G20: Finance Ministers Meeting — Statement

– in the House of Lords at 6:33 pm on 16th March 2009.

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Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury 6:33 pm, 16th March 2009

My Lords, with the leave of the House, I will now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer on the G20 Finance Ministers' meeting. The Statement is as follows.

"Mr Speaker, with permission, I would like to make a Statement about the meeting of G20 Finance Ministers and central bank governors held on Friday and Saturday, to prepare for the meeting of leaders and Finance Ministers in London next month.

Since November, when the G20 last met in Washington, we have seen a collapse in international trade. This is a much deeper and more widespread economic downturn, with every country in the world affected. In October, the IMF was forecasting world growth this year of 3 per cent. Now it predicts negative global growth for first time in 60 years. At the meeting, it was clear that every G20 country was determined to act together to restore growth, take steps to restore bank lending and prepare for recovery. There was unanimous recognition, too, that we must take action to help emerging and developing economies deal with this global downturn.

We agreed on the following. First, to support our economies, we agreed that we must take whatever action is necessary, for as long as it is necessary, to boost demand and support jobs. Many countries have already taken substantial steps to support their economies. The IMF calculates that in the US this year's fiscal stimulus is worth 3.5 per cent of GDP; in Germany it is worth 3.2 per cent; in China and France it is worth 2.6 per cent; and here our fiscal stimulus is 3.4 per cent of the economy. We also agreed that we should be ready to do more if necessary—not all countries in the same way or at the same time, but whatever is needed to deal with today's problems and prepare for recovery.

Secondly, to support people and businesses, it was recognised that it is essential to restore bank lending. It was agreed that countries need to consider the full range of options available, including liquidity support, recapitalisation and dealing with assets for which there is no market or whose value has fallen significantly. In dealing with these assets—something that we, America and other countries are already doing—there is no single solution or overnight fix, but we have developed a common framework so that countries can use the full range of options when dealing with the immediate problems in their banking systems.

Thirdly, on monetary policy, we welcomed recent reductions in interest rates and G20 central bank governors made a commitment to maintain lower rates for as long as it is needed. This is important as it sends a clear signal that central banks all over the world will keep interest rates at low levels to support economic recovery. It was agreed that central banks can also use measures other than interest rates; that is why the Bank of England, the US Federal Reserve and the Swiss Central Bank are currently putting money into the economy through their credit easing programmes.

It was also agreed that financial supervisory and regulatory regimes need to be strengthened both nationally and internationally. There is a significant consensus emerging, here and across the world, that we need to reform the system of banking regulation. That is why I asked Lord Turner, when he became chairman of the Financial Services Authority in the autumn, to come forward with recommendations on how to strengthen our regulatory regime. He will publish his proposals this week and I expect his overview of the system to cover four broad themes: first, capital and liquidity rules; secondly, remuneration and the links to risk management; thirdly, how to better anticipate risks to the wider economy presented by problems in the financial sector; fourthly, rather than abolishing our single regulator, how the FSA can be strengthened to regulate large complex institutions.

It was clear at the G20 meeting that financial regulation in most countries needs strengthening. In particular, all important financial institutions should be regulated, including those hedge funds that are systemically important. Wider regulation must be complemented by strengthened prudential oversight, by looking not only at individual banks but at how they contribute to wider risks to the economy. In future, banks throughout the world must have sufficient reserves at all times, and regulators need powers to ensure that banks do not overextend themselves.

We must also improve international co-operation, building on the 25 supervisory colleges set up since last year to supervise banks that trade across the world. We also need a joint international early warning system that will enable us to deal with emerging problems sooner. That means working with the European Union, too, recognising the need for co-operation which we have been demanding for some time while at the same time recognising the essential role of national regulators.

