26 September 2008
The credit crunch has hit the UK hard because of government mismanagement, argues Philip Hammond. So how would the Conservatives bring some relief?
The UK is facing its biggest economic crisis in years. Our financial system is in turmoil. Unemployment is rising. House prices are falling at record rates. Inflation is double what it was a decade ago. And economic growth is at a standstill.
The poorest members of society are struggling to cope with soaring bills and falling real earnings. More and more businesses are preparing to leave the UK because of uncertainty and politically driven U-turns over tax policy.
The country is crying out for strong leadership and long-term policy. Instead, we have a prime minister and chancellor who publicly disagree on the extent of the country's problems. The chancellor tells us that we face the most difficult economic circumstances in 60 years; the prime minister insists that the UK is well prepared for the downturn – despite mounting evidence that it is not. Instead of a long-term economic recovery plan, we get short-term political survival plans.
It is true that part of our economic predicament is global. Credit has been squeezed, oil prices are high and food prices are rising worldwide. But low consumer inflation in past years led UK politicians to allow spiralling inflation in asset prices to go unchecked. The growing mountain of consumer debt, built on inflation in asset values, was unsustainable.
This problem has been particularly significant in the UK. House prices increased faster than in any other developed country – twice as fast as in the US. Our personal debt is the highest in the G7 countries, at 175% of income, compared, for example, with 140% in the US. Now that the bubble has burst, banks are cutting back on their lending and households are feeling the pinch.
The Organisation for Economic Co-operation and Development is predicting that the UK will be the only major world economy to fall into recession this year. The budget deficit is 3% of GDP – the highest in the developed world – with borrowing set to increase even further. If the UK government had put aside money in the good years instead of allowing borrowing to escalate, it would be in a stronger position now to support the economy, as other governments are doing.
When chancellor, Gordon Brown declared the 'end of boom and bust'. That is why he has no answers now. If you believe you have abolished the business cycle, you believe there is no problem to solve. Because he believed his own spin, he neglected to prepare the UK to withstand the external shocks that hit every economy.
At the same time, he allowed our competitiveness to erode. According to the British Chambers of Commerce, the cost to business of regulations introduced since 1998 is £65bn. In 1997, we had the fourth-lowest corporate tax rate in the EU; now we have the 19th lowest. We have gone from fourth to ninth in the World Economic Forum competitiveness table.
So what would a Conservative government do differently? We have already proposed practical measures that will help to mitigate the burden on families and businesses in the short term, while strengthening our economy for the long term.
In the short term, we need to help people cope with the worst effects of the credit crunch and soaring prices. We need to restore confidence in the financial markets, by improving regulation, giving the Bank of England more powers to intervene in the markets, and taking action to protect people's savings. We are consulting on proposals for a fair fuel stabiliser, so that, when oil prices rise, the government uses the extra revenue it gets from North Sea oil to cut fuel duty. We are campaigning for planned increases in vehicle excise duty to be scrapped. We would cut tax rates for business, paid for by simplifying complex allowances. We need to offer help to those seeking to buy houses – which our fully funded proposal to abolish stamp duty for 90% of first-time buyers will deliver. And we should look at reforming insolvency law, so companies battered by the credit crunch are given breathing space.
In the longer term, we need to strengthen the fundamentals of our economy. We must reconstruct our monetary policy framework so that an unsustainable debt build-up is never ignored again. So we need to look carefully at what tools we can use, internationally if necessary, to manage credit expansion during the good years. We are looking at whether banks' capital requirements could vary during the cycle to dampen credit expansion in times of boom and stimulate it in times of contraction.
We must also reform the process of making tax law. A Conservative government will create an Office of Tax Simplification, to examine the tax code. We will also improve parliamentary scrutiny of new tax legislation.
Most crucially, in the longer term, we need to ensure that government lives within its means. We understand that there is a limit to the acceptable level of taxation and borrowing. And to avoid losing any more jobs to lower-tax economies, it is crucial that we maintain a competitive tax environment for businesses.
We are developing a new 'fiscal responsibility framework' to regulate how government raises and spends money. We must make sure that we put something aside for the rainy days during good times.
Conservative leader David Cameron has set out the key to our formula: sharing the proceeds of economic growth. We will not spend everything we have, or borrow to spend beyond our means. Instead, we will ensure that the state grows more slowly than the economy as a whole, so government spending falls as a share of national income and we can gradually reduce taxes and borrowing. This guarantees that taxes, or borrowing, or both, will fall over each economic cycle.
But any government will face demands to spend more on the essentials – whether it is cancer drugs, care for the older generation, equipment for our armed forces, or more prisons and police.
So how can we square the need to slow the relative growth of government with the inexorable demand for more and better public services?
First, we will address the rising costs of social failure. Family breakdown, unemployment, and drug and alcohol addiction all create enormous costs for government, so it is crucial that we tackle them.
Secondly, we will address the need for sustainable reform in the delivery of public services. High-quality public services do not come cheap, and we are committed to taxpayer-funded public services, free at the point of delivery. But we need to look at new ways of ensuring sustainable delivery of high-quality public services. Only genuine reform will protect our public services for generations to come.
Thirdly, we must reduce waste. Not by a one-off efficiency drive but by creating a culture change in government; one that is careful with public money. We must fight to ensure that taxpayers get value for money.
Through strong economic leadership, sharing the proceeds of growth and a commitment to fiscal responsibility, the next Conservative government will achieve the strong, competitive economy that allows our businesses to grow and our public services to be sustained, and will give individuals the best possible opportunity to make something of their lives.
Philip Hammond, Conservative MP for Runnymede & Weybridge, is Shadow Chief Secretary to the Treasury. The Conservative Party conference takes place in Birmingham from September 28 to October 1
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