a lot of money on this.
If Government Members still do not like the idea of putting those gross amounts on the balance sheet in the way that a company would, why not put on the specific guarantees, subsidies and injections, which would amount to about £1 trillion?

Mr. Brooks Newmark (Braintree) (Con): The Chancellor has asked the banks to be transparent in their accounting only this past week. Is this not a case of “Don’t do as I ask; just do as I do”? The Government should at least be making what is going on off balance sheet as well as on balance sheet far more transparent.

Mr. Redwood: Of course they should. The Government should not think that everybody outside in the real world is a fool. The outside markets and commentators are already adjusting for all these figures anyway, so why do the Government not get real and accept that they have to introduce them?
Mr. Bone: Is it not a fact that international accounting standards require them to do so? There are no ifs and buts—the Government have to consolidate.

Mr. Redwood: The Office for National Statistics is going to demand quite a big recognition of these banking risks. That recognition may not be for the full amount that I have suggested, but it will take our total indebtedness as a country, as defined by the ONS, to well over 150 per cent. of national income. That is well above many comparable countries around the world that have not blundered into so much bank ownership as this country has through the actions of the Government.

What should the Government do to start to cut the risk? First of all, they must recognise that the risk is colossal and that, if they get it wrong, taxpayers could be left hopelessly stranded and have to pay enormous losses. They must recognise that house prices are still falling, that the mortgage experience is deteriorating and that there could be more bad loans than we know about. They must recognise that the corporate sector is in deep trouble—I fear that there could be many more bankruptcies in the months to come—and that corporate loan books are still deteriorating at a terrifying rate.

For some unknown reason, the Government have made the taxpayer stand behind all those problems. Although a central bank must make sure that a main bank does not go under, it should do so through short-term lending. It should act as an intelligent bank manager and tell the bank involved to cut its costs and risks and to close down its casino banks. It must tell that bank to stop paying people £200,000, £300,000 or even £400,000 a year when they are making colossal losses that the taxpayer has to stand behind. It is grotesque that we, the taxpayers, are now expected to stand behind people who want to earn £200,000, £300,000, £400,000 or £500,000 a year, with pensions to match, even though their banks are loss making and need state capital and subsidy to survive.

I am a well known exponent of free enterprise capitalism. I am all in favour of people in the private sector getting great bonuses and lots of money if that is what they deserve and if they do it in the normal way, but I also think that they have to live with the downside. High rollers who get it wrong should get no benefit from doing so, and it is deeply offensive to many people in this country—and I am sure, in their honest moments, to many Labour MPs as well—that this Government are far too generous with the subsidy and capital that they give to the broken banks. The result of the Government’s actions is only that there is a delay in adjusting those banks and getting them sorted out so that they are in a position to behave normally again.

The banks involved cannot be subsidised into lending more: they have to be sorted out to lend more, and that means getting rid of the rubbish. They must sell some of their foreign banks and some of the assets that are good so that they can get cash to do something with. There has to be a patient and difficult case-by-case analysis of every loan on their books, and there also has to be some intelligent banking to see how many people can be got through the crisis and how many unfortunately cannot. For the latter category, it may be better to close the loan down quickly before there are more broken dreams and more lost money.
The Government will find out—as I think that they are beginning to do—that owning something means being responsible for it. By all means let us have intelligent and able people who are not politicians or civil servants running the banks that the Government own on behalf of the taxpayer, but they have to do so according to a sensible and understandable remit from the Government. They are not being given that remit, even though it should be very simple: cut the risk and the losses, get us out of dangerous things like investment banking activities, sell some of the good overseas banks because we need the money and should not be standing behind them.

The Government have placed the country at grave financial risk, financially. They were warned, but they ignored the warnings. They blundered because they regulated, and over-regulated, but they did not regulate the thing that matters. Will they now please concentrate on the thing that matters? That is that we now have, on the taxpayer’s account, two broken banks that are bigger than the national income. Do the Government understand how risky that is? Will they issue immediate instructions to cut the risk? Will they understand that the British people will not put up with, or be grateful for, paying enormous salaries to people for doing the wrong things in broken banks that then lose us a packet?

