Interest Rates

HC Deb 13 November 2003 vol 413 cc396-400

2. Miss Anne McIntosh (Vale of York)

What assessment he has made of the impact on the housing market of the increase in interest rates. [138324]

The Chancellor of the Exchequer (Mr. Gordon Brown)

Despite the recent rise in interest rates, Britain still has the lowest interest rates for 40 years and the lowest mortgage rates for 40 years. At around 5 per cent., mortgage rates contrast with British rates of about 10 per cent. or more during the last world downturn. We estimate that households pay 7.5 per cent. of their disposable income in interest payments, which is half as much as 10 years ago. At all times, our policy is to maintain economic stability.

Miss McIntosh

The Chancellor commented in his Budget speech in 1997 that stability would be the hallmark and central plank of the Government's housing market policy. How does he square that with the Governor of the Bank of England saying that we will see a return to negative equity and some correction in the housing market? Where does that put the Chancellor's central plank of stability in the housing market?

Mr. Brown

That is not what the Governor of the Bank of England said yesterday. He said that consumer spending is around trend and house price growth is moderating. He said, and he is absolutely right, that people should be vigilant about their debts. He also said that debt service payments are at a far lower level then they were 10 years ago in the last world downturn.

The hon. Lady should look at what we have achieved in stability. Since 1979, house prices in her region rose by 9 per cent. a year. Since 1997, they have risen by 8 per cent. a year. There are 75,000 more homeowners in her region and 1 million more homeowners in the rest of the United Kingdom. The reason for that is not just economic stability, but employment growth as well. Unemployment in her constituency is 1.2 per cent.—indeed, only 11 young people are unemployed in her constituency. It is about time the Opposition recognised the obvious: that we have economic stability.

Mr. John McFall (Dumbarton)

May I ask the Chancellor about the report that he commissioned from Professor David Miles into long-term fixed-rate mortgages? Does he agree that if we move to such a system it will take the volatility out of the housing market? He is aware of the interest of the Treasury Committee in that matter. Will the report be published before the pre-Budget report so that we can discuss it with him when he comes before the Committee?

Mr. Brown

As my hon. Friend, who chairs the Treasury Committee, knows, two reports are being prepared on housing. One is on housing supply, which is being produced by Kate Barker, the former economic director of the Confederation of British Industry, now a member of the Monetary Policy Committee. At the same time, there is the report by Professor Miles on the housing market generally. We have not yet received his report, so it is too early to reach any conclusions, but interim reports will be produced at the time of the pre-Budget report. The reports cover big issues about the housing finance market and how it operates. I hope that the House will await the publication of them before drawing conclusions about the future system of housing finance.

We will always remain vigilant about the need for stability in housing, the mortgage market and the economy in general. It would be foolish, however, not to recognise the achievements of economic stability, which have given us the lowest inflation and lowest interest rates for 40 years. At the same time, they have meant that our economy has grown while other economies have been in recession.

Dr. Vincent Cable (Twickenham)

May I add my best wishes to the Chancellor and his family? I also extend a welcome to the new Conservative Treasury spokesman, with the personal hope that he has a happier fate than an earlier commuter from Rothschild's to the House of Commons, Norman Lamont.

On the housing market, is not the brutal truth that with investment, exports and manufacturing output stagnating or falling, the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level? If the Bank of England is correct in its expectations of a market correction and rising interest rates, what action will the Chancellor take on the problem of consumer debt, which is rapidly rising, with 8 million annual visits from the bailiff?

Mr. Brown

The hon. Gentleman has been writing articles in the newspapers, as reflected in his contribution, that spread alarm, without substance, about the state of the British economy. As the Bank of England said yesterday, consumer spending is returning to trend. The Governor said:

there is no indication that the scale of debt problems have… risen markedly in the last five years.

He also said that the fraction of household income used up in debt service is lower than it was then.

I suggest that the hon. Gentleman look at the overall picture of the British economy. Yes, during the period of world downturn, when the rest of the European economy was not growing at all, it was necessary for both consumer spending and public investment to contribute to the growth that we have achieved in Britain; but he can see that business investment and manufacturing output are starting to return and that the export position will improve over the next period. What the Bank of England said yesterday about the prospects for growth, compared with what people said when we gave our Budget forecast in April, suggests that we have been right about the prospects for growth in the British economy, and the hon. Gentleman has been wrong.

