Economic Prosperity and Employment — Motion to Take Note

– in the House of Lords at 11:47 am on 18th July 2013.

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Moved by Lord Haskel

That this House takes note of the role of government in generating economic prosperity and employment.

Photo of Baroness Garden of Frognal Baroness Garden of Frognal Lords Spokesperson (Department of Business, Innovation and Skills), Baroness in Waiting (HM Household) (Whip)

My Lords, the timing for the next debate is very tight indeed. Could I encourage all noble Lords to keep within their time limit, in order to enable the noble Lord, Lord Haskel, to have a few minutes to respond at the end of the debate?

Photo of Lord Haskel Lord Haskel Deputy Chairman of Committees, Deputy Speaker (Lords)

My Lords, we are all concerned about the future of our economy and we all have a different view as to where the answer lies. However, I think that we all agree on one thing: the relationship between government and business is central to whatever the future may hold. I thank all noble Lords who have come to debate this important issue.

I will start by speaking of my early experience of government and business. Many, many years ago, new, higher standards were introduced for fabric safety, particularly for the flammability of fabrics in aircraft. As a young textile engineer, I had to develop fabrics and processes to meet these standards. I did this with the help of Bolton Tech, now Bolton University. At that time, the big market was the US. I went over there to sell our product but was amazed to find that a similar product was already available. It had been developed by the US military and was offered for sale, not only by large companies, but by smaller ones by virtue of a government assistance scheme.

I am pleased to say that we did rather well because of superior design, which is another lesson. That is how I learnt that, at the same time as preaching tough capitalism, the US Government have been engaged in risky research, on a large scale, in radical new areas from which business has benefited with products like the touch screen, GPS, the internet and nanotechnology: I could go on.

True, there must have been failures that we do not know about. However, over the years, this has illustrated the advantages of business and government consistently working together, not only in research and development but in reducing risk by taking public funding much closer to the market—far closer than EU regulations allow here.

Here in Britain, we have veered between extremes. When I started in business in the 1960s, the state had a role through public ownership and the public interest. It was a sort of command and control. Then we moved into a phase in which markets ruled through liberal capitalism. Private initiative, private enterprise and risk were encouraged. Markets were left largely to self-correct and self-regulate. The year 2008 demonstrated that that system did not really work. Some still see the solution in lower taxes, less red tape and less regulation, but an increasing number of people are calling for an industrial strategy that defines the relationship between the state and business. The problem is that the Government, the CBI, academia, finance and manufacturing all have different ideas as to what that strategy should be, largely because of sectional interests.

I would like to find a way in which government and business can work together, while allowing market forces and private initiative to flourish. Business would be free to experiment with new ways of doing things, with government having an enabling role that supported the public interest, not the factional interest. My noble friend Lord Sainsbury put this together rather well in his recent book, Progressive Capitalism. Unfortunately, he is not able to speak today, but he argues that prosperity is fostered by market-supporting institutions of an enabling state. They should be enabling, not market-directed, and far stronger than the weak institutions of the minimal state. These he calls progressive capitalism. These institutions do not start up and evolve spontaneously but are designed to resolve conflicting interests, and involve a strong measure of social justice. They are institutions with a purpose, not set up as an apology for failure.

Recently I have noticed frequent calls for such institutions. For instance, the Royal Institution of Chartered Surveyors’ Housing Commission recently proposed that such an institution was necessary to address the housing crisis in order to end the,

“short-term and partial policies”,

that created it. During the Second Reading of the Energy Bill, several noble Lords were concerned that its implementation was likely to continue over the lives of two or even three Governments and of many Ministers, and that, if nothing else, we needed an institution to provide continuity. I concede that this may take power away from Ministers, but it would be an enabling and more effective implementation of policy that is seen to be in the public interest and free from unpredictability.

Science and technology is one area in which we are already doing this. When the Labour Government came to power in 1997, one of their first priorities was to increase the funding for science and to prepare a 15-year road map for large research facilities. The then Government supported collaborative and applied research, which was first administered by the DTI but then handed over to the Technology Strategy Board, an executive, non-departmental public body. That gave it the independence necessary for it to be staffed by people with industrial and technological backgrounds and experience. It is to the credit of the coalition Government that they have continued this work. They have made a number of key investments, including a national network of technology and innovation centres, as a means of improving our innovation performance as an essential component for growth.

An evaluation in 2012 of earlier R&D projects showed an average return of £6.71 in additional gross value added per pound spent. So we know that this pays. Perhaps this explains why Germany spends nearly 10 times as much on its equivalent institutions However, there are still doubters. An announcement last week that the Government will match £500 million of industry investment to develop cleaner car engines was greeted by the Institute of Economic Affairs with the comment that if the Government have £500 million to spare, they should cut taxes.