Mr. John Redwood (Wokingham) (Con): What, if any, should be the limit on the amount that the UK Government print and borrow to avoid a run on the pound, a debt crisis or a trip to the international moneylenders?

Mr. Darling: If the right hon. Gentleman is referring to quantitative easing, he knows that I set out limits in the publicly available exchange of letters between me and the Governor of the Bank of England the week before last.

Mr. John Redwood (Wokingham) (Con): This is the biggest, most important and most dramatic money resolution I have ever seen in the House of Commons. It has taken 1,000 years to amass a debt that the Government put at around £550 billion. Under this money resolution and the associated actions that the Government might take, they might double the debt by making that amount of money available as loans and share capital to banks or put the same amount again at risk through their loan guarantee scheme. As my hon. Friends have indicated, if we consolidate on the general balance sheet, as we should, all the assets and liabilities of the banks that the Government are buying, we do not just double the debt but quadruple or even quintuple it when one takes into account the full size of RBS, Northern Rock and Bradford and Bingley—no others, we trust, but this is very open-ended and implies that there could be others.

The money resolution takes the form of two different assertions. First, we are invited to give the Secretary of State power to put out money provided by Parliament under these headings, and secondly, in urgent cases, to authorise payments to be made out of the Consolidated Fund. The Bill that backs up the money resolution contains even more wide-ranging powers relating to the central bank, enabling quite a lot of money to be generated by the bank through quantitative easing and the manoeuvres of its own balance sheets, so the process is literally open-ended. We have absolutely no idea how much is involved.

I was disappointed because I wanted to intervene on the Economic Secretary. He gave the impression of a Minister who was going to make a serious and sensible statement about this weighty issue, but he sat down as soon as he saw me trying to intervene and before he had mentioned a single figure. Call me old-fashioned, but if I were moving a money resolution in the House of Commons, even one for a modest sum of money, I would mention the sum involved and explain why I thought it would provide good value. We have a money resolution that could involve half a trillion or a trillion pounds. On a consolidated basis, if we take all the liabilities into account, it could be several trillion. We might think that it was worth giving a few numbers, or at least some kind of ceiling to suggest that the Government understand that we are talking about big banks in a relatively small country.

Mr. Newmark: Does my right hon. Friend share my concern that the Government do not know the answer because they have not had the time to do their own due diligence on the exact amount of risk to which they are exposing the country and taxpayers? That is why we are now on our second bail-out, and my concern is that we may end up having a third two or three months down the road.

Mr. Redwood: I quite agree. I do not know whether the figure of £37 billion is retrospective, or whether the Economic Secretary thinks it was voted for under some other provision. We know, however, that £37 billion of equity capital was put into banks just a few months ago. The money changed hands only comparatively recently because it took quite a long time to get the approvals and do the final detailed negotiation. In the case of RBS, we believe that £20 billion went in one week, and the following week it announced it had lost the lot and a bit more besides. Again, call me old-fashioned, but I do not feel I got a lot of value out of that £20 billion, and I wonder why the Government put it in, in the way they did, why they did not ask a few questions about the future results before they chose a price to put in new share capital, or why they put in new share capital at all, instead of using guarantees and short-term cash loans, which would have been quite sufficient.

Sir Peter Viggers (Gosport) (Con): To give a sense of perspective about the size of the amounts involved and the speed with which figures can change, on 13 October the Chancellor of the Exchequer told us that the assessment made on the money going into the banks at that point was a cautious one—the FSA had made it on a cautious basis—so the amounts involved were rather larger than might otherwise have been the case. Three months later, on 19 January, RBS had to write off £28 billion, which is the largest amount ever written off by a company.

Mr. Redwood: That is right, and some of us have urged the Government in the past to show a little more concern for the public money involved, to ask more questions and do a little of what is called due diligence in the private sector before committing such huge sums of money to get a better deal for the taxpayer, if they feel that they need to do such a deal at all.

