Yesterday's speech on the economy
The link is to the debate yesterday on the economy. I did not mention unemployment in that speech because time was limited and the debate was about the macro economic picture.
Obviously the government does need to work to reduce unemployment. However, that has to fit within the spending envelope which is why I have previously made proposals that reduce unemployment without unsustainable demand from public spending.
Available on Video hereThe Opposition are complaining that the forecasts show that the Government will have to borrow £46 billion more than was previously forecast. Their solution is to borrow more money. They are proposing to borrow an additional £31 billion in any one year—I think that that is the precise figure. I asked the shadow Chancellor what he thought the limit on borrowing should be, but he did not answer the question. One presumes therefore that he has no idea what the limit is. Well, the limit on borrowing is called the International Monetary Fund, when it has to come to the rescue when the markets will not fund a country’s deficit.
The reality is that the interest rates on deficits matter, because they represent a perception of the risk of non-repayment, and of the possibility that a Government will become insolvent. The difficulty is that, as a country increases its deficit, it also increases that interest rate. Gradually, the interest rate increases on the whole of Government debt, not just that borrowed in one year. If the whole of Government debt is in the order of £1 trillion, 1% of that is £10 billion. That £10 billion has to be found either from additional taxes over time, or from additional cuts. Labour’s strategy would lead to greater cuts or greater taxes in the long term—probably greater cuts.
Let us look at how we have got into this situation. An interesting person to turn to for quotations on this is Lord Turnbull, who was the Cabinet Secretary at the
start of the third Blair Government. He said that excessive borrowing started to be a problem from 2005. I quote him:
“It kind of crept up on us in 2005, 2006, 2007, and we were still expanding public spending at 4.5% a year”,
and he argued that the Treasury should have put more money aside. He said last year that the primary reason Britain was
“in the mess that we’re in”
“public spending got too big relative to the productive resources of the economy, by error”.
He added that a loss of output caused by the financial crisis also contributed to the Budget deficit. The mistake is thinking that the problem is caused by one thing alone. There are a number of factors: one is the banking problem; another is overspending by the previous Labour Government.
What we have before us is a motion to deal with a problem caused partly by overspending, to which the proposed solution is yet more spending. In this instance, that means borrowing by the Government for private spending, to be fair, although a cut in VAT on a temporary basis does not generally feed into people’s pockets, but into those of the corporations that do not reduce their prices and do not have to pay so much tax.
In his memoirs, Tony Blair proposed what should have been done. On page 679, we can read him reflecting on what should have been done, consistent with his analysis of the economy:
“In my view, we should have taken a New Labour way out of the economic crisis: kept direct tax rates competitive, had a gradual rise in VAT and other indirect taxes to close the deficit, and used the crisis to push further and faster on reform.”
Tony Blair was clear that Labour should have put up VAT.
I kept my ballot paper for the Labour leadership election; I did not think it was right for me to fill it in. One interesting thing about that ballot paper was that it came along with the manifestos of the candidates. I looked at the entry for the shadow Chancellor, who said that he had been “leading the fight” against the VAT rise. Last year, he led the fight against the VAT rise; now he says, “Yes, we need the VAT in the long term”, as at least the hon. Member for Bassetlaw (John Mann) recognises; he must have managed to persuade him.
What question needs to be asked? The Government have a strategy, and the strategy is reducing the deficit. There are obviously difficulties, given that the solution must be worldwide. Is it therefore right to follow the Labour party’s example and borrow yet more money—another £31,000 million a year—increasing the debt and potentially increasing the need for rescue in the long term, or should we keep on with the strategy we have? My view is that we should keep to the strategy that we have got.
This is the earlier intervention where Ed Balls (unsurprisingly) did not answer the question I asked:
John Hemming (Birmingham, Yardley) (LD): Whatever the Government’s policy, the Opposition’s policy is to borrow more to increase demand. Is there a limit on the borrowing?
Ed Balls: I will return to the hon. Gentleman and his party in a moment. They gave the Government some very good advice 18 months ago, but unfortunately it was not heeded.