I am sure the whole House will join me in sending our profound condolences to the family and friends of Corporal Lee Churcher, of the Royal Engineers, who died while serving in Iraq, and Corporal Marc Birch, Marine Damian Davies, Lance-Corporal Jamie Fellows and Sergeant John Manuel of the Royal Marines, who lost their lives in Afghanistan. This is a tragic loss. We owe them and all those who have lost their lives in the service of our country our gratitude for their service and sacrifice. As a House and as a nation, we will never forget them. As I saw in Afghanistan on Saturday, our troops are serving with great skill, great courage and enormous dedication. It can truly be said that Britain’s armed forces are the best in the world, and we are immensely proud of all who serve in them.

With permission, Mr. Speaker, I would like to make a statement on the European Council held last Thursday and Friday, and on my visits to Afghanistan, India and Pakistan this weekend. The European summit focused on two global challenges—economic recovery and climate change. I can report, first of all, that the Council agreed measures worth around 1.5 per cent. of European GDP—that is, around €200 billion—which will provide a fiscal stimulus for the European economy. This 1.5 per cent. fiscal boost is in addition to the work of the automatic stabilisers. The measures agreed included support for

“increased public spending, judicious reductions in tax burdens and direct aid to households, especially those which are most vulnerable”—

exactly the measures that Britain has already taken, just as France has announced a package of measures worth €26 billion, Spain measures worth €11 billion, and Germany a fiscal package worth €32 billion.

Just as Europe came together in October and November to lead the recapitalisation of the banks, so too Europe has agreed unanimously co-ordinated action which will support employment and growth. The Council agreed that its action was in a

“united, strong, rapid and decisive manner”,

and while committing to medium-term sustainable public finances, it agreed to

“mobilise all the instruments available to it.”

By acting in a co-ordinated and concerted way, the impact on jobs in each country is much greater than if we acted on our own, and the action across Europe will be of help to Britain, where nearly 60 per cent. of our trade is with the rest of Europe. The co-ordinated European action includes a speeding up of public procurement, a continued and general

“reduction in administrative burdens on business”,

and an additional €30 billion from the European Investment Bank to be invested in Britain and throughout Europe in the coming year.

So the debate about the use of fiscal policy to stimulate our economy and to give direct support for families and businesses in Europe is resolved. Europe favours substantial fiscal stimulus alongside cuts in interest rates. I am confident that the new American Administration of President-elect Obama will also introduce a large fiscal stimulus. This European set of announcements is the answer to those who said that nothing could be done and that the recession must take its course, and who believe that fiscal policy has no role to play. Indeed, even at this time of difficulty, they believe that public spending should be cut.

To back up the loan guarantee scheme, the export credits and the deferral of tax, today the Chancellor will announce new measures to speed up the resumption of lending to businesses and home owners, and the Minister for Housing will announce a £400 million package of measures which, building on our help with mortgages to avoid repossessions, will help up to 18,000 first-time buyers draw on the home shared equity scheme to get on their first rung on the housing ladder—real help to families and businesses now, possible only because we are prepared to make a fiscal stimulus in the economy.

In advance of Copenhagen next year, the summit agreed a new energy and climate change policy supported by all member states. When it is approved by the European Parliament, as I believe it will be, the programme will put into European law four far-reaching commitments: a 20 per cent. cut in greenhouse gas emissions by 2020, which, as part of the right international agreement, we will raise to 30 per cent.; a target that 20 per cent. of the European Union’s energy will come from renewables by 2020; a strengthened European Union emissions trading scheme with 100 per cent. auctioning of permits in the power sector, the introduction of auctioning for other sectors of the economy and help to ensure that businesses in international markets can adjust; and a financing mechanism to make potentially around €9 billion available for the commercial demonstration of carbon capture and storage.

Carbon capture is a transformative technology that every major economy will need, to ensure that it can continue to use coal, oil and gas without contributing to climate change. These commitments make Europe the first continent to make legally binding the detailed policies required to set itself on a path to a low-carbon economy. They provide a clear signal to the rest of the world that an international agreement on climate change can be achieved in Copenhagen next year. This was matched by agreement at the United Nations talks in Poznan at the same time, where a framework for countering deforestation was agreed. Britain will make a contribution of £100 million to that from our environmental transformation fund for sustainable forestry activities in developing countries.

At the European Council, agreement was also reached on measures to answer concerns expressed to us by Ireland. All countries were agreed that there could be no change or amendment to the Lisbon treaty and that we should proceed to ratification, with the Irish agreeing to hold a referendum within the next year. At the same time, to meet Irish concerns, it was agreed: that the Lisbon treaty, as we have always made clear, in no way affects the rights of member states to make taxation decisions; that the treaty in no way affects the individual defence policies of member states, including our obligations to NATO and Ireland’s traditional neutrality; and that because, as we have been clear, the charter of fundamental rights creates no new rights at a European Union level, the Irish constitution provisions on the right to life, education and family are not affected by its incorporation into the treaty—nor are they affected by the justice and home affairs provisions of the treaty from which Ireland has an opt-out. The Lisbon treaty allows for the Council, by a unanimous decision, to agree to ensure that each member state retains a Commissioner—and this, we stated, we would be prepared to agree to.

The Council also made an important statement on the middle east process. The Council welcomed efforts to give renewed momentum to the Arab peace initiative and affirmed that the EU will do all it can, practically and politically, to support the peace process and to urge the new US Administration to make it a major priority in the new year.

Let me turn to Afghanistan, India and Pakistan. I have already paid tribute to, and I reiterate, the service, sacrifice and dedication of our armed forces. Today, I can inform the House that the increased compensation payments have come into force—a doubling, for the most serious injuries, to a new maximum lump sum of £570,000 for armed forces personnel wounded in action or otherwise, an increase that means that around £10 million will be paid to 2,700 troops who have been awarded lump-sum payments.

While in Afghanistan, I and the Chief of the Defence Staff met President Karzai and took stock of our strategy with commanders and senior officials. We saw at first hand the hard and dangerous work that the armed forces are doing in very arduous conditions, far from home. Our goals in Afghanistan are clear: to support democracy and confront terror at its source; to build the Afghan capability by training its army and police to spread the rule of law into empty spaces on the map which shelter terrorism, narcotics and other problems; in all this, to root out corruption, respect local ways of life and strengthen traditional Afghan structures; and to give Afghan people an economic stake in the future.

Free and fair elections are an essential part of Afghans taking control of their own security and destiny. So as we approach the Afghan elections planned for next year, on top of the work that we are doing with NATO and the Afghan army to ensure security for those elections, we are pledging to contribute $10 million to help with voter registration. In return for this renewed commitment, and others, that we will make from Britain, I have asked for quicker progress on the decisions at the NATO summit on burden sharing, and I have asked President Karzai for leadership in tackling corruption. For our part, we are offering a multi-agency taskforce which we are ready to send immediately to tackle corruption.

Five years on from the first free and fair elections Afghanistan has seen in decades, we should reflect on what has been achieved. As Governor Mangal of Helmand, whom I met on Saturday, said,

“it has been a hard year for our brave police and soldiers, but it has been a much harder year for our enemies who have found through experience that they cannot defeat us.”

Today, with 5 million refugees returning to Afghanistan, 4 million more children in school, great improvements in health care, including massive reductions in child mortality, and the national income up 70 per cent., our task is to ensure that violence and insecurity do not threaten that progress.

Security depends on proper burden sharing. In recent weeks we have had to respond to the threat from insurgents in the district of Nad-e Ali near the provincial capital of Helmand. The operation involves 1,800 troops, not just from Britain but from Denmark, the USA and Estonia. It is a model of burden sharing that we need to see replicated across the whole of Afghanistan. Forty-one countries are involved in the NATO mission, but the burden is not always shared equally. As the international community and the American President-elect contemplate strengthening our commitment to Afghanistan, it is vital that all members of the coalition contribute fairly. This will be a subject of the NATO meeting on 3 and 4 April.

The second pillar of security in Afghanistan is enabling the Afghan people to take greater control of their own affairs by training thousands of Afghan soldiers and thousands of police. With our help, Governor Mangal is starting to work with tribal leaders, whom I met in Musa Qala—a place that only last year was in Taliban hands, but is now building basic services such as roads, power and water, and new schools and hospitals, which are having a tangible impact on the lives of Afghan people. This is starting to bring to Helmand the wider progress that we have seen in other parts of Afghanistan. To reinforce this progress, and having been briefed on the decision by the British commander—as is his right—to call forward reserves to work with our allies and deploy them on a temporary basis in the campaign in central Helmand, the Defence Secretary and I have decided, on advice from the defence chiefs, to approve until August, including the period of preparation for the elections, an increase in the number of British troops deployed to Afghanistan from just over 8,000 to around 8,300.