I urge the Economic Secretary, when considering the money resolution, to ensure that next time—I fear that there will be a next time because the Government are looking at a second package of banking support measures—the Government at the very least try to find out the scope of the problem. They should ask what the next set of figures might be. They should take that into account before valuing any share capital or loan capital they intend to put into the bank, and they should understand that a medium-sized country with an annual turnover and national income of £1.5 trillion will find it difficult to stand behind all the London-based banks with their combined multi-trillion-pound balance sheets.

If the Government are not careful, they will undermine the credibility and the reputation of their own debt and public finance by linking themselves too strongly and closely to some large banks, three of which we know have been badly run and have committed themselves to big risks and to big bonus and other contingent payments for no good reason, which have landed the taxpayer with a very big bill owing to the Government’s policy.

I know that others wish to speak. It is a pity that we do not have a three-hour debate on the biggest sum of money ever voted on in the history of Parliament, but I do not want to detract from colleagues’ time. I have made my main points: the Government should show more care, they should provide us with some numbers and they should understand that the total sum involved is too big.

Mr. Redwood: When the regulator decided to increase the capital requirement for each bank in the system, did it calculate how much lending that would take out of the system and, if so, was it happy with that?

Ian Pearson: I will answer the right hon. Gentleman’s question in a moment.

We recognise that it is tough out there, and getting tougher, for hard-working families and small businesses, so we are targeting support at those who need it most. We are supporting households that are facing higher food and fuel bills by raising the income tax personal allowance for 2008-09 by £600, which is worth £120 to the basic rate taxpayer. All basic rate taxpayers will have seen that in their take-home pay from September. We have delayed the fuel duty increase from April this year to April 2009, saving businesses and families nearly £100 million every month, as opposed to the Tories’ bungled policy, which would mean that people would now be facing a fuel duty escalator. We are making additional payments to the over-60s and over-80s of £50 and £100 respectively alongside the winter fuel payment, to the benefit of some 9 million households. We have announced a £1 billion package of energy efficiency measures, which means that all households will be able to save at least 50 per cent. on a range of practical energy-saving devices, for which 11 million of the most vulnerable households will qualify free of charge. We are offering financial support through the winter fuel payment, the Warm Front scheme and the expanded carbon emissions reduction target.

Despite the global credit crunch, we need to ensure that the small firms that are vital to our economy have access to the loans and capital they need to let their businesses grow and develop. An announcement from the Chancellor at the end of last month means that Britain’s small and medium-sized enterprises stand to benefit from up to £4 billion in loans from the European Investment Bank over the next four years. Based on the UK’s shareholding in the EIB, British small businesses should be able to benefit substantially between 2008 and 2011. As a first step, UK banks have already signalled their interest in securing around £1 billion a year from the EIB.

Mr. Redwood: Will the hon. Gentleman tell us how much more tax somebody on £50,000 a year should be paying, according to Liberal Democrat theories?
Mr. Browne: The right hon. Gentleman can be assured that they would pay less. Let me get to the party political dimension, because I know how much he enjoys that aspect of things.

Mr. Redwood: My hon. Friend is making some important points. Has he seen the work of our hon. Friend the Member for Braintree (Mr. Newmark), who believes that true Government indebtedness, including pension liabilities, is now £1.8 trillion—120 per cent. of gross national product—which is why some of us are worried about the country’s financial position?

John Howell: I am grateful to my right hon. Friend for making that point. He is absolutely right: a number of factors have not been taken into account—the pensions element is one, and the whole business of private finance initiatives is another. That is why it is crucial, as I said, to recognise that although the rules are too vague and flaky, it is not the rules themselves that cause the problems but their underlying assumptions. We can all make nice big rules, but if the assumptions and the data behind them are not accurate, there is no point in having them.

Mr. John Redwood (Wokingham) (Con): The right hon. Member for Airdrie and Shotts (John Reid) has made an important speech, and his idea is worthy of longer consideration, although some of the details would need to be fleshed out in order to see whether it was practical or could work. What motivates it is a sense shared on some parts of the Labour Back Benches, and certainly on the Opposition side of the House, that the twin crises that we are living through—the financial crisis and the recession—are not yet responding to treatment as quickly as we would like, and that the Government would be well advised to listen to friends on their side of the House, and to people on my side of the House who wish them well in trying to tackle the crisis, when we offer them advice on the other things that they could do to head off some of the worst disasters that might still lie ahead.

