Much has been written and spoken about the UK economy in the past nine months or so. With every word uttered or written, we are told about the darkening depths to which our economy is plummeting. In my contribution, I will consider the economy as a whole and mention some examples of sectors that I feel represent my argument best. At this point, I should highlight my external activities as recorded in the Register of Members’ Interests.
The financial sector has been a great wealth provider for the UK over many years, and that wealth has trickled down to many parts of the economy, including the high street, but we now see the banking sector as the villain, not the hero. For many years, when businesses asked banks for finance, they were expected to meet the banks’ demands in order to secure capital investment. It is now clear that the rules that the banking industry expected UK businesses to follow were not rules to which the banks themselves were playing.
Now, because of financial mismanagement of astronomical proportions, it is not only the banking industry that is in crisis but every sector, potentially, of the UK economy. Millions of people throughout the UK were employed in the private housing sector and its supply sectors, building homes for a market that struggled to meet demands. House building companies were busy, suppliers were busy and the manufacturing industry was busy. Although I appreciate that house prices in some areas showed unsustainable growth, it was a strong market with strong skills and high employment levels. Now it is decimated and haemorrhaging jobs and money as though there were no tomorrow.
Barratt Homes is a company close to my heart, as I was once a chief buyer in Scotland. It has fallen from being a FTSE 100-listed company with a share price of about £11 to having a share price of about 70p, after dallying with values as low as 34p. Barratt and its competitors have virtually stopped production. It is important to understand that the industry has always built speculatively, not to order. Only by speculation can businesses provide continuous employment—it is little different from the car market, where mass production is not to order—but that speculation has stopped. The sector has lost jobs at an alarming rate, affecting the supply side, design and manufacture and road haulage, to name just a few industries.
How do we stimulate a sector such as house building? In the words of Mike Farley, chief executive of Persimmon Homes, it is all about mortgages. I would like to discuss two aspects of mortgages. The first is deposits, or, in sector-speak, loan to value. Not so long ago, the financial sector was offering mortgages of 100, 110 and 120 per cent. of the value of properties. Plainly, that was madness. Lest anyone think that I am absolving individuals from responsibility, I am not. Individuals who use such vehicles have a responsibility, but so does the financial sector. We did not ask the financial sector to create those products. It created them and offered them to individuals on the clear understanding that lenders were content that individuals could afford them. Today, that madness has gone full circle. Most products now demand a high deposit of 20, 25 or 30 per cent. Why?
Last week, in my constituency, I convened a meeting with construction industry representatives, representatives of all the major banks and representatives of the economic development department in the local council. Unfortunately, at that time, the bank representatives were not in a position to clarify the criteria by which new loans and guarantees through Government financial injection could be accessed.
Does my hon. Friend agree that at a time when Government are acting speedily to get the economy moving, the banks have been unduly slow to clarify their position? Does he also agree that the banks have gone from one extreme to another on mortgages, and that the restrictions are equally irresponsible at a time when we need movement in the housing market? In addition, does he agree that unnecessarily bureaucratic planning systems in some local authorities have acted as a further brake on development? These unprecedented economic times demand unprecedented changes. Speeding up the planning process would be a necessary catalyst for change.
I agree with everything that my hon. Friend said, not only on the mortgage industry, which we are discussing, but on planning issues, too, which are important to the sector.
Why has there been the change to such high demands on mortgage deposits? Could it be that the lenders really have the individuals’ best interests at heart and want to ensure that they can cope with repayments? I do not think so, because if those were the banks’ true concerns, they would help by passing on the full falls in interest rates which have been generated recently. I believe that they are protecting their own backs against projected falls in house values. However, the solution is simple: we must return to widely available 90 per cent. mortgages if we are to have any hope of saving the industry.
The Treasury’s recent support for lending will not deliver if it fails to move lenders towards that goal. The Royal Institution of Chartered Surveyors shows that new homebuyer inquiries are at their highest level since October 2006, yet mortgage approvals, despite a rise in December, are less than 50 per cent. of the figure for approvals in December 2007.