We also agreed a range of other measures on international banking supervision: all credit rating agencies need to be regulated; there needs to be full transparency of off-balance sheet exposures; accounting standards will need to improve; regulation will cover payment and bonus systems; and we agreed that tax havens must be opened up—we welcomed recent agreements by Switzerland, Hong Kong, Andorra and Singapore to share information according to OECD guidelines. Here at home, we expect banks to comply fully with their tax obligations. So I can tell the House that I have asked HM Revenue and Customs to publish shortly a draft code of practice on taxation for the banking sector so that banks comply not just with the letter but with the spirit of the law.

The World Bank currently estimates that 129 developing countries, many in sub-Saharan Africa, are facing financing shortfalls, and up to 90 million more people could fall into poverty as a result of this global crisis. We agreed that we must minimise the impact of this on developing and emerging economies, many of which—India, Indonesia, Turkey and South Africa, for example—were represented at the G20. We agreed that this would require a very substantial increase in resources for the IMF and the development banks having the capital that they need. Agreement on total levels of support will need to be reached next month.

We remain committed to fighting protectionism and maintaining open trade and investment. That is essential if we are to avoid a prolonged downturn. It is also imperative that the international institutions reflect the reality of the day: the IMF and the World Bank were set up 60 years ago. Once, when we talked about the global economy, we meant the West and Japan, but not any more. China, for example, is already the third largest economy in the world. Emerging and developing countries need to be at the table too, so we agreed that the next review of IMF representation should be concluded by January 2011, while World Bank reform must be completed by next spring. We welcomed the recent decision to extend the Financial Stability Forum to cover all G20 member countries.

The G20 leaders and Finance Ministers will meet again in three weeks' time. We must seize the moment to make a real difference: supporting our economies, dealing with the banks' problems and preparing for recovery. Ours must be a time for renewal to tackle the downturn and build a more sustainable future. I commend this Statement to the House".

That concludes my right honourable friend's Statement.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury 6:43 pm, 16th March 2009

My Lords, I thank the Minister for repeating the Statement made in another place. A good subtitle for the Statement would be "Much Ado about Nothing".

The G20 communiqué is full of platitudes, and the Chancellor's Statement followed suit. Ever since the Washington summit last year, the Government have been hyping the fact that they now chair the G20. Real action was promised, but they forgot the inconvenient truth that summits and preparatory meetings rarely produce anything concrete, which is why they have been desperately trying to find a reverse gear in recent days.

Only last month, the Prime Minister was quoted as saying:

"The whole point of the G20 is that the whole world must take action to deal with a global problem".

By last weekend, however, the Chancellor was talking only about,

"pointing in the same direction", and the Prime Minister's official spokesman described,

"the world ... coming together to deal with the common challenges".

That is not exactly action-oriented.

The communiqué issued on Saturday started off by bragging:

"We have taken decisive, coordinated and comprehensive action to boost demand and jobs".

This demonstrates an extraordinary lack of awareness of what the economy feels like to the people around the world, including in the UK, who are still losing their jobs at unprecedented rates.

In keeping with the Prime Minister's absolute refusal to accept any measure of blame for what has happened in the UK economy, there was not even a collective "sorry" anywhere in the Statement. Surely when they all get together, they could muster up a joint apology. How out of touch can the world's finance leaders get?

The communiqué goes on to say that the G20 are also,

"prepared to take whatever action is necessary until growth is restored".

What does that mean? It is certainly not the co-ordinated fiscal stimulus which the Prime Minister said last month would be a feature of the G20 meeting. We know that France and Germany have ganged up to prevent that, even if it were ever a real possibility.

Closer to home, will the Minister explain how the Statement puts the UK's existing fiscal stimulus at 3.4 per cent of GDP, but Parliament was told that it was only 1 per cent at the time of the PBR? There are rumours of the Chancellor coming around to our view that a further attempt at fiscal stimulus would be reckless, given the state of our economy, although it is far from clear that he has yet convinced the man who actually got us into this mess. Will the Minister confirm that the Government are now taking to heart the need for the fiscal sustainability to which the communiqué specifically refers?

The communiqué said that the G20 was committed,

"to fight all forms of protectionism and maintain open trade and investment".

