My Lords, this has been a very good debate about what I found the profoundly depressing event that was yesterday's Budget. The only bright spark in that Budget was the announcement that the noble Lord, Lord Heseltine, was going to take a thorough, long-term look at the competitive challenges facing the country. He spoke about that with sharpness and authority today. However, much of the rest of the Budget-its main themes-was about politics and about holding together an increasingly fractious coalition, with the Chancellor positioning himself for the future leadership of a rightward-trending Conservative Party. That is what the Budget was about; it was not about achieving the necessary national unity and consensus that we need to address the long-term challenges.
Some of these challenges, as the noble Lord, Lord Heseltine, said in his remarkable speech, have been with us for a century. But we have also been hit, as my noble friend Lord Eatwell described in a wonderful metaphor, by a tsunami of a banking crisis. It was a global banking crisis that has led to the deepest slump that we have experienced since the 19th century; it is the gravest banking crisis since 1825, as some economic historian friend of mine was telling me. The likelihood is that we will not recover the level of output that we achieved in the UK in 2007 until 2013 or 2014 at the earliest.
This was a crisis that few anticipated. The occasional economist did so; Mr Vince Cable claims to have anticipated it as well. But certainly the majority of the political establishment, such as the Governor of the Bank of England and the Treasury mandarins, never saw it coming for a moment. It was a global crisis; not a crisis of public debt in Britain, but in origin a crisis of the total debt of a banking system and private debt bubble which has reached more than 500 per cent of British GDP. As a result of the explosion of that private debt bubble, we have had our tax revenues in this country decimated. That explains the rising deficit, not the Labour Government's irresponsibility. We have had a banking system which is now completely dysfunctional, and is still unreformed and not lending to the economy in a proper way. We have had an economy which is badly out of balance, a trading sector that is too small and manufacturing that has shrunk.
Here, I accept that Labour was slow on its watch in seeing what was happening to manufacturing during its period of office. British manufacturing was, to a large extent, crucified by an artificially high exchange rate, which rose far too high in the past decade as a result of the banking system pulling in capital from overseas, with its assets rising from 200 per cent to 500 per cent of GDP. In other words, there was a repetition of a problem we have been familiar with in Britain: of the interests of the City of London being different from the interests of the manufacturing sector of the economy. In the essence of a policy for manufacturing, one key element has to be a policy for the exchange rate. Yet this is still something we do not talk about in polite company in this country, and we have to change that.
As a result of this crisis, we face very tough times, and on this side of the House we, of course, accept that. There is no alternative to spending cuts and tax rises, or to many difficult decisions. For my part, I certainly accept that there are severe, practical limits to the scope for Keynesianism in one country. However, there is more room for manoeuvre on the deficit than the Government have so far been willing to exploit. On youth unemployment, the Government are doing less than the Thatcher Government did with the Manpower Services Commission in the 1980s. On mobilising investment, we are still short of the action necessary to get the huge investments in energy and housing that we need. There is still scope for prioritising within public expenditure social investments such as training, research and higher education, which will strengthen our position in the knowledge economy-exactly the sort of thing that the Swedes did in response to their banking crisis in the 1990s. On a prudent view of public finance, those kinds of expenditures on youth unemployment and social investments would pay for themselves within a very short period. We ought to be doing more to put money into these areas as part of our growth strategy.
Most of all, we need a more coherent industrial strategy for Britain. It is a great pity that when it was first elected the coalition, instead of building on my noble friend Lord Mandelson's industrial activism, chose to distance itself from it. Instead of reforming the regional development agencies and using them as an instrument for the Regional Jobs Fund which the noble Lord, Lord Heseltine, chairs, it chose to abolish this means of getting money out into the productive economy. There has been, as Vince Cable said in his leaked letter to the Prime Minister, no "compelling vision" of our future. That is why we look with great expectation to the work that the noble Lord, Lord Heseltine, is now undertaking. In my view, the noble Lord has to think very radically. We have to look again at the proposals that the noble Lord, Lord Skidelsky, has put forward for a state investment bank or national investment bank of some kind to resolve the relationship between finance and industry. None of the schemes being promoted at the moment is really effective. We have to do something more radical.
The Kay review looks very carefully at the shareholder relationship and how the relationship between shareholders and the managers of companies needs to improve. In terms of local business engagement and local initiatives, the new enterprise partnerships can, in my view, work only if they are accompanied by much more radical decentralisation within Whitehall so that questions such as how training budgets are spent are not decided by some central bureaucracy but are effectively devolved to the cities and regions that are in a position to know what best suits their local economy.
We have to change the Treasury mindset. The noble Lord, Lord Heseltine, said that he was not in favour of wasteful spending. When I advised the noble Lord, Lord Mandelson, my experience was that the Treasury appeared to think that any kind of industrial spending was wasteful. We also have to break what I fear has become a Whitehall mindset that Ministers and markets do not mix. I believe that in the right circumstances public policy and markets can mix and that you can promote an active industrial policy more successfully than we have done.
The Budget does nothing in those areas. Instead, it cuts the top rate of tax. The noble Lord, Lord Flight, talked about Blair and Brown advisers. I was one of them, and I was in favour of sticking with the 40p rate. However, in the circumstances of the 2008 crisis, when sacrifices were going to be required all round, there is no doubt in my mind that the increase in the top rate was justified, and I cannot see what has caused the Chancellor to change that judgment.
This is a fiscal consolidation that is to last seven years and we are at the end of only the first two. Even if the amount of money to be raised from these taxes were not substantial, the fact is that we have been debating in this House scandalous cuts in welfare spending, such as depriving disabled people of an extra bedroom in their rented home. We have been saying that that kind of expenditure cannot be afforded and, at the same time, are cutting the 50p rate of tax.
I feel sorriest for my friends in the Liberal Democrats. They have thrown away the 50p rate for nothing. There is no progress whatever towards the taxation of wealth in this Budget. They have shown themselves to be weak and irrelevant in this coalition. They are like the National Liberals in the 1930s and they should draw the lessons from this Budget: they have no power to influence anything.