Shared equity schemes are valuable and have a role to play, but they depend on how the lender views the share. If a 20 per cent. state-funded or industry-funded shared equity scheme is available, it is no good the lender demanding a 25 per cent. deposit on the remaining 80 per cent.; it defeats the purpose. The industry itself has many shared equity schemes, and I am advised of one developer whose company held £1 million of shared equity. Obviously, there was a need to turn it into capital, but when the markets were approached, the best offer that he got was £400,000. Why? Because the markets said that it would be worth £1 million in 10 years’ time, but not today. The really sad thing is that he was thinking about taking it.
Moving to 90 per cent. mortgages will help the housing sector, but it cannot stop there. If someone buys a new car, what do they do? Nothing, other than put fuel in it and drive it; but they did that with their old car. If they buy a new house, they spend additional money. Ask any high street retailer and they will tell you that a buoyant housing market—new and second-hand—fuels spending on the high street. New homeowners buy carpets, fixtures and fittings, curtains, white goods, furniture and so on. It is the one industry—of which I am aware—that directly feeds spending in other sectors.
Let me provide an interesting figure. In 2007, there were 357,800 first-time buyers, and Halifax has produced data suggesting that the cost of furnishing and equipping a new property is about £6,000, which equates to about £2.14 billion of high-street spend by first-time buyers alone. That, in my mind, is quite a fiscal stimulus, but I am not convinced that the Government have yet grasped it.
It is also relevant to discuss interest rates, because they affect mortgages and businesses. It is unacceptable that rate cuts have not been passed on; it is plainly and simply wrong. However, it is not holding back the markets as much as the issue of deposits.
What is the future for the wider economy? If the house building sector and its supply side cannot be returned to stable growth, I fear that we can kiss goodbye to zero-carbon homes in 2016. If that happens, we will be letting down our environmental ambitions and missing the opportunity to expand the sector into a greener future. The technology required to deliver the objective could be used worldwide, and we really could become market leaders, but not with lending as it is now.
More generally in the economy, businesses are being put under unacceptable pressure by the financial sector. In my constituency, businesses that have an overdraft facility at base rate plus 2 per cent. or plus 2.5 per cent. find that what is on offer for renewal is base rate plus 7.5 per cent., and that is when interest rates have plummeted. The Forum of Private Business has stated that 47 per cent. of its members who applied for funding in the last quarter of 2008 were either rejected outright or partially, and the Federation of Small Businesses, of which I am a member, says that about one third of its members are struggling to get affordable credit. That is all due to new criteria being introduced by the banks, many of which are in business today only because of taxpayers’ money. Such new criteria result in businesses being unable to afford the higher rates and going out of business, costing people jobs, the state money and—wait for it—the banks money, too.
I thank my hon. Friend for giving way, and I congratulate him on securing this important debate. He has touched on jobs; does he agree that there are serious implications not only for tradesmen and women who are currently employed in the construction industry, but for the future of apprenticeships? If the Government aspire to increase the number of apprenticeships, we will have to address those issues.
I agree wholeheartedly. Many people have learned their trade in the construction industry, and it is a sign of the times that the issue that is high on the agenda today is not that, but survival.
I applaud the Government for what they have done. Intervention was and is the only sensible option in an economic downturn or recession. In some ways, however, I want them to do more, because they are the only ones who can do anything positive. The Opposition in Westminster and the Scottish Executive in Holyrood seem intent on doing nothing. In fact, many from the Tory party are talking Britain down and taking rewards from the banking sector at the same time. The UK economy needs the effect of Government announcements to kick in quickly, and I urge the Minister to ensure that the support that the economy and UK businesses need is delivered now. The effects of any support will be diminished by delays of weeks or months while the detail of packages is thrashed out. Business can and does react quickly, as it must to remain competitive, and we need the Government to force the banks to react quickly so that business can survive.
