Economy

Part of the debate – in the House of Lords at 3:46 pm on 3rd November 2008.

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Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury 3:46 pm, 3rd November 2008

My Lords, I quoted the Institute for Fiscal Studies, a well known institute which has excellent material. I quoted it word for word. I can only suggest that the noble Lord, Lord Eatwell, takes that up with the IFS after this debate.

The foreign exchange markets have passed their own verdict on the Government's handling of the economy. The value of sterling has fallen nearly 25 per cent in the past year. This has outdone even the fall under Harold Wilson of 20 per cent in 1976, which forced us into the hands of the IMF. It is certainly higher than the 18 per cent fall after Black Wednesday, so I hope that the Government will now desist from making comparisons with that period in our economic history; they have now outdone that, too.

I remind the House about the economy that the Government inherited in 1997. There had been strong economic growth since 1992, unemployment was falling rapidly and RPI inflation was 2.6 per cent. What do we have now? Inflation is more than 5 per cent, growth ground to a halt in the middle of this year, and the consensus is that we are now in recession. The Government have refused to give updated forecasts on growth. The Minister referred to the Pre-Budget Report, but that has gone AWOL. I hope he will say when winding up when we can expect the moment of truth when the Government give their own forecast for the future.

The Government have boasted about creating new jobs and raising employment levels, but more than 80 per cent of the new jobs were taken by migrant workers. On a claimant-count basis, unemployment has hardly moved since 1997, economic inactivity has remained at more than 20 per cent and youth unemployment has actually risen. As this characterised Labour's boom, we were not surprised to see in the latest statistics that the bust is feeding directly into a jump in unemployment and jobseeker's allowance applications, coupled with a fall in employment.

The Prime Minister, when he was Chancellor, used to boast of his prudent approach to public finances. He invented two fiscal rules to shore up his image as a man to be trusted with the economy. This must count as one of the greatest con tricks in political history. The golden rule—borrowing only to invest over the whole cycle—has been so manipulated and distorted since it was invented that no serious commentator pays it any heed. The second rule—keeping public borrowing within 40 per cent of GDP—has long been something of a joke because of the dodgy accounting, such as keeping PFI debt and Network Rail off the books, and it has become risible since the Government nationalised Northern Rock. Public borrowing is in truth well over 40 per cent and rising rapidly.

Last week, the Prime Minister and the Chancellor abandoned the rules and have been spinning that they have discovered a truly wonderful Keynesian idea of combating recession by letting borrowing rise to unspecified levels, but it is unclear whether the Government are talking simply about the automatic stabilisers—the natural effect of rising benefit payments in a downturn coupled with falling tax receipts, which pushes up borrowing—or whether they are planning to go further and embark on a real spending spree in the hope that public expenditure can buy the economy out of recession. I hope that the Minister can clear that up today because the ambiguity is damaging our country's credibility, as we have seen in the foreign exchange markets.

Let me make our position clear: we think that a spending spree would be very dangerous. Our economy is weak precisely because the Government have overspent and over-borrowed in the good times. We should certainly support small businesses and hard-pressed families, but that must not be an excuse for taking the brakes off public expenditure. We hope that the Bank of England, whose independence we strongly support, will be able to reduce interest rates and provide some much-needed relief for businesses and individuals, but it will rightly be cautious if the Government embark on an inflationary course of unrestrained spending and borrowing.

We believe that the duty of a Government is to nurture the economy in the good times, so that it is well prepared and resilient for the bad times. It is downright dangerous to pretend, as the Government have done, that the cycle has been abolished and that there will be no more bad times. Labour's era of high spending and high borrowing has left our economy unnecessarily weak in the face of the problems that we now face. We are paying for that weakness through lost growth opportunities and through inflationary pressures from a weak pound. We are also likely to have to pay for it through higher taxes to reduce the extra debt that will now pile up. That is the trajectory that this Government have set for our economy.

In 1989, the Prime Minister wrote:

"Our balance of payments matters. No Chancellor who claims to have a medium-term strategy for long-term prosperity should treat a balance of payments deficit with cavalier disregard".

The truth is that our balance of payments record during the past 10 years is one of large and increasing deficits. If that is not cavalier disregard, what is?

The Government have presided over an extraordinary expansion of personal debt. Individuals followed the Government's lead and spent on the back of debt. The Government were only too happy to have the apparent miracle of continuous growth buoyed by consumer spending. They showed a complete lack of interest in the evident housing bubble, saying complacently that debt-to-income ratios were healthy. Personal debt now totals nearly £1.5 trillion, which is roughly the same size as our GDP.

In 2004, my noble friend Lord Northesk, on the eve of personal debt breaking through the £1 trillion mark, secured a debate on debt in your Lordships' House. The savings ratio had then fallen from around 9 per cent to around 6 per cent. The noble Lord, Lord Davies of Oldham, who I am pleased to see is in his place, in a display of complacency said:

"The fact that the people today are prepared to reduce their savings ratios is a reflection of the fact that they have faith in the Government's handling of the economy".—[Hansard, 9/6/04; col. 339.]

Since then, the savings ratio has slumped to virtually zero and, if pension contributions are eliminated, it is now negative. Do the Government still think that this is a statement of confidence in their handling of the economy or will they admit to a tiny bit of concern? Increased saving is a rational response by individuals to tough economic times. What does the Minister think will happen to GDP growth when the savings ratio rises again?

It has been well documented that private sector pension schemes have been irreparably damaged by this Government, starting with the abolition of ACT. The TaxPayers' Alliance has today costed this as £225 billion taken from pension scheme values. At the same time, the Government have done virtually nothing to deal with the burden on taxpayers of unfunded public sector pensions, with cost of that, overhanging the economy, estimated at more than £1 trillion. No Government could be proud of such a legacy.

I am sorry that the noble Lord, Lord Myners, will not wind up the debate this evening. I had hoped that he would bring the refreshing honesty that he showed when speaking to "Sky News" on 23 October about the financial crisis. He said:

"Nobody should say: 'Don't blame me guv, it's not my fault!' Everybody should say: 'Looking back on it there are things we would not do again in future'."

Perhaps the noble Baroness, Lady Vadera, will be able to tell the House this evening what the Government will not do again in future.

I am delighted that so many of my noble friends have chosen to speak today, and I am sure that they will add to the items on my charge sheet. The Government have not only failed to fix the roof while the sun was shining but undermined the very foundations as well.

We do not relish the prospect of a weak UK economy and so will support the Government in any reasonable policies to restore it, just as we have pledged to do in respect of the Banking Bill. However, we stand ready with a plan based on fiscal and financial responsibility to bring much needed economic change in future. We have had to pick up the pieces after Labour Governments before and, for the sake of our country, we are prepared to do it again.