John McDonnell
Main Page: John McDonnell (Labour - Hayes and Harlington)Department Debates - View all John McDonnell's debates with the HM Treasury
Charter for Budget Responsibility
John McDonnell Excerpts(8 years, 6 months ago)
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John McDonnell (Hayes and Harlington) (Lab)
I suppose I should deal straightforwardly with the U-turn. Yes, two weeks ago, I recommended that Labour MPs vote for the charter, and today I shall urge them to vote against it. Is that embarrassing? Yes, of course, but a bit of humility among politicians never goes amiss. When circumstances and judgments change, it is best to admit to it and change as well, so I would like to take this opportunity to welcome the Prime Minister’s change of heart on the bid for the Saudi prisons contract.
Let me clear: I have changed my mind not on the principles of the need to tackle the deficit, but on the parliamentary tactics for dealing with this charter. Labour will tackle the deficit. [Interruption.] The Chancellor has a record of ignoring the targets he sets in these charters and mandates, treating his own charter with contempt, so I recommended two weeks ago that we should do the same. It is difficult to take seriously the charters and mandates when time after time the Chancellor has come to Parliament to revise his own charter. It is difficult to take it seriously when he has consistently failed to meet his own targets.
I remember the promises; I was here. The Chancellor promised to wipe out the deficit in one Parliament, but he did not get through half. In 2010, he promised to reduce borrowing to £37 billion by 2014-15. Last year, it was £87 billion—135% more than forecast. He promised public sector net debt would fall to 69% of gross domestic product in 2014-15. Today, it stands at 80% and above. It is no wonder that the charter has been seen as one of the puerile political traps the Chancellor likes to set.
Several hon. Members rose—
John McDonnell
Let me make some room; I will give way in due course.
Voting against the charter makes someone a deficit denier; voting for it would lead to the Chancellor claiming for the next five years that we had signed up to support every one of his cuts in public services and benefits.
I regret that the procedure followed today is an unamendable order—a take-it-or-leave-it order. My initial view was to use today’s debate for a bit of traditional parliamentary knockabout to ridicule the Chancellor’s performance against his own charter. I admit it: I was trying to out-Osborne Osborne.
Apart from the economic analysis and professional advice I have received, what really changed my mind was a trip to Redcar last week, where I met steelworkers and their families in tears at losing their jobs, their livelihoods, their futures. The Government’s failure to invest in our manufacturing industry, even if only to mothball the plant until better times arrive, has meant the end of steelmaking in Teesside and immense distress to families. The Government’s refusal to invest will be embedded in this charter as it now moves on to limit all public sector borrowing.
Gareth Johnson (Dartford) (Con)
I am grateful to the shadow Chancellor for giving way. According to Hansard, during the last Parliament there were more than 100 occasions on which the hon. Gentleman criticised the Government and other organisations for failing to consult sufficiently. Does he now understand the irony, given his complete failure to consult his own colleagues over his position?
John McDonnell
In the Labour party, we have a democratic process involving the shadow Cabinet and the parliamentary Labour party. In fact, it is so democratic that it is reported in the press virtually daily.
This charter will be used time and again as an excuse for the Government’s refusal to intervene and invest, but the more we know about its potential use, the more my view is strengthened—it has to be vigorously opposed. It will be used to justify cutting services and support to families across the UK, including the cuts to tax credits, which are the working families’ penalty. I cannot support the cuts to tax credits for working families. These are people who have done everything asked of them: they have gone to work and looked after their children, yet because of the policy direction in this charter they are going to be hit with a £1,300 cut. Neither can I support the continuing attack on disabled people, which is inherent in this fiscal mandate.
John McDonnell
I will in a minute.
Disabled people are already harassed—some to death—by the brutal work capability assessment and often by benefit sanctions, yet they are to lose over £30 a week. Disabled people under this Government and under the coalition have been hit 18 times harder than other citizens by the impact of cuts. I do not want the Labour party to be associated in any way with these policies, and to dissociate ourselves clearly we need to vote against them tonight.
Sir Edward Leigh (Gainsborough) (Con)
Everyone understands the hon. Gentleman’s views, but he has to explain to the House what circumstances have changed in the last two weeks. There has to be some element of consistency, and of trust in the Opposition: trust that, in future, he will not be blown off course so easily.