Mr. Oliver Letwin (West Dorset)

It is generally accepted, and I agree, that it was a good idea by the Chancellor to hand control of interest rates to the Monetary Policy Committee, and I congratulate him on that. It is clear that the MPC's decisions have a considerable effect on house prices, but does the Chancellor agree that it cannot be expected to control the level of exports, the rate of productivity growth, the level of employment or, indeed, the general balance of the economy?

Mr. Brown

That is why getting the fiscal and monetary balance right is the policy that is being pursued by the Government. I hope that in the spirit of cross-party agreement the right hon. Gentleman agrees not only that it was right to make the Bank of England independent, but that the policies we have pursued since 1997—which, uniquely among all the major industrial economies, have secured growth while other economies have experienced recession—are right.

Let me welcome the shadow Chancellor to his new post—we will enjoy our economic debates with him. We were sorry that he mysteriously disappeared during the election campaign of 2001, so we welcome him back.

Mr. Letwin

I think that that was a yes, so perhaps the Chancellor could now tell the House what aspects of his policies, other than the MPC's interest rates, have been responsible for the fact that at a time when house prices are rising rather fast, household debt is now roughly the same size as the entire gross domestic product; that we have lost 700,000 manufacturing jobs; that we have a ballooning public sector deficit; that productivity growth has halved; and that we have the biggest traded goods deficit since 1697?

Mr. Brown

The shadow Chancellor will have to get the economy in proper perspective. He is trying to imply that the only economy that has grown consistently over the past six years is facing fundamental problems—he is absolutely wrong. The reason we have managed to grow and others have failed to do so is, first, that we decided to make the Bank of England independent; secondly, we set down monetary rules; thirdly, we went for a symmetrical inflation target, which the previous Government refused to adopt; and fourthly, we have a medium-term fiscal strategy, which has shown that we can cut debt to a sustainable level and still secure the rises in public investment that are necessary while meeting our fiscal rules. The problem, however, is that on each of those policies the Conservatives either oppose us or, alternatively, they wish to reverse the policy, as is the case with fiscal policy. The right hon. Gentleman must answer the question of how Britain could possibly have avoided a recession with 35 per cent. of GDP spent on public services.

Mr. Letwin

I am sure that the House will sympathise with the fact that the Chancellor has formed the habit of deploying a rather belligerent tone in his dealings with the Prime Minister, but I believe that our fellow citizens expect us in the Chamber to engage in a more rational discussion of issues, such as house prices and the balance of the economy, that closely affect people's lives.

If the Chancellor does not want to deal with a string of inconvenient facts, let us focus on just one of them. When he told us that instead of setting interest rates he would focus on productivity, which he described as

a fundamental yardstick of economic performance",

did he in fact mean that it was his intention to halve the rate of productivity growth, or did he make some kind of mistake?

Mr. Brown

The right hon. Gentleman is wrong and ought to be corrected. First, productivity growth is rising by 2 per cent. and more at the moment. Secondly, manufacturing productivity is rising by 5 per cent. Thirdly, we have bridged the gap with the Japanese economy, we are now catching up with the German economy, we have reduced the productivity gap with the French economy, and we are making inroads into the very large productivity gap that we inherited with the American economy.

The right hon. Gentleman should look at the facts on productivity, and he will see that we alone of recent Governments have had productivity rising every year, and that will continue to be the case. As for house prices and the housing market, if he wants to repeat what the shadow Chief Secretary said in a speech a few days ago and somehow predict a housing shock and a threat to the stability of the economy, I must remind him that at every point in the past six years the Conservative party has predicted that there would be a recession.

If we take house prices, then yes, they have risen as a percentage of income. If we take house prices as a percentage of wealth, that is not the case, because household wealth has risen by 50 per cent. in Britain over the past six years under a Labour Government. If we take the debt servicing payments that people have to meet for their mortgages, under the Conservative Government, at certain points, people had to pay nearly 30 per cent. as new homeowners, but under the Labour Government it is 17 per cent. In respect of the housing position, the right hon. gentleman is wrong, and wrong again.