Fiscal Responsibility Bill
Philip Dunne dismisses the Bill, which sets the Treasury targets to reduce government debt, as feeble and pure electioneering.
Mr. Philip Dunne (Ludlow) (Con): I am pleased to have an opportunity to contribute to this debate, on what is the first parliamentary day of the new decade. It is also the first parliamentary day of the final year of this Parliament and, I hope, of this Government. Change will undoubtedly come this year, in that it has to be an election year.
As previous speakers have noted, the election is at the heart of this Bill. That observation has not been confined to politicians in this Chamber, as it has been made by outside commentators as well. In its commentary on the pre-Budget report, Goldman Sachs wrote:
"The UK press has concluded that the relatively slow pace of tightening, which doesn't begin in earnest until 2011, reflects politics more than economics-there's a general election next spring."
We will have to wait and see whether Goldman Sachs is right about the spring, but the sentiment reflects what the Bill is all about.
I want to add my voice to those who have spoken in the debate and declared this to be an utterly feeble Bill. The only support for it has come from those on the Government Front Bench. It is one of the thinnest pieces of legislation that I have seen since I arrived in the House nearly five years ago, and it has quite properly been ridiculed-by the shadow Chancellor in particular, but also by every speaker other than the Chancellor himself.
No other issue is more significant, or a greater plank in the Government's own election planning, than sorting out the public finance deficit that this country faces after 13 years of Labour mismanagement. There is no bigger issue facing the country, or for voters to consider at the coming election. No difference between the Government and the Opposition is more striking than their respective approaches to dealing with this matter: the Government are clearly divided, and the Opposition are clearly united.
We could not have illustrated that better had we, as the potential Government in waiting, planned today's debate and set out the approach to be taken by Labour Members to supporting their own Government's legislation. They have not followed that approach. I said earlier that, apart from the Chancellor's, only one speech had been made from the Labour Benches, but now there have been two. Both speakers have said, in terms and at the outset of their remarks, that for very different reasons they would not be supporting the Bill.
There has not been a single speech in support of the Bill. That shows more clearly than we could ourselves the truth of the shadow Chancellor's allegation in his remarks that there is division at the heart of Government over how to tackle the deficit. As we have all acknowledged, I think, that is the critical issue that the country faces at present.
So given that lack of interest, I have to ask why the Government business managers have decided to rush the Bill through the Committee stages on the Floor of the House. The obvious answer may be that they need to get the Bill through quickly to have it on the statute book ahead of a general election, which may be called in early or late spring. But that is too simplistic an answer to my question. I think the simple fact is that the Bill will not be handled in Committee, where evidence sessions could be taken, because the Government are incapable of finding anyone to call as a witness to support the Bill. The evidence sessions would merely give grist to the mill of the Government's opponents on their own Back Benches and on the Conservative Benches in pointing out what a perfectly frivolous and ludicrous piece of legislation we have before us. In short, we are not dealing so much with solutions to a credit crunch. The Government are trying to deal with solutions to a credibility crunch.
The Government have form on the issue of fiscal stability. In his famous, or should I say infamous, Mansion House speech in 1997 the present Prime Minister, then Chancellor, set out his fiscal rules-his first attempt to provide an aura of credibility for his approach to the public finances. He said:
"We will introduce tough rules for government borrowing."
A year later, he told us:
"I will never let the deficit get out of control. We will not spend money we have not earned."
Well, we all know what happened to those fiscal rules. The goalposts were moved as soon as it looked like they might be missed.
The commentators at the Institute for Fiscal Studies spelt out in their 2007 budget briefing:
"The perception that the Chancellor has moved the goal posts and has delayed the tax raising measures and cuts in spending plans that we and other independent commentators had been saying would be necessary until after the 2005 election undermines the credibility of the fiscal framework."
The measures were obviously dropped.
What is the impact of that lack of credibility when it comes to dealing with the current state of the public finances? We have heard from other speakers this evening about the impact within the market. The right hon. Member for Birkenhead (Mr. Field) drew analogies with the run-up to the second world war, clearly with an eye to securing an impact in the media. The impact of the lack of credibility is extremely significant. It is not just the credit rating agencies, which have put the UK sovereign debt on informal credit watch. It is not just the market commentators, who are saying that the Bill will do nothing seriously to address the debt-to-GDP ratios, which must fall faster. The Governor of the Bank of England himself has said that the deficit needs to be reduced much faster than is proposed in the Bill.
Apart from the commentators, the markets themselves are telling us that we are getting perilously close to an apocalyptic scenario. Let us look at the three market measures that are most regularly used to compare this country's public debt with that of our international comparators. We can see that the UK is in a perilous position. In the gilt market-which includes the impact of currency, so the measure is not the most directly relevant-the yield on medium-term gilt is up 43 basis points since 1 December 2009. There has been a similar increase in the US, yet in Germany the figure has risen by less than half over that period.
We can look at inflation-linked bonds, which remove the differences in inflation between countries. Since 1 December 2009, UK medium-term inflation-linked bonds have risen by 23 basis points to almost 3 per cent.-2.96 per cent.-which indicates an inflation risk over the risk-free rate.