Listening to the Exchequer Secretary, I felt that she was being very complacent. She wanted everyone to believe that this was a global, rather than a British, crisis. Let us go back to August and September 2007, however. Northern Rock was a very British bank, lending too much money to British mortgage holders to pay too much for their houses, and getting into difficulties because it and its customers were greatly over-extended. It was regulated by British regulators, and they let it down very badly. They allowed it to expand too fast, and then starved the money markets of money in August and September. The Chancellor and the Governor of the Bank of England then lectured Northern Rock on how it had to live with its own mistakes. They brought the bank down and, afterwards, decided that the taxpayer should stand treat. That was not good management, or good regulatory practice, and I hope that the Government will learn from that and not do it to another bank.

If we look at the problems that the Government now have with Northern Rock, we can see what a bad so-called solution that was. Taxpayers were put on risk for more than £100 billion, and they have lost £580 million in the first half year in owning 100 per cent. of the equity. That was the stated interim loss. The second half losses might be bigger; there will certainly be such losses. Extra capital amounting to £3 billion has had to be sunk into the bank, and I do not think that we shall see a return on that any time soon. Half the staff are being sacked, £14 billion-worth of mortgages have now been repaid, and the bank is unable to make new advances. It is crippled, higgled and gravely damaged, and the taxpayer is going to have to pay all the costs involved in winding up a lot of the business, getting rid of the staff and shrinking the thing that was once a flourishing institution.

I invite hon. Members to cast their minds back to what the directors and owners of Northern Rock were debating in the spring and summer of 2007, as recorded in their annual report, which came out just before the crunch. They were discussing their response to the regulatory signals that were being sent out. The British and global regulators, but particularly the British regulators for Northern Rock, were telling them that they had too much capital for the volume of loans that they were making, and the discussion within the Northern Rock boardroom related to how it could get its capital down, or its loans up, in order to get nearer to the ratio that the regulator said was needed.

More recently, the British regulators have said to all the banks in Britain that the ratios to which they used to manage are no longer sufficient for the current circumstances, and they are making all banks have more capital, relative to the amount of lending that they do. So in the good times, when there was too much credit, the regulator was saying, “Don’t worry. Lend some more. You don’t need to have a very high ratio.” In the dreadful times, when there is very little credit available for anyone, the Government and the regulators have decided to send the alternative message that banks in the middle of this crisis have to raise a lot more capital, relative to their lending. That does not strike me as wise regulation on either score, but once the regulators have taken such action it becomes the new hurdle or standard, and every other organisation must do the same, not just to meet the regulatory requirements but in an effort to rebuild confidence. The Government need to understand the important point made by my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond), who observed that the £250 billion package of guarantees was not being taken up to a great extent. That is a sign that the package was not properly constructed.

I fully support the action of Government and the Bank of England in standing behind any major bank that is in trouble, and have always done so. Only a lunatic would want to see a major bank go down, and in view of the impact of Lehman’s going down, I would think that even someone who was a lunatic before that event might now understand that it is better to manage institutions through crises such as this rather than precipitate a major crash on the back of a very large institution’s biting the dust. That is why I supported the Government’s £200 billion of extra loans; and it is why I supported all the extra money that they flushed into the money markets, and the £250 billion guarantee scheme.
I think that that guarantee scheme should be revisited. It is not the case that the lending rates in the market between the banks have fallen to the extent that they have returned to their normal relationship with the rates that the Bank of England is signalling, and it is not the case that there is now a fluid and functioning inter-bank market. The best chance that the Government have of getting that market going again is to tweak, or change, the guarantee scheme in the short term, so that more money can flow between the banks. They should be warned, however, that it will never function as well as it did before the crunch, because the regulators—perhaps for good reasons—are now requiring much more capital relative to the amount of lending. All the banks are now fighting to reduce, rather than increase, their loan books, because that is what the regulator and the Government are asking them to do. The inter-bank markets cannot be expected to be as fluid and successful as they were in June 2007, because the regulatory mood—along with the confidence mood—has changed in the banking market.

