Economy — Debate

Part of the debate – in the House of Lords at 12:00 pm on 5th February 2009.

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Photo of Lord Peston Lord Peston Labour 12:00 pm, 5th February 2009

My Lords, I thank my noble friend Lord Eatwell for introducing this debate and making such an excellent speech. I suppose by "excellent" I mean that I agree with everything that he said. To begin, I would welcome a comment from the Minister on how interest-rate policy is working or, rather, not working. Certainly, the cuts have adversely affected lenders, whose income from past savings has fallen. Equally certainly, borrowers have not gained from lower interest rates since there appear to be no funds for them to borrow in the first place. It looks as though nobody has gained. Is my noble friend able to throw any light on this?

Next, since large parts of the banking system are, to all intents and purposes, in the public sector, what influence can the Government exert on how banks behave? For example, how many non-executive directors have been sacked? What view do we take of auditors who appear not to have noticed the existence of toxic assets? Above all, the bankers, despite being the cause of the catastrophe, still seem to regard self-preservation as their priority, rather than getting the economy moving forward again. I, for one, look on with amazement as the senior bankers, who are the villains of the piece, are invited to Downing Street for consultations. Equally, given that the Monetary Policy Committee of the Bank of England was almost the last to recognise the need for expansion in macroeconomic policy, on what rational grounds can it be thought right to place banking supervision—again—under the aegis of the Bank of England?

It has been said that we need a new Maynard Keynes. We do not. As my noble friend Lord Eatwell said, all we need to do is apply the principles of economics that Keynes laid down 70 years ago. We really need a new George Orwell; only a satirist of his quality could do justice to all of this.

This brings me to straightforward economics. What I find embarrassing is the large number of economists who have learned nothing from recent events. Indeed, many academic economists are still publishing articles that prove that what has happened in the past 18 years could not possibly have happened. It is apparent to almost everybody else, when the economy is subject to a major shock and moves significantly away from full employment equilibrium, that Keynes's analysis was entirely right: the automatic path back to full employment is so slow as to be indiscernible to almost everybody. Indeed, it is so slow that it probably does not occur to them at all. That is why expansionary fiscal policy is needed and why Governments, with our own being the earliest to act, are right to adopt an expansionary fiscal approach.

Turning away from economics, I refer now to the social impact of what has been going on, by which I mean the need for fairness in our society and economy. What has been discredited, apart from some of the economics, is the trickle-down theory, which was put forward during what we are told were the good years. That is, if we support enterprise and let the rich get richer, everyone else will gain. In the US that has simply turned out to be completely untrue. The median worker in the US gained nothing over the 20 good years. Even in our economy, inequality has risen in broad terms. The time has come to call a halt and to ask how any policy intervention will affect the poorest in our society. It is as important that Ministers are obliged to make a declaration on how the poorest are affected by any policy as it is that they make a similar declaration on the human rights effects. Fairness to the poor is at least as important as human rights.

We should stop demonising single mothers. I do not doubt that children would be better off with two parents being there for them, but the children are not at fault when there is only one. Furthermore, if we are to encourage single parents to return to the labour market when the children are old enough, which is right—Orwell would really have appreciated that being a central plank of government policy when unemployment is rising at an unprecedented rate, and would have felt that it was taking satire too far—three conditions need to be met. One is that the jobs have to be there to go to; secondly, there should be incentives—namely, people should be better off by taking the job; and, thirdly, even when children are older, we need to make sure that proper arrangements exist for emergency childcare. More generally, we should compare the attitude of some people—I cannot exclude Ministers from this—to single parents who work the benefits system to their advantage with their attitude to the fat cats who use every possible means to avoid paying tax altogether. The distinction is dreadful.

On the latter, my right honourable friend the Prime Minister worked extremely hard when he was Chancellor to close tax avoidance loopholes, but he discovered that, whenever he closed one, two more sprang up. The best way to deal with this is to reverse the burden of proof when it comes to tax avoidance; namely, the avoidance scheme needs to be demonstrably legal. Until it is demonstrated as such, the full rate of tax should apply.

My main conclusion is that the Government are right to pursue an expansionary fiscal policy and deserve everybody's support for it. Things will get worse before they get better, but that is not a reason for flinching. The Government must go on acting with determination and reinforcing the policies so that they will work.