§ The Financial Secretary to the Treasury (Mr. Francis Maude)
I beg to move,That the draft Debts of Overseas Governments (Determination of Relevant Percentage) Regulations 1990, which were laid before the House on 15th October, in the last Session of Parliament, be approved.The regulations form part of the proposals announced by my right hon. Friend the then Chancellor of the Exchequer on Budget day, which were discussed thoroughly during the Committee stage of the Finance Bill. The proposals introduced some changes to the tax treatment of doubtful sovereign debt; they are now contained in the Finance Act 1990.
Tax law allows relief for doubtful debt up to the amount estimated to be bad. While that works reasonably well for most debt, it proved very difficult to make accurate estimates of the amount of sovereign debt that will not be repaid, and large changes in estimates can have a significant effect on Exchequer receipts. As a result, we introduced some changes.
The new system preserves the principles on which tax relief is based, but will give greater certainty about tax deductions, and phases the cost of large changes to the Exchequer. It lays down rules—contained in the regulations—for calculating the maximum amount of debt eligible for relief, and sets some limit to the amount of relief allowable in any one year.
The regulations set the rules for measuring the extent to which a particular debt is irrecoverable. More specifically, they set the relevant percentage that is the maximum amount that can be allowed as a deduction for tax purposes. Each debt will be measured against the factors set out in schedule 1 of the regulations. Scores will be allocated, and the total score will be converted to give the maximum percentage of debt allowable as a deduction.
The regulations are broadly similar to the Bank of England's guidelines to banks on what provisions they should make on prudential grounds. Those guidelines are known as the matrix. One of the ways in which the regulations differ from that matrix is their exclusion of one of the more subjective factors, which requires an assessment of a country's present and future economic and political conditions. They set a definite percentage of debt that is tax-deductible, whereas the Bank of England matrix provides bands within which provisions for a country might be expected.
§ Mr. D. N. Campbell-Savours (Workington)
Does not the presence of a Treasury Minister demonstrate the scale of the problem? Should not an Overseas Development Minister be dealing with the debate? Does not that show that the Treasury is the prime motivator behind policy in this important area, rather than Foreign Office Ministers—particularly the Minister for Overseas Development?
Charities and other outside bodies interested in overseas development have alleged that the Treasury is interfering, and is preventing Government from making the right decisions and adopting the right approach. Does not the presence at the Dispatch Box of the Financial Secretary to the Treasury prove their case conclusively?
§ Mr. Maude
It would be rather eccentric for a Minister other than a Treasury Minister to come to the House of Commons to introduce Inland Revenue regulations.
The Inland Revenue published the regulations for consultation, and we have accommodated most of the helpful and constructive comments that we received. The draft version that we are debating tonight forms an integral part of the changes that we have introduced to the tax treatment of doubtful sovereign debt. The regulations will, I believe, bring welcome certainty to what has been a very uncertain area of tax law.
§ Mrs. Ann Clwyd (Cynon Valley)
That was an unusually brief ministerial introduction.
The current debt crisis is clearly devastating. In the words of Luis da Silva, a prominent Brazilian trade unionist,The Third World War has begun. A quiet war that is destroying Brazil, Latin America, and nearly the whole of the Third World. Instead of soldiers, it is the children who are dying. Instead of the wounded, there are millions of unemployed and the old. Instead of broken bridges, we see broken factories, schools, hospitals and whole economies…This war uses debts and interest as its most important weapon, and it is a more deadly weapon than the atom bomb.Lula, as Luis da Silva is known in Brazil, and the children, the unemployed, the sick and the mothers struggling to cope have not been invited to the debate tonight. They are not able to contribute, but their lives are affected by the numbers and percentages that we are discussing.
Perhaps, in the view of Conservative Members, we are talking only about relevant percentages as a basis for granting tax relief on bad debts owed to Britain's commercial banks. We believe that we are talking about debt relief or, more specifically, the lack of it and the fact that millions of people are suffering unemployment, ill health and plummeting living standards because their Governments are handing over their nations' wealth to creditors.
In this debate, the creditors under consideration are the commercial banks. But I hope that we shall on future occasions debate the debts owed to Governments too. But of all the major actors in the debt crisis, the banks bear the greatest responsibility and have suffered least. At present, the Third world owes $338 billion to the commercial banks. United Kingdom banks have the third largest share, after the United States and Japan. Last year alone, commercial banks worldwide received $20 billion more from poor countries than they gave in new loans.
The effect of that transfusion from south to north has been a roll-back of development in Latin America, Africa and parts of Asia. Decades of progress have been undone. Income has fallen back to the levels of the mid-1970s in real terms. As Governments spend more and more on servicing the debt, the percentage of their budgets spent on health has fallen on average by a half in Latin America and the Caribbean. Infant mortality and malnutrition have risen alarmingly.
