Cable on the Economy

11.02.53am BST (GMT +0100) Tue 23rd Jun 2009

• [Jun 18] Vincent Cable: I WISH to touch on three of the themes that have emerged from our discussion-the general state of the economy . . the budget deficit . . and the state of bank lending . .

The Minister is right to say that the mood on the economy has changed, certainly compared with three months ago. We are no longer talking in terms of Armageddon and a return to the 1930s. There has been a change of mood and greater optimism. On the objective evidence, it is clear that the economy is falling less rapidly than it was, although we probably cannot say any more than that. It is not surprising because the authorities-here, in the US and in other countries-have thrown the kitchen sink at the economy. We have had drastic cuts in interest rates, the creation of money, big fiscal deficits and, in the case of the UK, a massive devaluation. It would be amazing if all that had not had an impact.

I am more sceptical about where all this will lead. There are big areas of uncertainty. For example, unemployment is still rising, both in aggregate and among particular groups. This week we saw a big increase in the number of young people not in education, employment or training, and in two months a big graduate cohort will come on to the labour market, many of whom will not find work. The effect of rising unemployment is also significant in terms of confidence.

Nor do we know what will happen when the Bank of England withdraws the monetary steroids that are keeping the economy going at the moment. The Governor, in his speech yesterday-in one of his quieter passages-pointed out that next year, in order to prevent an excessive flow of liquidity into the economy and the danger of inflation, he will cut off the increased liquidity injection. We do know how that will affect growth. The Minister said he is confident in the medium term, and I hope that he is right, but we have to ask where that confidence comes from. Households and businesses are de-leveraging frantically and the Government will have to rein back their spending, so at this stage it is difficult to anticipate where the injection of growth will come from.

The hon. Member for Banbury spoke about the deficit. He is right to say that there is a serious problem. Government tax receipts are now 35 per cent. of GDP-lower than at any stage since the days of Harold Macmillan. We are in a low-tax economy-not by design but because of the collapse of revenue from the financial services sector and housing-and expenditure is some 48 per cent. of GDP, so we have a 12 to 13 per cent. gap that has to be borrowed, and that is clearly not sustainable. The Government have a problem with timing-I sympathise with them on this point-because it would be foolish to try to contract the deficit suddenly in the middle of a recession, but it will have to happen. Severe budget discipline will be needed, and it would be helpful to start from a platform of honesty about that. It is clear from the Government's own plans that current spending is being cut according to any meaningful measure, and anecdotes from local hospitals and other sources suggest that the cuts process has already started.

In addition, a very deep cut is planned in public investment-a halving from its peak. I introduced a debate on that point on 2 February, because it is a big problem. The Minister referred to the need for infrastructure investment, but it is difficult to see how that will be financed, given the scale of the cuts required. I agree with the hon. Member for Banbury that in this discussion of public finances, it would be helpful to get beyond broad aggregates about expenditure limits and get down to the particular programmes that we will have to talk about cutting. We have tried to inject into that debate discussion not only about the defence budget, as the hon. Gentleman suggested, but about tax credits-which may be good in principle, but have become over-extended-public sector pensions and many other items. We will need a mature and grown-up debate on those, in which this House should participate. Sadly, for constitutional reasons going back a century or more, we do not have the powers that we perhaps should have.

There is also clearly a serious problem still with the banking sector. Many solvent, successful businesses with good order books and a good credit history cannot get credit on decent terms. They face big arrangement fees and unreal demands for security, and this is causing them to cut back and close their doors. Many of us see that at constituency level, and the business federations also report that back to us. There is a big lending problem. Many individuals have also been excluded, which enhances the relevance of the post bank proposal put by the hon. Member for Blaydon.

In addition to the lending constraints, the Government have bottled the big issue of banks that are too big to fail. As the Governor of the Bank of England pointed out yesterday, that whole concept is outrageous. If banks are too big to fail, they are too big, and the Government will have to take the initiative to break them up or find some effective way of regulating them so that the taxpayer is not taking on excessive levels of risk.

The Governor also said that we need to address the whole climate of irresponsible risk taking in the City and the banking sector, which still has not been properly confronted. We have seen a premature return to the culture of bonuses, although we have seen some limited restraint in the semi-nationalised banks. However, the Government still have not put in place a framework for dealing with that issue systematically.

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