Section 5 of the European Communities (Amendment) Act 1993

Kelvin Hopkins Excerpts

Wednesday 27th April 2011 Commons Chamber

[Kelvin Hopkins (Luton North) (Lab)]

The Minister talks about imbalances. We always talk about financial imbalances, but the real imbalances in the European Union are the massive imbalances in trade. Germany has looked after its manufacturing and we have neglected ours under several Governments over the past 30 years. We at least are able to depreciate our currency and to address that to an extent, but there has still been a complete failure by successive Governments to do anything to counter the collapse of manufacturing that began in 1979 when we lost a fifth of it following the election of a Conservative Government.

[Mr Hoban]

The hon. Gentleman makes an important point. Under the previous Government, we saw a further deterioration in manufacturing and an overreliance on the financial services sector, creating some of the imbalances that led to the deepest recession since the 1930s. Part of the challenge faced by the Government is how to tackle those imbalances and move to a more broadly based economy, and I shall touch on that later in my speech.

We must remember that sustainable economic growth across Europe is vital to the success of the British economy. Having the right warning mechanisms in place, underpinned by sound data, will help to identify future economic crises that could harm the UK economy. Even though we are not part of the single currency and will not be joining it in the lifetime of this Parliament, we cannot consign ourselves to be bystanders in the debate.

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[Chris Leslie]

I presume that the House has to agree the contents of the convergence programme before it can be posted to the European Commission. The hon. Member for Bury North (Mr Nuttall) implied that the Commission could probably glean all the information online, and there is a perfectly reasonable argument that the Commission should follow events in member state countries rather than expect these matters to be handed to it on a platter. I do not think that presenting the information is necessarily genuflecting in front of Brussels, but the obligation to do so is certainly a core component of the treaties. I simply point out that fact.

The point of the motion about which we need to be most wary is the noting “with approval” the Government’s assessment of the economy, particularly given the Chancellor’s and Treasury Ministers’ lamentable failure to understand the need for economic growth. Page 13 of the convergence programme, which was published just 24 hours ago, says that the recovery is in line with previous recoveries. That, of course, is not the case.

In the recessions of the early ’80s and ’90s the economy had clawed back economic strength by this stage in the economic cycle. However, since this Government took office, the trajectory of recovery has stalled. We are already seeing that the information in the document, published just 24 hours ago, is becoming out of date.

[Kelvin Hopkins]

Is it not rather regrettable that we should have chosen to acquiesce in the Government’s decision rather than call for a Division? I would be happy to vote against the document if we had the chance.

[Chris Leslie]

We have the opportunity to divide the House on this matter, although I think that it would be a deferred Division; obviously, that is a matter for Mr Speaker.

As we go through the details of the document, we see that there are problems in it. Page 17 says that the economy is forecast to grow by 1.7% in 2011—lower than the forecast in the June Budget. Is that forecast sustainable? The Government and the Office for Budget Responsibility revised down their forecasts for growth in June and revised down expectations in November. The OBR then revised down expectations for a third time after the March Budget.

The answer to the question that I asked the Minister earlier—what was the OBR’s prediction for the first quarter of this calendar year—is 0.8%. Yet today the Office for National Statistics gave a rather comatose and limp growth rate of 0.5%. That comes on the heels of a growth rate in the fourth quarter of 2010 of minus 0.5%. Essentially, there has been a zero rate of growth—flat-lining—over the past six months.

As Stephanie Flanders, the BBC’s economics editor, said, it is

“depressing to think that the economy is treading water…in a normal recovery we would expect to see a lot of momentum at this point”.

Chris Giles, economics editor at the Financial Times, said that for there to have been any credible claim to a return of underlying growth, this quarter’s figure should have been 0.7%. He went on:

“Add in one quarter of the growth expected in 2011—about another 0.5 per cent—and the figure necessary to show the economy growing at an average pace in the first quarter is at least 1.2 per cent.

Arguably, it should be even higher, at somewhere about 1.7 per cent, if the underlying stagnation in the fourth quarter of 2010 has been recovered in the first quarter of this year.”

We are a long way from that, and that is a serious problem. Yet the Chancellor seems to think that we are on the right track; as somebody said today, if he thinks that, he needs to chuck away his satnav and get a new one.