I cite as an example the Philippines and the debts incurred during the Marcos era. Debt servicing grew from 11 per cent. of the Government budget in 1980 to 46 per cent. in 1986—the same percentage of the budget that the British Government allocated that year to our defence, education, social security, welfare and housing.
266 As debt servicing soared, spending on social services in the Philippines sank by more than a third in real terms. Not surprisingly, by 1985 the percentage of families living in poverty in the Philippines had risen to 59 per cent. and real incomes were back to their 1975 levels. A quarter of all children in that agricultural land are now malnourished. As half the population are children, the on-going austerity, poverty and malnutrition will have enormous implications for future generations.
With Latin America dependent on exports of primary commodities for three-quarters of its export earnings, it is not surprising that the scramble for foreign exchange has encouraged the plundering of natural resources and the destruction of fragile environments. As the Brundtland report put it:Latin America's natural resources are being used not for development or to raise living standards, but to meet the financial requirements of industrialised country creditors.I am speaking from the Dispatch Box tonight because we in the Opposition are talking about development and how to get it started again. I only wish that Conservative Members took the same view. Have they listened to the views of their Minister for Overseas Development, or has the Foreign Office not even bothered to explain that the number-crunching in the Treasury is crushing people's lives in the third world? If the Conservative party was to put overseas development in the Cabinet—giving it the sort of priority that the Labour party gives it—the Minister would perhaps have more clout in arguing for more money for the poor.
The 1990s will not be any better than the lost decade of the 1980s unless substantial and comprehensive debt relief is achieved. I accept that it will not solve all the problems of the third world. As Filipinos know, economic mismanagement and corruption, with earthquakes and hurricanes, do enormous damage. But however good the Government, the weather or world markets, there is no chance of stability and prosperity across the south without substantial debt relief. Western Governments must take action now to secure it.
We are discussing a statutory instrument that could be an instrument of debt relief. Our long-term aim is to reduce debt to the level at which developing countries can sustain regular payments without overburdening their economies and their people. The figures in the statutory instrument and in the Bank of England matrix give an estimate of their ability to do exactly that. Our long-term aim should be to reduce debt by the percentages that the Treasury and the Bank of England have supplied. Just imagine—a British Government official guide to debt relief! I am sorry to say that all we can do at the moment is imagine. The Government refused to seize the opportunity to encourage debt relief when they voted down Labour's amendments to the Finance Bill. They a re happy to sit back handing out tax relief to commercial banks and to watch the poor of the third world suffer.
Under British tax law, the Government are granting tax relief to commercial banks on the considerable provisions that they have set aside to cover doubtful debts to developing countries. According to this statutory instrument, provisions of about 50 per cent. of toal loans to developing countries will be regarded as bad, and therefore eligible for tax relief. The banks write down the debt in their accounting books and claim tax relief on the so-called loss. In practice, they do not write down the debt, but claim the full amount of the original debt from the 267 developing country. Having protected shareholders by making provisions, they can take a tougher negotiating stance with their impoverished debtors.
The amount of tax relief given on banks' provisions in 1988 is estimated to be about £1.7 billion—more than the Government spent on the entire third world aid programme. It is estimated that, last year, Barclays claimed £305 million in tax relief on its provisions against doubtful country debt; NatWest claimed £395 million; Lloyds claimed £453 million; and Midland claimed £184 million. That must be a ludicrous situation. The British taxpayer is subsidising the profits of United Kingdom banks but discouraging them from using those provisions to reduce Third-world debt. In other countries, such as the United States and Belgium, tax relief is not granted until debt reduction has been agreed by the banks.
Labour's proposal is to make tax relief conditional on the provisions being translated into debt relief. Debts must be written down in practice, not just in the books. If no debt relief is granted within, say, two years, the tax relief should be clawed back. Tax relief is supposed to be for irrecoverable debts. If part of the debt is truly irrecoverable, the banks should be willing to cancel that part.
The tiny change that the Prime Minister, when Chancellor of the Exchequer, announced in this year's Budget discriminates for the first time between a commercial sale of discounted debt and a sale to the debtor Government, which therefore contributes to debt relief. I welcome that recognition that tax law can be used to encourage debt relief, but the change does nothing to encourage the many other methods of reducing debt servicing, nor to encourage banks to use the enormous provisions already set aside for debt relief up to the prescribed levels.
The Brady plan and this year's World Development Movement report called on Governments to use tax, regulatory and other measures to encourage debt relief, yet the Government, who say that they support the Brady plan, refuse to take even this tiny step. Our proposal would cost the taxpayer nothing and would help debtor nations, yet still the Government reject it. In practice, the proposal might save the Treasury money, as banks would not get tax relief if they refused to grant debt relief.