An additional problem is that the twin difficulties of the financial crunch and the banking crisis are reinforcing each other. While we have lived through some of the worst parts of the financial crunch—let us hope that we now have more stability, because there is a clear understanding in the markets that Governments around the world stand behind their banks in one way or another—we are only on the edge of the serious recession that is now being widely forecast by independent bodies as well as by most Governments. I suspect that this Government will soon be forecasting one, when they get around to revising their figures.

That factor is particularly damaging to an economy such as that of the United Kingdom. The last 10 years in particular have seen very lopsided growth in Britain. Growth rates in London, with its financial services, professional services and business services, have far outpaced those in the rest of the country. Indeed, the growth rate in London has been more than double that in the north and west of the United Kingdom, reflecting the success of those financial institutions and the impact of the credit bubble on property-related and finance-related activity emanating from the very expensive districts in the centre of London. That concentration of effort makes the British economy doubly vulnerable to the downturn now hitting it. The epicentre of the crisis is the financial services and property sector, which is going to fall further—and we have more of it to fall than more balanced economies on the continent and in the Americas.

As the recession bites, the loan experience on all the bank books will deteriorate further. To date, we have been discussing the mortgage mess. The Government would like us to believe that the only mess that we really had to face was the sub-prime market in America, and it is true that some of our banks foolishly lost some money on that market, but we know that a far bigger crisis for the British banks was the mortgage crisis in Britain, where too much mortgage advance was made on house prices that were too inflated. There are big losses coming through as a result of that, which is why it was Northern Rock and Bradford & Bingley that needed special treatment in the United Kingdom. British banks under British regulators built a British property bubble.

The next phase of the crisis, unfortunately, will be a sharp deterioration in the loan experience that constitutes lending to everyone else, not just those involved in property and finance. The economy is now falling off a cliff, and activity is falling dramatically in sectors beyond finance and property. That means that there will be many more bad loans throughout the range of business activities and the industrial and commercial services sector, from here to John o’Groats. All around the country, the same pressures will be felt as the recession bites.

That is why I repeat my advice—it is heartfelt, as I love my country and wish it to do well—that when thinking about buying banks, the Government should be extremely careful about how much equity risk they take on. If they are really going to persist in taking major shareholdings in banks the size of RBS, which has an average balance sheet over the year of £2 trillion, a sum that is bigger than the national income and five times the tax revenue of the country, they should understand that it requires only a small mistake in terms of a bank’s assets and liabilities that falls on the wrong side for taxpayers for them to have very major losses on their hands.

That is why, in this period of relative tranquillity before all the deals go through, the Government should be looking again at the terms and the balance sheets that they will be taking over. They should be sending in the forensic accountants now. We all know they will stand behind the banks, so there will not be a confidence problem. There will, however, be a confidence problem in the Government, and in the amount of Government debt they will have to issue, if they do not behave sensibly by doing some basic accounting work and risk assessment on these huge banks that they are now thinking of nationalising or buying major shareholdings in. The Government should be warned by the fact that they lost £580 million in the first half on a very small bank—Northern Rock. They should remember that RBS is 20 times the size of Northern Rock, so if something goes wrong they will be playing not for a few billions of pounds, but for tens of billions. That is serious money, even for a rich country with a Government who collect as much in tax revenue as the current Government do.
If the Government press on, they must understand that where they are majority owners of a bank, they are responsible for everything. Ultimately, they are responsible for the lending policy, the bonuses and the number of highly paid staff, and for whether a loan is made to Mr. Snooks or Mrs. Smith. They will be made responsible by their electors—the people out there—who will not understand if they say, “This nationalised bank is not actually run by the Government. Yes, we the Government put in all the money on behalf of the taxpayers, but we have no control over how the money is spent.”

Kelvin Hopkins: I am following with great interest what the right hon. Gentleman is saying. He seems to be supporting my earlier contention that the Government ought to put in people to regulate the internal operation of the banks, to make sure that they act in the public interest.

