Mr. John Redwood (Wokingham) (Con): I remind the House that I am involved in business in a global manufacturing company and I am an investment manager of a company, but I am not, of course, here to speak for those companies.

Like most Members, including my right hon. and hon. Friends, I come here because I want my country to be prosperous. I come here because I want there to be more jobs, not fewer. I come here because I am appalled by the tragedy of unemployment that we see in our streets in our towns and villages today. I am appalled by the devastating impact that both domestic and global errors of policy have made on our economy and our country.

What I find most difficult to accept is hearing Government Members suggest that Conservative Members are here to argue the case for the banking industry, that we take great delight in having to cut public spending or that our motive is to have more people out of work or to make the poor suffer more. On the contrary, we are here because we want more opportunity and we are here because we want a wealthier and more prosperous people. Our recommendations to the Government come from the heart and from our experience. Surely Government Members can see that it is they who have messed it up: they should be a little more contrite; they should listen more and lecture less; and they should understand that this country needs many changes in order to give more of our people more of a chance.

We have heard a lot from Government Members about Japan, but they have misunderstood the history and the economics. They say that Japan cut spending, which created a 19-year recession, yet the right hon. Member for Oldham, West and Royton (Mr. Meacher) said that Japan has the biggest accumulated Government deficit and biggest stock of public debt in relation to the size of its economy of any major country he spoke about. Quite right. It does, and the reason it does is that it has had fiscal stimulus after stimulus year after year for 19 years—and they have not worked. Labour Members need to ask why they did not work. They did not work because that country did not mend its banks. If the banking system is not mended, throwing more money into public capital and into public works does not create a prosperous economy with many more people at work; it creates bigger problems.

If Labour Members cared to look at Canada, they would see that the country got into such a public deficit mess some years ago that it had to put through massive cuts on a scale that none of us would like to see. After that was done, however, the economy performed extremely well. The Canadian economy has got through this world crisis so much better than the British economy in part because its public sector is in better shape and making fewer extraordinary demands on its economy. If we look at the Australian economy, there has been no downturn at all. Again, sound public finances are part of the Australian response to the crisis.

Even the United States, which some people very stupidly try to blame for the whole thing—when, as my hon. Friends have said, this is a British problem made in Britain as well—has had a gentler downturn than the UK’s over the last year, largely because of the strength and depth of the American economy and the Americans’ refusal to go to the extremes of policy response that the British Government have adopted. The American Government did not subsidise and put as much public money at risk in their banks, relative to the size of the economy, as we did.

The problem Britain faces and the reason we are doing so badly relative to many other countries around the world at this time of danger and difficulty is that we have the worst treble crisis of all the major countries. Yes, we have the excess credit from the easy money days, the bad monetary policy days, of 2003 to 2007, when policy mistakes by the Government and the Bank of England allowed and fuelled a mighty boom in private-sector credit. Yes, we also have the worst problem of all major countries with our Government deficit. On top of the over-borrowing in the private sector, we are now heaping unbelievable amounts of extra debt on taxpayers through the public sector. We then have the third deficit—the banking deficit—where, quite wrongly I believe, the Government decided to force the effective nationalisation of two of our largest banks when they could have seen them through at much less cost and risk to the taxpayer.

Again, I deeply resent the way in which, in the past, some Ministers have tried to suggest that I wanted to bring the banks down, as if that would be a good thing to do. Of course no sensible person would have wanted our major banks to go down. What we wanted—what I wanted—was for Ministers to do a better deal and to be ahead of the game. We wanted them to regulate the banks effectively when they could have been pulled back from the brink, rather than taking them over the brink and then lumbering the taxpayer with so much risk and so much extra cost.

We did not need to draw Lloyds into HBOS, but the Government decided to do that. We did not need to allow the mega-mergers that created RBS, but the Government decided to do that, perhaps for Scottish reasons. We did not need to go public with the view that the banks were weaker than they should have been, which was bound to starve them of access to money markets and capital markets—the access that they needed—and then force them on to the taxpayer, who now carries far too big a burden.

In order to create the jobs that I think any sensible Member of Parliament wishes to see, and in order to ensure a recovery in the United Kingdom that is much more vigorous and faster—not as fast as the recovery in China, which has been in progress for many months and is doing extremely well, and probably not even as fast as the recovery in more broken America, but faster than any recovery that we are likely to see at the moment—the first thing that the Government need to do is go back and help to mend the banks. Nothing will work properly in this country until the banks are sorted out.
We have two mighty banks with combined balance sheets of £3 trillion—twice our national income—which are hobbled. They are hobbled by the regulations imposed on them, because, most extraordinarily, the Government and the regulator have decided to tighten the cash and capital rules at the bottom of the cycle, having failed to tighten them when some of us asked them to do so as we approached the top of the cycle. So we have pro-cyclical regulation. We are making the problem worse at the peak by making it too easy, and we are making it worse at the nadir by making it too tough.

In my opinion, the reason for that asymmetric regulation is quite clear. The Government are following an election strategy, not a recovery strategy. The election strategy is about spending as much as possible in every way in the public sector while knowing that that cannot be sustained beyond the election. It is about assuming that a future Government, if there is a change of Government, will obviously have to make cuts because that level of spending is not sustainable. If by some miracle the Government got away with it, they would say “Of course we had to make some adjustments, because the Treasury officials suddenly told us that none of the arithmetic worked.”

Far from fuelling a better recovery—far from offering hope to all the people who have lost money and jobs in the private sector—that strategy is doing the opposite. We have a completely lopsided economy. We have a public sector that is still taking none of the hit and none of the pain, and a much bigger private sector that is suffering, anaemic, emaciated and under pressure because the banks cannot lend it the money that it needs, and there is not the necessary demand to create that money through the turnover in the businesses.