We fully support that, but it has to be more than words. Only last November, the G20 committed itself to rejecting protectionism, and specifically to a 12-month ban on raising new trade barriers. India went home and increased tariffs on soya beans, the US introduced its Buy American programme, and our own Prime Minister talked about "British jobs for British workers". Does the Minister think that there is any hope of resurrecting the Doha round? As a minimum, does he expect the G20 to go beyond words and produce some genuine bankable commitment to avoiding further protectionism?

The second element of the communiqué was the priority to restore lending. We have been saying for a long time that credit is the most important issue to tackle in our own economy. The Government have regularly been grabbing headlines with various new plans to restore the flow of credit, but they have delivered little. How many mortgage borrowers have yet benefited from the mortgage protection scheme that was announced in December? None has yet benefited. How many businesses have benefited from the scheme to help the car industry, which was announced in January, or the working capital scheme? None has benefited. Whatever the G20 ends up saying about restoring lending, the plain fact is that nothing will help the UK economy unless our own Government turn promises into reality. We have consistently advocated a simple and bold national loan guarantee scheme. When will the Government see the light on this?

Much has been made of the apparent agreement to increase the funds available to the IMF "very substantially", but what does this actually mean? The Chancellor has already said that he did not even try to reach agreement on a number. The smaller countries have said that they will not contribute until they get more influence, and that is not scheduled to happen before 2011. Can the Minister give any more detail on this "very substantial" increase in funds, which apparently will be agreed in detail in a couple of weeks' time, and can he say what the impact will be on the UK's finances?

The communiqué committed the G20 to getting on top of the pro-cyclicality bias of Basel 2, which we have advocated for a long time. Yet again, however, there is neither timetable nor detail. We have yet to be convinced that there is a real consensus on this issue. Can the Minister say whether the UK, as one of the countries with banks that are very large compared with the size of our economy, will proceed whatever the state of international agreement? If there continues to be international foot-dragging, will we address the issues? There are many concepts in the communiqué that we support, such as the need for better early warning systems; but again, there is so little detail that we are left wondering whether anything will really change.

Lastly, the Chancellor's Statement included something which was not in the weekend communiqué—namely, a code of practice for taxation in the banking sector to make banks comply with the spirit of tax law. How will this work in practice? I believe that taxation needs to be imposed by clear law. We do not have purposive legislation. How can a code of practice alter that? Our tax system is so complex—a point which we have continually pressed—that it is difficult to see where the spirit really is. But perhaps that is just another mirror of the G20 communiqué; that is, words and political gestures which conceal the fact that nothing much will happen.

Photo of Lord Newby Lord Newby Spokesperson for the Treasury 6:50 pm, 16th March 2009

My Lords, I am grateful to the Minister for repeating the Statement. I have written as my opening comment that it is very easy to be sceptical about G20 meetings and the noble Baroness has made that point in spades. But it seems to me that whatever one's doubts about what flows from these meetings, the best hope of avoiding the kind of depression that we saw in the 1930s is that we have a G20-type process and other intergovernmental-type processes taking place, which means that any Finance Minister or Prime Minister who goes outwith the agreements made one to the next at the very least has to justify what they have been doing to their peers. In the absence of any external force, that seems to be one of the most persuasive ways of getting people to toe the line.

Let us take, for example, almost the first statement in the communiqué, to which the noble Baroness referred. It states:

"We commit to fight all forms of protectionism and maintain open trade and investment".

That would not have been said, and was not said, in the 1930s, which is one of the main reasons why the depression lasted as long as it did. Okay, the Indians have put a tariff on soya beans, which is somewhat different from a tit-for-tat protectionist war. I firmly believe that this process, flawed as it is—anyone who has ever had any negotiations internationally knows the force of them—offers not necessarily the perfect but the best opportunity for avoiding the worst of a prolonged global recession.