What objections to the plan could the Government possibly have? Someone may tell me that the charity laws are generous enough and that the banks can claim tax relief if they donate debts to charity, as the Midland bank did to the United Nations International Children's Emergency Fund. However, such donations are insignificant compared with the mountain of debt. I am not asking the banks for charity; I am simply asking that they take their share of responsibility. Surely the tax laws should enforce that responsibility.
Some will argue that the banks cannot afford to give debt relief. Do hon. Members really think that the people in the debtor countries should pay if that means untold damage to their development? United Kingdom banks have now set aside a provision of up to 70 per cent. of their third world loans. They could afford to reduce them by that much if only there were a mechanism to bring that about. In 1988, the profits of the big four United Kingdom 268 banks were £4.4 billion, and around 30 per cent. of that came from international operations. While the Third world suffers, the banks continue to rake in the profits.
Some hon. Members may question why banks should have to share the costs of bad loans. To put it another way, why should millions of people overseas sacrifice their poor living standards, their health and their education to repay loans, many of which have brought them no benefit? Let us consider the example of the Bhattan nuclear power station in the Philippines, which has cost $2.3 billion so far. Loans have come from Barclays bank, among others, and interest payments on the loan are $350,000 each day. That is about $2,000 since I started speaking in this debate.
The power station stands on a seismic fault, and it is far too dangerous ever to be switched on. Just keeping it idle but safe requires 400 engineers. Allegations of corruption and malpractice are still being investigated. The commercial banks expect the Filipinos to pay for that monstrous monument to mismanagement. Why should creditor banks and contractors, who either knew or should have known what they were funding, not take their fair share?
I anticipate that Conservative Members will say, "Oh no. Voluntary debt relief is very nice, but it is not for the Government to intervene. Commercial debt is a matter for creditors and debtors." What rubbish. Governments have been intervening in the commercial debt crisis all along, but to protect the banks and not to help the poor. Taxpayers are already bailing out the banks with tax subsidies. The whole idea of the Baker plan and of the Brady plan was for Governments to support commercial debt reduction even if that were done through voluntary market measures. Debt deals go hand in hand with International Monetary Fund instructions on economic reform and are now often supported by the IMF or by the World bank. That Governments are intervening is not in question. The question is, "Is not it time that this Government started using regulations to help indebted nations instead of just boosting the banks?"
A new instrument of debt relief is essential because the debt relief measures used so far have been welcome small steps, but have not gone nearly far enough. The Brady plan has not even lived up to its own modest expectations. Nicholas Brady was aiming at a 20 per cent. reduction in commercial debt in three years, but the banks have been slow to make reductions in debt and in debt servicing. Hence the estimates of the International Institute of Finance show that debt reductions through debt swaps and other Brady measures in the current year amount to about $22 billion, only 10 per cent. of the total commercial debt owed by Latin America and the Caribbean. In contrast, David Knox, former vice-president of the World bank for Latin America, warned us only last summer that Latin America needs a 70 to 80 per cent. reduction in commerical debt if there is to be any prospect of sustained economic growth.
For the low income countries not covered by the Brady plan, a reduction in their $6 billion commercial debt is also vital. Although small compared to their official debt, the commercial debts are blocking desperately needed trade credits. The World bank's facility established to buy up those debts from the private banks at high discounts is not working because the banks refuse to play ball.
We must now also consider eastern Europe. Poland is struggling with a $40 billion debt which brings the case for debt relief even nearer to home. Only Government action 269 will ensure significant commercial debt relief. Only Governments, not banks, can take the lead, co-ordinate the banks and ensure that the burden is shared internationally.
The central point is not difficult to grasp even if the implications are far-reaching. The Prince of Wales made the point well recently when he said:Most of all, we have to find a way of doing something about the burden of international debt. I really don't see how developing countries can be expected to achieve sustainable development and at the same time meet huge debt repayments.If there is to be any hope for development in the 1990s, debt relief is essential. The Government should realise that there are several policies that they could and should implement. First, tax relief on provisions set aside by commercial banks should he made conditional on debt relief. Debts must be written down in practice, not just on paper.
Secondly, new procedures must be established to adjudicate on illegitimate debts involving allegations of corruption such as the $200B7;3 billion nuclear power station in the Philippines to which I referred.
Thirdly, the Government should consider establishing a special scheme to give additional debt relief to finance environmental protection measures in developing countries. That should apply not just to national parks but to major reforms such as agrarian reform aimed at reducing a country's dependence on exploiting and exporting natural resources and finding sustainable livelihoods for the poor.
Fourthly, Governments should revise the instructions to the IMF and the World bank so that they can be more assertive in pursuing debt reduction.
Fifthly, the Government must back international debt relief initiatives with legislation and regulations that ensure that all commercial banks take their share of the burden.
Finally, new initiatives on commercial debt must be accompanied by substantial action on official debt. The new Trinidad terms are another welcome small step., but they leave out many countries. They also leave out the EEC and World bank debt and they leave too much debt still to be paid by the very poorest of all.