David Taylor (North-West Leicestershire) (Lab/Co-op): The right hon. Gentleman says that the public sector is taking none of the hits and none of the pain. Which parts of the public sector does he think should take some of the hits and some of the pain? Could he identify one or two of them?

Mr. Redwood: I should like to see it start from the top. The fat cats in the public sector, the excessive bureaucracy, the regulation that does not work, the unnecessary quangos, the people on the six-figure salaries: that is where we should start to slim down the public sector, because it is an affront to everyone else who sees the very different standards that apply to the private sector and the public sector in this world.

I am not someone who believes that it is a case of “public sector bad, private sector good”—although a fair number of Labour Members seem to believe that it is a case of “public sector good, private sector bad” in every instance. The world is much more complicated than that, and, like many Members, I am proud of many of the great public servants and public services in my constituency and elsewhere in the country. But if the Government still cannot see that the public sector overall is inefficient, bloated and in need of substantial treatment, they really are not fit to govern. Their own Ministry of Defence recently produced a damning report describing how much waste and incompetence there is in defence procurement, and that is the only Department on which they have put any downward pressure over budgets in recent years.

The biggest cuts in public spending that I want to see are cuts in welfare payments because people have gone back to work. We cannot afford the welfare budget at its current level. We need a much more active policy—which I am sure my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) will recommend—to enable us to spend the money more wisely, so that we can get more people into jobs more quickly and do not have to sustain this massive burden.

Another big cut that I want to see is a cut in interest rates. The interest rate burden is escalating out of control. If we are not careful, the interest programme will not just be bigger than the defence budget, but will be bigger than the budgets of some of the even larger and more important Departments of State that are more valued by members of the Government. We should be very worried about the way in which the interest rate burden could so easily get out of control.

There can be no sustained and sustainable recovery unless we ensure that there is a fairer balance between the public and private sectors. There can be no sustained recovery while people continue to be alarmed by the scale and rate of the increase in the deficit. That has an impact on confidence: it means that people hold back from business investment or spending. They know that there are tax increases around the corner from this Government, because the deficit is so implausible. They know that there will be rises in interest rates, because once the Government stop the quantitative easing—once they stop printing the money that they are now spending in their public sector—interest rates have only one direction in which to go.

People are going to say “We do not think we should lend to the Government at 1 per cent. for a short term, or at 4 per cent. for a very long term.” Given the risk posed by the Government—given the enormous scale of the deficit if it is not curbed and controlled—they are going to want a much higher rate of interest. The Government may then reach a point at which their interest rate costs and programme become completely out of control. The rates will rise not only because they are borrowing too much new money, but because each time they re-finance their debt they are re-financing it not at 3 per cent. or 4 per cent. but, perhaps, at 6 per cent. or 7 per cent. The arithmetic then becomes quite shocking and terrible.
So what should the Government do if they really want a recovery? First, they should change the regulation of the banks so that the banks have some scope, given their current capital and cash position, to lend to the private sector. Yes, that will mean laxer regulation for a bit while they get the thing going again, but there will be no problem with that, because the two weakest banks are state-aided and state-supported. People would not lose confidence in them if they took such action, and it is the sensible thing to do now. As my Front-Bench colleagues have pointed out here and at the party conference, allowing the banks to lend a bit more to the private sector means having to start adjusting the deficit in order to create a bit of room and a bit of balance between the public and private sectors in our economy.

How do you mend banks? Well, Mr. Deputy Speaker, as you own two of them—you and all the rest of us, and the Government as our representatives—it is much easier to sort them out. As shareholder, as the dominant influence on that bank, it is the Government, as our representative, who hire and fire the directors and senior executives. It is the Government, as the shareholder representative, who should be monitoring the cash and capital, and ensuring that they are happy with their rather ill-founded investment on behalf of the taxpayers.
What would I do if I were the Government trying to sort out those banks? First, I would go in tomorrow and tell them that there would be no bonuses for senior executives and directors until they became profitable and were returning to the private sector. I would tell them that I did not want to return Royal Bank of Scotland and Lloyds HBOS to the private sector in their current forms. I would tell them that they would be split up, and I would want plans on my desk as soon as possible to create half a dozen banks in the United Kingdom out of the two massive banks that we have. If they did not like it, I could say “In that case, we will negotiate with you the withdrawal of all subsidy and support from the state, because we do not accept this position. We think that there is not enough competition and choice in the banking sector, we think that you cannot run such a big organisation as this, and we think that we need to split it up and make it work rather harder for its living.”
There was not enough competition in the banking market before the problems that the authorities helped to create in 2007 and 2008. Now there is even less, because of the actions that they took over Lloyds HBOS, and the actions that they took over the three mortgage banks that they failed to regulate properly and that also got into considerable difficulties.

The Government should be alarmed that there is so little competition in the banking market, because without that competition there will be no loans for anyone who wants to run a reasonable risk—there will only be loans for people running practically no risk at all—and there will be no loans at sensible prices for the private sector. I do not know whether Ministers are aware of this, but interest rates and charges have gone through the roof because these banks, knowing that they now have oligopoly in the market, know that they can get away with charging the earth and nobody can stop them. All the time that position remains true there can be no virile, decent, strong recovery in Britain. All the time that remains true, our trend rate of growth will not be the 2.5 per cent. that we always said, or the 2.75 per cent. peak of the market forecast from the Treasury. It will not even be 2 per cent. I hope there is a recovery in the next few months—there may well be as the figures we are comparing with are so bad it would be stunning if there were not—but in no way will we get back to even 2 per cent. growth unless the Government mend the banks and sort out the public sector.