In the weeks after the banks were provided with the £37 billion recapitalisation package, with a design to raise mortgage availability back to 2007 levels, lenders dramatically reduced their lending, which has plummeted ever since. I hope that the Minister is aware of the anger that much of the public feel about our investment in the financial sector. Many people recognise the absolute need for it, but that does not stop the feeling of anger about banks being bailed out with taxpayers’ money while other areas are losing jobs as a result of the actions of the banking institutions that we are saving.
Lord Myners recently said that there has been mismanagement in our banks, but businesses in my constituency were saying that months ago. The RBS losses—£28 billion this year—are the biggest in UK history. That is virtually the whole of the Scottish Executive’s budget. Under its previous management, RBS has been an embarrassment. It searched for growth in order to hide its defects. If Scotland had been independent during this period, RBS would be bust and the Bank of Scotland would be bust. Given that oil—that one cornerstone of the Scottish economy—has tumbled in value, I shudder to think what would have happened to an independent Scotland.
While I am talking about Scotland, let me highlight the failure of the Scottish Futures Trust, which has failed to have any impact on the Scottish economy. I urge my hon. Friend the Minister to engage with Scottish Executive Ministers so that the Scottish economy can play its full part in the UK economy without unnecessary, idealistic barriers.
We are subject to a daily barrage of media comment, and comments in the media—there is a difference—on the recession. Recent positive comments by Ministers who see green shoots and light at the end of the tunnel are at one end of the scale, and hedge fund managers who tell us that Britain is bust are at the other end. I read an interesting article last week in that well-known bastion of socialism, the Evening Standard—perhaps it will be now that the Russians own it—by Anthony Hilton, who said that the people who deliver doom-and-gloom messages have, to put it bluntly, an agenda. I could not agree more. They have an agenda that delivers them financial gain from the further weakening of our economy. Hon. Members will know a saying that I have heard many times: “Someone will be making a lot of money out of this.” It was refreshing to see a commentator argue that there was no fundamental reason for the recent falls in sterling and stocks—just panic, fanned by those who can benefit from its effects.
What does the future have in store for the UK economy? Short-term predictions are gloomy, but there is only one action that can face up to the challenge: a return to lending. That would rekindle the confidence that is so lacking in our economic thoughts today. What is confidence? I do not have time to expand on what I think it is, but perhaps the Minister will in her response. The Government have a massive role to play in delivering that confidence. We need them to move the banks to provide funding streams that deliver confidence to businesses so that they will invest and employ more people. I worry seriously that things take too long to filter through. The Government at all levels need to streamline their process so that they can respond in difficult circumstances with the swiftness that business expects, needs and deserves.
Getting public money to support business investment projects is a tortuous process. We cannot use it as an acceptable yardstick for delivering new economic packages into the marketplace. It must be done swiftly. I also believe that in such situations, Governments cannot stop a recession or downturn but can lessen the impact and quicken the return to growth. I support the Government’s plans to get the unemployed back into work with golden hellos, but I would welcome an even greater direct intervention to prevent job losses in the first place.
Overall, we must take a long, hard look at the structure of the UK economy. We have been shown how dangerous over-reliance on one sector, in this case the financial sector, can be to the economy as a whole. We need a structured approach to spread our interests and risks, as business does every day. I urge the Minister to ensure that the announced financial support reaches its targets quickly. Failure to do so will cost a lot more economically and socially, and that is a price that I do not want the country to pay.
I congratulate my hon. Friend the Member for Ochil and South Perthshire (Gordon Banks) on securing this debate and on the points that he made. He is right to observe that we are facing some of the harshest economic conditions for decades. As I would expect of an assiduous constituency Member, he spoke about what he sees happening in his constituency.