In his speech setting out the Trinidad terms for dealing with debt owed by the poorest countries to Governments and official agencies, the then Chancellor of the Exchequer said:I would look for a comparable response from the banks in the claims they hold.If the Government want to show how seriously they take their new Prime Minister's words, they could start translating those hopes into regulations to promote reductions in commercial debt.
§ Mr. Peter Bottomley (Eltham)
We have just heard a pretty lightweight speech. The key issue is what rate of tax relief we should allow.
§ Mr. Bottomley
If the hon. Member for Cynon Valley (Mrs. Clwyd) had been in the House not for six years, as is the case, but for 16 years——
§ Mr. Bottomley
If the hon. Member for Workington (Mr. Campbell-Savours) were to listen for a while, he might learn something. In the years he failed to get elected as the Member for Workington, he would have seen the overseas aid budget under the Labour Government being used to build ships for Poland. That was criticised at the time by people in the aid lobby, and most Labour Members felt ashamed at what their own Government had done.
The hon. Lady—if she ever becomes Labour Minister for Overseas Development, whether in the Cabinet or not—should know that her predecessor went to India before 1979 and did a deal with the then Indian Minister for Industry. Off the Indian central plan, they arranged to build a steelworks where it should not have been built in the constituency that the Indian Minister hoped to pick up because he was so unpopular in the one that he was going to have to leave. That is the way the Labour party worked in government.
It is worth recognising that we need a package of measures. I am pleased that the British Government started writing off debt to the poorest countries, and Britain was one of the first countries to do that. I am displeased that we are not meeting the United Nations target to which we are committed. I hope that one of the things that we shall do is to rediscover that we have betrayed our promise of 0.7 per cent. of gross national income. It does not help to have sanctimonius pap from the Opposition and from people who should know better.
According to the Baptist Times, the principal of London Bible college, Dr. Peter Cotterell, said:the Holy Spirit was given at Pentecost 'not for party tricks"'.Next to that article is a photograph of the director of Christian Aid, Michael Taylor, who, in an advertisement for the Labour party—as a private individual, of course, not as the director of Christian Aid—said that he hoped that everyone would support the Labour party. That statement appeared in the Baptist Times, and it is similar to an advertisement in the Church of England newspaper, which had a similar open letter from Eric James. On the same page there is a quotation from the Church Army saying that a photograph appearing in one of its publications meant thatseveral readers said they would not support its work because 'it was a political act to publish a photograph'".If that principle works with other political issues, it works just as well when people such as the director of Christian Aid make the mistake of confusing his role in trying to add to the Government's help to Third-world development. The reaction of people such as myself should be to send an extra donation to Christian Aid and point out that the man has made a mistake, and perhaps on reflection he will begin to recognise it.
Having spent some time on the Select Committee which examined overseas development, examining the Labour Government's record and using the same criteria to judge the present Government's record, I know that it is clear that more needs to be done. Part of that process is to see whether commercial institutions such as the banks will continue to lend money overseas. If there is no way of dealing with doubtful debts, they are not likely to lend more money. The hon. Member for Cynon Valley, in her 20-minute speech, signally failed to deal with future lending by banks.
§ Mr. Bottomley
The hon. Member for Workington should try to listen with his ears rather than his mouth. During the Workington by-election the hon. Gentleman went around shouting off in his own constituency and failed to get elected. If he goes on like that, he may fail to get re-elected next time.
The hon. Lady failed to deal with future lending by commercial banks. Unless there is a way of dealing with the tax consequences of doubtful debts, they will be unable to do so. That is a purely practical point, which is no doubt above Labour Members' heads. There is the general point about overseas development and about grants and loans.
It is clear that much of the money that other countries need will have to be either in grants or in low-interest loans. It is wrong that domestic difficulties in the United States, in this country and in other countries in Europe, which have led to higher interest rates than expected, should have added significantly to the cost of loans given or provided to industries in other countries or to their Governments. It is better to face those facts openly than to try to twist the debate, which is on a specific tax point, into a general overseas development debate.
The problem with the overseas development debate was faced by the World Development Movement 10 years ago, when it was saying—as I was—that we should meet the 0.7 per cent. target, but three months before, it put out a call to everyone in Britain voluntarily to provide an extra £20 a year. Only 600 people provided that £20 voluntarily, and that is only one third of the extra sum that we are asking from the 56 million people of the United Kingdom. Unless and until we can give a better lead with our voluntary donations, we shall find it difficult to keep the Government up to the mark on their public commitment.
I hope that in future, when we have a serious debate on overseas development, the hon. Member for Cynon Valley will take a slightly different approach. I hope, too, that the hon. Member for Workington will try to join a serious movement which is concerned with taxation and with our obligations as a part of one world to those who are like us, but who are not living in the United Kingdom with the benefit of the economic growth that we have enjoyed over the past 10 years.