The GDP growth figure of 0.5% for the first three months of this year merely replaces the loss of output in the snowbound fourth quarter of 2010 and suggests that the economy has no underlying momentum at all. The chief statistician at the ONS said today that we had been “on a plateau” for the past six months. Tony Dolphin, the chief economist at the Institute for Public Policy Research, says that a 0.5% fall followed by a 0.5% bounce-back is equivalent to two successive quarters of zero growth—

“as close as it is possible to come to a recession without actually being in one”.

Yet the Prime Minister says that this is “good news”—those were his words as he trumpeted this resounding success at Prime Minister’s Questions today. Even the Minister said, a matter of minutes ago, that it is good progress. I am afraid to say, however, that the document we are being asked to approve is already out of date, even though it was published only 24 hours ago. It is a bit of dead parrot. It is no more, it has ceased to be, it has expired; it is an ex-convergence programme.

It is not good enough if the Minister cannot even produce a document when he gets advance notice of ONS growth statistics that matches the realities of the economy rather than the forecasting ideas that are dreamed up in the Treasury. That is a sign that the Government do not understand the importance of growth in our economy, especially when today’s statistics showed that construction has fallen back by 7% over the past six months, with total production already falling back even from the last quarter before Christmas. Government cuts have not yet started in earnest, and the VAT increase is already biting hard.

What are the prospects for business growth? On page 14 of the document, the Treasury says:

“Credit conditions have shown signs of stabilisation”.

That is certainly not the experience of small and medium-sized enterprises: lending to businesses is in an atrocious state. It goes on to say in paragraph 2.43:

“however, credit conditions for smaller firms remain tight”.

That is an exceptional understatement. The Bank of England’s lending report shows that lending to SMEs fell by a further 3% in February. That is echoed by the British Bankers Association’s growth rate statistics on lending to small businesses, which cited a figure of minus 6% in December. So much for the much-vaunted Project Merlin. Yet the mark-ups that small businesses have to pay for loans are widening, and the banks are charging small businesses even more even though less and less lending is available. We have a serious systemic problem with our economy. Underpinning the difficulties with growth are the factors that businesses need in order to fire up the economy, and they are going wrong.

We also have to look at the Government’s failure on employment. Page 84 of the convergence programme document says:

“In line with a weaker outlook for output growth, we expect employment to be lower than forecast in November.”

The OBR predicts that unemployment will go up by 200,000 as a result of the Government’s policies. If each unemployed person costs the Exchequer about £7,800 in welfare costs and lost taxes, that could represent a loss to the Exchequer of more than £1 billion—money that the Exchequer should have coming in that is going the wrong way. In addition, inflation is undermining Government spending plans, as the document admits in terms of VAT fuelling inflation, and it is forecast that borrowing and debt will be higher than predicted in June. As a consequence, the interest that we will need to pay on our borrowing will be higher because of the inflationary costs of social security expenditure.

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[Chris Leslie]

As the hon. Gentleman knows, the paradox of austerity and of an anti-growth strategy is that it costs more in the long run. I quite understand that many Government Members do not understand the causes of the deficit. It is therefore improbable that they are the right people to solve the deficit. If they understood its causes, perhaps I would accept their rationale on how to solve it, but they do not.

[Kelvin Hopkins]

I hope to help my hon. Friend a little. If one makes unemployment go up, fewer people pay taxes, more people depend on benefits and the deficit gets worse, not better. That is precisely what will happen.

[Chris Leslie]

That is precisely the point that we need to make this evening: an austerity approach that cuts too far and too fast will cost more in the long run. That is not just in terms of the lost generation of young people who are now on the dole—one in five young people are now unemployed—and not just in terms of the higher welfare costs, which will mean higher borrowing. The House of Commons Library told me today that if the past six months of the economy had emulated the first six months since the general election, the Exchequer would have received an additional £6 billion in revenues. However, because growth is flat-lining, the Treasury is recouping less revenue. The Chancellor will therefore have to add £6 billion to borrowing and the deficit will be higher as a consequence of low growth in the years ahead.

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[Kelvin Hopkins (Luton North) (Lab)]

I want to speak briefly on this document and to support my hon. Friend the Member for Nottingham East (Chris Leslie), who sits on the Opposition Front Bench. The Government’s economic policy will drive us into recession. The cuts have not really started yet, and when they do, unemployment will rise, and when unemployment rises, people will lose confidence and stop spending, and we will see a downward spiral into recession. I am convinced of that. I am not the only person saying it. As I have pointed out in the Chamber more than once, Paul Krugman, the Nobel prize-winning economist, has said that the Government are going in precisely the wrong direction. They should be trying to stimulate the economy through additional spending in labour-intensive areas, such as construction and the public sector—but that is the absolute opposite of what they are doing.

