Queen's Speech — Debate (3rd Day)

Part of the debate – in the House of Lords at 9:01 pm on 8th December 2008.

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Photo of Lord Newby Lord Newby Spokesperson in the Lords, Treasury 9:01 pm, 8th December 2008

My Lords, the debate today has concentrated on two questions: the nature and scale of the economic problems we face, and the nature and scale of the response. The majority of the time has been spent on the second of the two questions. I intend to follow that pattern.

As for the nature and scale of the problem, slightly different views have been expressed about how we got here. To summarise, however, I think that there is agreement that we now have a major economic crisis, caused in large measure by a financial crisis. The differences expressed have been largely to do with who is to blame and how much the Americans, as opposed to the British, should bear the burden of opprobrium. Frankly, that is a second-order question. The real question is: how bad is it going to get and what are we going to do about it?

As for the scale of the problem, the Government set out in the Pre-Budget Report their estimate of how deep they expect the downturn to be. I think it fair to say that most people believe that that is an underestimate. We heard the suggestion today, for example, that GDP next year might fall by as much as 2.3 per cent, and there have been many suggestions that it will take us longer than the Government predict to see growth re-established.

To make some sense of the scale of the problem, I returned to the old adage, "Why look in the crystal ball when you can read the book?". Noble Lords have mentioned this evening a string of stark and unwelcome statistics. The 0.5 million increase in US unemployment in one month was one. Another—which I am not sure was mentioned but is equally stark in the UK—is that car sales have fallen by 37 per cent in a year. One which I found almost incredible is that energy consumption in Italy was apparently down 30 per cent last month. Those are immensely worrying figures.

Equally, we have already seen from the Pre-Budget Report how these two crises are having seriously deleterious effects on the government finances. Page 32 of the Pre-Budget Report shows that, since the Budget, the Government's cash requirements have already increased by £108 billion beyond what was envisaged at the time. A significant proportion of that has to do with recapitalising the banks and putting money into the Bradford & Bingley, but a requirement of £26 billion has been caused over that short period by what is described in the Pre-Budget Report as a weakening of the fiscal position; that is, taxes are not coming in at the rate predicted and expenditure is increasing as the automatic stabilisers come into effect. So we are undoubtedly faced with the greatest economic crisis since the Great Depression.

That requires from us a proportionate response, and noble Lords have given many reasons for doing so. In addition to the obvious moral argument for mitigating the human costs of long-term unemployment, there are the more narrow economic arguments. If companies go bust, you cannot necessarily reinvent or reinvigorate them when the upturn comes. We know very well that the longer people are out of work, the less likely it is that they will ever get work again.

I turn now to the nature and scale of the response. The elements of the response clearly include getting the banks to lend again; fiscal and monetary policy; and a raft of other issues, including the skills agenda, which have been discussed this evening. As for getting the banks lending again, we broadly welcome the Government's actions in this area. However, there are one or two further things that they could do. First, they could make better use of their leverage as part or full owners of a number of major banks. This should include appointing explicitly government directors. The noble Lord, Lord Paul, spoke about the need to have manufacturers represented at higher levels of decision-making in bank lending. Perhaps we could have one or two manufacturers among them.

Secondly, the Government need to set their strategy. Ministers have sometimes seemed to think that there is no difference between setting a strategy and deciding which individual account holder is to be given a loan or have a loan withdrawn. That is a relatively straightforward distinction and the Government should follow it. Thirdly, taking up the point made by my noble friend Lord Oakeshott, the Government should use the nationalised or part-nationalised banks to work with the Post Office as its savings products partner, rather than the Bank of Ireland. We fear that the Bank of Ireland route is likely to lead to significant difficulties down the track. Fourthly, making the Banking Code statutory, as the Government are planning, is a good idea. I share the views of the noble Lord, Lord Broers, on that. Will it be done in the current Banking Bill in your Lordships' House before it goes back to the Commons, or will a second Bill be introduced later this Session? If so, what exactly is the Government's planned timing?

The final issue is whether the Government believe that further statutory regulation is needed in corporate governance, as the noble Lord, Lord Smith, mentioned, and whether we in the UK might look again, as the noble Lord, Lord Low, implied, at least at the principles of the Glass-Steagall Act. Are the Government giving any thought to either possibility?

As for monetary policy, we on these Benches welcome the MPC's dramatic reduction in interest rates. However, there is a possibility that if prices continue to fall, we could fall into the liquidity trap of zero interest rates. In those circumstances, noble Lords on all sides of the House might surprise themselves by looking to Milton Friedman. He argued that in such circumstances a quantitative easing is needed. To put it in layman's language, he argued in favour of providing "helicopter money", whereby the Government print money and effectively drop it from the sky in order to get expenditure going. I am sorry that, in his evocation of Milton Friedman, the noble Lord, Lord Higgins, did not extend his remarks to that aspect of Friedman's thinking. If he had, he might have found himself in an unlikely alliance with the noble Lord, Lord Smith, on the appropriateness of Friedman's thought. In dealing with the kind of severe deflation we now face, we find a most surprising conjunction: we might need to bring together Friedman and Keynes in producing a comprehensive policy response.