Transferring this work quickly into products and processes is a key to growth. Knowledge transfer is a means of achieving this. I declare an interest as the honorary president of perhaps the largest knowledge transfer network, the Materials Knowledge Transfer Network, funded by the TSB, the Research Councils and some 4,500 business members. I am trying to practise what I preach.

Although we have made progress in science and technology, we have failed in other areas. If we are to raise our game, technology is not enough. We must also raise our game in skills, finance and infrastructure. The latest McKinsey paper on innovation says that research and development is only 25% of what it calls our knowledge capital.

We have rehearsed many times the failures of the financial system. John Kay told us how savers have been let down by the system. The banking commission told us of serious flaws. We have rehearsed hostile takeovers, poor governance, short-termism and the isolation of shareholders many times. To achieve prosperity, we must ask again: what is the purpose of the financial markets and are they performing efficiently? The task is to create enabling institutions with a compelling vision that will change the culture and the narrative, so that the financial sector, rather than serving itself, serves society and the rest of business. I join many in thinking that the proposed banking Bill fails in this by not going far enough.

Some tell us that the economy is improving. Others ask if it is improving in the right direction, and point to the dangerous use of housing and consumption, instead of productivity, to rebuild the economy. A strong enabling institution, rather than a data institution, would recognise and help sort out these priorities.

Another area where we have failed is in the supply of technicians. This failure is there for all to see. There are currently many able young people who are unskilled and unemployed, in a nation that is desperately short of technicians. We are getting it right on technology, which is shaping our markets, economy and society. We are not getting it right on skills. We have millions of people working in jobs that do not earn them a living. Temporary work, zero-hour contracts and low wages characterise a trend that has been made worse by the recession.

Some seek inspiration from Germany. It is the strong trade associations in Germany that set the standards. Taking on apprenticeships is a condition of being in the trade association—and if you are not in the trade association, you are not in business. There are penalties for poaching and for apprentices who leave their courses early. The lesson is not just to copy Germany but to recognise that Germany’s success is associated with strong and long-lasting institutions that ensure that the world of education and training is synchronised with the world of work.

If we are to create strong institutions, Whitehall, too, has to raise its game. Yes, Whitehall does review its capabilities and is well aware of its problems. Its style of employment career planning, which rotates people, ignores building up the very expertise that Whitehall and Ministers need to create our lasting institutions. Even in the time of Harold Wilson, the Fulton Commission drew attention to these matters. So did my noble friend Lord Adonis in his recent review of BIS, as did the Institute for Government in its report today on the way that government outsources public services to the private sector. This was again referred to in the Private Notice Question.

So what about the private sector? There was a time when we had complete faith in private enterprise. Now we are not so sure. G4S, Serco and other companies seem to treat us as a business opportunity—an opportunity where vulnerable people who have no voice can be exploited, and where the private provision of public services is seen to be sometimes incompetent, often unaccountable and sometimes uncaring.

We tried to create institutions to support localism. They did not last long. We abolished the RDAs on an ideological whim, instead of developing them and building on what was there. The LEPs set up to replace them are embryonic and need time. The noble Lord, Lord Heseltine, tried to come to their rescue with a major amount of money. The Government watered this down to £2 billion, and then it transpired that this money was taken from local housebuilding support and the local road-building fund—hitting the political target, maybe, but missing the institutional point.

Many noble Lords will have heard businesspeople say that a major block on investment and business confidence is a lack of continuity, and uncertainty in government policy. A series of initiatives, however clever and generous, dealing with market failure or other problems is seen as short-termist and intermittent.

Addressing this has to be shared between government and business. Properly conceived institutions will do this, as has been demonstrated by the TSB. We have to repeat this in other sectors with institutions which are long-term, continuous, in which we can take pride and which will look after the public interest in the battle between the parties. Whatever the future may hold, a crucial part of our competitive advantage must lie in the quality and closeness of the relationship between government and business. We have work to do. I beg to move.

Photo of Lord Cope of Berkeley Lord Cope of Berkeley Conservative 12:03 pm, 18th July 2013

My Lords, the noble Lord, Lord Haskel, and I served together on the Select Committee on SME exports. We all warmly thank him for instituting this debate and, indeed, for the way in which he has introduced it.

My long-held view is that while economists argue continuously over monetary and fiscal policy, what really matters is whether SMEs flourish in home and overseas markets. That is what will decide whether our children and grandchildren live in prosperous times—I cannot help but mention that a fourth grandchild has just been born to my wife and me, to focus our attention even more on the future—but what the Government do about SMEs is crucial to the future.

Many business men and women when asked what government can do best for them say, “Keep out of the way”. I sympathise, but I do not agree. In 1967, I helped Lord Weatherill to write a pamphlet urging the Wilson Government to get much more involved in SMEs to emulate the small-business administration of America. A couple of years later, that Labour Government, to their credit and particularly to the credit of Harold Lever, took a few minutes off nationalising things and command and control and set up the Bolton committee on small businesses, the first authoritative study.