If we bring down unemployment, revenues will rise, benefit payments will reduce and the economy will grow, and that will reduce the deficit. I have used this example many times: after the second world war, under Conservative and Labour Governments, we had a gross debt two and a half times GDP—about four times what it is now—but we just maintained a policy of full employment, led by the magnificent Atlee Governments in 1945 and 1951. We had full employment, we created the national health service, living standards rose and we even ran a labour shortage such that people came from abroad to work here because the economy was growing so fast. We ran a growth economy led by public spending. That is what we should be doing now, but we are doing the absolute opposite. If other countries do the same, we will see the 1930s relived, but people have so much more to lose now it will be politically quite dangerous.

There is already a reaction in Europe to what is happening. In Finland, a Government have been elected who are baulking at the idea of bailing out some of the weaker members of the eurozone. I have no idea why we should be bailing out members of the eurozone. Ireland is a special case, because it is our nearest neighbour and effectively part of the sterling-zone economy, not the eurozone economy. We are its major trading partner and we have an exchange of population, so Ireland is a different case from the rest of the EU. For us to be bailing out other countries in the eurozone is complete and total nonsense. The sooner they leave the eurozone, recreate their own currencies and depreciate them, the sooner they will recover.

[Chris Heaton-Harris (Daventry) (Con)]

The hon. Gentleman puts a happy and cuddly aura around the old hard-left of the Labour party. Bearing in mind that for years we and other European countries have been reporting to the European Commission on these matters, does he think that the Commission has learned any lessons from the information it has been sent? If it has, why did it not try to help the economies of Greece, Ireland, Portugal, Italy and so on?

[Kelvin Hopkins]

I think that the hon. Gentleman and I agree on this point. It has learned absolutely nothing. To try to squeeze the life out of an economy that is already almost wrecked is nonsense. The Commission should allow those economies to grow, and they can grow only if they can recreate and depreciate their own currencies, and start to compete again. Ireland is in a terrible state because it chose—foolishly, I think—to join the euro. I have said to Irish politicians—in as friendly and comradely a way as possible—that they should recreate and depreciate the punt to something like the level of sterling, and rejoin the sterling zone, which is where Ireland belongs. Its economy would then start to recover. Without that, it will not recover.

[Martin Horwood]

I am just curious: who does the hon. Gentleman think would lend those Governments the money to finance that public spending, given their credit ratings at present?

[Kelvin Hopkins]

In the end Governments can print money if they wish to, but the idea that we can squeeze those economies into growth is complete nonsense. We could debate these matters at great length—I would be happy to do so on another occasion—but that is not what this debate is about. I want to focus on the Government’s economic policy, which I think is profoundly mistaken.

Another point in the document is the emphasis on fiscal neutrality. The Government do not seem to appreciate that fiscal neutrality can be achieved in various ways. If we cut public spending and taxation at the same time, that is, in a sense, fiscally neutral. If we raise public spending and taxation, that is also fiscally neutral. We can also achieve fiscal neutrality by raising taxes on the rich and reducing them on the poor. Fiscal neutrality can have all sorts of different effects. If we cut taxes on the rich and raise them on the less well-off, we will drive the economy into recession, because poor people will spend less money. The marginal propensity of the poor to consume is higher, so if we tax the rich and give more to the poor, they will spend. If we give pensioners a rise in their pensions, for example, they will spend more, but if we give a wealthy person a tax cut, they will not spend.

Those are marginal changes, but my general point is that fiscal neutrality can be achieved in various ways. In fact, it is nonsense to have fiscal neutrality when growth is flatlining. We ought to have an expansionary fiscal strategy, not a neutral fiscal strategy. I might add that this is my view, not necessarily the view of my hon. Friends on the Opposition Front Bench. They are perhaps more cautious than me, but in the end I would like to think that I and others will be proved right. We have to generate growth, but it will not happen if the Government continue to operate in the way that they are at the moment.

[Steve Baker (Wycombe) (Con)]

As the hon. Gentleman knows, I have great admiration for him on many subjects, but does he realise that when Keynes was suggesting those fiscal stimulus packages, the state accounted for only about a quarter of GDP, whereas now the figure is up to 45% and getting on for 50%? The capacity is just not there. I would suggest to the hon. Gentleman that even Keynes would be horrified at the notion of Governments spending more from present levels?