We, the Americans and the international community as a whole increasingly recognise that we cannot deal with Afghanistan in isolation from Pakistan. There is a chain of terror that links the mountains of Afghanistan and Pakistan right through to the streets of the UK and other countries around the world, and that chain of terror must be broken. On 27 November, the whole world learned that terrorists based in Pakistan can strike anywhere, when a murderous assault condemned by the whole world saw 12 terrorists kill 175 people in Mumbai, including British citizens. This weekend, I met Prime Minister Singh and President Zardari to discuss action that now has to be taken. I expressed my condolences to Dr. Singh, and through him to the Indian people, and assured him that the whole of Britain stands fully alongside India in its determination to see those responsible brought to justice.

I pay tribute to the efforts in Pakistan to deny the federally administered tribal areas as a training ground for terrorism and for the insurgency in Afghanistan and for terrorism. Indeed, more than 100 Pakistani troops have died since July this year in that area. Plots hatched in the FATA have a direct impact on the UK: of the security services’ top-priority terrorist investigations, three quarters have links to Pakistan. So our commitment to countering terrorism and the empty spaces that shelter terrorism, and to building local capacity in Pakistan to do so, must be just as strong in Pakistan as in Afghanistan. The time has come not for more words but for more action. We will offer our support to the democratically elected Government of Pakistan, but that Government must act rapidly and decisively against the terror networks based on their soil.

Pakistan’s own future depends on action against those within its borders who are bent on the destruction of its elected Government and Pakistan’s relations with its neighbours. To make this effective, Britain will work with both India and Pakistan to continue building counter-terrorism capability. Yesterday, I was able to announce more help on bomb disposal capability, scanning devices and airport security, and help to draw up new laws and to set up counter-extremism centres. Our assistance programme to Pakistan is the most comprehensive we have with any country, and will now include a programme, initially worth £6 million, to tackle the causes of radicalisation.

No matter how serious the other tasks we face, security is the first duty of Government. We will always maintain our vigilance against the evils of terrorism. I commend this statement to the House.

I join the Prime Minister in paying tribute to our servicemen Marine Damian Davies, Sergeant John Manuel, Corporal Marc Birch and Lance-Corporal Jamie Fellows, who were all killed in Afghanistan, and Corporal Lee Churcher, who was killed in Basra. It is particularly poignant talking about their families’ tragic loss at this time of year, but it should remind us of the bravery our troops show every day of the year.

Let me deal with the Prime Minister’s visits first. On Afghanistan, one of the lessons of Iraq was that the Government must give clear and frank assessments of what is happening on the ground. Does he agree that there are real causes for concern? The Taliban are operating closer and closer to Kabul, the road network is increasingly unsafe, and the number of Taliban and their armaments appear to be growing rather than shrinking. Does he agree that as well as a realistic assessment of conditions, we need a realistic mission? Should it not focus predominantly on security and rooting out terrorist training, not on an unrealistic objective of completely transforming a society thousands of miles away?

Clearly, our servicemen and women are doing a great job, but what about the others who are key to success? Can the Prime Minister tell us more about the representations he made to President Karzai, not just about fraud in his Government, but about drug dealing by those associated with them, and corruption by public officials?

On troop numbers, the Petraeus review is vital and it would be helpful if the Prime Minister could tell us about our contribution to that review, but surely we should send more troops only if there is a proper political strategy to help to deliver security, if there is more effective burden sharing with our NATO allies and if there is a corresponding increase in vital equipment, especially Chinook helicopters and armoured vehicles.

Just as important is progress in Pakistan. Does the Prime Minister agree that the British public will not understand why we are making sacrifices to prevent terrorist training camps from being established in Afghanistan if they are still operating across the border in Pakistan? He said that he received assurances from President Zardari about taking action, but what is the Prime Minister’s assessment of the ability of the Pakistan army, and the Pakistan intelligence services, to deliver on the commitments that he was given? Did he raise those matters directly with the Pakistan chief of general staff, General Kayani?

Turning to Mumbai, I know that the Prime Minister agrees that we must strengthen our relationship with India. Can he tell us more about the close co-operation we need between our security services? Clearly, this style of attack on a major city in an open society is a new tactic. Can the Prime Minister tell the House what the Government will do to address that threat here?

Turning to the European Council, on climate change we support the so-called 20/20/20 package, but will the Prime Minister confirm that the UK target for renewables is actually lower than 20 per cent., at 15 per cent. of total energy consumption by 2020? Would he accept that this environmental agreement shows that it is possible for Europe to take important decisions on important issues without new treaties and without new constitutions? The Lisbon treaty, by the way, has just seven words on the environment; that is all that it has on the subject.

On the Lisbon treaty—[Interruption.] Yes, I read it, actually—Europe’s leaders had to make a big decision: do they respect the wishes of the people? The answer was a resounding “no”. Just what is it with this Prime Minister and elections? An unelected Prime Minister wants to force the Irish people to vote twice because he did not like the result the first time, and he refuses to allow the British people to vote once because he is afraid that he would not like the result of that, either. Does he agree that one of the advantages of an early election here in Britain would be that the Lisbon treaty could be put to the people in a referendum, and we could let them decide?

Turning to the economic package, the Prime Minister makes three claims. First, he says that Britain is well prepared. If that is true, can he tell us why the pound has fallen to another record low? Is he aware that this lunchtime, his Olympics Minister said that Britain is

“facing a recession deeper than any that we have known, almost certainly”?

So is it not clear that we are not well prepared?

Secondly, the Prime Minister says that those in the EU all agreed with him that every country should take part in the same sort of fiscal stimulus, regardless of their situation. So why does the European Commission statement for the Council state:

“It is clear that not all Member States are in the same position.

Those that took advantage of the good times to achieve more sustainable public finance positions… have more room for manoeuvre now.”

The Prime Minister did not read that out. It continues:

“For those Member States, in particular those outside the euro area, which are facing significant imbalances, budgetary policy should essentially aim at correcting such imbalances.”

In other words, “If you’re in a hole like the one the Prime Minister has put us into, stop digging.”

Thirdly, the Prime Minister said that he is setting the agenda with his particular measures—he is leafing through his papers to try to find them. Let us take VAT. The French Finance Minister said:

“As far as we’re concerned…we’re not certain that when prices go down, a VAT reduction is that effective.”

The German Social Democrat budget spokesman said that the cut in VAT was counter-productive.

That brings me to the Germans. I note that the Prime Minister did not really mention them—or perhaps he did once, but he thinks he got away with it. Is not it true that the German Finance Minister—another Social Democrat, by the way—has completely blown the Prime Minister’s credibility out of the water? He described his approach as “crass” and mistaken. He criticised Britain’s debt, which he believes will

“take a whole generation to work off.”

In response, the Prime Minister claims that Germany’s fiscal expansion backs up his own plans. However, Germany went into the downturn with a budget surplus; it fixed the roof when the sun was shining. In contrast, the Prime Minister led Britain into the downturn with the largest budget deficit in the industrialised world. Next, he claimed that this was all to do with internal German politics, but has not that claim been shattered, too? The Christian Democrats’ budget spokesman said that the German Finance Minister’s comments

“have nothing whatsoever to do with internal German politics… the tremendous amount of debt being offered by Britain shows a complete failure of Labour policy”.

The Prime Minister is always telling us that he wants a consensus. He certainly got one in Germany: they all think that he has got it wrong.

With the EU Council in mind, will the Prime Minister act to deal with what the Governor of the Bank of England says is the most pressing challenge: getting banks lending again? Will he adopt our proposal for a national loan guarantee scheme? I have the draft Bill here. Will he support it, so that we can get business trading and Britain out of the recession? Instead of dreaming about saving the world, when will the Prime Minister start saving businesses here in Britain?

Let me say first of all that I agree with what the right hon. Gentleman says about the losses of life in Iraq and Afghanistan. It is particularly poignant, as we face Christmas, that so many families will be without their loved ones as a result of those deaths.

I thank the right hon. Gentleman for his support for what we are doing on Afghanistan, Pakistan and India. Our plan in Afghanistan is clear: to complement the military action that we have to take—because this is the front line against the Taliban—by helping Afghan people take more control of their lives and have a stake in the future. To do that—yes, we must tackle corruption. That is why we have offered President Karzai a multi-agency taskforce, which we will put at his side in Kabul to help him deal with the problems. It is also why we have taken the necessary action to increase our troop numbers in central Helmand so that they can deal with the Taliban in that vital area of Helmand.