On fiscal policy, there seems to be a near-unanimous view across the globe that a substantial and co-ordinated fiscal stimulus is needed. As noble Lords have pointed out, such a stimulus is being adopted across much of Europe and advocated on a very serious scale by President-elect Obama. There is, however, a notable exception to this consensus. The Conservative Party is not part of it. On 26 November, George Osborne in another place said that the Chancellor's plans have taken the country,

"to the edge of bankruptcy".—[Hansard, Commons, 26/11/08; col. 740.]

That is childish nonsense. He should take a leaf out of the book of an illustrious predecessor, in the shape of Harold Macmillan. In 1956, when he was Chancellor and the debt-to-GDP ratio was 146 per cent, as against the maximum of 57 per cent which the Government envisage over the next few years, Macmillan said:

"Whatever the temporary difficulties from trying to run too fast, if we stand still, we are lost".

Well, I fear that the Conservative Party in the Commons has decided to stand still, and, certainly, it looks lost.

As for the specific route that the Government have adopted to push the fiscal stimulus, in the form of the VAT reduction, I share the qualms of a number of noble Lords about its effectiveness and whether it is the best conceivable route that could have been taken. In his Statement, the Chancellor said:

"This temporary reduction is equivalent to the Government giving back some £12.5 billion to consumers to boost the economy".—[Hansard, Commons, 24/11/08; col. 495.]

However, the Pre-Budget Report makes it clear that half the increase, in real purchasing power, translates into an increased volume of spending, with the remainder used by households to bolster their finances. So even on the Government's own assumptions, only half of it will serve the purpose for which it has been introduced.

Our views are that there should be a rebalancing of the tax system, with higher rates of tax, particularly corporation tax, funding a cut in income tax for those at the bottom end of the scale. The reason for this, apart from any arguments of fairness at this moment, is that those on lower incomes have a higher propensity to consume than those on higher incomes, so a rebalancing of the tax system in itself, without an overall cost, leads to a fiscal stimulus. There is an argument for going further, but we have argued that any additional stimulus should take the form of programmes that boost investment.

The area that is crying out for investment more than any other at the moment is housing. The Government's plans to increase housing expenditure simply fail to meet the scale of the problems, particularly at a time when many housing associations are on the verge of collapse because they have entered into rather speculative deals with private sector developers who now cannot deliver. Frankly, unless the Government do significantly more than they currently intend to do on social housing, not only will they miss a major opportunity to have a real impact on a problem that has got worse and worse during the lifetime of this Government, they will also miss a major opportunity to put into employment many of those unemployed construction workers who are currently a drain rather a contributor to the economy.

Looking to the future, the Pre-Budget Report sets out how the Government envisage that they will recoup the money. Given the uncertainties, that seems an almost completely spurious exercise, looking so far into the future. Certainly, the 45 per cent tax rate looks highly unlikely to yield the funds that the Government predict for it.

I move on to one or two other points that have been raised in the debate. There has been some discussion of the global economic framework. I should like to ask the Minister in particular whether the Government are now confident that the declaration made at the end of the Washington talks that the Doha round would be concluded before Christmas is now likely to come to pass.

A number of noble Lords, including the noble Lord, Lord Bhattacharyya, the noble Baronesses, Lady Sharp and Lady Garden, and the noble Lords, Lord Rooker and Lord Layard, talked about the combination of education, innovation and science in apprenticeships, which is clearly another area of crucial importance in getting the economy moving again. I have great sympathy with the comments of the noble Lord, Lord Rooker, about the importance of science for cool professions such as fashion and motorsport. He might have added "computer games". It seems to be a major problem that the way these subjects are taught squeezes all the interest out of them. Instead of young people aged 10 or 12 being motivated to think that learning science will mean that they can do a really interesting and sexy job, they are faced with a series of bureaucratic, exam-based hurdles to get over, so any interest in science is squeezed out of them rather than enlivened.

A number of noble Lords, including the noble Lord, Lord Thomas, the right reverend Prelate the Bishop of Durham and the noble Lord, Lord Sawyer, spoke about mutuals and credit unions. I agree entirely with the comments of the noble Lord, Lord Thomas, and I hope that when we have the reform legislation on co-operatives and credit unions, we can go beyond mere technical tinkering to see what we can do in terms of regulations and, more generally, to breathe new life into the credit union network.

The coming months will see further major shocks to the economy, and some of them will be largely unexpected. From our different points in the House, we will no doubt have different policy responses. However, we welcome the fact that we now have senior Ministers in both DBERR and the Treasury in your Lordships' House, and we will welcome all opportunities to influence them as they exercise their judgment in taking us through the difficult economic times ahead.