[Kelvin Hopkins]

The role of the state is much larger than it was even in Keynes’s day; therefore, the state has to generate more demand. The state has a bigger role in the economy—I think that is a good thing—but we cannot withdraw from the idea of managing economies in the way that we did after the second world war. Between 1945 and the 1970s, we had a world that actually worked. We had rising living standards and the highest rate of growth in our history. We had full employment, we developed a welfare state and the national health service, and we had free tuition at universities. Since then, the neo-liberals and the monetarists have got hold of economic policy again and we have gone back to something like the early 1930s, albeit with higher living standards, at the moment, but that could so easily be destroyed if the current mistakes continue to be made.

[Alec Shelbrooke]

I really do not understand the hon. Gentleman’s rose-tinted view of the 1960s and 1970s. In the 1960s we had to devalue, and by the 1970s inflation and wage inflation were huge, to the point where teachers were given a 25% pay rise in the mid-1970s that was worthless the following year. As for the Keynesian arguments, the new deal in 1930s America failed until the second world war came along and the country could manufacture and lend money to support the war effort. That is what created the recovery. Surely the hon. Gentleman is not suggesting that we need another war to sort out the economy.

[Kelvin Hopkins]

I would advise the hon. Gentleman to read an excellent book by J. K. Galbraith called “The World Economy Since the Wars”. He said that wartime investment in American manufacturing transformed the economy, which emerged as the strongest economy in the world.

We could go into those matters at great length; the point is that it is nonsense to try to deflate our way to growth, as has been said by a number of leading economists. Okay, so they happen to be Keynesians rather than monetarists, but do we want to go back to a world of high unemployment and greater inequality, or do we want to go forward to a world of full employment and greater equality? That is the choice. The Government’s proposed strategy, as set out in the document under discussion, will have a devastating effect on our economy and—they may not be prepared for this—will make them detested and massively unpopular. I remind them that, after the second world war, Labour took office with a massive majority as a result of the working people of Britain rejecting what had happened in the 1930s: the recession and the war. We are in danger of going in that direction again, and the end result would be the election of a Labour Government who would have to pick up the pieces of an economy that had been destroyed.

Even PricewaterhouseCoopers—not a noted left-wing organisation—has suggested that, for every job lost in the public sector, one would also be lost in the private sector, as opposed to the private sector picking up where the public sector left off. Much of the demand in the private sector comes from public sector spending and public investment. We have already seen construction levels falling, with the cancellation of many school building programmes. That will create unemployment in the private sector as well as the public sector, and it is conceivable that unemployment could rise by 1 million. If we had 1 million unemployed, in addition to the 2.5 million that we already have, we would be in very serious economic waters. It would be a terrible time, not just for young people but for the whole economy. We would see falling living standards, mass unemployment and a mass political reaction to what was happening.

I had a different view on this matter from those on my own Front Bench, particularly before the election, when I and a number of Labour comrades rejected the idea of cuts altogether. We believe that dealing with the deficit has to be done by generating growth. After the banking crisis, the Labour Government did exactly the right thing. They pushed demand into the economy by printing money, reducing interest rates almost to zero and recapitalising the banks, all of which had to be done. In fact, the Conservative Government, in their first six months, were living on the growth generated by Labour’s policies—[Interruption.] That is the reality. Now, Conservative policies are kicking in and we are starting to see the economy go down.

I could go on about this at greater length, but others want to speak and this is a short debate. I am happy to come back and talk about these issues time and again if hon. Members wish me to. Indeed, I am happy to discuss them in private as well as in public. I am convinced that the Government have got this wrong, and that Keynesian economists such as Krugman and Stiglitz have got it right. We need to generate growth through public spending and public investment; we do not need to cut.

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[Mr Nuttall]

My hon. Friend is absolutely right. As everyone knows, printing money invariably leads to inflation. I am sure that that would be the case if we continued to print money today.

I want to address the issue of our dealings with Europe, but first let us consider our net borrowing figures. According to forecasts from the House of Commons Library produced just a few days ago—on 21 April—even if we take into account all the measures that the Treasury are taking, we will borrow £122 billion in the current financial year and £101 billion next year. We are not paying back our debts; we are simply reducing the scale of the debt.

[Kelvin Hopkins]

I could raise a number of issues, but one in particular is that the Treasury is now predicting that the deficit at the end of this Parliament will be £11 billion higher than it thought a few months ago, simply because it expects the economy to grow less.