§ Mr. Paul Flynn (Newport, West)
I shall restrain myself and not take up the remarks of the hon. Member for Eltham (Mr. Bottomley). It is only right that we in this place should be constructive on the issue.
Only about four hours ago, when a debate was taking place on the common agricultural policy, it was possible to draw a vivid contrast between the enormous sums that was then being discussed—80 per cent. is directed to intervention while 20 per cent. goes to the farmers, and in this country 80 per cent. of the subsidies go to 20 per cent. of the richest farmers—and no response to the needs of the Third world. There is an astonishing difference between the sums that deliberately we throw away in funding the CAP and those that we make available to the Third world.
I wish to direct a few remarks to the newly underdeveloped countries of eastern Europe. We have an as yet recognised debt to that part of Europe. The Conservatives milked the position in which it found itself——
§ Mr. Deputy Speaker (Mr. Harold Walker)
Order. The hon. Gentleman must have regard to the terms of the regulations.
§ Mr. Flynn
I wish to support what my hon. Friend the Member for Cynon Valley (Mrs. Clwyd) said about using the tax system as an instrument for assisting with debt relief. Every one of the eastern European countries is very different from its neighbours, but loans are being paid and I hope that we shall make loans in future. The collapse of eastern Europe will involve us within the terms of the motion and in terms of future policy. It is——
§ Mr. Deputy Speaker
Order. The regulations deal neither with future situations nor with hypotheses.
§ Mr. Campbell-Savours
May I help my hon. Friend the Member for Newport, West (Mr. Flynn), Mr. Deputy Speaker?
§ Mr. Campbell-Savours
There will be authorities and organisations in eastern Europe that will have borrowed and that will be unable to service their debts. Those who have lent to them within the United Kingdom, who take the form of banks, will probably claim relief. It is probable that such claims have already been made under the regulations that we are discussing. I refer my hon. Friend to the first paragraph of the explanatory note, which sets out the position and the background to the argument that he advanced.
§ Mr. Flynn
I am grateful to my hon. Friend for that intervention.
The scale of the dilemma that faces eastern Europe is one that is not recognised. We can use our tax system and tax instruments to aid the countries of eastern Europe in the repayment of loans and to encourage joint ventures.
The countries of eastern Europe face the triple task of building democracies, becoming independent and creating new market systems. In addition, they face the consequences of a collapsing Soviet economy, with all the lines of supplies and materials coming to an end. There is also the Gulf crisis, which has increased the price of oil to an almost impossible level for eastern Europe. I urge Conservative Members to understand that the know-how funds that the Government have made available to only a few countries amount to a modest contribution that is entirely out of scale to the disaster that is about to overtake eastern Europe. They should look at the problems of eastern Europe, particularly the Soviet Union.
The Conservative party has long had an infatuation with, and a belief in, the infallibility and omnipotence of Mikhail Gorbachev; only now is it finally recognising that he is responsible for economic chaos in that great empire. Some 13 of the 15 republics have announced that they wish to leave the empire and have some scale of independence. They all believe that they are putting a large piece of meat in the pot and receiving a small piece out of it.
While I realise that the instrument applies primarily to the banking system and the enormous problems of the third world, I urge the Government to recognise the magnitude of the problems emerging in eastern Europe. 273 They should use our taxation and banking systems in an imaginative and creative way to help those countries and aid them in creating their new democracies.
§ 11 pm
§ Mr. John McFall (Dumbarton)
I am pleased to be speaking in the debate.
Two relevant events have occurred in the past two months. The first was when I visited Sussex university with some of my hon. Friends. We attended a week-long seminar at the institute of development studies and considered third-world problems. The overriding message from the academics and experts was that the third world's position is decreasing year by year.
Secondly, my interest was stimulated by correspondence from Christian Aid setting out its campaign on banking on the poor against third-world debt. It is worthy to bring that message to the attention of all parliamentarians, despite the words of the hon. Member for Eltham (Mr. Bottomley). This is too important a subject to start putting one side against the other. Let us consider Third-world debt and our own responsibility, and fashion a policy that will help the third world. The debate should be taken forward on that basis.
A quotation that aroused my concern was uttered by one of the Catholic bishops in south America, the general secretary of the Latin American Council of Churches, Bishop Federico Pagura. He said:The debt is killing and it is killing in earnest, literally thousands and thousands of people in Latin America.The link between that statement and tonight's debate is that when we are aware that our high street banks and tax relief system involve some of the creditors who show no mercy, we simply cannot ignore the challenge. We must look at the systems of tax and tax relief if we are to help third-world countries. Another phrase used by a Churchman from Latin America was that we are all on the Titanic, but some of us are travelling first class. We are travelling first class, but to the same end as the other travellers if we do not heed the position of the Third-world countries.