These days there is general recognition of the importance of SMEs. In support of continuity, to which the noble Lord, Lord Haskel, referred, the Government have taken over from their predecessors, UKTI—UK Trade & Investment—and it has grown in stature and effectiveness under my noble friend Lord Green of Hurstpierpoint. His energy, focus and constant travelling have contributed notably to UKTI’s success, and I am sorry that he is leaving later this year.

Since the debate on our SME report last month, my noble friend Lord Green has told us of two new initiatives: the Future 50 programme, to help 50 selected companies grow to the point of being listed on AIM, and the creation of an alliance of high-tech digital clusters similar to Tech City. These are excellent, but the first reaction of some will be: can the Government or their agencies successfully spot winners? We know that it is difficult to spot winners, not only for the Government but for the investment industry, whose job it is. The oldest mantra in investment, after all, is, “Spread your risk”. The reason is the difficulty of picking winners and avoiding losers. The Government should not be put off by that. If only some of the 50 succeed, it will be worth it.

Part of what SMEs mean when they say, “Keep out of our way”, is “Do not keep changing the rules”. The noble Lord, Lord Haskel, referred to this, too. SMEs understand that it is necessary to collect tax and regulate employment, health and safety, but they hate spending hours mugging up on the latest initiative that has just come to their attention.

The latest example is PAYE. From April 2013, or April 2014 for some small businesses, RTI—real-time information—has been introduced. New PAYE software —not all small businesses use software—triggers automatic direct debit payments for PAYE and national insurance on pay day. This is necessary to the smooth working of universal credit. But for the small business with few employees, some part-time probably, striving to remain legal over the minimum wage expressed in hourly rates and changing every October and/or bumping up against the lower earnings limit for PAYE expressed in weekly rates and changed every April, all this is complex and a complete overhead on top of actually selling things and earning a living for the employer and their staff, which is obviously what they have to do to succeed. It is all desirable, no doubt, and perhaps it will be simpler in the long run. Technology often works that way, but it does not mean that it is easy to grasp in the first instance. Changes for small businesses mean more hours of trying to understand new forms and procedures, simply to stay in line with the latest requirements.

My basic message is always that if SMEs flourish, the economy will flourish. We must nurture our entrepreneurs. Only some of them will succeed, but we need them to do so.

Photo of Lord Giddens Lord Giddens Labour 12:09 pm, 18th July 2013

My Lords, let me begin by congratulating my noble friend Lord Haskel on having introduced the debate in such an elegant fashion. I also congratulate the noble Lord, Lord Cope, on his expanding family.

It amazes me that some people still seem to think that the economic crisis is cyclical. After all, it is the most profound crisis since the 1920s and 1930s. It is still in play after five years. No country—not the United States, not Germany and not this country—has shown, as yet, a sustained economic recovery. This crisis, to my mind, is clearly structural and demands a fundamental rethinking, much of which has to be done in the academic world. Neoclassical economic theory will have to be replaced by a 21st-century version of political economy. A reappraisal of the role of the state and active government will be central to that process. No one of course, as my noble friend Lord Haskel has said, wants a reversion to the old model of top-down planning, but the economic free-for-all of the past 30 years has collapsed in a most spectacular way, with the state having to pick up the pieces, causing suffering to many of the most vulnerable in our society.

That rethinking is starting, and has begun with what I would describe as a sort of historical retrieval process, a kind of hidden history, of the state’s key involvement in all the major technological transformations of the past 20 or 30 years and in all the surges of economic prosperity associated with them. The idea that the role of the state is to stand aside, reduce red tape and let entrepreneurial instincts flow turns out, through recent research, to be much of a myth. All the major transformations affecting economic development have had heavy public involvement, and it is only now that the research is being done by economic historians to bring that out. My noble friend Lord Haskel referred to several of them. They include the most massive one of our age, the internet. We still do not really understand it, and it has caused an absolute transformation in human history. However, it has its origins, as is very well known, in state involvement, although, it has to be said, that was in part for defence purposes, not for economic prosperity.

These findings are as true of the US as elsewhere. Noble Lords might remember the story that circulated a little while ago—it is probably apocryphal—of a major American leader, who will remain anonymous, who was looking at the difference between the United States and Europe and said, “The trouble with the French is that they do not have a word for entrepreneur”. Well, we do not have a word for entrepreneur either, expect for that one. However, we do have a new book by Mariana Mazzucato, The Entrepreneurial State, which I recommend to noble Lords because it is a detailed study of how the state is essentially a risk taker. In countries that have an active state, the state has taken risks that private capital will not. Whatever private capital breakthroughs have come, they have been the result of the preparation carried out by active government.

