Economy

Part of the debate – in the House of Lords at 9:40 pm on 3rd November 2008.

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Photo of Baroness Vadera Baroness Vadera Parliamentary Under-Secretary (Competitiveness and Small Business), Department for Business, Enterprise & Regulatory Reform, Parliamentary Secretary (Competitiveness and Small Business), Cabinet Office 9:40 pm, 3rd November 2008

My Lords, it is rare for this Chamber to have an extensive debate on the economy; but the insight of all the speakers showcases the wisdom of your Lordships' House, not least that of the three former Chancellors, six former Treasury Ministers or spokespersons, four economists and six leaders of business who have elevated this debate. It is a wisdom that should be tapped into more often, and I am very grateful to noble Lords for their contributions today.

As we enter a very difficult time for the economy, people are worried about keeping the homes that they have worked so hard for, and businesses are worried about securing the cash flow that they need. Indeed, it is perhaps the most difficult time for the economy in any of our lifetimes, but for this the intellectual memories of Members of your Lordships' House stretch further back than in most cases, and your Lordships have something unique to contribute. It is a daunting task to conclude such a debate and, given its depth and breadth, I cannot attempt to answer every significant point. However, I should like to take head on some of the central arguments that have been made.

First, the Opposition have appeared to suggest, as the noble Baroness, Lady Noakes, said in her opening remarks, that it is the Government's policies that have led to these challenging and extraordinary circumstances. Nothing could be further from the truth. It is important that we understand the genesis of the crisis. As the noble Lord, Lord Bilimoria, said, it is not to play political blame games but because if we misdiagnose the cause we risk misprescribing the solution. It is clear that this crisis is born of years of global financial imbalance, with large surpluses built up in countries from China and Russia to Saudi Arabia, creating excess liquidity. That has been added to by the mispricing of mortgages in the US, involving excess risk being taken by banks that are obscured and spread globally by securitisations.

Many noble Lords have commented on the need for reform of national financial regulation. In particular, erudite comments were made by the noble Lords, Lord Newby and Lord Lawson, and my noble friend Lord Haskel. The Banking Bill, which this House will have the chance to debate, will secure new powers and deliver new processes, so we agree with the need for reform. As the noble Lord, Lord Turner, the chairman of the FSA, said, we have lessons to learn. I also argue that there is an international regulatory deficit. Banks are global and international capital flows are global, but regulation is, in the main, national, as are the regulators.

We continue to press for essential international co-ordination, which is one of the principles for regulatory reform set out by the Prime Minister. Those principles include many of the principles that have been talked about in this House today, such as integrity with respect to conflicts of interest and responsibility with respect to remuneration tied to long-term shareholder interest, not short-term revenue generation. There should be good risk management, particularly with respect to capital adequacy and, above all, there should be transparency. Perhaps there should be a move away from Alan Greenspan, who once commented:

"If I seem unduly clear to you, you must have misunderstood what I said".

The need for regulatory reform, however, does not detract from the basic fact that this problem originates in the United States. Noble Lords may disagree, but I would simply point out that, for example, the UK has proportionately half the equivalent number of sub-prime loans as the United States. Indeed, we do not have, for example, like the United States, a structural long-term oversupply of housing. This is the first economic crisis of globalisation, so no one is immune, whether they are in the United States, where the crisis started, Iceland, Hungary, Indonesia or South Africa.

The crisis has gridlocked our financial system, which is at risk of no longer being able to fulfil its purpose of oiling the wheels of real economic activity by allocating capital effectively to business and families. With that crystal-clear insight into the nature of the crisis, the Prime Minister and the Chancellor took extraordinary steps for extraordinary times, which many noble Lords supported and have spoken in support of today. Those measures have been described at some length by my noble friend Lord Myners. As a result of the leadership shown by the Prime Minister and the Chancellor, what was once unthinkable has become commonplace in many leading economies. At present, 14 economies are considering or are committed to recapitalising their banks. However, that recapitalisation, the guarantees on their funding and their access to liquidity are not, as has been portrayed, a bail out of the banks, but a first step in tackling a crisis that affects us all, because the underlying purpose is to ensure financial stability and the resumption of lending to homeowners and to businesses, especially small and medium-sized enterprises.

Access to credit is the lifeblood of a modern economy. If one lesson was to be learnt from the 1930s, and more recently from Sweden in the 1990s, it was not to underestimate the impact of financial markets on the real economy. I am grateful in that respect for the measured comments of the noble Lord, Lord Lamont. I stress again that the banks being recapitalised by the Government have committed to maintaining over the next three years the availability and active marketing of competitively priced lending to homeowners and small businesses at 2007 levels. As the noble Lord said, it was very precise wording, which was perhaps not so precisely interpreted by the noble Lord, Lord Forsyth. It is not the same as requiring the banks to lend those amounts. Even in the 1960s, we did not micromanage such decisions. However, we will monitor the banks to ensure that they make available the capital liquidity and operational resources for them to lend at levels necessary to meet demand and market conditions. Lack of capital cannot be an excuse, and banks need to be open for business.

We all recognise that there will be deleveraging in the global economy, but the pace, nature and manner of deleveraging will affect the fate of millions of businesses and homeowners. I say to the noble Lord, Lord Bilimoria, and other noble Lords who asked about the £4 billion in loans from the EIB, that we are in active discussions with the EIB to bring them forward to meet demand, and we are in active discussions with the banks so that they can apply for the maximum amount that they feel able to.