As a result of the Christian Aid campaign appeal, I wrote to every church in my constituency, contacted the local Christian Aid branch through its secretary, Tim Rhead and received responses from the third world. My message to the Churches is to write letters to me so that I can seek meetings with the relevant chairmen of banks in Scotland and England, put the constituents' case to them and send the Minister the letters from the concerned Christians and constituents so that action occurs as a result of Parliament.
The hon. Member for Eltham spoke of 600 responses, which is a problem. But we should try to obtain 6,000 or 60,000 responses. We can do that tonight by highlighting our concerns about the third world and starting a campaign to arouse the interests of the commercially minded in the banks and the Government.
Third-world countries have suffered greatly since 1975. We all know about the quadrupling of the price of oil. Mexico is repaying £1 billion in interest every month, and it still owes more than it borrowed in the first place. The effect in Mexico, Brazil and other Third-world countries has been that, since the mid-1970s, their income has dropped by 20 per cent. Fewer children in those countries go to school, and UNICEF estimates that the debt crisis is costing about 500,000 young lives a year.
274 That catastrophe can be reversed only if something is done about the burden of debt. I echo what the hon. Member for Eltham said about Governments of the past, of whatever hue, having been responsible for the catastrophe. I beg the Government, because they are in power now, to do something positive.
Pastor Reginald Knowles of the Alexandria Christian Fellowship in my constituency lived in Guyana until a few years ago. He writes to me that it was a British colony until 1970. During his stay there he saw many sights that touched him deeply:A child sleeping on the pavement next to its mother. Another child whose arm had been chewed through by a rat while he had been a patient in the Georgetown hospital child surgical ward.He says that he spoke to somenurses who were so demoralised with their pay—98 Guyanese dollars a week compared to the cost of an 8 oz jar of coffee, at 175 Guyanese dollars.Given the increased lending by banks since the 1970s, and the drop in the price of commodities produced by third-world countries in the early 1980s, those nurses cannot even afford a jar of coffee.
That good pastor and his congregation have decided to send a full-time voluntary worker from my constituency, Ruth McEndoe from Dumbarton, to set up a charity.
I have not given the Minister notice of my next point, so it would be unfair to expect an immediate answer from him. Pastor Knowles says that the IMF and the World bank are engaged in an economic recovery programme that is due to provide $1 million in the form of grants, with the promise of another $2 million to come. Pastor Knowles says that there has been no mention of support for Guyana from Britain, and considering our past colonial links with that country, we should be ashamed of ourselves. What does the Minister think of that?
We should help countries such as Guyana in south America. We could invest large sums if only the banks could be persuaded to release the money. Banks are extremely important in all this. I do not want to score party political points, but it is a pity that the right hon. Member for Ayr (Mr. Younger) is not here, since he is chairman of the Royal Bank of Scotland. I shall write to him in the next few weeks, mentioning that British taxpayers are bailing out the banks.
Britain's four major high street banks, Lloyds, National Westminster, Midland and Barclays last year claimed relief for provision against Third-world debt that may eventually cost the average taxpayer £62.80. The Inland Revenue allows banks to claim relief at a rate of up to 35 per cent. on money set aside from their profits as insurance against bad debts in the third world. In 1989, the big four set aside £4.5 billion for that purpose, generating almost £1.7 billion in tax relief. That relief allows the banks to have their cake and eat it, providing them with public money to shore up their financial position but allowing them to continue to demand that countries such as Mexico pay their debts in full.
A tiny minority of debts have been reduced, but Third-world debt continues to grow and is spiralling. The banks are being subsidised by taxpayers, not for cancelling debts, but merely for assuming in the accounts that debts will not be repaid. Sad to say, the level of that public subsidy is higher than the amount that the Government spend on overseas aid. My hon. Friend the Member for Cynon Valley (Mrs. Clwyd) spoke about that. Official 275 development assistance in 1989 was £1.5 billion, costing each taxpayer £62.54. The tax relief to the big four banks was equal to £62.80 from each taxpayer.
In 1989, Lloyds set aside £1,763 million of debt provision. At 35 per cent. that represents tax relief of £617 million, equal to £24.49 for every taxpayer in the United Kingdom. National Westminster set aside £990 million, and tax relief on that is equal to £13.75 per taxpayer. Barclays bank set aside £983 million, and tax relief on that amounts to £13.65 for every taxpayer. Midland bank made a provision of £846 million, equal to £10.91 for every taxpayer. Those four high street banks set aside a total of £4.5 billion and received tax relief of more than £1.5 billion, resulting in £62.80 from each taxpayer. In the name of decency and morality, the Government should look at that and change the tax relief system.