Rather than using the examples that Mazzucato offers, I will take the case of shale gas, which has been studied in detail recently by the Breakthrough Institute in the United States. In the US, conventional gas began to decline in the early 1970s, which started a collaboration between the industry and the federal Government under a Republican President, Gerald Ford. Everybody knew that there were large deposits of gas, but the existing techniques of extraction were not up to it. There was an extensive partnership with federal agencies and, incidentally, with universities. National laboratories across the country, such as those in Lawrence Livermore, were crucially involved. A tax credit for unconventional gas was introduced in 1980, which lasted until 2002. The Department of Energy and the federal Government continued the funding of research when no one else at all was interested. The towering figure in the industry, George Mitchell, who I like very much—partly because he is a very good tennis player, and I admire people who can do two things really well—came along and applied the final touch, as it were. He made the final breakthroughs, but this would have been impossible without state involvement.

I am a supporter of shale gas, as long as it is properly regulated and coupled with the closing down of gas-fired power stations, but supporters of shale gas who decry subsidies for renewables should remember the tale that I am telling, because breakthroughs will come there too. The trouble with the UK is that they are likely to come in the United States and China, which are making the most substantial investments. The US might have led in shale gas, but it is also a big leader in renewables.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat 12:15 pm, 18th July 2013

My Lords, I join in the thanks to the noble Lord, Lord Haskel, for this important debate. Since I have only a few minutes, I am going to follow in the footsteps of the noble Lord, Lord Cope, and focus on small businesses. I think we are all aware that job growth is no longer going to come primarily from large companies opening large factories. Those days are over. Small businesses provide more than half our jobs. Many do not realise that they provide more than half our exports. Some will have heard of the rule of one in three. If one in three small businesses added one additional employee, this would wipe out unemployment. That is pretty much true across the developed world.

All government policy has been very slow to recognise the need to row in behind and provide the necessary support for small businesses. I am incredibly conscious that there is a wide range of programmes, such as EIS and other tax incentives to invest in small businesses, and the removal of stamp duty from AIM so that small businesses can raise public shares. UKTI also has very effective programmes now to provide support for exports, and the Government are reshaping export finance programmes so that they suit small businesses. But most small businesses do not have a clue about what is going on and what is out there and available to them as support.

I want the Government to look at the whole communication channel to this complex world of small businesses. It is certainly worth looking at the German approach, which tells every business that it needs to become a member of its local chamber of commerce—I do not care whether they pay only 50p to do so—so that they are in the system and contact can be made, communication can happen, education can flow through, and exchanges and networks can be built. We have to get serious about communication. If it is done through the structures of LEPs, that is fine with me, but we have to start making sure that there is an effective mechanism to reach out to that wide net of small businesses.

When I ask small businesses what is constraining their growth, the answer is always skills—I suspect that other noble Lords who are better equipped on this subject will talk later—but it still astonishes me that we manage to develop a highly sophisticated educational system at school and university level that delivers people often with extensive qualifications that simply do not match the job demand that is out there. Again, with a mechanism of more locally driven decision-making, local networks can try to counter that, but this surely has to go to the top of any agenda that we deal with.

In the three minutes that remain to me, I would like to focus on funding for small businesses. The major banks have long said that they finance anything—a small business, a large business, whatever else—that is bankable, but to those of us who have talked to so many small business and with various trade bodies it is evident that this is not true. I think that banks are finally facing up to that reality. They give us two reasons. I am interested less in their reasons and more in the actuality. One reason is that to work with really small businesses, highly knowledgeable people with exceptional capabilities are needed, because it is so granular when you work with a small business. The skills that have to be mastered are way too costly, given the structure of our banks. It is just not possible, given the way in which we organise ourselves and where we want our priorities to be.

The second issue is capital requirements. Banks have to be properly capitalised. We cannot give on capital requirements in a general way. Banks tell us that this is highly risky stuff, and that they are required to hold large amounts of capital, which essentially makes it uneconomic for them to offer credit on reasonable terms.

How have other countries that face exactly these problems dealt with them, and what can we learn from them? As I have only a short time, I shall look at the US example only. The US Government made a commitment a long time ago to what they call “the last mile”. How do you get money out to the small people in a community, much as we have the Post Office deliver a letter the last mile? The US Government decided that major US banks were not capable of that activity. You have to set up a different sector to deliver that, and because making sure that that happens is a public good, the US has been willing, through its Community Development Financial Institutions Fund, which sits in Treasury, to put substantial amounts of money into making sure that a sector exists that can deliver that. The US funds it by billions. As partners in that effort, it has drawn in its big banks. It has done it largely through a stick, the Community Reinvestment Act, which most noble Lords will be familiar with, so I shall not go into the details.