However, it has been suggested, unkindly perhaps, that one reason why the Prime Minister puts so much emphasis on international initiatives is that it is a displacement activity from looking at some of the problems that need dealing with urgently at home. Certainly, on looking at the Prime Minister's track record on dealing with tax havens, which is 12 years of almost total inactivity followed by the enthusiasm of the convert, one can see why people might think that he is looking externally for that kind of reason.

However, the Government need to take further action urgently on a number of things at home. First, on the crackdown on the tax avoidance of banks, the noble Baroness referred to the wonderful phrase in the Statement that HMRC is to produce a code of conduct to ensure that banks comply with the spirit as well as the letter of the law. She suggested that one of the reasons why these poor chaps have such difficulty in knowing what the spirit of the law is is that the law is more complicated. Did she read yesterday's Sunday Times about the way in which Barclays has deliberately sought to avoid hundreds of million of pounds of tax? It was not because it did not understand the law, or thought that the law was too complex and the poor souls were confused; it was because it knew that it could make a lot of money and did so assiduously and very successfully. How confident is the Minister that the banks now owned by the Government have stopped this kind of tax avoidance activity? If he is not confident, will he ensure that they are instructed to stop? Will the Minister assure the House that Barclays will not receive any help under the asset protection scheme until it has given a categoric assurance that all the tax avoidance activities exposed at the weekend have ceased?

The Government have accepted the need for reform of banking regulation, particularly in respect of large, complex institutions, and we should bear in mind that three of the five biggest banks in the world are now British. In view of the growing consensus in support of this, will the Minister revisit the idea of introducing at least a modified version of the Glass-Steagall Act into the UK so that we can clearly segregate off the casino-type activities of the investment banks from the straightforward deposit-taking activities of the retail banks? There is no doubt that the majority of people want a straightforward bank that does not do that kind of thing. It is now virtually impossible, unless one goes to a building society, to find a bank which fits that definition.

There are two bland statements in the communiqué, which mean something or nothing. Perhaps the Minister will help us. It says that credit rating agencies are to be regulated and registered. Will that be by means of national regulators alone or will there be some kind of international framework for them? We then have a wonderful statement:

"Accounting standards will need to improve".

I am sure that accounting standards always need to improve. What do the Government have in mind and when might they improve?

On global matters, the IMF and a number of points made by the noble Baroness, the Statement says that significant additional funding will be going into the IMF. I think everyone can see why that might be required at this point. But it is strange that while numbers have been floated in the press, the communiqué was completely silent on them. Does the Minister have any idea of when a decision will be taken on the scale of that increase? Finally, why will it take until January 2011 to complete the review of IMF quotas? One would have thought that it was a mathematical exercise of working out the current size of the various countries' economies within the global marketplace and accepting that the quotas should reflect them. It seems bizarre, perverse and unacceptable that we should have to wait nearly another two years to do that straightforward exercise.

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury 6:57 pm, 16th March 2009

My Lords, "Much Ado About Nothing" says the noble Baroness, Lady Noakes. It is quite the contrary in my view. A considerable amount has been achieved over a short period, which will have a very real impact on the lives of people here and throughout the developed and developing world. I salute the Chancellor of the Exchequer, the other Finance Ministers and the central bank governors for a thoroughly industrious and worthwhile outcome from a weekend of work here in the United Kingdom.

The report, far from achieving little, is full of initiatives. There was significant agreement about the importance of fiscal stimulus and recognition that that is critical to driving the world out of this global recession, but also recognition that each nation has its own issues in terms of fiscal management and that a single solution does not fit all. It will depend on the precise circumstances of the fiscal regime in each country, but the key thing is to have a continued, concerted and effective fiscal stimulus that provides demand from the public sector to absorb the capacity which is no longer being used because of the crisis of confidence in the private sector. There will be detailed reviews of fiscal stimulus and calls to report to the G20 and the IMF on the actions that are being taken globally on fiscal stimulus in recognition that this needs to be done by nearly all countries if we are to pull the world economy out of this global downturn. Similarly, there are clear commitments on monetary policy from central bank governors throughout the G20 countries: to keep interest rates low for as long as necessary and—to follow the lead set by the United States of America and the United Kingdom—to consider and, if necessary, implement credit and quantitative easing, with or without complex formulae.

