HM Treasury: Supplementary Estimate, 2008-09

David Gauke responds to a Government motion which restores funding to the Contingencies Fund - used for the Bradford & Bingley and Icelandic banks - and to provide the resources for the recapitalisation of Lloyds TSB, HBOS and the Royal Bank of Scotland. Mr. David Gauke (South-West Hertfordshire) (Con): I am grateful to the Financial Secretary to the Treasury for setting out the purposes of the motion. As he says, essentially it enables the Government to restore the money in the Contingencies Fund, following the expenditure in relation to the recapitalisation of Lloyds TSB, HBOS and the Royal Bank of Scotland, and in relation to Bradford & Bingley and the Icelandic banks.

Of course, we on the Conservative Benches support recapitalisation of the high street banks, which accounts for the majority of the funding, and we recognise the particular issues relating to the Icelandic banks and Bradford & Bingley. We have said throughout that we are keen to work on a bipartisan basis. None the less, this is a huge expenditure and it is right that we have an opportunity to scrutinise and question it.

Several of the questions that arise have not been answered as fully as they might have been, and I shall raise some of them with the Financial Secretary. I appreciate the prudence of the Government in seeking to restore the Contingencies Fund now rather than waiting until December, but it might be helpful if the House had the answers to some of our questions, so that we know where taxpayers' money will go. The sums are huge-£42 billion will double the borrowing that the Government previously proposed-and we need to know how it will be accounted for. The US had lengthy debates on these matters, although we do not want a repeat of the uncertainty that they created. In any case, we work on a different basis in the UK, but it is right for the House to have an opportunity to ask some questions.

We need further clarity on the issue of the Government's acquisition of ordinary shares. When the Chancellor made his statement on 8 October, on the banks that would qualify for the recapitalisation provided by the taxpayer, it looked as though the investment would be made through preference shares. The Chancellor set out his priorities and said that £25 billion would be used to acquire preference shares. He stressed that those would rank above ordinary shares and have better protection against future losses. It was also made clear that further capital would be made available, and I acknowledge that he recognised the possibility of the acquisition of ordinary shares. However, the Treasury memorandum made it clear that the Government will acquire £28 billion of ordinary shares in RBS, HBOS and Lloyds and £9 billion of preference shares. That is a substantial change from what was envisaged on 8 October.

On 13 October, the Chancellor explained this by saying:

"Given the scale of what is necessary...the balance"-

between ordinary and preference shares-

"has to be struck in a way that is workable...if too many preference shares were put into an organisation it would impede its ability to get through this period and recover".-[ Official Report, 13 October 2008; Vol. 480, c. 544.]

He added that he was acting on proper advice. That is clearly a change in approach and it would be helpful to the House to hear an explanation of that change. Is it the fear that the deal will involve no dividends until the preference shares are paid off, so that would have an adverse effect on the share prices of banks? Or is it, as The New York Times suggested, that the banks' memorandums and articles did not allow the issuing of enough preference shares to boost the banks' capital ratios to the required levels? The Chancellor referred to proper advice, and it might be helpful if the House could see that advice. That change has put the taxpayer in a different, and arguably worse, position. I am willing to be pragmatic about this issue, but we need to know the reason for the switch.

Each bank is paying a 12 per cent. interest rate on preference shares. It has been argued in newspapers and elsewhere that the risk profiles of the three banks are different. Given the scale of the investment in RBS compared with Lloyds TSB, and the different risk profile, why was the same interest rate required?

Another change in approach seems to have occurred in relation to board representation. On 8 October the Chancellor said:

"In relation to Government nominees sitting in boardrooms, I never thought that a particularly useful course of action to follow".-[ Official Report, 8 October 2008; Vol. 480, c. 286.]Now we will have five members on bank boards. I do not necessarily disagree with the proposal, but it would be helpful to know why there has been a change in approach. Will it be their role to enforce the various conditions imposed on the banks by the Government? How will those directors work, given that the Government are keen to have an arm's length relationship with the banks? Will the Government directors serve on the remuneration committees, for example? The remuneration policies of banks are causing concern, but it is a particular issue for banks that are partially nationalised. We know that cash bonuses will be curbed, but I hope that the Financial Secretary can provide greater detail on the Government's attitudes to share options for senior and not so senior bank employees.

Confusion has also arisen over lending conditions, as my right hon. Friend the Member for Richmond, Yorks (Mr. Hague) said at Prime Minister's questions. The Treasury statement on 13 October stated:

"The banks have agreed to maintain the availability of loans to homeowners and small businesses at 2007 levels."

We recognise that the purpose of the intervention is to unfreeze the lending market, but does that mean that the Government wish to maintain the same level of borrowing as in 2007? They appear to have backed down from that and now place great stress on the word "availability", but do they envisage that the partially nationalised banks should offer the same types of products as were offered in 2007? Will we see the return of 125 per cent. mortgages, for example? After all, 2007 was part of the age of irresponsibility-to coin a phrase. Do the Government really intend a return to those times? I suspect that it was merely spin, but it puts the Government in an awkward position. They are either guilty of spin or guilty of encouraging a return to irresponsibility. Which is it?

Mr. Bone: My hon. Friend is making a powerful speech, but is not the situation even worse? Term 6 of the share placing agreement talks of lending at "at least" the level of 2007, which suggests that the level should be even greater.

Mr. Gauke: I am grateful to my hon. Friend for pointing that out. It is further suggested that those levels should be maintained for three years. The Government are trying to retreat from that statement as quickly as they can, and the stress is being put on availability and marketing activity. However, greater clarification would be helpful. We welcome the unfreezing of the credit market as that would be helpful, but a return to 2007 levels would be grossly irresponsible.