When I was in Musa Qala, I could see that a place that the Taliban held a year ago is now a place where there is law and order. A school and a hospital had just been built and opened as a result of the investment that we and others are making. Afghan people are now taking control of the judiciary system and law and order in that area. If that can be done in Musa Qala, it can be done in other parts of the region.

I have to dispute what the right hon. Gentleman says about the money that we are providing for helicopters and vehicles. We announced only last week more provision for helicopters, and we have spent £1 billion on vehicles. We are determined that our troops have the best and most modern equipment.

I agree with the right hon. Gentleman that we must deal with the root of the problems in Pakistan, and I support what President Zardari is doing. I did meet General Kayani and talked to him about his responsibilities and those of the Pakistani army and the ISI to ensure that terrorists who have operated from Pakistan to do damage in India are properly rooted out, that the training camps of TEL are closed down and that order is brought back to the FATA areas. I believe that General Kayani shares President Zardari’s view that those things must be done, so that Pakistan can show the world that it is taking the action that is necessary.

I now turn to the European meeting. The right hon. Gentleman did not say much about climate change, but he questioned whether we were doing enough. I believe that the agreement that we have reached on a 20 per cent. cut in emissions by 2020 is an historic agreement. This is the first time that 27 countries have come together, and that was possible only because we are part of the European Union. It is now possible to move forward to the next stage, which is to win a worldwide treaty at Copenhagen, because the European Union—and, hopefully, the American Government—can join together in taking the action that is necessary.

As for Ireland, let me repeat to the right hon. Gentleman that the agreement to meet Irish concerns means that the Lisbon treaty in no way affects the rights of member states to make taxation decisions or individual member states’ defence policies—both things that we in Britain have always insisted on. We have also made it clear that the charter of fundamental rights creates no new rights at the EU level. That is something that we have always insisted on, and which the Irish now want as part of their protocol. Therefore, it was perfectly proper for us to support the Irish in their determination to get those three things made absolutely clear, as well as to have a Commissioner of their own.

The right hon. Gentleman talked about what the European Union is doing on the economy, but it is interesting to read what President Sarkozy has said:

“Everybody agrees that there is a need for economic recovery along the lines of the…Barroso plan, around 1.5 per cent.”

and what Chancellor Merkel has said:

“Germany has…declared its willingness with regard to this 1.5 per cent.…You know…in January we will discuss the matter of further steps”.

The one thing that the right hon. Gentleman tries to deny, by quoting people whom he would never quote in ordinary circumstances—German Finance Ministers and European Union politicians—is the one thing that is absolutely true: that the whole of the rest of Europe wants a fiscal stimulus, and wants it to complement the interest rate cuts that are being made. The Conservative party does not even have the Czech social forum with it on this occasion. Not one of the leading parties in Europe supports the position of the Conservative party.

Why is that the case? Because the Conservative party has committed itself not only to doing nothing during this period, but to public spending cuts. The Conservatives say that they will cut public spending from 2010. Just at the point when people need help, they revert to the old policies of the 1980s and 1990s. That is what made people think of the Conservative party as the nasty party. The Conservatives will give no help to home owners and no help to small businesses, because they will spend no money. They have announced support for a national business guarantee scheme, but there is no public money behind it, as a result of their decisions to cut public spending, and there is no help for the unemployed. This is the Conservative party that we are coming to see. At a time when people need help at Christmas, the Conservatives would pull the help away. It is the same old uncaring Conservative party of the past.

May I add my expressions of sympathy and condolence to the family and friends of Lance-Corporal Steven Fellows, Corporal Marc Birch, Sergeant John Manuel and Marine Damian Davies, who tragically lost their lives in Afghanistan, and to the family and friends of Lee Churcher, who, sadly, died in Iraq? We all owe them a huge debt for their service and sacrifice.

Like so many European Union summits before it, last week’s summit was stronger on words than action, richer in promises than in delivery. I welcome the summit proposals for a fiscal stimulus to boost the economy, in the shape of tax cuts and public investment. The question, then, is: why is the Prime Minister not properly practising here at home what he has preached in the European Union? Instead of having his short-term VAT cut, why will he not make the big, permanent, fair tax cuts for ordinary families that were called for at the European summit?

Instead of wasting extra borrowed money on that VAT cut, why will the Prime Minister not invest in green infrastructure for Britain’s future, creating green jobs and green growth, as were also called for at the summit? Does the Prime Minister not see that if he does not boost growth in that way—permanent tax cuts and green jobs—Britain will fall behind those countries in Europe that he has been boasting about beating for about a decade? Already, in some places one can no longer buy a whole euro for a pound. Does the Prime Minister recognise that many eurozone economies could surge ahead of Britain, under his leadership, leaving us once again as the sick man of Europe?

The summit was a wasted opportunity to defeat climate change. All those of us who want our children to have a planet worth living on will be disappointed that dirty industry has been given extra time to clean up its act. Will the Prime Minister tell us when the commitments will be reviewed, and when the loopholes for dirty industry will finally be closed?

The Prime Minister also told us about his visits to Afghanistan, India and Pakistan. I welcome his words of commitment to those countries and support the temporary increase of troops until August in Afghanistan. Does he now recognise that any lasting peace in that country will have to come from a regional agreement—like the Dayton peace accords in the Balkans—and that we need to start talking now to China, Russia and Iran? Does he also agree that, if the local pragmatists in the Taliban are to be split from the national fundamentalists, the talks with the moderate Taliban that are going on in the shadows need to be brought out into the light and given new emphasis?

Finally, I was disturbed to see that Zimbabwe warranted only a few words in the conclusions of the summit, even as millions face disease and starvation, and no words at all from the Prime Minister this afternoon. The Government have got their priorities wrong: instead of being tough on Mugabe, they are being tough on his victims, by refusing to allow Zimbabwean asylum seekers here to work, and, despite assurances to the contrary, by still deporting Zimbabweans to their fate—including Privilege Thalambo, who was arrested with her two daughters for deportation just last Friday.

The Prime Minister talks with great passion about Africa, but he is not providing the right leadership. He has given the wrong leadership on the Congo. Why, instead of encouraging EU leaders to send EU troops, has he encouraged them not to send them? He has also given the wrong leadership on Zimbabwe. Why has he not pushed for international action by the United Nations under the new doctrine of responsibility to protect?

Does the Prime Minister not agree that, on the economy, on climate change and on Africa, making the right promises is the easy bit, but delivering them is the real test?

The right hon. Gentleman’s whole theme was that the summit was stronger on words than on action; if any group in the world is stronger on words than on action, it is the Liberal party.

I shall answer individually each of the questions that the right hon. Gentleman has asked. On troops in Afghanistan, I am grateful for his support for the additional mission to ensure that central Helmand is free of the Taliban.

On Zimbabwe, I disagree that we have done little; we have done a huge amount to try to get humanitarian aid to the people who are affected by cholera, to persuade the southern African states to take the necessary action, to bring this forward to the Security Council, as we are doing, and to ensure that the whole world understands the blood-stained regime that we are dealing with in Zimbabwe. We will continue our efforts to try to persuade African leaders to take a tougher stand on the issue.

On the Congo, I think that the right hon. Gentleman realises that, in preference to rushing to deploy an EU force at the moment, the most important thing is to strengthen the UN force. It is to rise from 17,000 to 20,000, and we have put aside some money to help the recruiting of the additional troops for work in the Congo. By far the quickest and most effective way of getting help to people there, and of dealing with the incursions that are taking place, is to strengthen the numbers, the quality and the leadership of the UN force on the ground.

On climate change, I also disagree with the right hon. Gentleman. There is a debate to be had about carbon leakage, and there is to be a rigorous examination of its impact. No action will be taken to exclude the non-power sectors of the economy from auctioning until that rigorous examination has been carried out. The proposals will then go back to the Council for further discussion within six months, so that we can be clear that carbon leakage is not being used as an excuse to escape responsibility for taking action on climate change. Our objectives of a 20 per cent. cut in emissions, of 100 per cent. power auctioning and of a €9 billion commitment to carbon capture and storage were all achieved at the summit, and, for all the difficulties that the right hon. Gentleman has raised about carbon leakage—a matter that has still to come back to be discussed in full later—there have been enormous advances that will put Europe in a position to take the lead in Copenhagen in securing a climate change agreement.