John McDonnell
The hon. Gentleman has clearly not been listening. It was professional advice. It was watching the economic headwinds grow. But, in addition to that, it was meeting families who had lost their futures in Redcar that made me decide that we need a Government who would invest and would not leave them adrift.
John McDonnell
I will in due course.
It is increasingly clear that the charter and the fiscal mandate are not economic instruments, but political weapons. This is not an economic debate. It is about the politics of dismantling the welfare state, the closing down of the role of the state, and the redistribution of wealth from the majority to the minority. Austerity is not an economic necessity; it is a political choice.
Mr Jacob Rees-Mogg (North East Somerset) (Con)
The hon. Gentleman said at the beginning of his speech that he wanted to reduce the deficit, but whenever any cut is proposed, he is against it. What would he cut? What would he do to balance the books?
John McDonnell
If the hon. Gentleman bears with me, he will discover the answer. He is renowned for his patience.
John McDonnell
No. This is a limited debate, so I need to press on.
Over the last five years, the focus of the economic debate on the deficit has reflected the capture of the economic narrative by the right since the crisis in 2008. Over six years, the Conservatives have managed to convince many people that the economic crisis and the deficit were caused by Labour Government spending. It has been one of the most successful exercises in mass public persuasion and the rewriting of history in recent times. Today I am going to correct the record.
The facts speak for themselves. The Conservatives backed every single penny of Labour’s spending until Northern Rock crashed. The average level of spending under Labour was less than it was under Mrs Thatcher. It was not the teachers, the nurses, the doctors and the police officers whom Labour recruited who caused the economic crisis; it was the recklessness of the bankers speculating in the City, and the failure of successive Governments to ensure effective regulation. In opposition, this Chancellor and his colleagues wanted even less regulation of the banking sector that crashed our economy. The deficit was not the cause of the economic crisis, but the result of the economic crisis.
Mr Clarke
What happened under the last Labour Government was that the Chancellor and his regulatory authorities allowed first the dotcom bubble and then the crazy credit boom. Tax revenues temporarily soared to astonishing levels. The Labour Government carried on running a deficit on top of those tax revenues, and then the revenues collapsed, leaving us with the worst annual deficit in the G20. The last Government were complicit in the consequences of 2008.
John McDonnell
And when that expenditure was being determined in the House, the Opposition supported it, and never objected. The right hon. and learned Gentleman may well have rejected it, but I remember his Budgets. His Budgets balanced, but when they balanced, there were 40,000 homeless families in London. People were dying on waiting lists before they got their operations. Those were the consequences of his economic policies.
Focusing on the deficit continues to mask the underlying weaknesses and failures of our unreformed economic system. We are witnessing a recovery based on rising house prices, growing consumer credit, a ballooning current account deficit and still inadequate reform of the finance sector. I worry that some of the warning signs are reappearing. But the Conservatives have adhered to their dictum: never let a crisis go to waste. They have skilfully used their narrative of the deficit to enable them to cut public services, slash benefits, and give tax cuts to the rich and corporations. Successive charters and fiscal mandates brought before this House have been cynically used as a weapon in that cause.
The purpose of the original Fiscal Responsibility Act 2010, brought in by Labour, was to bolster the then Government’s economic credibility. I recall what the current Chancellor said. He described it as little more than a political stunt. But he soon learned what a useful tool charters and mandates can be, and immediately upon the coalition’s election, he introduced his own. The fact that he missed most of his targets was irrelevant to him; what was more valuable was that charters could be picked up whenever needed and prayed in aid to excuse any attack on the welfare state and any cut in benefits, and provide a means to redistribute wealth upwards.
The charter before us today also has little basis in economics. Let me quote Dr Ha-Joon Chang, Professor Thomas Piketty, Professor David Blanchflower, Mariana Mazzucato and Simon Wren-Lewis. Those eminent economists in our society said that it has
“no basis in economics. Osborne’s proposals are not fit for the complexity of a modern 21st-century economy and, as such, they risk a liquidity crisis that could also trigger banking problems, a fall in GDP, a crash, or all three.”
They go on to say that if the Government
“chooses to try to inflexibly run surpluses…Households, consumers and businesses may have to borrow more overall, and the risk of a personal debt crisis to rival 2008 could be very real indeed.”
