1. Questions to the First Minister – in the Senedd on 18 October 2022.
2. What assessment has the First Minister made of the impact on Wales of the recent turmoil in the financial markets? OQ58590
Llywydd, I thank Ken Skates for that question. The recent turmoil in UK financial markets, for which the UK Government’s fiscal statement was the catalyst, has increased the cost of borrowing for Government, businesses and ordinary citizens. It will damage growth, worsen the public finances and make life harder for borrowers, including homebuyers.
Thank you, First Minister. Of course, the fourth Chancellor in as many months has now buried Trussonomics and u-turned on pretty much the entire mini-budget, but, as you outlined, the effects of steering the economy like a bumper car will have devastating consequences: higher taxes, higher inflation, high mortgage rates. Is it fair that the people of Wales and the people of the UK are being treated like experimental guinea pigs by the Conservatives?
Well, Llywydd, of course, it's not fair that we have all been subjected to the failed experiment—a failed experiment that took less than a month to collapse in front of us. And the reason it's particularly unfair is that the experiment was doomed to failure from the outset. It didn't need to come in contact with the reality of the markets for people to have understood that. An economic approach based on the failed theories of trickle-down economics, depending upon uncosted borrowing, was always going to fail. Now, in that failed experiment, as I said, Llywydd, people across the United Kingdom will now pay the price. I'll give just one example: because of the increase in the mortgage rate that we now see as a result of what has happened, by 2024, people across the United Kingdom will have paid out £26 billion in additional interest payments—£26 billion taken out of the pockets of families right across the United Kingdom. Now, it's not more than a couple of weeks ago that the Prime Minister was trying to portray those people who didn't agree with her failed ideas as anti-growth. That was never ever the case, of course, but what's now guaranteed is that the recession the Bank of England says we are already in will be deeper and longer than it otherwise would have been, because that £26 billion, Llywydd, would have been available for people to spend in shops, to use in hospitality, to do the things that keeps the economy going. That £26 billion by itself will now no longer be there to support the economy back into growth, and, here in Wales, this time next year, the average person with a mortgage will be paying £2,300 more in a year than they would be had interest rates stayed where they were in the current quarter. That is the scale of the failed experiment, and that's only one example of it.
As the First Minister is aware, liability-driven investments use the equity in pension funds to borrow money. This borrowed money is then used to buy gilts, which in turn deliver fixed-rate interest over a set period. The major risk, however, is that if interest rates rapidly rise on gilts, as they have now, then pension funds have to acquire larger amounts of collateral to cover the money that they've borrowed, which leads them to sell their assets, including gilts. This is problematic when there is no buyer, as was the recent case when the United States issued an eye-watering $0.25 trillion for sale just over a week ago, which attracted investors who would normally have bought from the UK market. As the First Minister may remember, in his first budget in 1997, and despite warnings from the pension industry, Gordon Brown removed pension dividend tax credits from pension funds, the consequences of which are still felt today—[Interruption.]
We're going to have to listen in some quiet, so the First Minister can hear the question.
Thank you, Llywydd. This drastically impacted the finances of many pension funds and has ultimately led to the over-reliant use of LDIs by desperate pension schemes aiming to make up the shortfalls that they've continually suffered since then. In the frantic attempt to raise revenue, this financial legacy of the last UK Labour Government has seen pension funds seek riskier and riskier borrowing—[Interruption.]
Let the Member come to his question, and I'm sure he's going to very, very quickly.
Yes, last sentence, Llywydd—riskier borrowing strategies, some of them leveraging up to four times the collateral they hold. First Minister, in the wake of this disastrous Labour policy that still has repercussions to this day, what financial assessment has the Welsh Government made of the security of pension funds in Wales that use LDIs? Thank you.
Well, Llywydd, the Member deserved better from more senior Members of his group who ought to have advised him, before he stood up, not to offer a contribution of that sort on the floor of the Senedd. 'It's all the fault of Gordon Brown and the United States of America.' Well, even in a week in which the most extraordinary explanations have been offered, I don't think anybody has attempted to persuade us of that. I thank the Member for his explanation of the way that the gilt market works and its impact on pension liabilities. I think I probably had understood already that if you have a market in which nobody is prepared to buy, then the value of the goods that you're trying to sell inevitably goes down, and, when that happens, the person who is forced to sell faces a very bleak position. It's why the Bank of England, of course, was forced to intervene, spending billions and billions more that we will now have to pay for in the future. The catalyst for that was nothing said by Gordon Brown in 1997, nor was it anything to do with actions taken in the United States. It was the direct and predictable consequence of the recklessness with which the then Chancellor of the Exchequer and the person who sacked him for agreeing with her embarked upon then.
The in-tray on the desk under which the Prime Minister is now hiding was substantial, but rather than face the economic challenges with seriousness, Truss favoured this fantasy of trickle-down economics with tax cuts for the rich. She has been forced to reverse nearly every measure, but the damage to the economy is here to stay. As a direct result, as we've heard, my constituents face soaring mortgage bills, extreme energy bills from April and further austerity. Prif Weinidog, the Welsh Government has said that it can't protect people and services from the full force of the UK Government's actions. I understand that, but many of my constituents would like to know what action the Welsh Government will be taking to try to protect them over the coming months. Assuming that either the Prime Minister in name only or the real Prime Minister, Jeremy Hunt, get round to calling you eventually, what message will you be giving them, Prif Weinidog, on behalf of the people of Wales?
It's an important point that the Member makes, and I want to repeat it again this afternoon, as I did last week, because these are absolutely serious times in the lives of citizens in Wales. The Welsh Government's budget is already worth, in purchasing power, £600 million less than it was in November of last year at the time of the comprehensive spending review, and the Chancellor has said that he has no intention at all of making up for that erosion in the budgets available to protect citizens and public services in Wales. And now we know that there are cuts on top of that on the way.
While the Welsh Government will use every capacity that we have, every pound that we are able to mobilise, every partnership that we are able to rely on, to do what we can to protect people in Wales from the impact of those cuts, there will be a limit beyond which we simply cannot go. And people will see directly and inevitably, not simply because their mortgages now cost astronomically more, not just because the energy protection that they were promised last week would last for two years is now only to last for six months, not only because the benefits on which they rely may be cut while bankers' bonuses are unrestricted, but they will see it as well in the services that they have been able to rely on up until now that simply will not be there in the same way, if we have to cut our budget on the scale that some commentators are predicting.
Llywydd, the biggest cut we've ever had to make in a single year came when George Osborne was Chancellor of the Exchequer. We had to cut 3 per cent of our budget, and we did it after 10 years in which our budget had grown every single year, year on year on year, real-terms growth, and then we had to cut by 3 per cent. The Institute for Fiscal Studies, last week, were saying that there would be a 15 per cent—a 15 per cent—cut in public expenditure, and this now not after a decade of growth, but after a decade of austerity as well. Nobody can pretend that people in Wales can be sheltered from the full onslaught of that, and that’s the message that I will be conveying whenever we have an opportunity—as my colleague Rebecca Evans did in her conversation with the latest Chief Secretary to the Treasury, the sixth one she’s had to deal with during the time she has been the finance Minister here in the Welsh Government.