I know that the right hon. Gentleman does not favour the VAT cuts that have taken place, but I believe that they are already making a difference, and I hope that he will support the increase in public spending that is taking place as a result of decisions that we have made. Not only has £5 billion already been allocated to small businesses, with a great deal more to come, but a £10 billion increase in the capital budget from last year to next year will enable us to proceed with our plans for roads, transport, schools and hospitals in a way that will employ more people. I hope that the Liberal party will continue to support that action, which is necessary to inject more capital spending into the economy at a time when it is most needed.

The fact of the matter is that monetary policy has a transmission mechanism that is impaired, and we cannot rely totally on monetary policy. No other major country in the world is saying that monetary policy alone can do this work, apart from the people who represent the Conservative party at the moment. Fiscal policy is absolutely essential, especially at a time of low inflation and low interest rates: the case for using fiscal policy is even stronger then.

It is unfortunate that the Conservatives have not learned the basic lesson of the 1970s and 1980s that a recession is prolonged by a failure to invest and a failure to use capital spending. The Liberals and I are agreed on the need for capital investment. The Conservative party should go back to the drawing board and think again.

The Prime Minister has rightly referred to his efforts to improve the climate between India and Pakistan and to secure greater co-operation against terrorism, but does he not agree that the Afghan Government also have a responsibility to improve co-operation with Pakistan so that there is a collective effort? He referred to burden sharing. What discussions has he had with his German partners in NATO about Germany’s beginning at last to pull its weight in European and NATO security, especially in the context of the dangerous areas in Afghanistan?

I should point out to my hon. Friend that the German Government have taken responsibility for the training of police in Afghanistan. They have a number of people allocated from Germany to do that, and they are taking responsibility for the rest of the European Union to do that.

If we are to succeed in Afghanistan, we will have to increase not only the number of soldiers and armed forces trained—70,000 are being trained at the moment—but the quality and quantity of police on the ground to do the job. Those who visit Musa Qala, as I did, will see that the police force is working in providing law and order. In every other part of Afghanistan we must carry out the training that is absolutely essential, and the German Government have agreed to take the lead in that.

As I listened to the Prime Minister reading out the list of reasons why we needed to be in Afghanistan, I found myself agreeing with them, but not inspired or enthused by them. Is there anything that he can do to inspire the country so that it actually starts to believe, with some enthusiasm, the reasons why we need to be in Afghanistan?

I have said before and I say again—and I think that the country understands this—that Afghanistan is the front line against the Taliban as well as al-Qaeda. If we are to prevent terrorists from Pakistan and Afghanistan from entering our country, we need to be both in Afghanistan and working with the Pakistani authorities to deal with terrorism.

Afghanistan is now a democracy. Schools have been built and young people, including girls, are going to school and receiving an education. Health centres are also being built. Yes, the Taliban have changed their tactics and it is now guerrilla warfare that is being practised through roadside devices, suicide bombings and other means, but we are in a position to turn the Taliban back in many areas in Helmand, and where we have not yet done so, we are taking action to do so. I believe that if we are to protect ourselves at home, we must remember that the terrorism that affects us in Britain starts from Pakistan and Afghanistan.

I welcome the Prime Minister’s statement that the European Council has endorsed the European Commission’s recommendation that €200 billion should be put into the European economies, building on the €62 billion from France, the €32 billion from Germany and the €2.18 billion from Portugal, as well as a future $800 billion from the United States. Given the flawed monetary policy to which the Prime Minister has referred, is it not beyond peradventure that a monetary policy plus fiscal stimulus is the only way out of the difficulties, and that to talk consistently of a national loans scheme for small businesses when one already exists is simply a camouflage for having no policy at all?

My hon. Friend is absolutely right that what used to be called the one-club policy of using only interest rates—of using only monetary policy—will not work in the circumstances that we now face. The more the Conservative party ties itself to that, the more it ties itself to the failed policies of the past. The reason why fiscal policy is important is that we are in a period of low inflation with low interest rates—low inflation next year, following the low interest rates we currently have. That is why fiscal policy can have the greatest effect. If the Conservative party is going to say that this is the right time to stop building schools, to stop building hospitals, to cut back on transport and to cut back on the roads, and to say that it will severely cut public spending from 2010 onwards, it will have to explain why it is making nurses, doctors, teachers and others unemployed. That is the policy of the Conservative party.

May I remind the Prime Minister that several years and four Defence Secretaries ago—the first of whom, the right hon. Member for Ashfield (Mr. Hoon), is now sitting next to him—when we sent our first small contingent to Afghanistan, I warned that, as the Russians had found in the 1980s, 300,000 men would not be sufficient to achieve military victory in that country, and that the Pashtun Taliban are a religious-tribal sect with no international ambitions who have always disliked the al-Qaeda Arabs and will be thankful to be rid of them if they can be rid of all foreign troops at the same time? Now that the Prime Minister has at last recognised that the threat of international terrorism comes primarily from Pakistan, why can we not have a settlement with the Afghans on that basis?

The hon. Gentleman cannot deny the evidence of the Taliban working with al-Qaeda. He cannot deny the evidence that people are coming across the borders from Pakistan to support the Taliban in action against British troops, as we saw in the suicide bombing carried out by a young child in Afghanistan last week. He cannot deny the interrelationship between what is happening in Pakistan and Afghanistan. We have got to take action to protect our troops in Afghanistan, but also to protect the democracy of Afghanistan, and we have got to take action to persuade a democratically elected Government in Pakistan and their army to take action against terrorism within their borders.

May I warmly welcome the Prime Minister’s visit to India so soon after the events in Mumbai? That underlines the fact that we have a very special relationship with India; the Prime Minister was, of course, the first Head of Government to visit India after the Mumbai tragedies. When he told the President of Pakistan that 75 per cent. of the plots being investigated were rooted in Pakistan, what was the President’s reaction? Will my right hon. Friend confirm that the Government will provide any additional resources that are necessary for our high commission in Islamabad, in order to deal with this very serious problem?

I am grateful to my right hon. Friend for his comments. I passed on the condolences of the entire British people for the loss of 175 lives as a result of the terrorist activities of only 12 people in Mumbai a few days ago. I offered the Indian Government any help with the investigations that we can give, and we talked about how we could increase our counter-terrorism activities together so that India and Britain can work more closely to identify terrorism and the sources of it.

My right hon. Friend is also absolutely right that a heavy responsibility falls upon Pakistan. It has already been identified that the terrorists who struck in India came from Pakistan. It is also true that many people from Pakistan have gone into Afghanistan and attacked British troops there. My right hon. Friend is absolutely right that the evidence suggests that three quarters of the terrorist plots we have had to investigate in Britain have links in one way or another with Pakistan. That is why I said to the President of Pakistan, and the Prime Minister, that we will be prepared to give them help to counter terrorism—help in their capabilities, in advice, in strengthening their laws, and in building up action against extremism, particularly in the education of their children, so that they can expose the perversion of Islam that is taking place. However, that requires the Pakistan Government to take responsibility by taking the necessary action, particularly in the tribal areas. The President of Pakistan assured me that he was determined to take action, and we said that we would monitor what is done over the next few days.

I fully associate myself with the words of condolence expressed by the Prime Minister earlier in his statement. On Afghanistan, he has announced the multi-agency taskforce, which as part of its remit will have some work to do rooting out fraud. Is it not therefore logical that it should also oversee the rebuilding of infrastructure?

There are other means by which the rebuilding of infrastructure is taking place in Afghanistan. The importance of clearing the roads of bombs and making the roads safe was mentioned earlier. The dam project is moving ahead as a result of international action and a lot of reconstruction is taking place in Afghanistan itself, so I do not think that a multi-agency taskforce should be the organisation that deals with corruption. The relationships at the centre of Afghanistan are trying to move forward the reconstruction, and of course, we are taking action in Helmand itself to build new facilities.

My right hon. Friend is absolutely right to ignore the siren voices who are opposing reflationary measures at this time. In talking about the Germans—or some of them—may I say how disappointed some of us are to hear that they were against a number of the measures relating to further developments on climate change? That is a marked departure from their previous record. Would my right hon. Friend like to say to them that we would like them to be where they were previously, on both economic policy and environmental policy?

I can say that Chancellor Merkel supported all the main principles of the climate change package. The issue has been how we deal with carbon leakage, and a lot more work has got to be done on that, but 100 per cent. auctioning is to take place in the power sector, and there is an agreed 20 per cent. cut in carbon emissions. To be able to do that as a European Union, and also to invest in carbon capture and storage—€9 billion is to be invested in that—is substantial progress. Everybody who looks at the history of action on the environment knows that we have to build a consensus. If we can build one in Europe and persuade America that it is right that it takes action, it is possible that we will achieve for the first time an environmental agreement that all countries are prepared to sign.