The effect of being required to put money into these entities and to provide them with knowledge, support and expertise is that it now seems normal to US banks. I have been talking to those here. They find it astonishing that it is a reflex action of our major banks to say, “This is an area we are not going to serve. It is not right for us”. It is exciting to be able to get in there with relatively small amounts of money and do it. I ask the Government to look at those opportunities.

Photo of Lord Monks Lord Monks Labour 12:21 pm, 18th July 2013

My Lords, I, too, thank my noble friend Lord Haskell for initiating this timely debate. The state has many roles. Often it has not sought them, but has had them thrust upon it by the failure of markets in important respects. At the moment, the list of roles tends to grow as the country’s problems are no longer masked by the windfalls of the North Sea and booming financial services; they are not completely over, but they are a lot less significant than they were. The problems are not new—economic historians trace them back to the 1870s—but they seem to be getting worse in some fundamental ways: the shrinkage of manufacturing, a persistent balance of payments deficit and too few companies still thinking for the long term, with a relatively low spend on innovation and training. Investment in new machinery is apparently at a lower level than in Austria, Turkey or Mexico. The low productivity levels that we are experiencing reflect inadequate skills, low capital investment and, sometimes, poor relationships at work.

While we are proud of our open economy, can we really be so relaxed about the continued foreign takeovers of successful British companies? The latest is Penguin Books, which has recently been taken over by a smaller rival, and it seems that Invensys is shortly to go as well. There is no comparable traffic in the opposite direction, nor is there a flowering of new UK companies of the same size and importance. A large part of what could be called the commanding heights of the economy is now held abroad. Too many managements and shareholders are governed by thoughts of value extraction—the price they can get—rather than adding value to what they have. There is not a squeak from Eurosceptics or Europhobes about what this means for national sovereignty. A small proposal from the European Commission sends them into paroxysms of anger but when this fundamental change is going on, nothing is said.

We also have a systemic tendency for rewards to go disproportionately to people at the top and for them to outstrip performance. The inequality statistics are truly frightening. Will the Royal Mail in private hands follow the same depressing path by charging higher prices and contracting out delivery services to lower paid, less securely employed workers? Then will we see the Royal Mail sold off, perhaps overseas, like so many of our privatised utilities? Must we watch helplessly as private equity or other predators move in for quick kills? Why are golden shares so out of fashion in developments of this kind?

The stark truth is that private ownership has not unleashed a fresh burst of investment. Thames Water and BT are seeking government guarantees for major investments in the super sewer and national broadband; there is not much appetite for risk among many of these large privatised companies. Centrica withdrew from the new nuclear power project because its shareholders wanted higher returns over a shorter period. This rather frenzied approach to short-term gains continues to enfeeble UK companies. If you add in the periodic devaluations of sterling, which make UK assets relatively cheap, you can see the vulnerability of our economic model.

Some are using the term “responsible capitalism”. I use it myself sometimes; it is a nice thought. However, there is a risk of many in the citadels of deal-making seeing it as an oxymoron and treating it risibly and not seriously at all. We have good economic models among our neighbours, particularly on the other side of the North Sea. Why do we not learn more from them and build, as others have said in this debate, a stronger training culture, foe example, comparable to their economies? Why do we celebrate so much a deregulated labour market while our northern European neighbours reject easy hire and fire, zero-hour contracts and the trend towards making jobs less secure? They are relaxed, even enthusiastic, about collective bargaining and extensive information and consultation arrangements.

Finally, what about our management cultures in this country? We claim some of the world’s leading business schools. I declare an interest as a visiting professor at Manchester Business School. However, they are often seen as transmission belts to put people into financial services or into the finance function of business—accountants and so on. How can they be transformed to become the staff colleges to make the UK a new, North Sea-style economy? The noble Lord, Lord Heseltine, has sought to address some of these issues and I believe that the Business Secretary recognises the problem, but as yet we are well short of measures to promote an economic model and culture that will be both successful and sustainable.

I end with a remark from a senior Siemens executive. When asked what the key factor in the company’s success was, he replied, “Continuity”. Would many top UK executives say the same? I doubt it. We must change that culture so that in due course they will consider that to be the normal way to describe their business.

Photo of Baroness Valentine Baroness Valentine Crossbench 12:28 pm, 18th July 2013

I declare that I am chief executive of London First, a business membership organisation, which includes companies involved in infrastructure and development.

I thank the noble Lord, Lord Haskel, for introducing this debate and presenting such a cogent argument. However, I want to gently challenge the title and suggest that the role of government is not to generate economic prosperity and employment but to create the conditions in which that prosperity and employment can flourish. Timely interventions by a Government can do that. However, the most efficient, easiest and least costly interventions are often avoided because they are politically uncomfortable. Where business would act, government prevaricates.

