Economy — Debate

Part of the debate – in the House of Lords at 12:55 pm on 7th May 2009.

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Photo of Lord Lamont of Lerwick Lord Lamont of Lerwick Conservative 12:55 pm, 7th May 2009

My Lords, I congratulate my noble friend Lord Forsyth on introducing this debate and on his excellent speech. I do not think that anyone could have envied the Chancellor of the Exchequer in introducing this Budget. His situation was not one of his own making, but I thought that he delivered his speech with commendable stoicism considering the position in which he found himself. Before the Budget, I said that I hoped it would be a Darling and not a Brown Budget. Unfortunately, I think that it was a Brown one, and highly cynical at that. Nowhere is that cynicism more demonstrated than in the decision to reintroduce the 50 per cent rate of income tax—not just the measure, but also its timing.

The Government's whole argument has been, "You can't have tax increases now. You can't have spending cuts now. In the middle of a recession it's wrong to do that". But, somehow, it is different when it comes to the 50 per cent rate of income tax. No doubt, populist measures and attempts to attack the better-off are a useful distraction, but they will hardly help Britain to attract inward investment, headquarters and entrepreneurs into this country.

My main criticism of the Budget would be that it did not show a clear path to restoring the national finances. The public finance figures revealed in the Budget were a horror story with the gargantuan deficit. I would suggest that the most alarming figure was not the 12.4 per cent of GDP deficit, but, as my noble friend Lord Lawson pointed out, the figure for the structural deficit—the 9.8 per cent of GDP. That huge figure shows that a large part of the deficit was not related to the downturn and not going to come back just with the recovery of the economy. By itself, that figure was a condemnation of the fiscal rules the Government have practised in the past and of their own overspending.

The Government now make attempts to minimise the importance of the total stock of debt. The noble Lord, Lord Eatwell, joined in that argument. But if debt does not matter, it is rather surprising that the Government for so long tried to adhere to a rule limiting debt to 40 per cent of GDP. I disagree with the noble Lord, Lord Eatwell. The deterioration in the level of debt is alarming and matters for two reasons. First, the burden of debt means that more resources are devoted to interest payments, some of the money going to foreigners, crowding out private investment. Less is available for spending on programmes. Secondly, if rates rise, interest becomes more expensive. If the Government do not move to deal with that situation, rates may rise further and the Government may soon find themselves in a debt trap.

The risks are there. As I know from the previous recession, the peak of the deficit came one year after it had ended, so it is perfectly possible that the figures that the Chancellor revealed, shocking as they were, still may not be the worst figures. Worse figures may appear later this year or in the Budget next year. The figures disclosed by the Chancellor are really an admission that the growth in recent years, about which there has been so much boasting, has been illusory. One commentator at the FT wrote that in the years since 2000 everything was oversized and GDP became inflated by the ability of debt to expropriate tomorrow's expenditure. He said that it was as if we had made Bernie Madoff responsible for the national accounts.

The Prime Minister has developed some sophisticated rationale for saying that this is not a return to boom and bust, although it appears like that to everyone else. It is true that this is an international crisis, but it is a crisis that was co-authored by America and Britain. No other major country has had banking crises as big as those in the United States and Britain. That is clearly shown by the IMF figures for the projected cost of bank rescues: 13 per cent of GDP in the United States, 9 per cent of GDP in the United Kingdom, and both far bigger than in other countries. The Government like to point out that in Canada, Italy, Japan and China, exports and manufacturing are falling faster than here, but those countries contributed nothing to the banking crisis; they did not have banking crises. They are the victims of our retrenchment, our deleveraging and our debt deflation.

My major concern remains the banking system and the fear that it will be a drag on the economy. The Government have rescued the banks and I pay tribute to the noble Lord, Lord Myners, whose skills and knowledge of this sector have been great assets, but so far we have been dealing with the problems of the boom. The problems of the recession are only just beginning; the deleveraging is only just beginning. The IMF points out that debts to be written off in Europe and the United Kingdom have not been written off as quickly as they have in the United States and casts doubt on the ability of the banks to raise new capital in the private markets. The OECD points out that recessions from financial crises are usually very prolonged and severe, and so too are globally synchronised recessions. We have both, and for that reason we face a long recession and, when it ends, a weak recovery. We must never get into this situation again. We need to pay more attention to borrowing, both public and private. Above all, we need a complete change of culture to one that encourages much more saving. That change in culture is going to depend on a change in government.