I agree with my hon. Friend on the economy that it is important that all countries support the fiscal stimulus, but he must recognise that the German Government have made a fiscal stimulus and are planning another. The only party of any significance that I can see that is against a fiscal stimulus is the Conservative party, because it made a terrible decision last week that it would cut public spending.

As it now appears from the Irish example that holding a referendum on the Lisbon treaty and voting no leads the European Union to make substantial concessions, why does the Prime Minister not, even now, take the same route and hold the referendum that he promised us before the last election?

We have had this argument in the House on many occasions, and every time that it is put to the vote, this side of the House wins and that side loses.

My right hon. Friend will know very well that after many years of military rule, Inter-Services Intelligence, Pakistan’s security service, is far from trusted as being under proper civilian control. Did he have a chance to discuss with President Zardari whether it is possible for Britain to lend assistance that will ensure that the democratic Government of Pakistan can bring the internal security service under that proper democratic control?

We did talk about how we can support the Pakistani authorities in many different ways, including helping them to rewrite laws to deal with terrorism, as we have had to do ourselves. I did offer support in a number of different ways to President Zardari. I also repeated to Mr. Kayani, who is the head of the armed forces, our offer of help to the Pakistani authorities, and we will continue to work with them to do everything that we can to support the Pakistani effort against terrorism in their own country. It is important to recognise that many Pakistan citizens have also been the victims of suicide bombings and that there have been many terrorist incidents within Pakistan itself. We want to give support to the Pakistan Government, but at the same time we are urging them to take more action, particularly against the organisation TEL, which has been held responsible for the Bombay bombings.

I understand that the Prime Minister is leading a wider review on Afghanistan within Whitehall. If he decides to deploy more troops to Afghanistan, will he consider tasking them principally with the training of more men of the Afghan army and police, that being by far the most effective way of enabling the Afghans to take some control of their own affairs?

I agree with the hon. Gentleman, because it is important that the number of Afghan troops in Afghanistan is increased. Some 70,000 are being trained at the moment and more is being done every month—about 1,500 are being trained every month—but the figure will have to be a lot higher than that for a country the size and scale of Afghanistan. A new target of 120,000 has already been set. I do not think that that is big enough for the size of the country. I saw British troops training Afghan soldiers and working with them, and the Afghan soldiers are courageous and strong, but there needs to be more of them—the hon. Gentleman is absolutely right. That is something that we continue to push on President Karzai.

The previous increase in British troops in Afghanistan two years ago resulted in an increase in the deaths of our brave soldiers, from a total of seven to a total of 132. Is there not a grave danger that an increase in the number of troops means more targets for the Taliban? Is not the best way of consolidating the gains made in Afghanistan to embark on a new policy, based not on a military victory but on tackling the causes of terrorism with a peace strategy?

I should point out to my hon. Friend that our strategy is based on complementing the military intervention that is necessary to keep peace in Afghanistan and maintain democracy with other measures that will build up the confidence of the Afghan people so that they are enabled to govern themselves. That includes, as I have just said, training the Afghan forces and police, as well as building up local government, working with the tribes to create a means by which localities are properly governed and cleaning out corruption from the centre—on which I have pressed President Karzai, and why our multi-agency taskforce is going in. It also includes giving Afghan people a stake in their future—by helping them to become wheat farmers, for example, rather than farmers of drugs and narcotics—whether they are in villages, towns or in the countryside. That is our strategy for Afghanistan. It is necessary that we have the number of troops to deal with the Taliban, but it is also necessary that we train the Afghan army and police and that we invest in building the facilities that are necessary so that people have a stake in Afghanistan’s future.

The Prime Minister says that there are more helicopters on the way, but may I ask him the same question that I asked him on 21 November 2007? When will the dedicated Chinook helicopters that were ordered by John Major for our special forces and delivered to Tony Blair in 2001 be fully available to be deployed by UK special forces in Afghanistan?

I agree that we have set aside a huge amount of money for additional helicopters. The timetable for their introduction depends on re-equipping many of them and, at the same time, training the forces to do so. I shall write to the hon. Gentleman specifically about the Chinook helicopters, but I can tell him that the money and the resources have been provided for the additional helicopters.

At this weekend’s international conference on Afghanistan in France, the Iranian Foreign Minister did not turn up, even though he was expected. Given what the Prime Minister has said about Afghanistan and the need to work with neighbouring countries, did he discuss either at the EU Council or on his visit to Afghanistan and Pakistan how to bring the Iranians into discussions about the future?

It is very difficult to say, when we are debating with the Iranians at the moment, whether they will accept that they will be under the non-proliferation treaty that they have signed up to. We have presented Iran with a choice: it can either be part of the international community and get all the advantages of being such a part, including being free of sanctions, or it can allow itself to become isolated by defying the international community on nuclear weapons. That is the choice that Iran has to make, and it affects all the other areas in which we operate.

When the Prime Minister calls upon the Pakistani Government to do more to destroy the Taliban in the frontier areas, is he aware that the Pakistani army and intelligence agencies have always been influenced by the fact that successive Afghan Governments, over 60 years, have refused to recognise the legitimacy of the international frontier between Afghanistan and Pakistan, and that they believe that that thereby gives them reason to suspect that Afghanistan harbours aspirations to incorporate those provinces into its own country? Will he therefore seek to persuade President Karzai to reconsider this policy and, in the interests of Afghanistan itself and stability in the region, to recognise the legitimate frontier as that which currently exists between the two countries?

I understand the difficulties and the challenges that the right hon. and learned Gentleman raises, which result from history, but when I talked to President Zardari he informed me that he had made big changes. There has been a change at the head of the ISI and there are further changes in the departmental heads. It remains to be seen what happens as a result of that, but President Zardari was determined to tell me that the army is dedicated to the pursuit of terrorism. We will hold him to those words.

The Prime Minister will be aware that it is now more than seven years since coalition forces were sent to Afghanistan, and he tells us today that there will be a small increase in British forces there until next August. If the situation is unchanged by then, will we have another increase? Is it not time for a complete rethink on the policy towards Afghanistan and are we not just heading down the route of the same failed philosophy that the Americans pursued in Vietnam—endlessly putting troops into a failing situation?

I have to point out to my hon. Friend that 41 countries are involved in this coalition, not just one or two. There are 41 countries determined not only to bring peace and reconciliation to Afghanistan, but to help to build a stronger democracy there. I have also to tell him that we will discuss at the NATO meeting on 3 and 4 April the burden sharing that is necessary for the future. I am determined, too, that other countries play their part in Afghanistan. This is the fundamental question, which brought us to Afghanistan in the first place: there is the front line against the Taliban. We have removed the Taliban from power in Afghanistan. I think that it is our duty to help to uphold the new democracy in that country.

How does the Prime Minister justify his endorsement of the deceitful bullying of the Irish people in these conclusions with his claim to be a democrat?

The Irish brought to the EU concerns that they had expressed about the interpretation of the treaty and the treaty. We agreed that there would be an extra Commissioner, but that is within the power of the Lisbon treaty. We also agreed to reiterate what is important to us in Britain as well: the Lisbon treaty in no way affects the right of members on taxation decisions and in no way affects our defence policy. As we have a protocol on the charter of fundamental rights, it was right that the Irish be given assurances on that as well. That is what has happened. I would have thought that people in the House would support it.

I am sure that my right hon. Friend agrees that it is necessary to see through the process of reconstruction in Afghanistan until a stable, strong and fully democratic state emerges. Will he say more about the efforts he is making to get other countries to play a greater role in burden sharing so that that state can emerge sooner rather than later?

As my hon. Friend will know, France and other countries have upped their contribution of forces during the past year. I think that we have 52,000 troops in total from a large number of countries in Afghanistan at the moment, but I have made it clear that we need further burden sharing. Whether it is by providing more forces or more help with training forces or the police, or whether it is by providing equipment such as the helicopter fund that has been formed so that people can contribute as we and others will to other countries bringing helicopters to Iraq, we are determined to continue the process. If 41 countries are part of the project, they must make a contribution to it. The burden sharing that I have talked about will be discussed at NATO on 3 and 4 April.

As the Irish people are to be made to vote again on the Lisbon treaty on the ground that they made a mistake last time, will the Prime Minister call an early general election on the ground that the British people made a mistake last time?

No, and I would have thought that when the right hon. Gentleman looked at the Irish statement as a result of the European Council, he would support most of it, not oppose it.

