My Lords, first, from these Benches I congratulate the noble Baroness, Lady Lane-Fox of Soho, on her brilliant maiden speech. Like other noble Lords, I look forward very much to her contributions to the deliberations of this House and her contribution to driving growth in the economy, which she touched on so ably in her remarks.
There has been much criticism of the gracious Speech, particularly from those on the Benches opposite, who suggest that it is slight and insubstantial. I do not share that view. The criticism suggests that the role of government is to legislate. I do not believe that that is right; the role of government is to govern. Do we really believe that the 30 or so crime Bills in 13 years of Labour Government caused the recent drop in crime rates? I certainly do not. I come from the school which believes that we have too much legislation, and I have often thought that occasionally a one-line Queen's Speech saying, "My Government propose no legislation this year", would be appropriate. Whether your Lordships agree that the primary role of government is to govern, all must agree that the Government now face two major challenges, both of which have been touched on by other noble Lords: what to do about the economy and what to do about Europe.
On the economy, there is common ground that economic growth will not be forthcoming without a correction in aggregate demand. Unlike in the 1930s when Keynes was a lone voice against the austerity measures of the Bank of England, there is also now common ground that an economic slump is not self-correcting, that there are limits to monetary policy alone in dealing with a deficiency in aggregate demand, and that fiscal policy plays a significant role in stimulating demand. But then policy advocates part company. On the one hand, Keynes is prayed in aid, particularly on the Benches opposite, to dignify any proposal to spend more money and oppose cuts, while on the other hand, the right wing-not represented quite so strongly here-sees its authority in Hayek rather than Keynes to justify supply-side arguments-namely, that we need more deregulation, to scrap employment legislation, and that growth will come from the private sector always filling the space left by a retreating state. I have always leant towards the Keynesian side of the argument, but I have to accept that the UK crisis since 2008 is different from that in the 1930s.
In the 1930s, we did not see the difficulties in the banking sector that we have had since 2008. Indeed, in his classic work, Keynes hardly mentioned the problems of the banking sector. If we take banking assets relative to GDP, the UK has the biggest banking sector of any major industrial country. The banking crisis and the measures taken to avoid future crises have, as my noble friend Lady Kramer said, seriously impeded credit flows, particularly to SMEs and to individuals. As the Minister indicated, the Green Investment Bank and the business bank represent an attempt to start to deal with this problem. However, progressing from millions to billions being available for investment through those two institutions will not be easy.
To understand the other difference with the 1930s, I need to be a bit technical. In the 1930s, Keynes assumed that private sector multipliers of two to three times for every £1 of public sector spending would apply. However, the Office for Budget Responsibility now estimates that there is an income multiplier of only 0.4 for tax cuts and revenue spending and a multiplier of one for capital projects. Tax cuts, or an increase in current spending as advocated by certain members of the Opposition, would have significantly less effect on the creation of demand and carry a much greater risk of damage to our credibility in world markets and our ability to finance the deficit. When the coalition Government were formed in 2010, it was clear that the UK would lose the confidence of our creditors without a credible plan for deficit reduction. However, the issue for the Government now is whether the balance of risks has changed. In May 2012, the IMF said that the risk of losing confidence as a result of a more relaxed fiscal policy, particularly the financing of more capital investment by borrowing, may have diminished relative to the risk of deterioration of public finances through lack of growth. I believe that there is now a case for a significant increase in public investment where there are impediments to growth, particularly capital spending on housing and infrastructure spending on the so-called "shovel-ready" projects.
On Europe, the noble Lords, Lord Lawson and Lord Lamont, as well as television star Michael Portillo, have now weighed in on the side of the "come out" camp. I am slightly reluctant to intrude on Tory grief over this issue but will make three points against them. First, the noble Lord, Lord Lawson, disagrees with the common assumption that leaving Europe would cost 3 million jobs. Indeed, he said that the Deputy Prime Minister was talking "poppycock" in using that argument and knew nothing about economics. As Alistair Darling said in the Times last week, although any assessment is theoretical, even if only 1.5 million jobs would be lost, that is a lot of jobs. Secondly, the main thesis of the noble Lord, Lord Lawson, was that our presence in Europe distracts our industry from competing in the growth markets of Asia, India and South America. However, it does not seem to stop the Germans in those markets-and they do not want to come out of Europe. The third argument against those advocating coming out seems to be the potential loss of international investment. The motor car industry is a classic example of an industry that has seen major overseas investment, primarily because of our presence in the European Union. The motor vehicle industry is a huge success story-last year, for the first time ever since the creation of the motor car, we exported more motor cars from the UK than we imported. Why should Tata, the Japanese and the Americans locate a new plant in the United Kingdom if we are outside the European Union? It is a highly risky strategy to assume that the European Union would allow us free trade in motor vehicles if we were outside it.
I have a suspicion that the arguments to come out, certainly from members of the Tory party in another place, have much more to do with fears of UKIP than economics. However, those Members of another place who are in fear of UKIP are in danger of misreading why people have been voting for UKIP.