There was also a series of co-ordinated actions on regulatory issues. On the macro front, there is reform to the IMF, enlargement of the financial stability forum—a small, under-resourced unit that has achieved a great deal and which I, and others, believe can play an important role in future—and a commitment from the full G20 group to root out the deleterious effect of tax havens. On the micro level, much was achieved through agreement: on bank lending ratios, on liquidity management in addition to capital management—a clear deficiency of the Basel approach to managing bank capital—and on embracing within the regulatory regime the non-banks that have had such a damaging effect on the downturn of the global economy. I refer to the shadow banking sector— organisations that looked and behaved like banks but were not regulated like banks. Clearly, there was also agreement that this is a real global challenge, not one linked to a few countries but, rather, one which the world has to unite behind to find solutions.

The noble Baroness said that she is picking up some suggestions that the Chancellor is now of the view that further attempts at fiscal stimulus would be reckless; we shall await the judgments he reaches on that in the Budget, but whatever they are, we are committed to sustainable fiscal management. That is why we have taken the quite extraordinary step of spelling out changes that will be introduced once the economy is recovering in terms of slowing the pace of growth in public expenditure and identifying tax increases that will then be introduced. There is a clear statement on protectionism, which I welcome. As the noble Lord, Lord Newby, said, it is important that that comes at the top of the G20 communiqué.

The noble Baroness, Lady Noakes, said that people have not benefited from car and mortgage schemes. Goodness me: the fiscal stimulus has been very significant. The noble Baroness also asked, on the mathematics, why the figure given by the Chancellor differs from the IMF calculation. That is because the IMF includes the fiscal stabilisers in its calculation of 3.4 per cent. As we have previously discussed in this House, the UK economy has some of the world's most powerful fiscal stabilisers, as a consequence of our very real programmes to support those who find themselves in need during an economic downturn. The car industry and those borrowing for house purchases are benefiting from the fiscal stimulus, from a good and sensible monetary policy introduced and maintained by an independent Monetary Policy Committee, and as a consequence of our support for banks—through capital, through funding and liquidity and, now, through the asset protection scheme. I have already praised the comments on protectionism made by the noble Lord, Lord Newby. His observations about the need to avoid a move toward protectionism are absolutely right, and the Government clearly share that concern.

Regarding the taxation of banks, it would probably be inappropriate for me to comment in detail on allegations made in yesterday's Sunday Times in connection with Barclays¸ but in his Statement today the Chancellor was absolutely right to make clear the spirit that banks are required to recognise. In my view, there is no difficulty about that spirit; banks, and all corporations, must behave as responsible members of society and make the contribution through taxes that we expect them to. Quite frankly, some schemes and structures that banks and other companies have pursued do not pass the "Can I look at myself in the mirror?" test, being the behaviours of people acting in a way that would command the respect of their peers and of others in society.

The noble Lord, Lord Newby, also asked about Glass-Steagal. My own sense is that the report by the noble Lord, Lord Turner, which we are expecting, and other thinking on bank regulation, will mean that we will, effectively, see a move back to more specialist institutions. The cost of capital being placed behind the proprietary dealing, derivative and exotic trading sides of banks has been far too low in the past. We need to put much more significant capital and liquidity requirements behind those activities, which will have the impact of dampening down their scale. I, for one, will have no discomfort with that. The noble Lord also asked about credit rating agencies, and who will regulate them. I must be absolutely frank; I am limited to the G20 communiqué and while it is, as I have said, a wonderful document of considerable achievement it nevertheless asks a number of questions. That detail will, no doubt, be provided in due course, as will the matter of improving accounting practices. We can be perfectly frank, however; the failure to incorporate into banks their off balance sheet activities and the impact of market-to-market will, I imagine, be two issues that the accounting profession will be working to address.

