I was put in mind of Peter when I read this morning’s gloomy economic news. Major retailers are continuing to fail – Zavvi, the re-branded former Virgin Megastore, being the latest. High Streets have been busy over the last couple of days, but, generally, the Christmas story from the retail front line is of wall-to-wall despair.
It is now fairly clear that the Government’s economic stimulus package is not working. The 2½ per cent cut in VAT has been shown to be virtually irrelevant at a time when shoppers can walk into any outlet in any retail park and expect to see discounts of 30, 40, 50 per cent or more. In fact, Superdrug has announced that it will be cutting prices by 90 per cent from Boxing Day, so to describe the 2½ per cent reduction as feeble might be regarded as engaging in the most outrageous understatement.
That’s not just my view. It’s also the view of no less a personage than M. Olivier Blanchard, chief economist of the International Monetary Fund, who yesterday said that the VAT cut would not significantly influence shoppers’ behaviour:
“Temporarily cutting VAT, a measure that was adopted in Great Britain, does not seem to me to be a good idea – 2½% less is not perceived by consumers as a real incentive to spend.”
That’s not just M. Blanchard’s view, either. More importantly, it is a view that has been expressed to me by several dozen constituents over the last few days. Not to put too fine a point on it, the general view is that the VAT cut is a joke. It makes no difference whatever to their spending patterns.
The real problem is one of confidence. As someone said on the Today programme yesterday, confidence is an elusive commodity that takes years to build up, but can be destroyed in a second. At present, confidence throughout the economy is virtually zero. Nobody trusts anybody else. Most particularly, the banks don’t trust one another, nor do they trust their customers. Credit has virtually dried up and shows no sign of returning in the foreseeable future, notwithstanding the bluster of Messrs Brown, Mandelson and Darling.
A constituent of mine is a case in point. He runs a well-established private building company with an excellent track record and no overdraft. He now wants to start developing a site he owns in Rhos on Sea. He needs a facility from his bank in order to do so. He has been told, however, that the bank won’t lend to him, despite his exemplary history. The bank, apparently, has a blanket policy of not lending to property companies, with no exceptions.
As a consequence, not only has my constituent had to lay off several members of staff, but he has had to abandon, temporarily at least, a project that would keep 30 people in work for up to three years.
So anything that the Government can do to help restore confidence will come as a real boon to the economy, unlike the damp squib of the VAT cut.
Which is where Peter Hain comes in.
In last week’s Welsh Grand Committee debate on the Pre Budget Report, Peter made a good speech in which he focused on the issue of confidence:
“There is also the vital question of a lack of finance for businesses… The banks currently look at the overall situation and see commercial risk in all directions. When they look at car manufacturing, for example, they consider the car sales situation for a particular company, which is currently massively down on last year, and the precarious nature of parts of the dealer network… The banks then look at the supplier network and see the potential problems that a collapse of General Motors or Chrysler might have on the situation. The failure of a supplier could stop production lines and have a significant effect on output. It is then possible to understand why the banks are reluctant to be flexible on their policies and covenants. They are simply taking a normal, prudent banking point of view, albeit a frustratingly self-interested one…
“The only way we will unlock funding from the banks is by way of Government guarantees for approved facilities to industries that are profitable but have short-term financing problems. One would naturally expect that measure to be coupled with certain restrictions, such that, while the Government guarantee was in place, there would be limitations on the distribution of funds from the company and so on.”
Peter is absolutely spot on. If there is one single thing the Government should be doing, it is to intervene to guarantee bank loans to business. It would do more than any other individual measure to inject confidence into the market.
The Government does have a small business finance scheme, but it is a timid affair, and limited to £1 billion – a quite inadequate sum, given the extreme financial conditions we are now experiencing.
The Conservative party, however, has proposed a much more ambitious £50 billion national loan guarantee scheme, which has found favour with, among others, the Institute of Directors, the Confederation of British Industry and the Federation of Businesses. Just as importantly, it has been endorsed by my builder constituent from Rhos on Sea.
It is also very similar indeed to what Peter was proposing in his Grand Committee speech.
The worry is that the Government will be late to put forward their own loan guarantee scheme, for fear to be seen to be admitting that the Tories are right. In the meantime, British businesses will be starved of the credit they so desperately need to help keep afloat.
So if the Government won’t listen to the Conservatives, perhaps they will listen to Peter Hain. It doesn’t really matter.
But they really should get on with adopting the idea, or something very similar, as quickly as they possibly can. Because the longer they delay, the more firms will fail and the longer will be our recovery from the economic nightmare in which we find ourselves. Messing about with VAT isn’t the answer.
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