Mr. Pelling: Is some of that movement in basis points to do with the market discounting the heavy prospective issuance of debt that is coming, particularly in the US and the UK? Reference was made earlier to PIMCO, which has invested heavily in Government bonds and has taken the view that the UK and the US are particularly difficult investments at this time.
Mr. Dunne: That helps to explain the differential rates in different countries. I am trying to draw out the significant increase since this Bill was first referred to in the pre-Budget report, to show that the markets have no faith in it as a means of trying to reduce the public finance black hole the country finds itself in.
The third measure is credit default swaps, which take out the currency risk because they indicate the premium this country would have to pay should it raise debt in other currencies. Here again, the issue is stark. The UK credit default swap rate today is 83 basis points, up 12 since 1 December 2009, whereas in Germany the rate is only 26 basis points and has risen by three since 1 December. We have had an increase of four times more than that in Germany, and we have a credit default rating twice that of the United States.
Where does that place the UK when competing for finance internationally to fund our deficit? A table helpfully produced by the House of Commons Library showing 2009 Government borrowing as a proportion of gross domestic product for OECD countries rates the UK as third worst. Only the economies of Iceland and Greece are in a more precarious position, and the country that is closest to the UK is Ireland. We have all seen what has happened to their borrowing costs and the stark action that has had to be taken by all three of those countries to bring their public finances under control. The UK sits right in the middle of that bunch.
Quite apart from the challenges of funding the Government's spending over the coming years, given the public finance position we are in, the other significant worry is the impact the increase in rates will have on the rest of the economy-the whole private sector, whose borrowing costs are also priced off the so-called risk-free sovereign rating. There is no question but that the volume of Government debt is not allowing private sector credit spreads to contract. The simplest indicator is the continued wide spread of new mortgages. It is not the supply of credit to the household sector that is so much of a problem, but the price. The Government need to recognise that their action in failing to get to grips with the state of the public finances is spilling over and restraining growth in the private sector of the economy that they are so keen to support.
The Government's credibility is the key to understanding whether the Bill has any prospect of achieving success. We have heard from many other speakers this evening that the Government have no credibility when it comes to forecasting either their debt levels or GDP growth. The track record for their debt forecasting was well demolished by my hon. Friend the shadow Chancellor. As he said so clearly, in every Budget or pre-Budget report from the Chancellor and his predecessor, there has been a claim for debt reduction over a four-year period-as envisaged in the Bill-yet not once has it been achieved.
On the forecasting track record for GDP growth, the pre-Budget report assumes, first, that the economy will recover in a more dramatic fashion than we have experienced in any previous recession. Secondly, it assumes a consistency in growth rates that is unprecedented on two counts. It assumes a 3.25 per cent. increase in GDP for the four years starting next year. This is not only above the trend rate that the Government have presided over throughout the past 13 years, but it is a greater and more sustained increase than in any comparable four-year period of the Blair/Brown chancellorship. One can only assume that those forecasts were optimistic.
My final point on the credibility of the Government in their approach to the Bill relates to their actions. The Bill does nothing to restore faith in the Government's competence in administering the economy or to restore faith in the Treasury's competence. Let us take a recent example of Treasury competence to see whether the current Treasury team are the right people to monitor the reductions in the deficit envisaged in the Bill. Let us take the issue of the bank bonuses.
At the time of the pre-Budget report, the Government announced that they wished to get a grip on bank bonuses. Their objective, which was widely shared across the House, was to extend the period of deferral of bonuses to bank executives in particular, to ensure that they were not motivated to bet the bank's balance sheet, to put it crudely. Let us take as an example the largest financial institution over which the Government have some direct influence-the Royal Bank of Scotland, where the taxpayer is the largest shareholder.
The Government have proposed a bonus scheme for executives at the Royal Bank of Scotland that envisages payments over a three-year period-50 per cent. in year one, 25 per cent. one year later, and 25 per cent. a year after that. That is, broadly speaking, more generous than the current market norm, where deferred bonuses are typically paid equally in three instalments, rather than loaded to year one. Leaving that criticism aside, the other issue that the Government have completely failed to take into account when considering introducing a deferral scheme to Royal Bank of Scotland is that a large proportion of the senior executives at RBS who are transacting in the markets and who are therefore eligible for bonuses are former ABN bankers-the very bank that got RBS into the perilous state that it is in.
If we look at the bonus scheme that applied to those bankers-the current RBS executives who were formerly ABN AMRO executives-the Government's proposed bank bonus deferral scheme, far from extending the period over which they get paid their bonuses, will actually reduce it. Their scheme had a four-year deferral provision, whereas the proposed scheme has a three-year deferral. Not only have the Government introduced a more generous scheme in the one company over which they have some direct control, but they have exposed an issue in relation to the Bill-that is, what happens to a Government Minister who makes such a mess of an area for which they are responsible, such as the bank bonus deferral that I have just described?
What sanctions apply? Will such a Minister be fired or moved on? Who knows? That is highly unlikely. In this Bill no sanctions at all are proposed in the event that one of the targets is missed. As Martin Wolf suggested in the Financial Times to add to the ridicule of the Bill, a future Chancellor who failed to meet the targets might be sent to the tower of London. What chance of this Chancellor or the Minister accepting that as a suitable sanction in the event of failure of the Bill? Perhaps she might be able to tell us.
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