Finally, the noble Lord asked about IMF quotas. I am sure that he is, in some ways, right to say that we could all make a simple review, agree it on the back of a menu and sign up for it at the end of the dinner. I suspect that people are more delicate about those issues and that it will take a little longer, but spring 2011 is a target date for completing the review. With good will, perhaps an earlier date can be achieved.

Photo of Lord Soley Lord Soley Labour 7:07 pm, 16th March 2009

My Lords, my noble friend the Minister put considerable emphasis on the banks and responded in even more detail to the two Front Benches. I welcome that, but does he agree that, since this crisis started in the banks and the finance industry, we ought to start looking at the possibility of putting limits on the leverage ratios of banks? That seems to be an important factor, and one almost implied within what my noble friend said.

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, my noble friend Lord Lea has also raised a Question in the past about leverage ratios. Although, in answering his Question, I said they were a somewhat blunt instrument, I find myself increasingly persuaded that blunt instruments have a role in regulating banking activity. As such, leverage ratios may well have a part to play in future bank regulation, here and elsewhere. I shall be interested in whether the noble Lord, Lord Turner, has any views on that when he publishes his report later this week.

Photo of Lord Jay of Ewelme Lord Jay of Ewelme Crossbench

My Lords, I welcome the Statement from the Minister and the emergence of the G20—not just at Finance Minister level but at Heads of Government level—as a more representative body for handling global issues than the G8, which I hope it will, in time, replace. However, one glaring defect of the G20 is that it has no direct representative of the world's poorest countries, particularly those of sub-Saharan Africa. Can the Minister say a little more about the measures that may be taken at the G20 summit next month to ensure that the poorest countries, and the most vulnerable people within them, will not suffer from the implications of the present financial crisis?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, I agree with the comments of the noble Lord, Lord Jay, about the G20 becoming a more significant grouping. It has been a long time arriving, but it offers some real advantages over the various other smaller "G" groups that we have lived with in the past. It is more worthy as a consequence of being representative of a more diverse set of economies. Indeed, the opportunity that the G20 provides to harness the energy and commitment of a broader group can only be good for the world.

I share the noble Lord's concern about the world's poorest. That was clearly covered in the G20 communiqué and I know that it will feature on the agenda of the meeting to be held in London at the beginning of April. Our own Prime Minister is particularly concerned about the economies and people who are most vulnerable as a consequence of the downturn. We will make representations in the G20 to ensure that the needs of those in sub-Saharan Africa and elsewhere are not overlooked during this challenging global crisis.

Photo of Lord Higgins Lord Higgins Conservative

My Lords, the communiqué appears to give a general approval to a continuing regime of very low interest rates but, if we are to increase bank lending, we have to encourage savings and deposits. The reality of the situation is that there is no point in having a low price for money if in fact you do not have a supply of it. At some stage we will have to consider whether pursuing the policy of low interest rates, when carried to extremes as it has been, is really the right thing to do.

I have another point. There is a crucial difference between tax evasion, which is illegal, and tax avoidance, which is legal—I am glad to see that a former Financial Secretary to the Treasury on the Cross Benches agrees with me. If we blur that distinction, it would be very dangerous indeed. If the Government do not like what a particular taxpayer is doing, the right solution is to legislate. It is completely wrong to say, "We will introduce a code of practice", because that leaves the directors of a company in the dark as to whether they are doing the best thing for their shareholders. They cannot suddenly say, "We are not going to do what is best for our shareholders". They can go on to do something that is entirely legal and create a situation where the Government have to rely on the spirit of the tax system. However, the tax system does not have a spirit and does not have a soul. What we have is taxation law.

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, the noble Lord, Lord Higgins, has correctly identified the Augustinian position that we find ourselves in globally in connection with both fiscal and interest rate policy. The fiscal deficits being run across the world at the moment are not sustainable in the long term, which is why the G20 communiqué makes it very clear that there will come a time when we have to move towards a more sustainable position. The same clearly applies to interest rates. At the moment, with a low risk of inflation, interest rates can be sensibly held at these levels. In real terms, however, if the RPI goes into the negative soon, one could argue that real interest rates are still high by comparison with various periods in the past.