Mr. Redwood: There is at least one difference between us, in that I would not nationalise a bank at all, as I think that would be too dangerous for the taxpayer. The hon. Gentleman is right, however, that if the Government persist in nationalising—taking a majority stake or complete control—they cannot avoid ultimately being responsible for the financial consequences of their actions. I think that Ministers are completely responsible for Northern Rock. They own 100 per cent. of it on behalf of the taxpayer, and I quite understand why people will want to make that an issue with Ministers.

Why did the Government take this huge stake in Northern Rock? They presumably did so because they felt they could do a better job in the public interest by backing the bank than by enforcing a market solution. They did not seem to want a private sector bank to take over Northern Rock, and they did not want just to lend it some money to see whether it could then find ways of making more profit or raising capital in the normal way. I therefore think the hon. Gentleman has a point. When Ministers say they will not intervene, they do not really mean that, of course, because they have already told us they have views on bonus payments and on how much lending should be done. When Ministers try to enforce elements of those views, they will discover that they are trying to do so in respect of very complicated institutions that could lose the taxpayer a fortune if the wrong guidance is given, and which might lose them quite a lot of money even if they do not give any guidance at all. They will find this situation extremely difficult.

It is also crucial to offer people the hope that, in the process of settling the banking crisis in the way we have been debating, more will be done to try to offset the real damage being done to the rest of the economy. I welcome the new enthusiasm in all parts of the House for tax reductions. It is vital to put more spending power into people’s pockets as quickly as possible. Income tax cuts for those on lower and middle incomes would be extremely welcome, as it would be the quickest way of injecting more spending power into the economy.
Ruth Kelly: Does the right hon. Gentleman accept the proposition put from the Conservative Front Bench that those tax cuts should be fully funded, or is he arguing for a fiscal stimulus?

Mr. Redwood: I would not start from where the right hon. Lady and her Government start from. I would be running a much more prudent show than they are, because I would not want to spend all this money on bank shares; I would do it by short-term loans and in the other ways that have been identified, so I would have room for a fiscal stimulus in my Budget. My Front-Bench colleagues have backed the banking package in full, which was very generous of them. However, they are absolutely right: given that amount of borrowing—the banking package as well as the rest of the borrowing—it is too risky to borrow yet more for the fiscal stimulus. They are drawing attention to the fact that Britain is not well equipped to do what it should be doing, which is to give a fiscal stimulus by cutting taxes and borrowing in the short term to pay for that tax cut. Given where the national accounts are, it would be ruinous to add yet more to the borrowing.

The Labour Government seem to believe that there is a free lunch out there. They believe that because a recession is coming, they can say that they can borrow any amount they like, and the markets will miraculously supply it. They need to be very careful. Past history in this country shows that markets can be very forgiving for quite a long time. Of course, markets are just groups of people: they are all the people in the country and overseas counterparties, and they, like Ministers, want the economy to do well and would like all these packages to work. However, if the Government start to present markets with too big a burden of borrowing—if they say that they need to borrow such colossal sums that the markets say, “But we’re not sure we can find that money any more”—we will be in a far worse crisis than we are currently experiencing.
At the moment, the Government seem to think that the answer to too much borrowing and lending in the private sector is to transfer it to the public sector. That is not the answer. If the problem really is, as they described, too much borrowing and lending, we have to go through a process of reducing it. We can do that in a very sharp, quick, deep, damaging way; or we can try to manage it over a longer period, so that there is not such a sharp downturn, but a longer period of slow growth, no growth or modest reductions in activity. The Government seem to have lurched from wanting a very sharp reduction in private sector debt—that is what their regulators and the Monetary Policy Committee were saying last year, with the Chancellor saying that it would serve the private sector right—to wanting a much slower run-down. If they simply transfer it all to the Government sector and build up even more Government debt, they might have another problem on their hands: that of finding it very difficult to finance their borrowing at a sensible price.

The Government have already taken a big hit on the currency. We are about a quarter worse off against the dollar compared with a few months ago, there has been a very big slide against the yen, and against all the strong currencies of the world sterling is very weak. If the Government are not prudent enough, they could also have a further leg down on sterling, which would make us all a lot poorer and make it more difficult to raise the money that they need to carry out their tasks.