James Cleverly
The wording of this charter has not changed in the past two weeks, and I am therefore curious: what happened two weeks ago? Did the hon. Gentleman read the charter and not understand it, or had he not read the charter when he advised his colleagues to vote on it?
John McDonnell
May I just say to the hon. Gentleman that it is always best before making an intervention to have listened to the debate so far and it is always best to make a calculation as to whether he is going to add to the sum of human knowledge by the intervention? [Hon. Members: “Ooh!”] All right, I was a bit harsh. Sorry about that. Mr Speaker, I am not usually so undiplomatic, am I? May I press on? The Chancellor may not appreciate the economic points that have been made, but—
Lucy Frazer (South East Cambridgeshire) (Con)
I would like to make the point that my learned Friend—my hon. Friend the Member for Braintree (James Cleverly)—was making: if there is no basis for this measure, why did the hon. Gentleman agree to it two weeks ago?
John McDonnell
May I apologise to the hon. Gentleman, as I was too harsh? I certainly do not want to be with the hon. and learned Lady, but if she could just keep up it would be really helpful. I have tried to reiterate three times—I have said it three times. [Interruption.]
Mr Speaker
Order. Let us have a bit of order, on both sides. The nature of such a debate is the existence of strong and contrary opinions. If people insist on shouting from a sedentary position as part of a sort of group therapy, thinking they are being clever, they should just think of what the electorate want, which is a civilised debate, not the most juvenile badinage.
John McDonnell
I am sorry for being so ungallant to the hon. and learned Lady and I apologise to her for that, but I have explained three times already.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
We are getting to the crux of this debate, which is that this fiscal charter is intellectually moronic. It essentially commits this House to never borrowing to invest, even when the cost-benefit analysis of that investment is such that the country would benefit greatly. That is why it has not one serious economist backing it, other than the self-styled experts on the Government Benches.
John McDonnell
I could not have said it better myself. Can we move on?
The Chancellor may not appreciate these economic points, but I believe many of his advisers do. That is why there is a sizeable get-out clause for the charter rules not to apply outside normal times when there is a significant negative shock to the UK economy. Not only are the social consequences of this programme devastating, but the scale of the cuts we are witnessing represents a false economy. They jeopardise the long-term economic prosperity of our country. It is a false economy to cut adult social care when the burden is shifted on to hospitals and accident and emergency departments. It is a false economy to pursue an ideological sell-off of council housing eventually to put up the rents and eventually increase housing benefit. It is a false economy, ironically, that when this Government came to office there were 70,000 people at HMRC and within the next year that is planned to fall to 52,000—a cut of more than 25% in the number of tax-collecting staff, when HMRC says that tax evasion is as high as £10 billion a year. But the worst—
John McDonnell
If the hon. Lady does not mind, I have taken a large number of interventions. The debate is time-limited. If she has any points that she would like to raise with me, I am happy to meet her separately or write to her. [Interruption.] I am doing my best to be nice. It is the new politics of the Labour party.
The worst false economy is the failure to invest. This will be a direct result of Government policy embedded in this charter, with its limits on all public sector borrowing. Economists from across the spectrum have written and commented on the need for investment for the future. The World Economic Forum ranks the UK 10th for the quality of our infrastructure, behind Germany, France, the Netherlands and Spain. This Chancellor’s strategy has given us investment as a share of GDP lower than all the other G7 countries, falling even further behind the G7 average in recent years.
That is why business leaders, trade unions and a host of others are calling for investment. It is incomprehensible for the Chancellor to rule out the Government playing a role in building our future. For him to constrain himself from doing so in the future, no matter what the business case for a project, has no basis in economic theory or experience.
We also face an uncertain medium-term future for the global economy. In recent weeks there has been mounting evidence of a decline in global demand, particularly in the emerging markets.
Several hon. Members rose—
John McDonnell
I will press on, if hon. Members do not mind, as time is short.
Economists have warned of the potential for a future slowdown in western economies as a result. Former chief economist at the World Bank, Larry Summers, wrote last week that the dangers facing the global economy are more severe than at any time since the height of the crisis. Faced with these potential challenges, it makes no sense to close down the fiscal options available, especially when there is a possibility that monetary policy options may also be constrained.