In relation to matters discussed at the European Council, does the Prime Minister agree that one of the things that will be vital to long-term economic recovery is ensuring that strategically important industries can weather the current storm and prosper into the future? In that context, will he say a little more about efforts being made at a European level in relation to the automotive industry, whose health is vital to many EU member states?

Decisions on the automotive industry will be made by individual countries, which will look at the situation and make their own judgments about what is likely to happen. My hon. Friend’s question prompts a more fundamental question about whether one is prepared to help families and businesses in times of great difficulty. We are prepared to do so; the Opposition would not.

The evidence is that the position of the international community, including the Karzai Government, in Afghanistan is becoming more difficult day by day. It is also evident that public support in the UK for our troops in Afghanistan is declining rather than increasing. The Prime Minister is conducting this important and much-needed review of policy towards Afghanistan. Can the House of Commons have the opportunity to contribute to the review through at least a day, but preferably two days, of debate before it is completed?

We have regular debates in the House of Commons, such as the debate on defence that took place very recently. Of course a debate on Afghanistan can take place, if the Opposition choose to propose that subject. At the same time, we will keep the House fully informed of any decisions that we propose to make on Afghanistan.

On a point of order, Mr. Speaker. Has any Minister indicated to you whether a statement will be made on the alleged Madoff fraud? Surely, as $50 billion is a huge amount of money, a ministerial statement to reassure the UK markets would be appropriate.

I am sure that the Ministers concerned will have heard the hon. Gentleman’s concerns.

On a point of order, Mr. Speaker. Has anybody asked you for a statement on the failure of the Greater Manchester congestion charge, which affects not only the north-west but many other areas that want to bring in such a scheme? Has anyone brought that subject to your attention, and may we have a statement?

No one has brought that matter to my attention apart from the hon. Gentleman through his point of order.

I wish to inform the House that I have selected for debate the amendment in the name of the Leader of the Opposition. Standing Order No. 33 provides that on the last day of debate on the motion for an address to Her Majesty the House may also vote on a second amendment, selected by the Speaker. I have selected the amendment in the name of the leader of the Liberal Democrats. The vote on the amendment will take place at the end of the debate after the amendment in the name of the Leader of the Opposition has been disposed of.

I beg to move an amendment, at the end of the Question to add:

“but humbly regret that the Gracious Speech fails to deliver a clear direction for British economic policy, does not contain measures to assist in building a low debt and low tax economy, and lacks any radical action to unblock the credit channels of our banking system; note that many individuals have seen returns on their savings severely reduced as a result of the economic downturn and regret that the Government has no plans for emergency protection of pensioners with a suspension of annuity rules; further regret the absence of a clear strategy on value added tax; and further regret the absence of measures to avoid the United Kingdom undergoing the worst recession in the G7 next year.”.

Thanks to your decision, Mr. Speaker, to grant our request for an emergency debate, it has been three weeks since we last examined the Government’s handling of the recession that is now engulfing our country. We were then told by the Chancellor from the Dispatch Box that the measures in the pre-Budget report would hasten the end of the recession by bolstering confidence at home and the credibility of British Government policy abroad.

What has been the judgment in the last week alone on the Chancellor’s claim? The pound has fallen against the euro, hitting a record low earlier today and demonstrating again the Prime Minister’s maxim that a weak currency is a reflection of a weak economy and a weak Government. The loss of international credibility has sent the cost of insuring British Government debt higher than insuring the debt of those two homes of French fries, Belgium and McDonalds. An independent survey out today says that the drop in the VAT rate seems to have made little difference in lifting consumer confidence and encouraging consumers to spend. The head of Barclays bank says that despite the measures announced by the Government over the past few weeks, such as those on stamp duty, house prices will fall by at least as much next year as they have this year.

This lunchtime, the Minister for the Olympics has contradicted every statement made by the Prime Minister and the Chancellor over the past six months by admitting, in her words, that Britain is facing a recession

“deeper than any that we have known”.

So, what about all that talk about the 1980s and 1990s now? The Finance Minister of the world’s third largest economy has described the Government’s approach as “crass” and “breathtaking” and as raising debt to a level that will take “a whole generation” to pay off. That is the problem with saving the world—sometimes the world answers back.

The Chancellor and the Prime Minister tried to dismiss the German Finance Minister’s comments—indeed, the Prime Minister again did so just a few minutes ago—as their being all to do with the internal politics of Germany. Mr. Steinbrück is a Social Democrat, and the Christian Democrats issued the statement:

“Peer Steinbrück’s comments have nothing whatsoever to do with internal German politics, as Prime Minister Brown has suggested.”

Indeed, one could feel the sense of schadenfreude after all those brusque encounters with our Prime Minister at ECOFIN meetings, when the spokesman continued:

“After years of lecturing us on how we need to share in the gains of uncontrolled financial markets, the Labour politicians can’t now expect us to share in its losses. The tremendous amount of debt being offered by Britain shows a complete failure of Labour policy.”

That is not a Conservative politician—it is not even a Liberal Democrat—but the spokesman of another Government.

Of course, this debate should be about more than the mistakes that the Government made with their pre-Budget report, serious though they are; it is about the legislative programme for the coming year, so my hon. Friend the Member for Epsom and Ewell (Chris Grayling) will speak about the welfare reform and child poverty Bills. Let me make it clear to the Chancellor that our offer of co-operation to ensure that the Banking Bill, carried over from the previous Session, passes through Parliament by next February still holds, but we expect the powers we give the regulators to be enforced in the courts if necessary, as my right hon. Friend the Leader of the Opposition made clear today.

I wish that today’s debate was an opportunity to examine the Government’s response to the Equitable Life scandal and the damning report from the parliamentary ombudsman. After all, only a couple of weeks ago the Prime Minister made an absolutely unambiguous promise at the Dispatch Box:

“There will be a statement before the House rises at Christmas. I can say to the hon. Gentleman that that will be done.”

When Members on the Opposition Benches shouted out in disbelief, the Prime Minister said:

“There will be a statement before the House rises this Christmas.”—[Official Report, 3 December 2008; Vol. 485, c. 38.]

Indeed, that was followed up by a letter from the Economic Secretary to my hon. Friends the Members for Fareham (Mr. Hoban) and for Macclesfield (Sir Nicholas Winterton), saying that the Government would give their considered response to the ombudsman’s report to the House shortly, and—in the Economic Secretary’s own handwriting—“before the recess”.

Those were the promises made to Parliament—to Members of the House—yet now it seems that the promises are to be broken. Having waited months for the Government reply—indeed, they have had a draft report for well over a year—desperate policyholders will have to wait even longer. As the Public Administration Committee put it in a report today:

“Justice further delayed will mean justice denied to even more people.”

Equitable Life policyholders have suffered enough: raising hopes and then dashing them before Christmas is a shabby way to treat people. It is time the Government said sorry and accepted the ombudsman’s report. I suspect that the Chancellor will not do so today, but I am sure that he will be forced to in due course.

Instead, we must focus our attention on the deepening recession into which the Government have led us, and what better place to start than by reminding the House what the Chancellor told us in the debate on the Queen’s Speech a year ago? That debate was held many months after the August seizure of the credit markets. It took place long after the Chancellor had discovered from reading his Financial Times that a credit crunch was happening. It was after the Northern Rock run and after warnings had come thick and fast about the downturn that lay ahead; in other words, when the Chancellor rose to speak in this debate a year ago there was absolutely no excuse for his not facing up to the economic realities, preparing the country for a forthcoming recession and readying the House for the difficult decisions that lay ahead. However, instead he told us that Britain

“will grow the fastest of all the developed countries. Inflation is around target…The foundation for all those things is a strong and stable economy…That is why, as I have said time and again, we shall take no risks with stability.”

Britain was to grow faster than any other country and inflation was to be on target—it just shows what a complete fantasy world the Treasury was living in.

To be fair to the Chancellor, he gave us the following warning, which turned out to be nothing short of prescient:

“What risks stability is getting into a position of making promises that cannot be afforded. That will result either in increased taxes elsewhere or, more likely, increased borrowing, which puts pressure on interest rates. That is the last thing we need, especially at this time of international uncertainty.”—[Official Report, 14 November 2007; Vol. 467, c. 701.]

A year ago, he said that increased borrowing was the “last thing we need”, but it is the very first thing he proposed in the face of the recession.

How did the Government move from the position a year ago, when the Chancellor boasted that he would take no risks with stability, and predicted that Britain’s economy would grow the fastest of all developed economies, to today’s position? Now, the prediction from almost every international body is that Britain’s economy will contract the furthest of all developed countries in the world, and the Chancellor is taking enormous risks with stability—risks that mean increased taxes, increased borrowing, and pressure on long-term interest rates, as he warned us a year ago.

