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Sky's the limit: Cable believes the Government can do much more to end the recession

IT WAS over six years ago that Vince Cable first voiced his fears to Parliament that “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”.

He wasn’t listened to. In fact, what appears markedly prescient now was dismissed out of hand by the then-Chancellor Gordon Brown. Not that Cable, the Liberal Democrat’s Shadow Chancellor and deputy leader, has ever sought credit for this foresight. He is far more concerned that the country seems destined to make the same errors again.

“Everybody I meet in the City is just waiting to go back to business as usual,” he said, during a visit to Wales last week. “It is frightening, actually, the extent to which, after only 12 months, people have forgotten. The other area which worries me is that a key contributor to the crisis was an asset bubble in property markets, and yet whenever you pick up a newspaper it will say: ‘House prices are rising. This is good news. It is a sign that the economy is recovering.’ Well, actually, it’s in danger of reproducing this bubble economy that has landed us in so much trouble. That’s why any radical government is going to have to talk about breaking up the banking system, otherwise we shall simply reproduce all these mistakes all over again.”

Breaking up the banks, and dealing comprehensively with the City’s financial practices are issues that Cable returns to a number of times. They are familiar themes for anyone who has read his latest book, The Storm, which unpicks the genesis of this financial crisis. Partly as a consequence of the book’s detached language, the Twickenham MP has developed a reputation for an analytical rather than political approach. However, he went on the front foot when Alistair Darling gave his Pre-Budget Review statement this month, dismissing it “good budget for bingo and boilers but not much else”.

“I had two main criticisms. First, in relation to the Budget, I don’t think the Government spelled out how difficult the process is going to be of managing the budget deficit reductions, and setting out a clear programme for achieving it. What they did do was to raise taxes through National Insurance and, as far as I can see, all this money is going to go into additional spending rather than reducing the deficit. That is not responsible in the current environment.

“My second big criticism was that they are not dealing with the big crisis which continues in the banking sector. We’ve had one of the world’s biggest financial crises over a year ago and British banks were at the heart of it. The government’s initial response was very sound – the part-nationalism and support for banking was right. But since then the situation has drifted. Banks are not lending to good customers, to good businesses, as they should.

“No action is being taken to break up the big banks so that they are less of a threat to the economy in the future, and we have a completely self-centred bonus culture, a complete lack of sensitivity to the wider population, who are of course not guaranteed by the tax payer in the way the banks are. The Government’s response to it was very feeble. They’re accepting the structure. Their only proposal is this very temporary extra tax on bank bonuses which, as I said at the time, has more holes in it than a cheese grater. It’s avoided what the Liberal Democrats have argued, which is that banks should pay more. They are guaranteed by the tax payer, they should pay more. We have suggested 10% of their profits as a payment for the guarantees they get.”

The issue of bonuses resurfaced this month when the board of RBS, which is over 70%-owned by the British tax payer, threatened to resign. It took legal advice after the Treasury indicated that it might prevent bank staff from collecting such benefits. RBS and others have pointed to their results and argued that the awarding of bonuses has been instrumental in helping banks to deliver better-than-forecast profits, allowing them in the process to over-pay back what they have borrowed from the Exchequer.

The argument cuts little ice with Cable: “The investment banks – RBS, Goldman’s, Barclays and others – are making quite substantial profits and in the short term it’s easy money because it’s on the back of quantitative easing, handling Government gilts. What I question is whether it’s healthy for the British banking industry to be so highly dependent on investment banking, because it’s unstable, it’s dangerous. We’ve seen in the last year how dangerous it is. I think the Government needs to take more out of the banks. But, rather than creating a separate tax for bank bonuses, which is impractical, you would be much better simply to tax their overall profits.”

This helps get around a sticking issue for many City commentators, who point out that because the Square Mile is able to afford and attract the finest minds in the land, and pay for the best legal counsel, it has the best tools available for getting around any restrictive law that a government may introduce. Cable agrees, but believes there are other legislative areas Westminster could focus on.

“No, you can’t really introduce legislation that way. That’s why it wasn’t the right route to go down and it was done almost for almost entirely political reasons. It wasn’t brought in as a serious tax measure.

“There are some obvious anomalies already which the Government should have been tackling. There’s a massive disparity between the tax on income, which is 40% at the top and soon be 50%, and the amount of money you pay on capital gains, which is 18%. So there’s a massive incentive for the smart guys in the City to convert their income into assets, shares particularly, which they can then pay 18% on while they’re appreciating in value.”

Cable, a former chief economist for Shell, believes that closing loopholes should be part of a wider, far more radical reorganisation of the UK’s financial infrastructure. “Government should be setting out – it doesn’t have to happen overnight – a programme for breaking up the banks . Partly for the too-big-to-fail argument, you can’t have globalised banks dragging down their retail operations. And also because we have a lack of competition. We’re going to finish up with four big banking groups dominating retail, mortgage and business lending. This is not helpful and they should be broken up.”

His conviction over the future of the banks comes from a belief that the UK’s reliance upon the City as the engine for our economy was a “terrible mistake”. And it also comes from his concerns that we may experience a double dip recession. “If this economic recovery that the Government predicts doesn’t happen – and there are several reasons why it won’t happen, because the economy’s been artificially stimulated by money supply creation, because we have this massive government deficit that’s got to be cut, because the banks are not working properly – you’ll then get more Government-bank bad debts and that will in turn create more problems in the banking system.”

Instead, the Liberal Democrats have been arguing for a focus on economic growth away from the City, in areas like manufacturing. Cable was in Wales to see for himself a number of projects, including an innovation spin-off from Cardiff University.

Cable says: “Traditional metal mashing is in decline across the western world. But we’re already seeing lots of good, small and medium-sized companies which are what you would call part of the knowledge economy. Some of them are manufacturing, some of them are service-based, but they’re usually rich in intellectual property. This is where the future lies. What will create prosperity and jobs are small and medium-sized businesses, but we’ve got to create an environment for them.”

However, Cable admits that “there are limits to what governments can do to promote enterprise”. He believes that the education system needs to address two deficiencies: “One is 20% or so of school population leaving without any meaningful qualifications at all, destined to be unemployed or unemployable. And, at the top end, the university and college system is not creating enough people with basic mathematical literacy who can go on to do physics, chemistry, biology, engineering.”

Away from education, preparing an advantageous climate for companies to trade in is more important than providing direct aid, believes Cable. “We want to create an infrastructure bank, something that can finance big broadband rollout programmes, big renewable energy projects, new rail projects. At the moment there isn’t a financing mechanism for that and we want to harness the capital that’s currently tied up in insurance and pension funds that are looking for a safe return. We have a need to build this kind of infrastructure in which business can grow and flourish.”

With hundreds of billions of pounds estimated for carrying out such work to improve the UK’s infrastructure, such an idea is unlikely to find its way to the top of the two parties that are expected to win next year’s General Election. But then again, which of them wants to hear Vince Cable saying “I told you so” in 2015?