I mentioned Brazil and Mexico. Brazil's foreign debt stands at US $120 billion, the biggest such debt in Latin America. No interest payments have been made since July 1989 and the Brazilian Government have said that none will be made for the remainder of this year. The Brazilian economy relies on huge imports of oil and is certain to be hit hard by the Gulf crisis. The Economy Ministry has calculated that this year's oil bill will be at least US $1 billion higher than forecast.
All concerned parliamentarians plead with the Government to do something about those problems. I leave the Minister with a Christian sentiment from Christian Aid. The bishop of a small industrial area near Rio de Janiero, Mauro Morelli, said:In the gospel the bread was blessed, and divided for 5,000. In Brazil 5,000 people produce the bread and one person takes it.We are party to that shameful state of affairs. On behalf of Christian Aid and the concerned Churches in my constituency, I plead with the Minister to look at the issue and say that that is no longer acceptable. He should then do something to help Third-world countries and show that Britain has some morality.
§ 11.8 pm
§ Mr. D. N. Campbell-Savours (Workington)
I have heard some good speeches by the hon. Member for Eltham (Mr. Bottomley), especially on social policy and in the great debate in the early 1980s on child benefit, but I was appalled by his speech in this debate. I hope that, on reflection, he will apologise to my hon. Friend the Member for Cynon Valley (Mrs. Clwyd). His approach was quite disgraceful.
The explanatory memorandum at the back of the statutory instrument states:These regulations provide the method of determining the 'relevant percentage' in relation to a debt owed to a company …I understand that the arrangements prior to the introduction of this instrument have been helpful to the banks. The statutory instrument that we are debating will help the Exchequer. The Labour party argues for a policy that will help the borrower.
The problem with the statutory instrument is that while it deals with some of the lenders' difficulties, it fails to deal with any of the borrowers' difficulties, the most important of which is invariably debt reduction. My hon. Friend the Member for Cynon Valley referred to an example of such 276 a borrower, who was lent money by Barclays bank, which I understand in one year was able to claim £300 million of relief. No doubt, if I am wrong, it will write to tell me so. The example is that of the Bhattan power station in the Philippines, and it illustrates what is wrong with the arrangements for loans.
The power station cost $2.3 billion to build. I understand from research carried out by my hon. Friend's staff that it is not operational, and that the repayments on the loan, which was made by a number of organisations, including Barclays, are $350,000 per day. That is happening in a developing country with unstable political institutions and it is a classic example of what happened in the late 1970s and early 1980s, when the Arab countries used London and other international financial markets to recycle petrodollars, and the banks receiving those dollars spent them irresponsibly on investments, many of which could not be justified on reasonable economic and commercial criteria.
The problem is that, wherever those investments have taken place, and in whatever projects they have been invested, they have only added to political instability. The burden of servicing the debt invariably falls on the taxpayers or, if they are fortunate, on rescheduling, although many of these countries are not in a position to reschedule their debts. The repayments swallow a large proportion of public expenditure, so that expenditure that should go on social projects does not, which in turn heightens social tension and creates the political instability that many of my hon. Friends hope to see avoided.
As my hon. Friend the Member for Cynon Valley said, 46 per cent. of the budget of the Philippines is spent on servicing its debts to overseas banks and other commercial institutions. The United Kingdom has an annual public expenditure of £200 billion. If we had to pay such a large proportion of it in that way, £90 billion would be spent on servicing debts. It is an unreasonable burden for those countries to carry. If we were supporting a £90 billion debt-servicing arrangement, there would be a revolution. There would be gross political instability and violence in our streets. Governments would shake, be removed, replaced, and removed time and again as a result of the difficult social conditions.[Interruption.]
Conservative Members may laugh if they wish—I do not object to that—but such things are inconceivable in our democracy. To some extent, the reason why we have a democracy is that we do not have a level of debt which requires such a level of public expenditure to service it. The absence of such debt provides political stability at home, but a debt on the scale of that carried by the Philippines can only undermine that country's Government. That is why there have been repeated attempts to bring down the Aquino Government.
§ Mr. Campbell-Savours
The Minister is trying to score a political point. It is true that we have had large debts that we have had to repay, but never on the scale carried by Third-world countries—and never on such a scale that it threatened our very political stability.
I wish to relate the implications of that form of debt to another part of the world—eastern Europe—where huge political changes are taking place. I am sure that the Government are as aware as the Opposition of what might 277 happen if things went wrong. We see nightly on our television screens demonstrations, shortages of food, problems with distribution systems, and lack of managerial expertise in the development of market economy and private enterprise companies—all the deficiencies that we know make for political instability.
What worries me is not so much that money is going to eastern Europe—we want that—but that it will go into the wrong projects. If it is left completely to the free market, the danger is that the Bhattan nuclear power station syndrome could extend to parts of eastern Europe. Projects may be justified on some commercial basis, just as those managers who flew out of London in the early 1980s to invest petrodollars in other parts of the world somehow found commercial justification for the decisions that they were taking and the investments that they were recommending. That might happen in eastern Europe on a similar scale.
