Michael Meacher

Labour Party | Oldham West and Royton

Pre-Budget report debate

Thursday January 7 2010

Pre-Budget report
[Relevant documents: The Fourth Report from the Treasury Committee, Pre-Budget Report 2009, HC 180; and the Third Report from the Joint Committee on Human Rights, Legislative Scrutiny: Financial Services Bill and the Pre-Budget Report, HC 184.]

3.43 pm
Mr. Michael Meacher (Oldham, West and Royton) (Lab): What has been rather depressing about listening to the speeches of Opposition Members is how exclusively they seem to be concerned about the interests of the financial markets and how little concern they appear to have about the wider interests of the people of this country. All this is rather like a double-take of the Geoffrey Howe Budget of 1981, to which the right hon. Member for Hitchin and Harpenden (Mr. Lilley) has just referred. That Budget decimated the industrial economy and, as my right hon. Friend the Member for Holborn and St. Pancras (Frank Dobson) has said, produced a lower rate of growth over the relevant period than in the preceding period of the 1970s, which was extremely difficult because of hyper-inflation due to oil prices. It is rather tragic that minds seem to be closed to the idea that there are alternative ways of dealing with the deficit that will not be so socially destructive and that could be more effective in the long run. That is what I want to discuss.

I shall focus on one crucial aspect of the pre-Budget report, which has had a little attention today but which has not been properly faced up to: the Treasury's assumptions about growth over next year and the year after. The Chancellor's view, as he expressed it, was that the worst is over. As we all know, the contraction of 4.75 percent. in 2009 is a post-war record and borrowing this year is on course to reach a peacetime record of 12 to 13 per cent. of GDP, yet the economy is forecast to rebound by 1 to 1.5 per cent. this year, rising to 3.5 per cent. in 2011-12. That would enable the Government to achieve their target of halving the deficit within four years, without the savagery of the full cuts that the Tory are clearly planning if they were to win the election. That projected growth is absolutely crucial to the PBR strategy but where is it going to come from? That is my question.

It is true, of course, that there are some real signs of recovery. They include the unprecedentedly fast turnaround of financial markets, which some say has never happened so quickly in 300 years. The assumption is that somehow that will drag the real economy up behind it, but that

7 Jan 2010 : Column 346

remains to be seen. Other factors are the slowing in the increase in unemployment, which is very welcome, the lower rise in home repossessions than in previous downturns, and the greater support for youth employment brought about by the Government's present expenditure of £5 billion on job placements for 18 to 24-year olds and the increase in training and apprenticeships. However, my question remains: all that is important and useful, but will it add up to a huge surge in growth to 3.5 per cent. within two years?

In the boom years before the crash in 2007, household consumption contributed 1.75 per cent. of growth each year, with business adding about another 0.25 per cent. for a total of 2 per cent. That, of course, was in the fat years but now-after the worst recession since the war, the collapse of large elements of the banking industry, a big drop in house prices, a record fall in investment and with tax rises and spending cuts being promised by all parties-the Treasury is looking to household spending contributing 2 per cent. to growth in 2011-12, and to business adding another 1 per cent. I simply ask again whether that is credible.

Unemployment is still expected to rise to 2.8 million, and family budgets remain tight. Pay cuts, pay freezes and short-shift working are still spreading across the country. I ask again: where is growth on a sufficient scale going to come from?

In my view, the essential element missing from the PBR is a major injection of demand in the public sector. The private sector will not provide that demand, because there is no prospect of profitability until there is a much more visible turnaround in the real economy. Quantitative easing even of £200 billion has not provided the necessary level of demand up to now, as the banks have used the money not to increase lending to struggling businesses but rather to consolidate their balance sheets. In any case, we understand that the Bank of England seems minded to call a halt to quantitative easing once gilt purchases hit £200 billion in February.

Moreover, the injection of demand that we need will certainly not come from private consumption because, as we all know, the level of consumer debt is not far short of the whole of GDP. So the only way to inject the necessary demand into a very weak and fragile economy is through massive public investment in job creation: not £750 billion, which was spent bailing out the banks; and not £200 billion of quantitative easing, which has been much less effective than expected. A fraction of that could be used to underpin large-scale job creation in sectors where it is desperately needed, such as house building.

There are 12,000 people in my constituency alone on the waiting list for a house, and I am sure that the situation is much the same throughout the country. House building is at its lowest ebb for 80 years, and with a recession that is an extraordinary combination. We need such investment for the restoration of our creaking infrastructure and to blaze the way for the new green and digital economy, which I think all Members agree is where the future lies.

Why do the Government not make that investment? I suspect that it is because they came into office committed, after the Thatcherite monetarist years, to a complete repudiation of Keynesian demand management. The Opposition absolutely share that view, but I had rather higher hopes for the Government. We certainly heard

7 Jan 2010 : Column 347

that view in the speech from the Opposition Front Bencher, the hon. Member for Runnymede and Weybridge (Mr. Hammond). The story is well known, but I am embarrassed to recall that in 1997 the then Chancellor, the current Prime Minister, said that he was pursuing a regime of neo-classical endogenous growth theory. Shorn of the unfortunate terminology, it means that demand should be generated by the enhancement of supply within the economic system: from education, improvements in training, increased research and development, which is necessary, the commercialisation of science and so on. That, combined with Friedman's quantitative money theory, which was prevalent in the 1970s, certainly provided the basis for Mrs Thatcher's macro-economic policy. It is a quixotic, old-fashioned and perverse Tory theory, and regrettably-very regrettably-new Labour took it over wholesale in 1997.