The noble Lord has made informed and concise observations about tax. In some ways I wish that tax did have a spirit, but I take his advice in that respect. There is a clear difference between tax evasion and tax avoidance and we shall see whether a code is helpful in guiding the policies of companies. There is a dilemma. The boards of directors of companies are clearly charged with managing the activities of their businesses in the best interests of their shareholders, and tax is in some respects a cost that they should seek to mitigate in so doing. Indeed, I have been familiar with that in my own business career. However, my experience is that the good boards on which I have sat have always tended to hold an annual review of tax strategy and through that have sought to determine how far they would go in aggressive tax management. I believe that good companies—those that are respected members of the community—say, "This far and no further. This structure is so complicated and devoid of any commercial reality or merit, would be so exposed to ridicule and would cause such reputational damage that we will not go beyond that point". A code to help and guide thinking in that respect is well worth a try.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, spurred on by my noble friend's kind remarks a few moments ago, perhaps I may take the opportunity of airing another bee in my bonnet. The third paragraph of the communiqué concerns the reputation of economists and economic forecasting. Is it not astonishing that side by side with the sins of bankers and the maestros of new financial instruments, we had a forecast last October that growth would be at 3 per cent, with which, like the Gadarene swine, all the world's economists—the Bank of England, financial institutions, the Bank of Tokyo—agreed? Now growth is in the negative. Is there not something that needs to be looked into in the model of economic forecasting used around the world whereby everyone says, "Well, we have to stay in line with what the Bank of England and someone in the Financial Times has said", when they are all up the pole? Could not an inquiry be made into the characteristics of the internal workings of the City and the financial system that made all these economists march over the edge of the cliff together?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, perish the thought that my noble friend Lord Lea of Crondall would invite me to defend economists as a profession. However, my own experience in business suggests that economists are rather good at extrapolating trends and factoring in modest changes in the delta but are hopeless at forecasting inflection points. That is true of economists whether they are operating in commercial organisations, international agencies or academia. The answer to that lies in the fact that human behaviour goes beyond their modelling ability. Their lack of capacity to capture fear as the reverse of the exuberance that they also failed to recognise in the previous strong global economy is a real limitation. I think that economists' forecasts are helpful, but they should always be treated with a high degree of scepticism. I have always been much attracted to the Bank of England's use of fan diagrams to indicate not only a central expectation of certain important metrics but also a spread of decile expectations to give a sense of whether it has a high degree of confidence and certainty about its forecasts.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

My Lords, I hope that the Minister will be able to help me and, I guess, quite a number of other people in the country. If, as the chairman of the FSA, the former president of the French central bank and others who have produced reports say, the fundamental cause of the current crisis was interest rates being held too low, an expansion of monetary policy, excessive debt, excessive borrowing and people spending beyond their means, how can it be that more borrowing and lower interest rates are part of the solution and not part of the problem? Do the Government take no responsibility for having held down interest rates? As far as gearing and excessive debt are concerned, were their policies—for example, cutting the effective rate of corporation tax to 10 per cent for private equity and others—not partly responsible for this? Would not the Government have more credibility at these summits if they were to acknowledge the error of their ways and the part that they played in getting us into this mess? Would that not be the way to achieve any recognition of their abilities to get us out of this mess?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, I have seen no real evidence that the people identified by the noble Lord, Lord Forsyth of Drumlean, said that monetary policy was the root cause of the global crisis. There is much more evidence that people whose views one respects in this area recognise that global imbalances were the core source of the problem. Global imbalances as a consequence of the high productivity of developing nations, together with their low propensity to consume, coming after the Asian banking crisis at the end of the previous millennium, meant that large credit balances were produced in the developing world, which fed the insatiable demand for products produced by the developing world. The developed world manifested a sense of, "I must have it and I must have it now and, if necessary, I will borrow", and the large global imbalances meant that it was possible for people to borrow on what appeared to them to be attractive terms. This was not monetary policy; this was a consequence of trade imbalances.