Take our international links. To provide us with much-needed air routes to emerging economies we should have built a new runway in the south-east years ago. While we have been staring at our navels, Frankfurt, Paris and Amsterdam have built four-runway or six-runway hubs. There is an easy solution: the Government could just say yes to any of the privately funded offers to build more runways that are currently on the table.

Back in the real world, while I support the creation of the Davies commission, the business community needs assurance that whoever might be the Government of the day will act on its recommendations. Can the Minister reassure me that the current Government would? Can he also reassure me that, while we wait a decade or more for even one runway to be built, the Government will do everything in their power to enable more flights to emerging economies in the mean time?

On immigration, Paris attracts eight times as many high-spending Chinese tourists as London. Why? Because France is part of the Schengen visa, on which you can visit 26 European countries but, to add the UK to a European tour, visitors need to go through the hassle of applying for a separate visa. I accept that, politically speaking, we are unlikely to join a single visa system, strong as the business case may be. However, if we are to acknowledge that political reality, can we please do whatever we can to take the hassle out of applying for two visas? Let us build on the Government’s recent improvements to our visa process, but recognise that incremental improvements will deliver only incremental increases in visitor numbers. The step change will be achieved by sharing application centres in China with key European partners, once Schengen introduces biometric requirements.

In a similar vein, the practice of treating international students as a balancing number in our net migration target has had the unfortunate consequence of giving countries such as India the impression that their students are unwelcome here. Higher education is our eighth biggest export and we should be cultivating rather than inhibiting that sector.

I turn to an area in which positive government intervention can make a real difference, albeit at a cost: investment in infrastructure. I pay tribute to the Government on their recent spending review. A five-year settlement for Transport for London’s capital investment programme makes much more sense than an annual one. The guarantee for the Northern Line extension has enabled the redevelopment of the iconic Battersea power station, paving the way for up to 26,000 jobs.

We must keep that momentum going, though, and with a sense of urgency, if real progress on vital projects such as the Thames tideway is to be made before the next general election. If creating 9,000 jobs to build this new sewer is not enough of an incentive, then the Government might also consider the benefit of allowing the residents of London’s thousands of new homes to flush their new toilets. I am confident that the Government will do the right thing and give the go-ahead.

Finally, I must mention Europe. The UK is one of the most successful global trading nations. We are the third highest exporter of services and the sixth highest of goods. The global companies that base themselves in London do so as a centre for Europe. They have no interest in or understanding of the UK breaking away. While they certainly struggle with aspects of European regulation, particularly of our financial services post-credit crisis, they understand the need to address failures in regulation and for intensive negotiation to find solutions that balance stability, reputation and growth. I have not met anyone in any of these companies who is looking for an exit. Indeed, for most, talk of a referendum suggests a trigger-happy approach to sensitive diplomatic matters.

There is, though, the need to reassess the relationship between those inside and outside the eurozone, and to do that the Government need to fully engage and negotiate as an equal partner, rather than with one hand on the escape hatch. While there are political realities, therefore, there are also economic realities, and if the Government are serious about prosperity and employment, there are occasions when they need to recognise that government itself is the problem, rather than looking for new, politically easy solutions.

Photo of Lord Bates Lord Bates Deputy Chairman of Committees 12:34 pm, 18th July 2013

My Lords, I, too, pay tribute to the noble Lord, Lord Haskel. He has a well deserved reputation for, over many years, seeking to improve the understanding, particularly in the Labour Party, of the role of management of the private sector. Having listened to the speech of the noble Lord, Lord Monks, I suggest that his work is yet undone; he still has much to do in that important area.

The noble Lord, Lord Haskel, sets an important task for us, which is to take,

“note of the role of government in generating economic prosperity and employment”.

That begs the question, “Does it have one?”. Of course, the answer to that is yes. The role of government is to generate economic prosperity through untying the wealth-creation potential of enterprises and allowing them to flourish; to maintain a tight fiscal control on the costs and operations of government, through the avoidance of waste and unnecessary regulation; to construct the tax and benefits system in a way that rewards those who work, cares for those who cannot and incentivises the risk-takers while protecting consumers and upholding fair competition; to provide a stable monetary policy which creates the right balance between borrowers and savers in the economy; to provide the investment in the physical and intellectual infrastructure that we will need for the future; and to maintain and develop strong international trading relationships. In short, the role of government is to prepare the ground and regulate the climate for economic prosperity and employment while recognising that, ultimately, it is enterprises which will actually build and maintain it. That would be my definition of an enabling or entrepreneurial state.

If this is the description, how have the current Government performed? I do not think that many in this House would argue against the proposition that no post-war incoming Government have had a more favourable economic legacy than that which fell into the lap of the Labour Government in 1997; I declare no interest as a Treasury Minister at the time. At the same time, there would not be many who would argue that any incoming Government have had a less favourable economic inheritance from their predecessors than that which befell the current coalition in 2010.

