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My Lords, I join the noble Lord, Lord Eatwell, in welcoming the noble Lord, Lord Deighton, to the Treasury Bench; I hope that he enjoyed the experience of renewed contact with the supervision of his former teacher.
When George Osborne took over the controls at the Treasury, he decided that fiscal policy would be governed not by the state of the real economy but by the state of the public finances, as measured by preset fiscal targets, particularly the rate of deficit reduction. Those targets were designed to reassure investors in government debt that the state was solvent and would remain so. Half-way through the life of this Parliament, we can say that the effects of that policy in terms of output and growth have been disastrous. Britain, like the eurozone, remains stuck in the slow lane. We did not grow at all last year, and we enter 2013 with a realistic prospect of a triple-dip recession. Despite our freedom to devalue and massive open-market operations by the central bank, British output is 3% lower than in 2008. The results of the fiscal targets are correspondingly dismal. A state with high debt where no growth has become the new normal will not retain the triple-A rating on its sovereign debt.
What has gone wrong? The central design failure is that the targets were set on the heroic assumption that the economy would recover despite the tightening of fiscal policy implied by the targets themselves. In a balance sheet recession, when the private sector is cutting spending to reduce its overindebtedness, that assumption was just wrong. Put simply, we cannot all deleverage at once. To save more, you spend less, and if everyone does that, including the Government, the economy shrinks. That is lesson number one to which the noble Lord might respond.
George Osborne blames the failure of Britain to grow on the eurozone, but that argument is circular, as it is following exactly the same policy as we are. It is the Chancellor's own policy which explains the stagnation of the British economy, not the eurozone.
Mad economists are emerging from the woodwork to say that George Osborne is not cutting deep or fast enough. For example, Andrew Lilico appeared on the "Today" programme this morning telling us that the reason that the deficit is not going down is that austerity has not started. Apparently we are in the middle of a Keynesian boom. We need more cutting. Cut benefits, cut the welfare state, cut government, cut everything that can possibly be cut-and behold, the private sector phoenix will rise from the ashes. These Einsteins of finance never explain how bigger cuts are supposed to produce recovery, or, indeed, even cut the deficit itself. It makes one despair of economics.
The Chancellor can claim that the unemployment figures are slightly lower than they were some months ago. How can this be when output has not grown and may even have fallen? There is a puzzle here, but it is not a large one. The reason is that today, with a more flexible labour market, a fall in output is not necessarily, or immediately, reflected in a fall in employment. It may simply lead to a movement of workers into lower-paid, part-time or intermittent jobs or work training schemes, none of which count towards recorded unemployment. This has certainly been happening. It also explains why the Government can claim success in increasing private sector employment faster than the public sector is shedding employment.
I have no doubt that if the Chancellor continues cutting as hard and fast as Mr Lilico wants, those of us left with decent jobs or incomes will be able to have as many drivers, gardeners, trainers, cleaners, nannies, domestic servants, chefs, butlers and waiters as we can possibly want, and, no doubt, at the equivalent of Victorian wage levels. In other words, back to the world of "Downton Abbey". After two centuries of industrialisation, what a wonderful solution to the unemployment problem.
The obvious alternative to blind faith in fiscal targets is action to restore the economic trajectory that underpinned the targets in the first place. The international organisations are now saying this; the noble Lord, Lord Eatwell, has quoted Olivier Blanchard, who has just said that the Chancellor should "ease up" on fiscal austerity, which is as near as an international civil servant can come to saying that his policy is dead wrong. Even Boris Johnson says we should junk the word "austerity".
In plain English, "easing up" on austerity means stimulating investment. Public capital spending is not included in the current deficit target, so the Government can restart the investment machine without breaching their own targets on current spending. That is the only way to get the deficit down, or to meet their targets.
In this context, I welcome the Government's announcement that they have approved the second phase of High Speed 2. However, I have two questions. Why will it take so long? The first phase is scheduled to be completed in 13 years' time, and the second phase in 2033. Two years ago I asked the noble Lord, Lord Adonis, who had just stepped down as Secretary of State for Transport, how long it would take to complete this project with any sense of urgency. He said that it would take about five years. He is in his place, and I hope that he does not tell me that I have remembered that wrong. As I have said before, if only we had a Lloyd George in charge of this programme, we would get some movement.
My second question is: how will it be funded? According to the Financial Times, the Government will have to,
"start raising private sector finance to part fund the £34bn project".
Why? Here is an opportunity for the Government to take advantage of the spectacularly low cost of their own borrowing-why it is so low is the subject of another discussion-to finance the whole thing itself. It is a genuine capital investment, which will yield an identifiable rate of return. Perhaps the noble Lord would give us some indication of how the Government will finance this project. I hope that they will not repeat the disastrous PPP schemes which made such a mess of the London Underground and Channel Tunnel projects.
Will an investment strategy such as I have proposed not cause the public debt to increase? This is the crunch question. The Minister said in opening that it would not be possible to borrow our way out of our debt crisis. If indeed the project starts reasonably expeditiously, the debt will go up. There is no doubt that it will be higher in 2015 or 2017 than it would have been otherwise, but so will the capital stock and the economy itself, while the increased output can be taxed to finance the interest cost of the extra debt.
There are, of course, obvious risks. The risk of a pro-growth strategy is that borrowing more than initially planned may spook the bond markets and lead to a rise in borrowing costs. However, it is a much smaller risk than putting one's faith in pre-set fiscal targets which produce a stalling economy, without any guarantee that this will actually deliver on the fiscal numbers. Which strategy does the Chancellor really think is more likely to keep our AAA rating with the credit markets?
If the growth-first strategy makes sense for Britain, it should make sense for Europe as well. This country was a pacesetter in adopting fiscal targets as a guide to policy after the financial crisis. Why not be the first mover in showing how to reset policy and help lead Europe out of self-defeating austerity?