ANY QUOTES USED MUST BE ATTRIBUTED TO MURNAGHAN, SKY NEWS

DERMOT MURNAGHAN: This week the Bank of England will publish its twice yearly report on the strength of our financial sector but with credit downgrades and computer errors, confidence in Britain’s banks isn’t exactly high. Let’s say a very good morning to Labour’s Shadow Chief Secretary to the Treasury, Rachel Reeves. Ms Reeves, I want to start off with the banking problems that have affected RBS Nat West in particular but other elements of that group. Is this something that we should regard as between their IT department and their customers or does it tell us something more widely about the bank’s performance?

RACHEL REEVES: Well first of all it is absolutely imperative that RBS gets a grip on this situation because for thousands, millions of customers who are without their monthly pay, who haven’t been able to settle transactions, don’t know how much money they’ve got in their accounts, it’s causing real hardship at the moment and to say we’ll put it all right in the end isn’t really good enough but there are wider issues with the financial services sector as well all know. Talk to any small business who has tried to get a loan or has tried to improve the terms and conditions on their overdraft for example and they’ll say that the banks are totally unsympathetic to their concerns, they are putting up fees and charges, interest rates are too high. Talk to a young person trying to get on the housing ladder, trying to get together a deposit of 20% and they’ll say the banks just aren’t helping at the moment so I want to see proper reform of the financial services sector, I would like to see the Vickers recommendations being implemented faster. At the moment those recommendations are only set to be implemented by 2019 which is more than a decade after the global financial crisis and I don’t want to see those proposals watered down as it looks like is going to be happening in terms of the capitalisation of the banks. So it’s not just an issue about RBS and the problems they’ve had with their computer system, there are bigger issues with financial services reform that the government needs to tackle head on in terms of getting the banks lending again, to support more businesses and families and also the Vickers recommendations on splitting up the retail and investment banks and also on the recapitalisation.

DM: But they are almost two different things aren’t they because the Vickers recommendations are designed to protect the financial system and indeed the economic system more widely in the event of more meltdowns, in terms of what you are talking about, about getting credit flowing to people who want to get on the housing ladder, to small businesses, what can be done? Because fundamentally we as the public, you as a Member of Parliament, can’t take banking decisions for the bankers, they have to do it themselves.

RR: Well a couple of things could be done. For example the government implemented what they call their Project Merlin agreements with the banks and that was supposed to get banks lending to small businesses but what we’ve seen over the last year is net lending to small businesses has fallen in every month over the past twelve months. That’s not good enough and the government needs to set proper binding targets for the banks to lend to small businesses but also the Vickers recommendations are about the structure of the financial services system but also about competition within the banking system as well. We’ve seen over the last twenty years a huge consolidation in financial services so there are now fewer banks for customers to choose from. As a result there is less competition and as a result of that, less choice and higher fees, charges and interest rates than I think is necessary so I think the Vickers recommendation about splitting up retail and investment banks could go some way towards improving competition in the financial services sector as could the government playing its role as the owner of the banks when it sells them off. If you look at what happened to Northern Rock for example, the government was being lobbied extensively to turn that bank back into a mutual for example, to get it to be part of a British investment bank to lend to small businesses – they didn’t do any of that. I’d like to see the government being much more creative in terms of its stakes in these banks.

DM: Let’s put that in the current context with so many banks globally on the European scale and indeed based in Britain, having themselves downgraded in the last week. That they say will put up the cost of funds and make their ability to lend at lower rates even more difficult. Do you fear that it can get even worse, given the looming crisis within the eurozone?

RR: Well we’ve seen over the last six months mortgage interest rates go up for customers despite the fact that the bank base rate stays at record lows and the banks are being able to borrow at very attractive rates from the Bank of England through quantitative easing, so I do think that the banks could be doing much more to support the economy and support the recovery with lending to small businesses but also to households and families as well. The banks need to play their full part in getting the economy back on track. The UK taxpayer had to bail out the banks and now the banks have to do their bit in bailing out the economy to get it moving again and they can borrow at very low interest rates and those are not being passed on to customers in the right way.

DM: Mentioning credit rating agencies, do you think that the banks and this government, this British government, is too enthralled to the credit rating agencies in that we’ve seen other countries and major banks having their ratings downgraded and still being able to borrow relatively cheaply. Do you think that is something this government could risk in order to institute what I know you want to see, a bit of a Plan B, at least some kind of stimulus?

RR: Well the UK is on negative outlet from the rating agencies and the reason they give for that is that the economy is in recession, very weak economic situation at the moment and the credit rating agencies themselves have said that austerity alone is not enough, you also need a plan for jobs and growth to get the economy back on track and the reality is that the decisions that this government have made to cut too far and too fast choked off the economic recovery about a year and a half ago and our economy has flatlined now for 18 months. Of course the economy is now shrinking because of the decisions that this government has made and so we do need an alternative, an alternative to get people back to work and an alternative to get the economy moving again because unless you’ve got people in work you’re going to have to pay out more in benefits and that’s what this government is finding and you get less in tax revenue as well.

DM: Could you just be explicit about that then, may I paraphrase for you and see if you agree? Are you saying that if we continue on this path in recession we’ll get downgraded anyway so we might as well borrow a bit more money now to attempt some form of stimulus and get growth going and it doesn’t matter if we get downgraded?

RR: Well if you say about government borrowing more, this government is now borrowing £150 billion more than they’d planned, more borrowing than set out by Alistair Darling in his final budget as Chancellor and the reason for that is because the economic recovery that was forecast two years ago just has not materialised. We are the only G20 country, apart from Italy, back in recession and that’s not because of what’s happening in the eurozone, it’s because of the policies being pursued here at home so Labour has set out an alternative which involves getting the economy moving again, getting people back to work. So a temporary reduction in VAT, a cut in National Insurance for small businesses taking on new workers, bringing forward infrastructure investment and a tax on bank bonuses to fund 100,000 jobs for young people in the construction of new affordable homes. If you have those policies, it would get the economy moving again, would bring in more in tax revenues and would mean we were paying less out in unemployment benefits and other out of work benefits, so it could be a double win. It gets the economy moving but also helps achieve our goals of deficit reduction as well.

DM: Final question sort of on that, you mentioned benefits and what we’re reading today about Mr Cameron in a speech tomorrow says he is going to get tough on those who get undeserved benefits. Do you feel that might free up some more money for the kind of project you are talking about?

RR: Well numbers from the House of Commons library last week showed that the government is now spending an extra £5 billion on unemployment benefits and another £4 billion on housing benefit because you’ve got more people out of work and you’ve got more people working part time rather than full time so needing housing benefit to top up their pay. So if the government are really serious about dealing with the benefits bill, they’ve got to get the economy moving again, they’ve got to get people back to work. If you’ve got 2.6 million people out of work like we do at the moment, if you’ve got a million young people out of work, you’re paying more out in benefits and you are getting less in in tax revenue. That’s not going to get the economy moving again but also it is making it harder to get the deficit down as well, so to get the benefits bill down you need an economy that’s growing and you need more people in work.

DM: Okay, Rachel Reeves, thank you very much for appearing on Murnaghan, the Shadow Chief Secretary there.