In the late 1980s, inflation rose into double digits and interest rates rose in an effort to control it. As a result of domestic policy mistakes, the economy entered recession in 1990 and unemployment rose above 3 million for the second time in 10 years. We must recognise that the nature of the downturn that we face at the moment is fundamentally different from those that we have suffered in past decades. It is not a domestic problem; it is a global one. Due to increasingly integrated global financial markets, ever higher amounts of capital flowed across borders every day. Low inflation and low interest rates across the developed world meant that returns on conventional investments were low and borrowing was cheap.
In their search for higher yields, the financial institutions discussed by my hon. Friend borrowed heavily and devised new products that packaged securities into investment opportunities. Advances in information technology parallel to those developments allowed those new products to be repackaged, as it turned out, again and again and sold around the world in ever more complex forms. That meant that banks, credit rating agencies and national regulators struggled to understand where the risks lay. The scene was set for the irresponsible lending that we saw in the American mortgage markets, which subsequently infected institutions around the world. Bad decisions at the heart of the financial system have led banks to lose confidence in each other and global credit markets to freeze up.
The effects of the credit crunch are being felt everywhere, and increasingly in the real economy. In the past few months, trade and manufacturing have contracted sharply in America, Europe and Asia as companies have been unable to access the credit that they need. Economic forecasts for growth in 2009 have been revised down sharply, with gross domestic product expected to fall significantly in the US, Germany, Japan, Italy and here in the UK. In the US, 2 million jobs have been lost in the past two months. Many forecasters now expect the world economy as a whole to contract for the first time since the second world war.
The problems are global, and they require global solutions. Working with our international partners, the Government are taking a role in agreeing and delivering those solutions. That is why my right hon. Friends the Prime Minister and the Chancellor took a leading role in the G7 autumn discussions in Washington. The five-point action plan that was produced as a result of that meeting was largely based on the UK’s own recently implemented financial stability measures.
Both my right hon. Friends attended the Washington summit in mid-November, and the next meeting of leaders will be in London in April. The UK holds the presidency of the G20 Finance Ministers and central bank governors forum in 2009, through which we will drive an ambitious work plan to help tackle the problems that my hon. Friend has brought before us today.
My hon. Friend mentioned the package of financial stability measures. It was my understanding that the recapitalisation of the banks was, at least in part, to help banks continue lending, particularly to small businesses. Will the Minister tell us what the Government are doing to monitor just how much the banks are continuing to lend, and to whom, if anyone, they are giving the money?
Certainly. We have set up the lending panel, which meets regularly. As part of the latest measures announced by my right hon. Friend the Chancellor on 19 January, we will also be coming to legally binding agreements with the banks that we are supporting. In fact, there has been an increase in lending to our economy from the banks that have been recapitalised. The problem for my hon. Friend’s constituents and those of my hon. Friend the Member for Ochil and South Perthshire is that the globalised banks and non-bank institutions that are not based here that used to lend into the economy have now retrenched and taken away their lending, which has led to an overall decline in the availability of lending in the economy. Although our banks that were recapitalised have increased their lending, the overall effect is still a decrease because of the retrenchment of other non-bank institutions and foreign banks. Clearly, some banks, such as the Icelandic banks, have disappeared completely.
I fully understand and agree with what the Minister has said about the hole that has been left by the international banking sector pulling back. However, it is an untenable situation for basically state-funded banks to move their overdraft rates from 2.5 to 7.5 per cent.; it is untenable for the businesses concerned and it should be untenable for us as a Government because it is taxpayers’ money. When interest rates have fallen to the level that they have, there is no explanation that I can swallow for why the interest rate being offered to business will grow by 5 per cent. It is shameful.
I do not disagree with my hon. Friend’s sentiments, but I want to emphasise that we have taken steps to support the banking system not because we support bankers, but because we wish to guarantee the savings of the many millions of people who have their money in retail banking. It is important to remember that retail depositors have not lost a penny, because of Government action. We also want to make certain that companies can access credit. That is vital to the functioning of our economy, if we are not only going to recover from the current circumstances, but aspire to have a resumption of growth and prosperity in the future. That is what we have been doing.