The Government’s answer is that it is all America’s fault. That has become a kind of mantra for the Government, like something in a panto; I know that the Chancellor has been spending time with panto characters. The Government blame sub-prime, Lehman Brothers, AIG and all that. Of course, all those things help to explain why all countries are facing tough economic circumstances; the Chancellor says that that is right. However, they do not explain why the slow-down is forecast to be worse in Britain than in any other major economy. They do not explain why the European Commission, the International Monetary Fund and the Organisation for Economic Co-operation and Development predict that Britain will have one of the steepest recessions and one of the sharpest rises in unemployment. For a decade, when the Prime Minister was Chancellor, he took personal credit for the fact that, as he modestly put it, Britain was doing better than anyone else. Now, he refuses to accept any personal responsibility for the fact that, as the world sees it, Britain is set to do worse than anyone else. That will not do.

Eleven years ago, the Prime Minister inherited a strong economy from the predecessor Government. Now, once again, Britain is on the path to being the sick man of Europe. Labour has done it again. The blame for that lies fairly and squarely with him. The truth about the Prime Minister’s record is that during all his years at the Treasury, he became so convinced of his own propaganda about abolishing boom and bust that he mistook a finance and housing boom for stability, and never prepared Britain for the bust.

The Prime Minister talked of prudence endlessly from the Dispatch Box, but ran up a huge structural budget deficit. He pledged that he would be the iron Chancellor, but let spending rip. He went on and on about the long term while wrecking our pension system. He preached a kind of Presbyterian morality, yet presided over an age of excess and irresponsibility. He created a regulatory system that allowed the biggest financial crisis of our lifetime to develop entirely unnoticed. Indeed, last week he pleaded to a newspaper that he did not know what was actually happening behind the scenes.

When the credit markets froze last year, the Prime Minister froze, too. The Government were paralysed by indecision, because, as ever, he did not want to do anything that might lead him to admit that he could, in some way, be held to blame. The Budget came and went without anyone noticing, except the poor motorists, who were to be hit by higher taxes. Just days before his own party decapitated him, the drama of the collapse of Lehman Brothers and Washington Mutual threw the Prime Minister a lifeline and enabled him briefly to seize the international limelight with the recapitalisation plan that the Bank of England had drawn up.

Ever since then, the Prime Minister has been scrabbling around for other things to announce—on housing, on VAT, on almost anything—regardless of whether the measures would work, regardless of the absence of any detailed policy, regardless of the cost or the impact on national debt, regardless of the burden placed on future generations, and regardless of the damage done to Britain’s international credibility or creditworthiness. The attitude is, “It doesn’t matter whether it is the right or wrong thing to do, just so long as it can be spun as something rather than nothing.” That is what the last few weeks have been all about—the short-term political plans of the Prime Minister, not the long-term economic interests of this country.

That is why Britain is where it is today—badly prepared for the recession, and badly led now that the recession is upon us. It is not just that the Prime Minister failed to fix the roof when the sun was shining. [Interruption.] I will say it again: it is not just that the Prime Minister failed to fix the roof when the sun was shining—his plan for the recession is now failing. Britain has been in recession since July—almost half a year—and at some point the country will ask whether all the promise of action has actually delivered. There is no evidence that the bank recapitalisation has got credit flowing again to businesses; no evidence that the stamp duty holiday has persuaded a single person to buy a house; no evidence that the £12 billion temporary VAT cut has made the slightest difference to the confidence of a single consumer.

I am following the hon. Gentleman’s argument carefully. He has noted the importance of getting credit out to businesses, so that they can open again after Christmas. One obvious way of doing so is to use the two nationalised banks, and perhaps the moneys that we are putting up, to cut VAT. On Wednesday, we have a chance to vote on the VAT reduction—will the hon. Gentleman seek ways to vote against it, so that Government Members who would like the money to be spent in other ways will similarly be able to vote?

If I needed persuading before that intervention, I am totally persuaded now. We plan to vote against the VAT reduction, which has already come into effect. Because of the procedures of the House, the Government did not allow us to have a vote before it did so. Our argument, made over many weeks and against quite a lot of criticism, not just from Ministers but from various economic commentators and so on, was that we were standing in the way of a fiscal boost that would deliver a transformative effect on the British economy. There is an independent survey—the first, I suspect, of quite a few—out today that shows that there is absolutely no evidence that that measure has had any impact whatsoever on consumer confidence.

May I push the hon. Gentleman further on that? Members on both sides of the House will be desperately worried about how the unemployment figures out on Wednesday or Thursday will begin to affect their constituencies, and what the level of unemployment will be after Christmas. The one thing that we could do to mitigate those redundancies would be to ensure that firms, which will prosper only if the banks deliver credit to them, received credit. The banks are clearly not going to do that, so we should use the moneys from VAT to go through the two nationalised banks so that firms can get credit and open again after Christmas.

The right hon. Gentleman makes a compelling case, with which I agree, about the need to get credit flowing from the banks to businesses. That is essential if we are to keep small and medium-sized businesses in particular, but also larger businesses, afloat. That is the single most pressing problem facing the Government. I disagree with him about the method: I think that a different approach is needed, and I shall discuss it in detail—[Interruption.] The hon. Member for Bishop Auckland (Helen Goodman) giggles, but I think that the Chancellor is about to copy something akin to what the right hon. Gentleman or I have announced about a loan guarantee scheme, so perhaps she will have to swallow her giggles. However, I certainly agree that we need to do something about the problem. I would introduce a loan guarantee scheme similar to the inter-bank scheme that is now in place, with the Government underwriting lending, and I shall come on to discuss that in more detail.

Supporting businesses is an aim shared by Members in all parts of the House. The Government have borrowed £37 billion of taxpayers’ money and given it to the banks, but they have set an interest rate to the banks of 12 per cent. They then expect the banks to lend to small businesses at a rate of about 3 per cent. The banks cannot be pulled both ways: that is why money is getting stuck, and it is why small and medium-sized businesses are not receiving the support that they need from the Government.

My hon. Friend makes an excellent point. Again, I shall come on to discuss recapitalisation. I certainly think that the Chancellor needs to revisit the terms of recapitalisation, as the 12 per cent. charge is too high, if one considers the coupon bond charged in the United States, Germany, France and other countries. That is one reason why our banking system has the problems that it does.

Will the hon. Gentleman give way?

I always enjoy giving way to the hon. Gentleman.

I am grateful to the hon. Gentleman. He is always gracious to me. I understand that he and his party are concerned about fiscal stimulus. As their amendment states, they want

“a low debt and low tax economy”.

To me and many of my constituents, that suggests that there would be considerable cuts in public expenditure. That is a coherent political position, but my constituents deserve to know what cuts the hon. Gentleman and his party propose to make to public expenditure.

Let me say two things to the hon. Gentleman. First, according to the Institute for Fiscal Studies, if we use the same methodology as the Labour party used against us at the last election—as, indeed, the Chancellor used—the thing that Labour Members all cheered a couple of weeks ago amounted to a £37 billion cut in public expenditure, so no one will ever believe anything they say again about spending cuts. Secondly, when it comes to specific Departments—[Interruption.] Treasury Ministers say, “Answer the question.” They probably do not know the answer to this question, so I have some sympathy with them.

As I understand it, the Chancellor has announced that he would take £5 billion in efficiency savings from Government Departments from 2010 onwards. There is absolutely no indication from the Government which Departments that will come from. They cannot tell us what the total spending will be on health, defence, schools or anything else, so it is a little unreasonable of the hon. Member for Wolverhampton, South-West (Rob Marris) to ask me what my health spending would be as opposed to the Labour party’s, when we do not even know what the Labour party’s plans are because they came up with the £5 billion figure and have not filled in the details yet. Once again, further evidence that everything they say on spending is total nonsense.

Before the shadow Chancellor moves on from VAT, may I point to him that it is £12.5 billion of real money in the real economy—about 1 per cent. of GDP? Would he have been more satisfied if the Government had been straight and said that business would keep that to see themselves through the recession, rather than pretending that it would be passed on to consumers?

I know one business that kept some of the VAT for itself—the Labour party, whose own shop did not pass on all the VAT cuts. Some businesses made use of the potential secret fiscal stimulus.

rose—

I shall make a little more progress and perhaps give way to the hon. Gentleman later.

