My Lords, I remind the House of my interests that are relevant to the subject, which are documented in the Register.
The UK economy is in recession, inflation has risen to more than 5 per cent, unemployment is rising, house prices are falling and repossessions are increasing. This is causing great pain to many people and households in this country. I have no wish to detract from the seriousness of the present recession, but it is important to maintain a proper perspective. The media talk of meltdown and global collapse. In my judgment, we are not entering another great depression. Business cycles are endemic to market economies; they have been documented since the mid-18th century.
The great depression of the 1930s, which followed the Wall Street collapse of 1929, was exceptional by any standards. Between 1929 and 1933, real output fell by one-third in the US and 10,000 banks went bust and, between 1931 and 1941, unemployment averaged 25 per cent. At present in Britain, unemployment is 6 per cent; if it increased to 3 million, it would represent only 10 per cent or 11 per cent. The US Federal Reserve through mismanagement reduced the money stock by one-third. At the same time, countries pursued beggar-my-neighbour policies through competitive devaluations of their currencies, the imposition of tariffs, import quotas and non-tariff barriers.
Today, the situation is entirely different. The UK and US Governments have taken decisive action to deal with the banking crisis and it is clear that the action has had an impact. I applaud the Government for that. The Bank of England has accepted its role in maintaining financial stability. Central banks have acted in a co-ordinated manner by providing increased liquidity to the banking system. Countries are not pursuing beggar-my-neighbour policies. President Bush has called a meeting for later this month—the so-called Bretton Woods 2 meeting. I share the scepticism of my noble friend Lord Lawson about the outcome but, on the other hand, the meeting will consider a more appropriate regulatory framework.
All those things should give us cause for hope, even in this difficult situation, especially when one compares it to the early 1990s, when inflation reached 8.5 per cent, mortgage rates were 16 per cent—they are now just above 6 per cent—and we were constrained in what we could do by our membership of the ERM. Although the present recession is painful, we have every reason to believe that we will avoid serious deflation and anything approaching a great depression.
In these circumstances, what should the Government and the Bank of England do to try to reduce the scale of the recession without creating conditions for rising inflation in a few years? I suggest three measures. First, the Bank of England must cut interest rates now. This is a crisis and we need bold action. In my judgment, there should later this week be a cut of at least 1 per cent. At the same time, the Bank is right to be concerned about future inflation, because of the explosion that we have seen and are seeing in public borrowing. At some future date, the Bank will come under great criticism, because it will wish to protect the currency, and the Government will be forced to take the difficult decision to cut public spending, to raise taxes or to abandon its inflation target. That is an issue for the future. For the present, it is imperative that we cut taxes.
The second measure relates to the banks. The noble Lord, Lord Forsyth, made an eloquent statement on this, as did other noble Lords. The Government were absolutely right to take drastic action last month to kill a banking panic. It was right that, when the Government rescued the banks, the shareholders should have borne a significant cost. However, I ask the Minister whether the draconian terms imposed on the banks at a time of financial emergency should be revised. The Government stopped the banking panic. The challenge is how to get bank lending to small businesses going again, as the noble Lord, Lord Bilimoria, reminded us. Asking the banks to lend is fine, but the more that you can align their commercial interests with government policy, the better. In my judgment, that means allowing them to pay dividends and removing many of the controls that are imposed on them. That, I think, would allow them to take better decisions.
Thirdly, there is Treasury policy. Spending and borrowing will clearly rise in the recession. There is an urgent need to get back confidence and get money back into people's pockets. I doubt whether infrastructure projects are really appropriate, due to the planning, consultation and administration involved, but it seems to me that one thing could be done—whether within the existing framework or as a separate, almost Keynesian, measure—which is to cut taxes and, in particular, national insurance. National insurance is a tax on employment: it hits employers and employees. At a time when unemployment is rising, the announcement that rates would be cut in the Budget would give business one less reason to shed labour and employees one more reason for reducing expenditure less.
In conclusion, we face a serious recession but not, I believe, a great depression. We must all, including banks, take responsibility for our part in creating it, but if the Bank of England and the Government act now, I believe that they can reduce the severity of the recession to the benefit of the whole nation.