Over time, my hon. Friend will have seen announcements not only about the recapitalisation of banks, which happened last October, but about the small business package, which was recently announced by my noble Friend the Secretary of State for Business, Enterprise and Regulatory Reform. That will make hugely increased amounts of money available to small and medium-sized enterprises. There have been further announcements on supporting and insuring banks against their losses. Those measures will enable banks to do the job that they should have been doing and that they were created for: lending to the real economy.
To partially answer my hon. Friend’s question, there has been a contraction in lending not only because we have lost some of the major players that were lending into the UK economy, but because of the huge amounts of uncertainty being caused, following the collapse of Lehman Brothers, about the bank balances and assets of various of the large players. They have been unable to price their losses and, therefore, they have hoarded cash.
Unfreezing that cash and making lending available to the real economy is the key to dealing with the challenges that face us now. That is why earlier this month my right hon. Friend the Chancellor announced a package of measures to support the banking system and safeguard the millions of jobs that would be put at risk if the banking system continues to have difficulties lending. These measures are aimed at beginning to replace the lending capacity lost by the withdrawal of foreign banks and other non-bank institutions from this market and addressing the barriers that are preventing UK banks from expanding their own lending, supporting stability and restoring certainty to the banking sector.
Again, I fully support what the Government have done, but the crux of the matter is the swiftness with which that filters through to the end user. The announcement is one thing, but if we spend weeks and months thrashing out how this is going to get through to business or the person looking for a mortgage, its impact will be diminished. We need swiftness. We need the lending on the high street now.
I can assure my hon. Friend that we in the Treasury are well appraised of the need to achieve that degree of swiftness and that result. That is why the Government are acting to deliver real help now, partially by introducing £3 billion of capital projects on housing repairs, insulation, school extensions, health centre refurbishment and transport improvements. To ease the cash flows of business, we have set up a scheme to allow businesses to spread their tax payments over a timetable that they can manage and some 25,000 businesses have spread tax payments worth £430 million already under that scheme. I would say that that is quite rapid and immediate help.
We have committed an extra £1.3 billion to boost the capacity of Jobcentre Plus to get people back into work and we have expanded our schemes to help those who lose their jobs stay in their homes, with support for their mortgage repayments to avoid repossessions in all possible ways. We are increasing household income next year by putting an extra £145 in the pocket of every basic rate taxpayer. We have given all pensioners a bonus of £60 on top of their annual £10 Christmas bonus and the basic state pension for a single person will be increased from April. We are supporting families by permanently increasing child benefit to £20 per week in January instead of April.
We will continue with our approach, enabling banks to stabilise their own balance sheets and lend into the real economy, using the insurance proposals that my right hon. Friend the Chancellor announced, to put a floor under banks’ losses and give them the confidence to lend again.
I urge any businesses that are experiencing difficulty accessing credit to look at Government websites and to go to the development agencies and Government agencies dealing with this issue to access help and assistance if they need investment to grow. There are also other parts of the structure that will allow them to get assistance. I expect that the proposals put in place by the Government will ease lending in the near future.
I am well aware of how difficult it is out there at the moment, as all hon. Members will be from seeing people visiting them in their constituency surgeries, be they businesses or households. We understand that real help, rather than a policy of doing nothing, is needed now. That is why the Government have acted, as only Governments can, to stabilise the banking system to give it certain guarantees, which the Institute for Fiscal Studies said in its green budget today may not only not cost taxpayers in the long term, but could even make a profit, although the figures at the moment look eye-watering.
We have to stabilise the banks as a necessary condition for economic recovery. We continue to work with our international counterparts to ensure that the fiscal stimulus that we have announced, and the global stabilisation of the banking system, is mirrored elsewhere, because the more effectively that is done, the sooner the global economy will cease to suffer from what the IMF has characterised as the greatest shock to mature financial markets since the first world war.