I was speaking about the lack of evidence that the stamp duty holiday, the VAT cut and so on had made the slightest difference. There is plenty of evidence that the prospect of a trillion pound national debt and the tax bombshell to pay for it is undermining national confidence in the future, and that makes the recession worse today. We will begin to see proof of whether the Prime Minister’s tax and borrow recession plan is working when we see the unemployment figures later this week, and particularly when we see the unemployment figures in January and February, by which time the Government will have been dealing with the recession for more than half a year.

The Prime Minister has staked his claim to office on the performance of the economy. Let him, then, be judged by it, just as we are prepared to be judged by the positive action that we now urge on the Chancellor—action that really would help reduce the length of the recession and instil the confidence that we need for a future recovery. That action begins, as my hon. Friend the Member for Bournemouth, East (Mr. Ellwood) said, by addressing the problems in our credit markets, for this is a credit crunch, and until we address the lack of credit, the Government are only scratching at the surface of the deep problems that we face.

The problem for the Government, and particularly for the Prime Minister, is that it requires an admission that he does not want to make. That admission is that the bank recapitalisation may have rescued the banks back in September and October, but it has not rescued the wider economy. There remains an acute shortage of credit. An over-leveraged economy is de-leveraging—[Interruption.] The Chief Secretary to the Treasury, who survived the fire that was taking place behind her on the Andrew Marr programme yesterday, is obviously very excited by the incident and is gabbling away. If she wants to make an intervention, she is more than welcome to do so—

rose—

—and while she is up, I want to know what happened to the Equitable Life statement.

Perhaps the hon. Gentleman will tell the House whether he supports the £60 for every pensioner, to be paid in the new year; that will be paid for through £900 million of borrowing.

I notice that, again, there was not a word on Equitable Life; perhaps the Chancellor will deal with that issue. In a recession, of course we want to be getting money to the front line. I think that the money for things such as the pensioner bonus could have come from within Government.

From where?

By the Chief Secretary’s own admission, there are billions of pounds of efficiency savings to be made. We have said that the £12 billion VAT cut was a waste of money. If, when he responds, the Chancellor of the Exchequer can provide any evidence that that cut is having a significant impact on consumer confidence, or changing the spending patterns of British people in the run-up to Christmas, I will be delighted to hear it. So far, we have seen absolutely none.

rose—

rose—

I give way to the hon. Lady.

What would the hon. Gentleman say to the right hon. and learned Member for Rushcliffe (Mr. Clarke), who spoke in support of the VAT cut on Sky News yesterday? He said that the best fiscal stimulus was a VAT cut, and that such a cut gives a little boost to consumer demand and stops us hitting the bottom too hard. Is this another split in the Tory party?

With the greatest respect to the hon. Lady, I should say that I think that she is reading the planted Whips’ note from three weeks ago. It has not been updated to take account of the fact that my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) has made it very clear that, given the scale of Government borrowing, this could not be afforded. He said that in the House and on many occasions. I apologise, but if that was a Whips’ note issued yesterday, the Labour party needs a new set of Whips as well as a new set of notes.

On the hon. Gentleman’s plans for recapitalisation and repairing the banks, why has the Conservative party set its mind and not made any positive comments about the use of what might be described as the “bad bank” solution—that is, taking bad debts off the banks’ balance sheets so that they feel more confident about lending to each other? Has that been a consideration in policy making within the hon. Gentleman’s party?

We are looking at all the options. The idea of a bad bank is at least worth considering, although the problems that the troubled assets relief programme, or TARP, encountered in the United States make it clear that that route is not easy. However, as I am sure the hon. Gentleman is aware, because of his knowledge in this area, there is plenty of speculation that this may not be the end of the story of bank recapitalisation when it comes to rescuing the banks. We may need some further form of recapitalisation. That might take the form of injections of share equity, as we have seen, or something else, such as a TARP scheme for the United Kingdom. It is not sensible to rule any of those options out, but if we look at the problems with the Paulson plan—or the Paulson-Geithner plan; we will see what Mr. Geithner does in office—we see that there may be other, better routes to pursue.

Another aspect of bank recapitalisation was raised by my hon. Friend the Member for Bournemouth, East. As I said, there remains an acute shortage of credit. An over-leveraged economy is de-leveraging at an alarming rate, and money is being withdrawn from our economy—withdrawn because those who used to fund loans from the wholesale markets cannot get that wholesale funding; withdrawn as US money market funds and other international investors pull back from the UK because they can see the truth about our economic prospects; and withdrawn as recapitalised banks use what resources they have to pay the Government’s coupon or buy out the Government’s stake as quickly as possible, instead of using the resources to lend out to business.

The fact is that the 12 per cent. rate that we are charging the banks is too high; it is more than twice the rate that the American Government are charging and half as high again as the rate that the Germans and French are demanding. Instead of summoning the bank chiefs to endless summits and briefing the press in advance about the ticking-off that they are going to get, the Chancellor would surely spend his time better looking at exactly what he is asking the banks to do. He wants them to pay the Government coupon, repay the preference shares, rebuild their balance sheets, lend more money in a deteriorating economy and pass on rate cuts to borrowers while protecting rates for savers—no wonder that last week the Council of Mortgage Lenders took what for it was the pretty extraordinary step of issuing a press statement:

“Current policy objectives are conflicting and incoherent…The tug of war with lenders being pulled in every direction at once needs to end.”

The Treasury and the Prime Minister need to go back and negotiate a different deal with the banks, cut preference share rates, and cut the costs of the inter-bank guarantees, as the Dutch have done. If that requires them to swallow some pride, they should swallow a bit more and introduce, alongside the recapitalisation deal, the Conservatives’ national loan guarantee scheme, for which we have been calling for over a month.

Earlier, in his statement on the European Council, the Prime Minister said that the Chancellor is about to announce a lending scheme of some sort. We will wait to hear what he has to say about that. I hope that he follows our lead and the model that we have set out, which has been discussed with and approved by many business organisations and individual businesses. We need the Government to underwrite, for a fee, lending from the banks to businesses in the same way as they are underwriting lending from one bank to another. That is the only way to ensure that sound firms get their overdrafts extended and their loan facilities renewed. It will not be enough merely again to back up securitisation in the international markets.

I would argue that directly guaranteeing lending is the only way to restart the credit insurance that, for example, underpins the supply chain, the absence of which contributed to the sad demise of Woolworths. Everyone knows that that is required. The CBI, the Federation of Small Businesses and the British Chambers of Commerce all support a version of the Conservatives’ national loan guarantee scheme, and it needs to be introduced now. The Chancellor of the Exchequer, who has a long and distinguished history of copying the ideas that we propose from this Dispatch Box, is more than welcome to copy this one. If he does, it is of course an admission that the Government are looking to the Conservative party for solutions to the Labour party’s recession.

To substantiate what my hon. Friend is saying about our proposals for a loan guarantee scheme, is he aware of further evidence—if that is required—from a new survey by Essex chamber of commerce showing that a quarter of all businesses have found that their banking terms and conditions have deteriorated markedly in recent weeks courtesy of the banks’ tightening of conditions? There is clear evidence that credit flows are not working and small businesses are suffering, and the Bank needs to stop talking, get on its bike and start acting to get some fresh proposals.

I agree with my hon. Friend, and I would be delighted to read the survey from Essex chamber of commerce. He makes a good point. There are all sorts of ways in which credit is being withdrawn from businesses. In some cases it is simply refused, in others a very high interest rate is being charged, and in others a very high arrangement fee is being charged. This credit famine is manifesting itself in several different ways. There are other ways in which the Government can help businesses that are struggling to stay afloat and to keep people in work, which I entirely agree with the right hon. Member for Birkenhead (Mr. Field) is the key priority for the Government. They could allow businesses to defer their VAT and tax bills, cut national insurance costs for the smallest employers, or provide a chapter 11-style breathing space so that problems can be worked out before the liquidators are sent in.

Will my hon. Friend give way?

I will certainly give way to my hon. Friend, who has excellent connections with the German Christian Democrats.

I thank my hon. Friend for giving way, although this is not a question about Germany. One of the sectors that have been particularly badly affected by the credit crunch is that of housing associations building social housing, which are being offered terms by banks whereby they will get new loans only if they renegotiate the terms of their existing loans to give them higher interest rates. Does he agree that one of the worst effects of the inability to get banks lending falls on people in our society who desperately need new houses and proper Government financing to be delivered for those homes now?

I absolutely agree with my hon. Friend that that is another example of how the credit problems in the economy are affecting all sorts of different sectors. One of the Prime Minister’s great boasts was that he was going to build 3 million homes, but house building has virtually ground to a halt. That is due not only to the lack of a market for homes to be sold to the private sector but to the lack of credit for social landlords and the like. That is further evidence of why we need to address the credit problems.