The coalition arrived in office to face a debt that was unsustainable, government spending that was out of control, and a public sector that was too strong, and a private sector too weak, to sustain it. We had grown too dependent on financial services and lost our competitive advantage in manufacturing. We had become obsessed with the old, established markets and trading relationships of Europe, and paid insufficient attention to the rising new markets of Asia and Latin America. We had taken no note of the fact that the tax and benefit system could provide perverse incentives that made not working more attractive than working. Wealth creators and risk takers were insufficiently rewarded. Our education was failing generations of young people through its lack of rigour, and vocational training was not delivering the skills that industry needed.

Three years on, what has been the result? Well, we have seen a reduction in the deficit; it is down by a third. We have seen sustained cuts in corporation tax which will mean that we will have the lowest corporation tax rates in the G20 by 2015. We have seen businesses create 1.3 million new private sector jobs, which is close to three jobs created in the private sector for every one lost in the public sector. This week, we have seen unemployment fall further, by 57,000, and the claimant count fall below the level of May 2010. The reform of the benefits system will ensure that people are always better off in work. Through raising personal tax allowances, people working full time on the minimum wage will have had their income tax bill halved during the time of this Government. We have seen investment in infrastructure. Danny Alexander, the Chief Secretary, announced £100 billion of investment in infrastructure between now and 2020. There were 520,000 apprenticeship starts in the last academic year, up 80% on the last academic year under the previous Government.

We are seeing the evidence for this in increased economic indicators showing, for example, that exports are at records levels according to the British Chamber of Commerce and the purchasing managers’ index. We even see this morning an announcement that retail sales have gone up by 2% in the past year. We see that our exports, particularly to those new, dynamic markets such as Brazil are up 25%, with China up 40% and Russia up 80%. That is extremely welcome.

The culmination of this is that the predictions for a double-dip or triple-dip recession that were so frequently made from the opposition Dispatch Box turn out to have been wrong. There has been a reassessment which shows that we are now into growth, and the IMF has reassessed its forecast to show that it expects this economy to grow strongly. I urge those on the Benches opposite to recognise that it is time for them to reassess the record of this Government and their own policies in the light of that performance.

Photo of Lord Bhattacharyya Lord Bhattacharyya Labour 12:40 pm, 18th July 2013

My Lords, I thank my noble friend Lord Haskel for choosing such an important topic for this debate. He is a passionate believer in manufacturing and technology. I declare an interest as chairman of Warwick Manufacturing Group at the University of Warwick, where we have worked for three decades to deliver growth, both at home and abroad.

It is vital to remember the positive difference the previous Government made to our society and economy. Since 1997 we have seen huge improvements in the infrastructure of the nation in rail, schools, hospitals and science. If we had not made those investments, our public realm would have resembled that of a third-world nation. The Labour Party should be proud of those achievements. There are problems, of course, but real successes too. For example, the importance of the science budget is reflected in the current Government’s decision to protect that funding. Naturally, there is a need to go further. We have already heard about the need for infrastructure spending as a driver for growth and I strongly support projects such as HS2. A single driver such as HS2 will create not only a different mindset among industrialists throughout the world but also employment. I also support innovation policies to create a more broadly balanced economy.

We can learn, too, from fast-growing nations. I often visit China. On a recent trip I saw that when growth faltered, the Chinese Government announced 25 major rail projects. They also announced further investment in innovation, aiming to surpass American R&D spend in the next decade. This approach creates a framework for long-term growth, encouraging business investment and increasing the likelihood that jobs created by these businesses will be sustained over a period of time. Here in Britain similar policies are vital, not least for the many young people who face long-term unemployment if there is little growth. Of course, Britain faces real financial constraints. This means we need a better understanding of the impact of our policies.

The real question is not whether government should contribute to economic growth, but how effectively it makes that contribution. I am reminded that the original title of Lloyd George’s Yellow Book of 1928 was Britain’s Industrial Future. Since then we have had many such mantras, such as national champions, white heat, sunrise industries or industrial activism. All of them have agreed with the fundamental judgment of the Yellow Book on industrial policy, which was:

“There is no question of principle at stake but only one of degree, of expediency, of method”.

A focus on expediency and method should make us sceptical of grand claims for any growth policy. As Karl Polanyi said of the industrial revolution,

“No one had forecast a development of machine industry; it came as a complete surprise”.

Similarly, no one could have forecast what is happening today with the digital revolution.

Governments can never guarantee, or even predict, disruptive innovation. Instead, they should focus on incremental change, supporting infrastructure and innovation, thus creating a framework in which innovators prosper. This means better understanding of what government does well and where it must do better. In this spirit I propose a practical change to encourage the effectiveness of growth policy. It is simply that we commit to a higher standard of evaluation of public policies to support growth.