On opening up access to markets, I am not yet going to say that it is game over, however many bank shares we own in the mean time. However, by rebuilding confidence and balance sheets, whether by carrot or sticks, persuasion or cajoling, financial engineering or just hammering home the point, the Prime Minister, the Chancellor and my Secretary of State have shown that we will do all that we can to ensure responsible and competitive access to credit for businesses and families. In a crisis like this, that is our job, as it is the job of any Government. For those that see no role for government in that, it is perhaps just as well that they do not aspire to be in government.

I wish to confront a second tenet of the argument proposed by certain noble Lords, that we are not well placed historically, or relative to our competitors, to face this turbulence. The counterfactor is, of course, always hard to illustrate, but there have been points in our economic history with interesting comparators. As the noble Lord, Lord Griffiths, said, in the year before the recession of 1991, the bank rate was almost 15 per cent; today the bank rate is 4.5 per cent. Inflation reached almost 7 per cent—indeed, it slightly exceeded it; today, it just over 5 per cent. Corporate profitability was at 11.6 per cent; today, it is at 14.4 per cent. Corporates were net borrowers, equivalent to 3.9 per cent of GDP; they are now net lenders, at approximately 7 per cent of GDP.

There has been much talk of roof repairs, but it is not just the statistics that show that the UK is well placed. The IMF said in its most recent appraisal of the UK's performance:

"For over a decade, the United Kingdom has sustained low inflation and rapid economic growth—an exceptional achievement ... the fruit of strong policies and policy frameworks, which provide a strong foundation to weather global challenges".

Some argue that the strength of the UK economy over the past 10 years has been the result of a debt-fuelled bubble, but debt cannot explain the improvement in the supply side of the economy, as measured by productivity performance. We have eliminated the productivity gap with Germany that we inherited and narrowed the one with France, and we are the only G7 country to have kept pace with the US's impressive productivity growth. Inch by inch, it has been long fought, hard won and structural, and it is a tribute to British workers and British companies.

Productivity growth may not be headline-grabbing but it is the key driver of growth and prosperity, higher living standards and the basis for spending on vital public services. Our improvement in productivity underpins a one-third growth in the economy in the past 10 years, matching the US and outstripping Germany and France. Real GDP per capita has grown faster in Britain over the past decade than in any other G7 country. In the words of Paul Krugman,

"Productivity isn't everything, but in the long run it's almost everything".

The noble Lord, Lord Newby, commented on our dependence on financial services and the noble Lord, Lord Watson, talked about a post-industrial society, but I reiterate a point made by my noble friend Lord Haskel. A closer look at productivity illustrates another important fallacy. UK manufacturing productivity has grown by 50 per cent in the past 10 years, twice as fast as the rest of the economy. While financial services are, and will always remain, important, in fact they represent a smaller proportion of GDP than manufacturing. The perceived dominance of financial services fails to acknowledge less recognised leadership in other sectors, such as creative industries and pharmaceuticals. We are second only to the United States in aerospace; we are home to Europe's electronic design; and indeed we have its largest ICT industry. We have always said that our future lies in a mixed and balanced economy.

The third tenet that I should like to discuss is the notion that the use of fiscal policy is the equivalent of fiscal irresponsibility. I remember very well the Mais lecture of the noble Lord, Lord Lawson, because it occurred in the first year of my professional life, so I say this with much humility. We were reminded of his central argument by the shadow Chancellor last week, when he said that it was the job of monetary policy, not fiscal policy, to manage the economy. It is of course well recognised that monetary policy is the primary and more flexible instrument to manage an economy. However, we are very well aware from their actions that the previous Government did not regard fiscal policy as an appropriate instrument to use, even in a downturn. They actually tightened fiscal policy during the recession of the early 1980s. This, along with inappropriately tight monetary policy, made that recession one of the deepest in living memory.

This Government will not repeat the mistakes that were made. The discipline that we have imposed on the public finances means that net debt is low by both international and historic standards. That provides us with the flexibility to support the economy in the face of these current shocks. It means that we can allow borrowing to rise this year to support families and businesses and, in particular, we can allow the automatic stabilisers to operate and smooth the path of the economy in the short term.

Instead of the somewhat unrecognisable accusations that I have heard of "spend, spend, spend", perhaps I may note that the Chancellor talked about,

"switching our spending priorities to areas that make a difference".

Indeed, in his recent Mais lecture, he said that fiscal policy should be supportive of monetary policy. We will choose the path not of irresponsible spending nor of irresponsible fiscal tightening but of the responsible use of all levers to support our economy. We will, of course, continue to focus on the main tasks at hand, taking decisive action on comprehensive measures to ensure financial stability; to work to ensure access to credit, especially for small and medium-sized enterprises; to show global leadership for both international financial reform and co-ordinated action on downturn; and to fight protectionism. We will also help individuals facing redundancy to equip them for their next job; we will help families facing repossessions through accelerated interest servicing help; and we will maintain competitiveness for the future, a future which we face with huge opportunities for the doubling of global output over the next decades and a billion new jobs which could be created through globalisation.

We cannot be complacent about the exceptional and unprecedented tests which face each and every one of us in the coming months. As parliamentarians, we must be neither doom-mongers, nor complacent, but confident in Britain's ability to emerge strong from these challenges—however tough—and our ability as a House to lead— however difficult.