I want to break the stranglehold that the focus on deficits has had on the economic debate in this country in recent years. Yes, the deficit is vitally important, but we need a paradigm shift to open up the wider debate on what makes a healthy economy, a prosperous economy, in which everybody shares in that prosperity and in which everybody is secure, not just the wealthy few, where everybody has a decent home in a sustainable environment, is able to develop their talents to the full, has secure, stable, well-paid and rewarding employment, and support when they fall on hard times. We will tackle the deficit, yes, but we will not tackle—[Interruption.] Hon. Members should listen and they will hear.
We will not tackle the deficit on the backs of middle and low earners, and especially not on the backs of the poorest in our society. We will tackle the deficit, but we will do it fairly and to a timescale that does not jeopardise sustainable growth in our economy. We will balance day-to-day spending and invest for future growth, so that the debt to GDP ratio falls, paying down our debts. We will do this, first, by ending this Government’s programme of tax cuts to the wealthiest in our society. This winter, when the letters go through the letterboxes telling working families how much they will lose in tax credits, we will be reminding them that their tax credit cut has paid for a cut of billions of pounds in the inheritance taxes of the richest families in this country.
Secondly, we will give HMRC the resources and powers to tackle tax evasion and avoidance—no more Facebooks paying less than £5,000 in tax despite £35 million in bonuses and total global profits of £1.9 billion—but above all else we will grow our economy. We will use smart Government institutions to strategically invest in the key areas that increase GDP in the future: education, health, research, technology, human capital formation and training—a progressive economic agenda that recognises that wealth creation is a collective process, working in partnership with businesses, workers, public institutions, and civil society organisations that create wealth in this country.
John McDonnell
I have given way a number of times and this is a time-limited debate; I apologise.
That is why we will establish a national investment bank to invest in innovation across the entire supply chain, from the infrastructure we need to the applied research and early stage financing of companies. To tackle the growing skills shortages we will prioritise education in schools and universities along with a clear strategy for construction, manufacturing, and engineering skills to build and maintain sustainable economic growth. The proceeds of that growth will reach all sections of our society.
So we are launching the debate on the economy we need and the economic instruments and policies needed to achieve that prosperous and sustainable growth. That is why we are reviewing every aspect of economic policy and systematically assessing our economic institutions, the Bank of England, HMRC and the Treasury.
Today I can announce that I have appointed a former member of the Monetary Policy Committee, Professor David Blanchflower, to lead a review into whether the Monetary Policy Committee should be given a broader mandate. He is joined by Lord McFall, the former Chair of the Treasury Committee.
This is Labour’s radical project. It is based upon the sound advice of some of the best economic brains in the country. We will be testing our policies and economic instruments and we will be asking the Chancellor to give us access to the resources of the Office for Budget Responsibility to model our proposals. I am asking the same of the Governor of the Bank of England.
We are seeking the widest public engagement in our economic policy discussions. The dividing lines between us and the Government are not just on how to tackle the deficit and who pays for the crisis. They are more fundamental. It is about for whom the economy works and the role of the strategic state in this process. So today we will oppose this charter as an instrument for imposing austerity on our community unnecessarily. We are bringing to an end the petty game playing and moving on to a more serious debate of how the economy can work for everybody.
Stewart Hosie (Dundee East) (SNP)
Thank you, Mr Speaker. I shall be as concise as I can be, within reason.
The Chancellor was right to talk about the ups and downs in the economy, and he is right to be cognisant of the risks involved, but to set out a charter with a fixed target with a fixed timescale—namely, to run a fiscal surplus by 2019-20—is precisely to remove any flexibility that might be required in the meantime. No one could have been in any doubt about the Government’s intention when the charter for budget responsibility summer update—the most recent update—was published in July. It was to target a fiscal surplus by 2019-20 and continue to run a surplus thereafter.
The problem for us is what that means in the real world, for ordinary people in the real economy. We kind of know what it means because many have told us—not least the Institute for Fiscal Studies, an organisation often prayed in aid by the Chancellor. We have had our disagreements with the IFS, but for the purposes of tonight’s debate I have to say that it is doing a sterling job. It has published an updated analysis on the scale and distribution of the public sector spending cuts expected in the November spending review. Those cuts underpin the charter’s objectives and the Government’s austerity policies, but the IFS says that those policies put a disproportionate burden on the most disadvantaged families.