§ Mr. Peter Bottomley
My shoulders are, I hope, broad enough to accept the insults that the hon. Gentleman doled out at the beginning of his speech. Had he listened rather than talking during my speech, he would have heard me say that we had been through this before. He is warning us of important issues. I raised the subject of what happened in the 1970s in an attempt to avoid it happening again, and I cited the two examples of eastern Europe and the Indian sub-continent. I hope that hon. Members will pay attention to this part of the hon. Gentleman's speech, as he is making an important point.
§ Mr. Campbell-Savours
I did hear the hon. Gentleman refer to those matters, despite my sedentary interventions.
I hope that the Minister will reflect on the implications of the statutory instrument for investment in eastern Europe. Perhaps there will not be an investment on the scale that exists in other parts of the world, but the danger is that we might go down that road. Perhaps the Minister will comment on the extent to which we monitor decisions on commercial investments in eastern Europe. Due to a lack of knowledge of how the market works, deci sions could be taken, involving large amounts of money, which might at the end of the day need to be bailed out on the basis of a statutory instrument such as the one that we are now debating.
§ Mr. Maude
With the leave of the House, Mr. Deputy Speaker, may I say that I was mildly chided by the hon. Member for Cynon Valley (Mrs. Clwyd) for the brevity of my opening remarks, but I spoke briefly because I spoke only about the regulations that are the subject of the debate, not about a number of other areas relating to the vexed issue of debt to which those regulations naturally lead.
My hon. Friend the Member for Eltham (Mr. Bottomley) made a powerful speech, which carried all the more weight because of his long record of speaking out courageously on such issues. His remarks about Christian Aid were particularly cogent because of his long experience as a trustee and director of it. The House should listen with considerable respect to what he says.
There has been a good deal of talk about other debt initiatives; other things that should be done to sort out the problem. The Government have played an active role in supporting debt initiatives—contributions to the 278 International Monetary Fund and the World bank, support for the Paris club, our own debt initiative leading to the Toronto terms and the new Prime Minster's Trinidad initiative—all of which have been widely welcomed and are extremely valuable measures. We supported the Brady initiative which has led to substantial bank involvement in restructuring agreements in, for example, Mexico, the Philippines, Costa Rica and Venezuela. All that is important, but it has been done on a sensible and hard-headed case-by-case basis.
The idea that blanket debt forgiveness does any good is crazy. Where countries have got themselves into substantial economic difficulties, the voluntary undertaking by Governments of a proper adjustment programme to get their economies back in order must be a condition for any programme of debt restructuring. It is no kindness simply to forgive debt and allow economies to go on being mismanaged in the way that has led to the problems arising in the first place.
It was difficult to connect what the hon. Member for Cynon Valley said with the image that the modern Labour party has sought to project—taking an interest in things such as markets, and so on. She sounded like an old-fashioned capitalist conspiracy theorist; it was all a plot got up by the banks in order to drag hapless innocent Governments into debt so that they could be sucked dry for ever more. The level of bad debt that has arisen is not such as to lend credence to the view that there has been a hugely effective conspiracy.
The fact is that the banks are a very convenient whipping boy for the Labour party. The venom with which the hon. Lady spoke about the banks, as though they had been going around forcing Governments to borrow money against their will when that was the last thing they wanted to do, would be laughable were it not that the circumstances that we are talking about are so serious.
What the Government have done has not been hugely dramatic, but it is commendable and it has made a significant difference. The regulations are an important measure. They lend certainty where there has been uncertainty and will help the countries which have some of this debt.
§ Mr. Chris Smith (Islington, South and Finsbury)
Does the Financial Secretary deny that, during the 1970s, a large amount of this debt was run up by some fairly aggressive selling by the western banking institutions to the third world countries concerned? It is not right for him to place the blame—if blame has to be placed—entirely on the shoulders of the borrowers rather than the lenders, as he is seeking to do.
The hon. Gentleman has made no attempt to explain how the Treasury arrived at the matrix figures that it has put before us in the regulations. They are broadly in line with those in the Bank of England's matrix, but differ substantially—both up and down—on a country-by-country basis with the secondary market value of the debts of the countries in question. Can the Financial Secretary say how the Treasury arrived at its figures, and is he confident that they represent a proper and realistic assessment of the debts of the countries concerned?
§ Mr. Maude
There is no such thing as perfection in a calculation of that nature. However, the regulations were issued in draft form for consultation, and most of the representations received in response were contained in the 279 final draft. As to aggressive selling, it takes two to arrange a loan—one to lend, and one to borrow. And all of the borrowing was voluntary.
§ Question put and agreed to.
That the draft Debts of Overseas Governments (Determination of Relevant Percentage) Regulations 1990, which were laid before this House on 15th October, in the last Session of Parliament, be approved.