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Economy: Growth — Motion to Take Note

Part of the debate – in the House of Lords at 7:37 pm on 29th January 2013.

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Photo of Lord Davies of Stamford Lord Davies of Stamford Labour 7:37 pm, 29th January 2013

My Lords, I begin by adding my voice to the many expressions of congratulation and welcome which the noble Lord, Lord Deighton, has received warmly and genuinely from all sections of the House this evening. It is very good to think that there is now going to be someone in government with an economics background. However, I have to tell him-if it is not already blatantly apparent-that he has joined the board of a company that has been extraordinarily mismanaged over the past two and a half years. The record is extremely bad and was quite unnecessary. In the first two quarters of 2010, our growth rate was 0.3% in the first quarter and 0.7% in the second quarter. Then it just fell off a cliff because of the negative confidence impact of the declarations of the new Government.

In the light of experience, there must be very few people in this country who are not politically signed up to the Government or otherwise engagée in a party-political sense who would not agree that it is very regrettable that we did not continue on the trajectory set out by Alistair Darling in his Budget of March 2010 to reduce the deficit on a much slower path. That would have been a much better idea.

Remarkably, those things were predicted by a number of people at the time. Everybody has to pay tribute to my right honourable friend Ed Balls, the shadow Chancellor, who did something which I would never have dared to do as a Minister or shadow Minister, which was to make a very specific economic prediction. He said that the policies adopted by the new Government would bring about a double-dip recession. Sadly, he was all too right. The dangers which the Government were running were quite clear at the time, but so far we have had not a word of recognition of their mistakes. Not only was the basic macroeconomic judgment clearly wrong, but the manner in which economic policy has been adopted has been extraordinarily cack-handed and clumsy over that time. I will give one example in relation to VAT, which I mentioned in this House at the time.

I thought that it was quite reasonable to increase VAT, but not by 2.5% at one go, and certainly not to do so on 1 January. If you want to increase a consumption tax like VAT, and maximise the revenue impact but minimise the negative demand impact, which presumably any sensible person would try to do, the one thing you do not do is to deliver it on 1 January. Any shopkeeper, restaurateur, car salesman or anybody else could have told the Government that that is the lowest seasonal moment in consumer demand in the course of the year. The effect of putting on an enormous consumption tax at that point is to exacerbate the downturn of the economy and increase the volatility of the economy, when the aim of a stabilisation policy should be to reduce it. That was not a very intelligent thing to do, and it is a very bad record. That is the first, and fundamental, mistake. I will list five fundamental mistakes-five stupidities-of which this Government have been guilty over the past two and a half years, and that is the first one.

The second stupidity relates to infrastructure. Of course, it is a rather good thing to spend money on in a recession, because factor costs, labour costs, land and interest rates are lower. I am sure, by the way, that the noble Lord, Lord Deighton, learnt all that when he studied economics under my noble friend Lord Eatwell all those years ago. Indeed, in what he said this evening he showed signs of having done so and genuinely wishes now to put them into effect. I congratulate him on that. Perhaps this is a new broom in the Government, which is very welcome.

He mentioned infrastructure; the trouble is that a lot of opportunities have been lost irrevocably. We should have been spending that money on infrastructure over the last two years, as we have been in recession. It is not much use-or it is better than nothing but very much less use-now to plan to spend more money on infrastructure several years hence. In the case of HS2, that money will not be spent until the 2020s. I hope that we shall be back in power long before then and that the economy will be booming. That infrastructure spending might be contributing to an overheating of the economy, requiring an increase in interest rates. It will still be a desirable investment for the long-term productive capacity of the economy, but opportunities have been lost.

Particularly important opportunities have been lost-the broadband plan has been mentioned. They were all ready to be implemented in 2010, but the new Government simply cancelled them. The third runway at Heathrow was all ready to be implemented. Work could have been going on now-we really could have done with that infrastructure spending. Those opportunities have been gratuitously lost by the Government.

The third stupidity perpetrated by the Government relates to monetary policy. I can quite see that with such a very restrictive fiscal policy the Government's only hope of generating some demand and compensating for the collapse of private sector demand was through monetary policy. Monetary policy obviously cannot be conducted by reducing interest rates, considering the level at which they now stand. A number of people around the world have come to the conclusion that quantitative easing is the best tactic in current monetary conditions, and one can understand that. An argument is to be had as to whether the type of quantitative easing adopted by the Bank of England in this case was the right one, or whether it would have been much better to have bought paper from the non-banking sector, thereby putting money directly in the pockets of the private sector, rather than to buy paper from the banking sector.