The IFS also talks about the higher minimum wage, but says that it will not be enough to compensate lower income households for the welfare cuts. That is a particularly important point, given how many of the welfare cuts are now being directed at tax credits. We all believed that tax credits were an essential tool to “make work pay”, but they are now to be removed to the extent that perhaps 3 million households will be worse off. Also, the scale of cuts to public services envisaged by this trajectory in the public finances will be substantial, with non-ring-fenced Whitehall Departments being asked to find real-terms cuts of between 25% and 40% over the next four years. In short, the austerity measures announced in July will disproportionately harm the poorest and most vulnerable households and non-ring-fenced Departments while of course giving tax breaks to the better off, thus increasing inequality.
Indeed, the IFS and others have repeatedly warned that the planned changes to the tax and benefit system are regressive. They have said that, given the array of benefit cuts, it is no surprise that the changes overall are regressive, taking much more from poorer households than richer ones. The September analysis of the IFS said that the poorest two income deciles will each lose on average about £1,000 a year as a result of the tax and benefit changes announced for implementation during this Parliament. Of course the richest two deciles will be largely unaffected.
According to research by the House of Commons Library—this is the most commonly accepted figure—we are now looking at some 3 million households losing somewhere in the order of £1,300 a year. Importantly, notwithstanding the rhetoric we sometimes hear from the Government Benches, it is the case that the increase in the minimum wage for people aged 25 and over—wrongly branded a living wage—is nowhere near enough to offset the cuts in tax credits.
If we go back to what the IFS said, the national living wage is not a substitute for targeted benefits and tax credits when it comes to helping poorer households and tackling poverty, which runs rather contrary to the assertions made in answers by the Prime Minister at Prime Minister’s questions today. The irony is that the largest part of the gains from the new minimum wage will not go to the poorest households. Indeed, 55% will go to households with higher than average median earnings. The Chancellor’s national living wage is no such thing. In the context of the charter it is important to remember that the real living wage reflects the minimum income necessary to achieve an acceptable standard of living and accounts for existing in-work support. As tax credits are cut, the current living wage, which is already higher than the proposed national minimum wage, will have to be increased further. On top of that, the UK Government are set to continue with their cuts to day-to-day public services. That is the implication of the fiscal charter. Those day-to-day cuts to public services in unprotected Departments will be around £24 billion—19% in real terms over the rest of this Parliament. Scotland, Wales and Northern Ireland will see something in the order of a 5.2% real terms cut to their budgets over the same time frame.
Let us put that in context for the people who may be watching this debate. This will be 10 years of discretionary consolidation—a decade of austerity for real people and the real economy. Austerity strangled the recovery early in the previous Parliament and it will increase inequality in this one. All of that is driven by the fiscal charter. [Interruption.] I think I will leave our friends in the Labour party to their own mourning over the shambles of the position changes over the past 24 hours.
Stewart Hosie
Before I move on to the fiscal charter, I will happily give way to the shadow Chancellor.
John McDonnell
Is it not true that the proposals that the Scottish National party have now brought forward are actually Labour’s proposals from six months ago?
Stewart Hosie
May I say gently to the hon. Gentleman, whom I genuinely like, that we voted against the fiscal charter on 13 January? Whether he liked it or not, it was his party that voted with the Tories. I am pleased that it has changed its position, but I think on balance it might be better to focus on this matter, where the Chancellor and his party are on rather weak ground, rather than on some internecine struggle.
Before I move on to the fiscal charter, I want briefly to ask the Chancellor about the consequences for Scotland. He knows that under the Scotland Act 2012 Scottish Ministers now have limited borrowing powers, so can he confirm that there is nothing in the charter that will limit the exercise of those statutory powers and that, irrespective of whether or not the UK is borrowing, Scottish Ministers will remain free to borrow up to the agreed limits?
What the Chancellor has done, of course, is insist that the economy not only breaks even, but runs a current account surplus that will hit £40 billion by 2019-20. He announced in July that, in order to do that, additional welfare cuts would total £33 billion in this Parliament. Cuts to essential capital expenditure would total another £5 billion in this Parliament. Essentially, he is cutting £40 billion more than is necessary to run a balanced current budget, and almost all of it will be paid for by punishing the poor and stripping the capital budget of another £5 billion.