My Lords, within the past few weeks we have had to face the reality of a double-dip recession. Britain is facing prolonged economic woes. The Governor of the Bank of England has expressed his certainty that the UK economy will eventually emerge from its recession, but it is notable that he has been unwilling to give a timescale for this forecast. Others have foreseen the prospect of a decade of economic misery, and the experience of Japan comes to mind.
The lost decades of Japan, running from 1991 virtually to the present, followed the bursting of a Japanese asset bubble. The parallels between Japan's experience and the current circumstances of the UK economy are close and very discomforting. Despite the quantitative easing that occurred in Japan under the guise of a zero-interest rate regime, its economy stubbornly failed to revive. There was a prolonged weakness in domestic demand, which was partly the consequence of the traditionally frugal habits of Japanese consumers, and there was a failure among Japanese export industries to provide a necessary stimulus. This failure could be attributed to the rise of the manufacturing industries of the competing south-east Asian economies and to the maintenance of the high value of the Japanese yen in international currency markets.
All of these features are characteristic of the British economy at present. Nevertheless, the British experience differs from that of Japan in some crucial respects. The lost decades of Japan followed years of post-war economic success in which its export industries led the way. British industry, by contrast, has suffered years of senescent decline. The withering of British industry has meant that we have had to make our way in the world by other means. For years, we have experienced a balance of payments deficit in our exports and imports of manufactured goods-and even in the overall current account, which includes exports and imports of both goods and services. The deficit has been made good by a surplus on the capital account. There have been large inwards capital investments, mediated by the City of London.
There has been a remarkable sale of British assets to foreign owners, in the process of which the City financiers have reaped some remarkable benefits and personal rewards. They have ensured that British companies can be taken over more easily than companies anywhere else in the world. The foreign ownership of our rail franchises, of our power industry, of our water utilities and of much else besides implies that we have ceded our strategic control over investment decisions in vital areas of the economy. While these massive inward investments enable us to sustain financial deficits, they also serve to exacerbate our fundamental problems. Inward flows of capital equate to a demand for sterling on the international currency markets, which enhances the value of the pound. Such a high value relative to other currencies means that our exports are expensive and face a limited demand. The decline in the earnings of our export industries increases the need for the inward flow of capital. The cycle cannot continue indefinitely. When it is broken, which will happen sooner rather than later, we shall face a very harsh economic climate.
The manner in which capital flows have come to displace exports is well illustrated by the Government's recent efforts to find ways of stimulating the British economy. In January, George Osborne took a trip to China. His primary aim, so it was declared, was to encourage the Chinese to increase their imports of British goods. A secondary aim, which Mr Osborne pursued in his meetings with senior figures in China's financial sector, was to encourage investment in British manufacture. The primary aim was quickly relinquished; instead, Osborne succeeded in convincing China's sovereign wealth fund to purchase an 8.6% stake in Thames Water, which is London's water company. There have since been further Chinese acquisitions, including a manufacturer of one of Britain's favourite breakfast cereals. More significantly, there has been strong encouragement by the Government for China to assume a major role in regenerating the UK's nuclear power-generating industry.
The Government's attitude to the emerging crisis in the UK power industry serves to illustrate their basic economic philosophy and to highlight its dangers. The Government's economic philosophy is dominated by an atavistic notion of free-market enterprise. Britain, they say, is open for business and any willing provider of goods and services is welcome to participate. According to this philosophy, the Government should relinquish any responsibility for making industrial investment decisions and, by relinquishing responsibility, they imagine that they will conveniently avoid the blame for mistaken decisions. For example, it is believed that if a previous Government had adopted this stance, they would not have been blamed for encouraging the UK nuclear industry to pursue the development of advanced gas-cooled reactors when the rest of the world was opting for pressurised water reactors. Yet by avoiding making strategic decisions about the future of such industries, the Government are abrogating their essential responsibilities.
What should a responsible and imaginative Government do when faced with Britain's economic problems? The answer is that they should do many things that are not even in the nature of the present Government to consider. In the first place, they should instruct the Bank of England to pursue an active exchange-rate policy aimed at lowering the value of the pound vis-à-vis the currencies of our economic competitors. At the same time, the Bank should seek to reduce the volatility in the exchange rate which, by common consent, has a negative impact on our export industries.
However, there are some far more demanding requirements that we should make of the Government. They should look to the infrastructure of our national economy and ensure that some fundamental needs are met in a timely manner. This would entail support for emerging technologies and the fostering of Britain's neglected scientific and engineering skills. The renewal of our power industry is perhaps the most urgent requirement at present. It offers possibilities for technological innovation that it would be appropriate to discuss in detail on another occasion. For the present, it should be observed that none of these things will materialise without a commitment from the Government to provide the substantial support that is necessary.