The policy works fine when other vigorous, external sources of demand such as strong export demand from other countries, major technological breakthroughs or continuing private sector investment are in place to drive the economy, as they were in the boom years of 1994 to 2007. The policy works disastrously when there are no strong external sources of demand, as there were after the infamous 1981 budget, which over the next four years pushed unemployment up to 3.2 million; and as there are now, after 2008, when unemployment is still heading towards 3 million and when even the type of fiscal expansion that in 2000 countered the downturn from the dotcom collapse is not possible because of the budget deficit. If there was ever a time for Keynesian measures to restore demand in a very fragile economy, it is now.

The black hole in the PBR is not the opaqueness about where the cuts will fall, as the Opposition have repeatedly taunted, but the lack of any action to create the 500,000 to 1 million jobs that the economy desperately needs. Of course, the enormous budget deficit must come down; we all agree about that. But it is far better to do so by getting people off unemployment and housing benefits and back into work, where they start contributing to income tax, national insurance and VAT. The alternative, of rapidly making drastic cuts in public expenditure, clearly appears once again to be Conservative policy-but probably on a greater scale than any of us have yet realised. However, that could well have the opposite effect of turning a deep recession into a vicious spiral of decline, and prompt an even worse double-dip slump.

That is exactly what happened in Japan in the late 1990s, when after a lost decade the Government increased public expenditure but also increased taxes. They did that prematurely and suffered the consequences of another lost decade. It was the same when Roosevelt came to office. He was a balanced-budget man, but he saw the plight of the country and got expansion going with the new deal. By 1935, two years later, there was an improvement-an expansion-in the economy, but at that point he started to raise taxes and the United States went into a fairly serious further decline from which it did not escape until the war.

Of course, it will be objected that with the deficit as high as it is, we cannot afford to increase it any further, but that is simply not true. Our current debt-to-gross

7 Jan 2010 : Column 348

domestic product ratio is 61 per cent.-slightly higher, I agree, than that of France and Germany, but less than in the United States, where it is 69 per cent., or Italy, which is perhaps not the best example, where it is 102 per cent., with Japan still on 107 per cent.

Mr. Hands: Surely the right hon. Gentleman must realise, first, that our indebtedness is rising incredibly quickly, which is in itself a cause for alarm; and secondly, that the savings rate in countries such as Italy and Japan, as opposed to our utterly anaemic domestic rate, makes that comparison a very difficult one. If we had the savings ratio of Japan or Italy, perhaps we would not be as alarmed as we all are and should be.
Mr. Meacher: If we are looking at Japan and Italy, that is a perfectly fair point. The hon. Gentleman says that our indebtedness is rising quickly, and I accept that, but the question continues to be what is the best way of reducing it. The point that I was about to make-he did not give me a chance because he intervened a bit too quickly-is that the best comparison is with Britain's position during the second world war, when our debt-to-GDP ratio reached 250 per cent.-two and a half times our entire GDP. What happened after the war-did we tackle the situation with gigantic cuts in public expenditure? No, it was tackled in exactly the opposite way with large public expenditure programmes of just the kind that I am talking about to get the economy working again and to get unemployment down. I hate to say this but, in some says, that inaugurated the golden age of capitalism between 1948 and 1976. [ Interruption. ] I say that ironically. The fact is that that was a highly successful policy.

Let us not forget that, under the Thatcherite policies of the 1980s, we had not just one collapse, but two. It is all very well to talk about Geoffrey Howe's Budget producing a great deal of growth-it did in the end, of course, because of growth in other countries and the rise in exports, and the end of the oil inflation of the 1970s, but it then produced another collapse in the early 1990s.

I should make it clear that I am not at all opposed to public expenditure cuts where they are justified. We should always be looking to see whether public expenditure is justified. I think-a significant number of very senior military chiefs, if not most, agree with this-that the £75 billion planned over the next 30 years for continuing with Trident is not justified. I also think that the £10 billion or so for identity cards cannot be justified on a cost-benefit rationale, and that one cannot justify expenditure running into tens of billions of pounds on massive Government Department IT super-computers, which is pretty wasteful given all the experience we have had.

Let me say to the Conservatives, who may agree with some of what I have said, something that they may not agree with-that taxes on the wealthy should be boosted so that they pay their fair contribution at a critical time for the nation. The Government are beginning to do that, but in my book nowhere near to the degree that is justified given that the wealthy and the bankers have produced the problem and that the rest of the country are expected to pay for it. That simply cannot be justified-that is the bottom line.

We should crack down much harder on tax evasion, which is reckoned to cost the economy something like £25 billion every year, and significantly increase the

7 Jan 2010 : Column 349

penalties for those who are caught. We should end the non-dom abuse, as it is insufferable that it has carried on for so long in this country, and we should certainly introduce a Tobin tax on financial transactions. We should raise capital gains tax to the level- dare I say it?--at which Nigel Lawson left it at the end of the 1980s of up to the 40 per cent. that is the higher rate of income tax. It is only fair that there should be a rate of 50 per cent. on incomes over £100,000 and 60 per cent. on incomes over £150,000. If the situation is as critical as many people believe, such rates are fair and equitable.

We need public expenditure cuts where justified, tax increases where necessary but above all a massive public investment programme in job creation to swing the economy out of recession and decline and back into growth and expansion. There is no other realistic foundation for the Government's prognosis of 3.5 per cent. growth by 2011-12. I trust that the Government will make that the highlight of their last pre-election Budget in March. It would be thoroughly good for the economy and extremely popular in the country, so I ask my right hon. Friend the Financial Secretary whether we can have that assurance.