Article by Roger Baird, 26th November 2008
In City AM Click here to see a PDF version of this article Treasury select committee chairman John McFall gives his first interview about the PBR AJAUNTY John McFall hobbles across his spacious corner office, having tweaked his hamstring in the gym yesterday – but he feels there is nothing broken about the government’s momentous pre-Budget report released on Monday.
As the influential treasury select committee chairman sees it, “This is not a return to tax and spend Labour. We are facing a serious global situation, and we have to respond in an extraordinary way. The country needed a fiscal boost.”
The Dunbartonshire West Labour MP was responding to the government’s measures, which saw it pump £20bn of tax cuts into the country, largely by cutting VAT from 17.5 per cent to 15 per cent. However, the move will see the national debt rise to a record £118bn in two years, which will be paid for by a range of tax rises. The top rate of tax will also go up to 45 per cent for those earning £150,000 a
year.
The pace of spending and the collapse in revenues, brought about by the global financial crisis, will smash government debt levels through the current 40 per cent of national income limit. Debt is forecast
to race to 57 per cent of GDP by 2012, when it will hit £1 trillion for the first time.
Silver-haired McFall, 64, is clear why the government was pushed into producing the most radical budget since it came to power in 1997.
“We have to get the banks lending again. That is the most important issue facing the country today,” he says.
“We have got to stand behind the banks, however unpalatable this might be to the average taxpayer. They are the blood in the body of the economy. If they fail to lend then the rest of us will suffer a seizure.”
According to McFall, even though the government has bailed out a number of British banks to the tune of £37bn, more may be necessary to get the economy moving.
But before this happens he says the Bank of England (BoE) and the Financial Services Authority (FSA) must set up a closer system of monitoring banks.
And he says that banks must be told some hard truths about the situation they find themselves in.
“We must reinforce the message that part of the money they have been given is to absorb future losses. They have been lent this money for a purpose, and it is madness for them to hold onto it in this
way,” he says.
“But ultimately we need to let the banks know that they are only a hop, step and a jump from nationalisation – and they have to get on with it,” he adds.
To help regulate banks in the future, McFall says they should be made to keep larger capital reserves if they chase bigger risks. When the dust begins to settle he also wants to see “a narrower view of what
a bank is.”
“Banks were taken up by complex derivatives and other tools, that many people overseeing these desks could not understand. This was because banks began to chase yields wherever they saw them. Selling mortgages to people who could not afford them in the US being a case in point. We need to start treating banks as utilities and not as casinos,” he says.
Far more controversially, he argues that the millions of pounds that top bankers are paid should be taken back retrospectively – more than seven years later – if their behaviour is found to be reckless.
“This money does not just set up these people, but their children as well. If they are later found to have taken their company up the wrong path, then it should be taken back,” he says.
McFall also argues that a top rate of tax set at 45 per cent, which will rise from the current rate of 40 per cent,will not lead to a drain of wealth creators – although according to PricewaterhouseCoopers, the UK will soon have the joint highest top rate of tax in the G20.
“A move to 45 per cent is a conservative step. It is still very competitive when compared to America and Germany,” he says.
“Besides, I think there are wealth creators all over the country. I meet teachers, nurses and factory workers everyday and they are also helping to create the wealth of this country. The term ‘wealth creator’ does not exclusively apply to people who work in the City.”
Some economists argue that with shops like Marks & Spencer offering 20 per cent discounts on all their goods, a 2.5 per cent VAT cut will do little to encourage people to spend even more.
But McFall is adamant in his defense of Brown: “A VAT cut of this size over the course of the year or so it is planned for is the best way to get extra money to flow right through the economy.”
McFall argues that deregulation in the late Eighties and Nineties by governments across Europe and America allowed banks to take greater risks.
“This is bound up with globalisation, which on its good side has led to over 300m people around the world being taken out of poverty in countries like China and India. But on the downside it can lead to the loosening of proper controls in key industries.”
“There needs to be a recalibration of the economy that has become too dependent on financial services, housebuilding and government spending. I would like to see more of a role for manufacturing, but that is a debate that needs to be had,” he says.
McFall left school as a teenager and had jobs in the local parks department and a factory before going back to college and eventually getting a night-class MBA at Strathclyde University. He worked as a teacher and joined the Labour party in Dumbarton, becoming an MP in 1987.
In opposition, McFall resigned as a whip over the first Gulf War but was brought back as a frontbench spokesman on home affairs, education and then Scotland, and made a Northern Ireland minister when
Labour came to power.
But the reopening of Stormont made McFall’s role redundant. With no ministerial reshuffle likely before the 2001 election, he joined the treasury committee that he has led since then.
The year ahead will be filled with debate with how our financial system should look. McFall’s voice will be one of the sharpest among them.
CV: JOHN MCFALL
Born: Dumbarton, October 4 1944
Educated: Paisley College; Strathclyde and Open universities
Family: Married to Joan and has four children
Lives: Dumbarton and Victoria, London
Time off: Running, reading and gof