As to admissions for failure, it must be abundantly clear from the G20 communiqué that this is a global problem and has nothing to do with the UK alone; indeed, our experience is being shared by many other countries. We are committed to working with other countries in the G20 to address these issues and to ensure that we minimise the damage being done by this global crisis.

Photo of Lord Hannay of Chiswick Lord Hannay of Chiswick Crossbench

My Lords, I support what the Minister said about protectionism and trade policy and, indeed, I support the very good article that the noble Lord, Lord Mandelson, put in the Times this morning on that subject, but does the Minister accept that there is a real credibility problem? In November, as the noble Baroness said, the G20 Prime Ministers committed themselves strongly to avoiding protectionism and called for an early meeting of Ministers to complete the Doha round. Alas, the meeting of Ministers never took place and the pledge to avoid all protectionist measures was honoured as much in the breach as in the observance. There is a real credibility problem if the best that can be done in April is just more warm words about trade and resisting protectionism and no specifics of any kind. Is there any possibility of getting some kind of monitoring mechanism that holds the G20 to its statements about avoiding protectionism? Is there any prospect of a firm sense of direction about the rather rudderless Doha round, whose revival is, I think—and I imagine from what he said that the Minister would think—is an absolutely necessary part of the revival of the world economy?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, I, too, enjoyed reading my noble friend's article in the Times this morning. The noble Lord, Lord Hannay, is right to draw attention to the arguments that my noble friend made in that article and in other statements that he has made about his personal commitment to the Doha round. I anticipate that this item will be on the agenda for the G20 meeting in London in three weeks' time. At their meeting over the weekend, the Finance Ministers reviewed the progress that had been made in the commitments to address the risk of protectionism and concluded that, on the whole, good progress had been made. However, insidious forms of protectionism are beginning to creep in and we need to be alert to them. My right honourable friend the Prime Minister will take encouragement and strength from the observation of the noble Lord, Lord Hannay, in respect of the need to be vigilant in addressing the risks of protectionism.

Photo of Lord Elystan-Morgan Lord Elystan-Morgan Crossbench

My Lords, I invite the Minister to return to the point raised by the noble Lord, Lord Higgins, in relation to tax avoidance and evasion. The Minister will recollect that the words, "Evasion is unlawful, avoidance is lawful", were spoken by the greatest of all tax lawyers, Lord Merriman. While appreciating as a moral precept that both are to be condemned, can the Minister place himself in the position of a trustee who is responsible for the expenditure of millions of pounds in regard to his beneficiaries every year and is seeking the advice of learned counsel or solicitors as to whether he should indulge in a scheme that is an artificiality—not a culpable transaction, not something that smells, but a clear artificiality? Does the Minister say that artificialities are to be regarded as evasions and therefore criminal? Or will those remain and what he is really attacking is the grey area that is near to evasion?

Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury

My Lords, I have already touched on this point. I do not think that, in practice, there is a clear point at which most boards or trustees can say that that is the end of avoidance and this is the beginning of evasion, not least because many of these issues would need to be tested in a court of law. My experience is that companies that have a responsible approach to tax management build into their policies a statement that they will not use strategies that they believe are likely to be challenged by the Inland Revenue. They will also take full advantage of the facility that the Government have established for companies to discuss tax strategies with the Inland Revenue and to form a view with it on whether the tax strategy is acceptable.

I believe that there is a good possibility of a code being effective; it is certainly worth trying. However, I also recognise that there issues that HMRC will need to continue to develop in order to ensure more clarity. HMRC will need to be alert to the fact that innovative and ingenious schemes that seek to undermine the fiscal threshold will always be developed. This is a battle that may never end but it is one in which we should use as wide a range of instruments as possible. Morality plays an important part in this process. Companies that engage in wholly artificial structures, often involving dozens of trusts, companies and Anstalts, in order to avoid tax need to say, "How do I look to those in my society? Can I defend the fact that these strategies are placing at risk important programmes?".