Earlier today, the Leader of the House referred to trying to re-establish reasonable rates for lending to small businesses and households, but that is not how the policy was presented earlier this week. There is clearly some confusion, which brings into question whether the Government appreciate some of the lessons that they should have learned from 2007 and before.

On the treatment of home owners, the Treasury statement of 13 October said:

"As part of its investment, the Government has agreed with the banks supported by the recapitalisation scheme a range of commitments covering...support for schemes to help people struggling with mortgage payments to stay in their homes".

We recognise and appreciate that point, but we must bear in mind the case of Northern Rock, which has been nationalised for some time. From December 2007 to June 2008, the percentage of its properties in possession increased from 0.29 to 0.56 per cent. That is a substantial increase, and it is particularly striking compared with the 0.16 per cent. figure for properties in possession for mortgaged homes as a whole. Again, clarification would be helpful. Will the partly nationalised banks, and in particular their mortgage arms, take an aggressive approach to repossessions? Is it the intention that they will take a more generous approach than the market as a whole, or will they, like Northern Rock, take a more aggressive approach? Again, it would help the House if we had further details.

Earlier, I touched on the implications for the public finances of those items of expenditure, and I ask again how the Government anticipate that that expenditure will be treated. Will it be treated as borrowing, and will it be treated as part of the public sector net debt? We know that the Office for National Statistics will make a determination on that point, and it looks likely that the expenditure with regard to the high street banks will be treated in such a way. If that is the case, public sector net debt will be at around 50 per cent. of GDP, a percentage which it has not reached since 1976. Where will that leave the sustainable investment rule? We debated that matter last week in the House of Commons, and it appears that the sustainable investment rule has been blown out of the water. The Government were likely to breach the rule notwithstanding Northern Rock-if one includes Northern Rock, they are already in breach-and these particular measures. The sustainable investment rule appears to have been broken. Have the Government abandoned it? It is about time that this House knew the answer.

Have the Government made any assumptions on when the preference shares will be paid off? Have they made any assumptions on when they will be in a position to dispose of the ordinary shares? I appreciate that no precise answer can be given, but are they working on any assumptions at all? Given that we are discussing very substantial items of expenditure, how will that expenditure be accountable to this House? Will we have an opportunity to review, debate and, if necessary, vote on any progress in reducing the level of preference shares and ordinary shares? What opportunities will there be to debate particular policies pursued by banks in the light of their partial nationalisation, over and above the usual methods such as Treasury questions?

On the Icelandic banks, the supplementary estimate refers to £600 million, which relates to the payment to ING under the Transfer of Rights and Liabilities to ING Order 2008. That relates to the transfer of retail deposits of Kaupthing, Singer and Friedlander and of Heritable, as the Financial Secretary has mentioned. As far as I know-I am willing to be corrected on this point-this is the first time that this House has had sight of that figure. The Financial Secretary will correct me if I am wrong, but the figure of £600 million has certainly not been referred to very frequently. We have frequently heard about the £100 million loan-indeed, the Leader of the House referred to it earlier today-but the £600 million figure is new. If it is possible to obtain more details about what that involves and how the Government hope to get their money back-if, indeed, they hope to get their money back-we will be grateful. Equally, on the figure relating to Bradford & Bingley, more details about when and how the Government intend to get their money back would be appreciated.

We all agree that the financial crisis is extraordinary. Some Labour Members, not many of whom are present in the Chamber today, view the measure as a triumph for the Prime Minister. We do not view it as such, although we have been prepared to work with the Prime Minister and the Government to address particular concerns. Finally the bills for the Brown boom have had to be paid. For years, the Prime Minister declared at every opportunity that there would be no more boom and bust. In an interview in the Daily Mail at the weekend, he said:

"I actually said, ‘No more Tory boom and bust'".

There are a number of ways one can take that comment. I do not know whether it meant that there would be no more Tory boom and bust because instead we would have Labour boom and bust, or whether he really thinks that he said that. I cannot explain that comment.

The facts that the UK was so badly prepared for the financial crisis, that the regulatory system was unable to cope with this bust and that the public finances are woefully unprepared for this downturn suggest that maybe the Prime Minister believed throughout the 10 years when he was Chancellor that there would be no return to bust, whether it was Tory bust or any other kind of bust. That is deeply disturbing, because it means that he believed he could defeat the business cycle, which has existed for ever. The consequence of that was enormous complacency. No attempt was made to use the good years to prepare for bad years; no attempt was made to fix the roof when the sun was shining. We have been left in a terribly vulnerable position in which we are more exposed than almost any other economy in the world to a global economic downturn with inflation at three times the level of '97, with unemployment rising at a faster rate than at any time in the past 17 years and with the public finances in one of the worst positions of any particular economy in the world. No more boom and bust-if only it were so. Today, we are paying the bills.

1.9 pm

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LATER INTERVENTION IN THE SAME DEBATE

Mr. Gauke: If the Financial Secretary is saying that it was necessary to make the arrangements in the way in which the Government have with the proportion of ordinary shares that he has set out, why was that not clear when the deal was reached at 5 o'clock in the morning on Wednesday? That supports the widely held view that the deal was put together quickly. My hon. Friend the Member for Chichester (Mr. Tyrie) has pointed out the lack of preparation for recapitalisation.

Mr. Timms: Events certainly moved very quickly, and the Government had to respond very quickly. The conclusions that were reached and the precise figures that have been quoted in debate were the outcome of detailed discussions and analysis between the parties to which I have referred. I think that the judgments were right. We made it absolutely clear last week that we were open to underwriting ordinary shares as well. The package reflects not, as has been suggested, memorandums and articles, constraints or things that were not clear at the outset, but an assessment of the position in each of the institutions.

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