Be that as it may, it was completely crazy to pay interest-and as far as I know the Bank of England is still doing this-on the deposits of the Bank of England, which were being inflated in this way. I think that the interest rate that the banks receive is 75 basis points; the Minister can perhaps correct me if I have got that wrong. I should be delighted if the Minister tells me that this particular stupidity has come to an end. It really is quite extraordinary. There is no point whatever in having the banks simply accumulate deposits at the Bank of England. That is not the money supply; it may be a figure included in some of the indices, but it is not conceptually the money supply, it is not at all cash held for the purpose of transactions in the economy, and is absolutely useless from the point of view of investment, consumption or demand. The only purpose of this exercise is to get the banks to leverage on those deposits by extending their lending; by credit creation. The penalty for not doing that is being reduced by paying the banks for keeping those deposits on deposit at the Bank of England, by paying them the 75 basis points. To put it another way round, this is reducing the incentive for the banks to lend. This, therefore, is a question of the Government putting their foot on both the accelerator and on the brake-not perhaps as much on the brake as on the accelerator-but why do that? It is completely crazy.

I see that the Minister is good enough to nod. I hope that one of his early tasks will be to look at what is going on in this particular field, come to the right conclusion and get rid of this particularly foolish policy. That is what I believe it to be.

My fourth example of quite gratuitous stupidity on the part of this Government is, again, a contradiction between two different policies adopted simultaneously by the Government. One is the Government's desire to see the banks lending more; to see greater credit creation, which is a sensible objective. The real problem for credit creation is confidence. The Government are doing nothing to contribute to confidence, so against that background, all these other technical attempts to generate greater bank lending are unlikely to be enormously successful. Nevertheless, the Government are apparently sincerely signed up to the cause of increasing credit creation in this country. However, at the same time, they are telling the banks that they are about to impose on them higher capital adequacy ratios, introducing Basel III.

I had this out several times in this House with the noble Lord's predecessor, the noble Lord, Lord Sassoon. When I raised it, he said, "Ah yes, but we have had two or three exchanges in this House on this subject in the past two years. These new capital adequacy requirements will not come into force until 2018, so that's all right". It is not all right. I hope that the noble Lord will look at this again, because it is certainly not all right. I sat for a number of years on the board of an investment bank, with a lending book of many billions of pounds, and I can assure him that if the regulators-the Bank of England in those days-had said to us, "We want to increase your capital ratios in five years' time", we would have had to start right then. At the next board meeting we would have been discussing how to change our policies. In a market in which it is very difficult to raise new capital because the bank shares are on the floor, and for the same reason you cannot really reduce your dividend, and banks, for less estimable reasons will not reduce their bonuses, there is no way of achieving higher capital adequacy ratios other than reducing their lending book.

Banks will, therefore, now be adopting policies that are designed to follow a trajectory to get them to the capital adequacy position they need to get to by 2018. That goes completely counter to the Government's expressed desire to get banks to increase their lending. It does not make any sense at all. Again, it is a complete and utter contradiction, and I hope that the Government look at that again and not take too long about it.

Finally, the fifth stupidity the Government have gone in for-again, not for very creditable reasons-is the decision to hold a referendum on our membership of the EU. This, of course, is a subject which I know we shall have a chance to debate in greater detail in two days' time, and I will not trespass on this ground for very long. Nevertheless, it must be brought into an economic debate. This is a way in which a Government, who should have as a priority the creation of the maximum degree of confidence in the economy, reducing the risk of the environment in which investment and consumption decisions will be taken, are doing exactly the opposite. They are gratuitously, deliberately and unnecessarily creating a whole new area of risk, which is about whether or not this country will still be part of the European Union in a few years' time. In the past three weeks, two Cabinet Ministers have said that from their point of view they can quite easily see their way to our leaving the European Union. You cannot do a worse day's work in terms of undermining confidence in the economy than to do what this Government are doing on that particular front.

Once again, just as some infrastructure decisions such as abandoning the third runway at Heathrow were basically driven by party-political considerations, marginal votes and seats in west London and so on, I fear that this decision about a European referendum has been based on party-political considerations such as the need to appease the eurosceptics in the Tory party at the expense of the national interest. It is time that the national interest came first and last, because this economy is in a very difficult situation and we need to get out of this recession as quickly as possible. It is about time that the Government, in addressing that task, make sure that they adopt a position that is purely based on national interest, not on such short-term party-political considerations.