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Economy: Growth — Motion to Take Note

Part of the debate – in the House of Lords at 6:35 pm on 29th January 2013.

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Photo of Lord Northbrook Lord Northbrook Conservative 6:35 pm, 29th January 2013

My Lords, I welcome this opportunity to discuss the UK economy and the Government's role in promoting growth. Before I do so, I should like to extend a warm welcome to the noble Lord, Lord Deighton, in his new role as Commercial Secretary to the Treasury. His success as the chief executive of LOCOG in delivering the Olympic Games and the Paralympic Games last year deserves high praise. His previous eminent position at Goldman Sachs will also stand him in good stead not only in understanding the UK economy but also globally with his former firm's contacts in, for instance, the US Government. His role is to lead on infrastructure and economic delivery, but I hope that he will also have time to assist our deliberations on the all-important banking Bill coming before your Lordships' House later this year. His experience and background will be a vital influence on the success of that legislation. My noble friend Lord Sassoon has set him a high standard to follow, but I know that he will be more than equal to the task.

I move on to examine the state of the UK economy. Clearly, the latest GDP figures were disappointing. According to the FT, it was small and troublesome sectors, such as construction, and North Sea oil, which was particularly affected by maintenance problems, that had a big impact on the quarter. Excluding those, the economy actually grew by 0.7% over the last three months of 2012-a better performance but not a healthy one. However, it is encouraging that, according to the ONS, our volume of exports to non-EU countries has increased by around 35% since 2009, and I hope it will continue to be a source of strength.

There are some other, more encouraging signs according to the FT: broad money supply growth is picking up and mortgage rates have fallen as the Bank of England's funding-for-lending scheme starts to help the flow of credit from banks to the real economy. The FTSE index of leading companies is at its highest level in four and a half years and there are signs of recovery in some major economies. The other bright spot is that people are continuing to find jobs. Half a million more people are in work compared with a year ago and these jobs, according to the ONS, have all been created in the private sector. I am not an economist but I find it difficult to reconcile the continuing poor GDP figures with the continuing good news on private sector job creation. I am not sure whether the diagnosis of the noble Lord, Lord Skidelsky, is correct.

Public sector net borrowing has also fallen from its 2009-10 peak of £159 billion to an OBR forecast of £108 billion for 2012-13. That is a major improvement but the one-off factor of the Royal Mail deficit transfer has helped the figures. However, unless growth picks up, I see that borrowing will decline much more slowly. Table 4.18 in the OBR December 2012 forecasts shows that it is not overall public sector current expenditure that is decreasing but the rate of increase in this expenditure. Therefore, if the economy does not grow, public sector net borrowing will not decrease significantly.

However, the Autumn Statement contained the most encouraging measures that the coalition has produced to encourage growth. The £5.5 billion capital package and support for long-term private investment in roads and science infrastructure is very welcome. The cancellation of the 3p rise in fuel duty was well received, especially by small businesses. The cut in corporation tax and the significant increase in investment allowance will be of great help to companies. The idea put forward by my noble friend Lord Heseltine of devolving a greater proportion of growth-related spending to local areas from 2015 has been welcomed by the CBI. However, I maintain my concern about whether the quality of the local enterprise partnerships, which have replaced the regional development agencies, are up to the task.

Measures to ensure that businesses-particularly smaller businesses-can access finance and support include plans to create a business bank, deploying £1 billion of additional capital. In addition, the Autumn Statement included funding to enable UK Export Finance to provide up to £1.5 billion of loans to finance small-firms exports. Both measures were particularly welcomed by the Federation of Small Businesses.

Looking at Labour's reaction to the Autumn Statement from Ed Balls, and listening to the noble Lord, Lord Eatwell, I note their criticism, but I have yet to see a detailed Labour Party alternative plan to get us out of the mess that they created. Their general alternative seems to be to spend more. This is a dangerous path to pursue since it could well lead to our borrowing costs going up considerably.

I move on to the second part of the debate-the Government's role in promoting growth. I am not of the belief that the Government should intervene to pick industrial winners. In a paper entitled Industrial Policy in Europe Since the Second World War, written last year, Geoffrey Owen of the LSE makes a tour through UK, French and German industrial policy since 1945. His conclusion is that, in the main, government intervention has not worked and that, instead, it would be far better to create the right economic conditions for the industry that I referred to a moment ago. UK government intervention failures included the de Havilland Comet, Concorde, the advanced gas-cooled reactor, British Leyland and ICL. British Aerospace and Rolls-Royce were the major successes. So, with some exceptions, these interventions were generally unsuccessful. Policy- makers tended to overrate the risks and costs of market failures and underestimate those associated with government failures. There is also a mistaken assumption that there were certain technologies that a country somehow needed to have, and that they were more likely to be achieved through centralised direction than through competitive markets. The cost to the taxpayer of ill-judged industrial policy was high.

I believe that it is more important for the Government to create the right business regime to encourage growth through simple and lower taxes, less but sensibly targeted regulation, speeding up the planning application regime-as my noble friend Lord Wolfson mentioned-better business education and encouraging bank lending.

We must not allow ourselves to become too pessimistic. I conclude by giving two examples of company bosses-at completely opposite ends of the spectrum in terms of size-who, despite their concerns, feel optimistic for 2013. Rob Law is a businessman who was turned down by "Dragons' Den" but has still done well in the field of producing children's suitcases. He summed up matters well in a recent interview in the Hargreaves Lansdown investment magazine, saying:

"I think the holy grail for government is to simplify the tax system. When you start out in business, unless you have an accountancy background, which most people don't, it is hugely complicated. I think if you had a simpler tax system, you'd get a lot more multinationals coming here".

Despite his concerns, his company has done well. He goes on to say:

"We've had a brilliant year"- in 2012.

"We started production in the UK, grew our team to about 30 people and launched a couple of new products. We are now exporting to 97 countries".

At the other end of the experience scale, Sir John Parker, chairman of Anglo American, has recently made some very optimistic comments. He has said:

"I think we mustn't become too pessimistic. There are some reasons for optimism ... I think the fundamentals for UK companies are looking stronger than for many years. Non-financial companies have been generating significant cash surpluses over the last few years. Whilst profits have recovered, uncertainty has prompted companies to save rather than invest. But over the next few years I expect this uncertainty to fade, which should encourage companies to start investing again. I regard this as the key to a sustained economic recovery in the UK in the medium term".