The noble Lord, Lord Haskel, rightly proposes enabling institutions to support growth. We also need an evaluating institution. All too often—whether in RDAs, LEPs, research councils or government departments —a policy is announced, a programme is delivered, the impact is evaluated by a consultancy firm, a number is put in a press release and then it is ignored. Frequently, bodies responsible for spending money, whether research councils or the Technology Strategy Board, define their own impact and decide if their objectives have been met. As Professor Henry Overman of the LSE said of RDAs, many of which have created important growth in their regions, you can read thousands of pages but evaluating them is very difficult, unless the current Government come in and get rid of them. The issue is not that projects have performed well or badly but that too often we do not know how they performed at all.

It is time that we had a national impact office with a duty to monitor the effectiveness of all government policies to support growth in the real economy. That happens in other countries. Such a body is crucial, especially if we are to embrace devolution in growth policy, for example with LEPs. As the noble Lord, Lord Heseltine, pointed out, the ability to share best practice and identify where things are going wrong is crucial. How can we do this without a neutral body examining what is best practice?

I have always been a passionate believer in the positive role that the state plays in industrial policy, but all good engineers know that it is only by critically evaluating the strengths and weaknesses of any past design that you gain the knowledge to help you do better in the future. We should be absolutely fearless in assessing which policies deliver growth. That is what we should be evaluating in future.

Photo of Lord Bradshaw Lord Bradshaw Liberal Democrat 12:46 pm, 18th July 2013

I, too, add my thanks to the noble Lord, Lord Haskel. I am going to take a rather different line from some noble Lords. I have worked in industries which employ engineers. Engineers were my colleagues. They were highly respected. Over my career I have seen that respect for engineers go down and down so that now the engineer is lucky if he sits at the top table because it is crowded out with people qualified in finance, human resources and other things, when it is the engineers who actually drive our businesses forward.

Several noble Lords have referred to the list of apprentices and how the number is increasing. I ask you to look very carefully at who these apprentices are. They are not technically trained. There are people with apprenticeships in things like catering, business services and law, but those are not the skills which drive the economy forward in the way that I think we all want. I also want to comment on our professional institutions. The professional engineering institutions went through a period where they insisted on graduate entry, yet many of my colleagues started their careers as premium apprentices, took their higher national certificate, got practical experience and then qualified as professional engineers. Fortunately, that approach appears to be coming back—at the Institution of Mechanical Engineers, for example—because people need to know what they are doing. I want to draw to your Lordships’ attention the paucity of maths and physics teaching in schools. It is awful in many schools and there are so few students actually studying these subjects. Without an understanding of these subjects, we are not going to be able to provide the engine for the growth which all of us desire.

I was struck by the question that the noble Lord, Lord Bhattacharyya, raised about evaluation. Many large infrastructure projects of the sort which are being discussed here are judged on the values of time. This is an old system that was invented to evaluate rival road schemes in the 1970s. It was overseen by an organisation called the Standing Committee on Trunk Road Assessment, and it forms the basis of a lot of Treasury thinking. If you can prove that you can save 10 minutes going to Birmingham or a few minutes by putting an extra lane on the motorway, that will often be the deciding factor. However, if you build an extra lane, say on the M25, and at the end of three years you still have congestion as bad as when you started, I cannot see that that value of time is delivering a measurable quantity. On a visit to city hall this week I was heartened to hear that the Mayor of London is saying to people, “Are we creating jobs and building houses? Are we doing good?”, not focusing on how much time people are saving in whatever they happen to be doing.

We need to have a target for funding registered technicians. We should look very carefully at where the money spent on apprenticeships is going and make sure that enough of it is going towards engineering technicians. We are not going to re-equip our railways, modernise our water system, build new power stations or engage in fracking unless we have the skills here or we import them. The Government have more or less set their face against immigrant labour, so we have an urgent task in encouraging some indigenous labour to do the job. Finally, we really have to recognise the status of the engineer and his value to the community.

Photo of Baroness Donaghy Baroness Donaghy Labour 12:51 pm, 18th July 2013

My Lords, I thank my noble friend Lord Haskel for initiating this important debate. I will concentrate on a couple of things that the Government should not be doing and then move on to some large but neglected sectors to which the Government should turn their attentions.

First, the Government should stop messing about on Europe. Of course there is a need to reform its institutions, but the opt-out approach to Europe is counterproductive and isolating. As John Cridland recently wrote,

“we must focus on a positive vision of reform”.

A recent CBI study looked at the relationship between Norway and Switzerland and the EU. Both countries are outside the EU but Norway is part of the single market through the European Economic Area agreement. It pays €600 million a year for the privilege, making it the 10th-highest contributor to the EU, just to be allowed to follow the EU rules as a non-member. A Norwegian conservative, Mr Nikolai Astrup, said:

“If you want to run Europe, you must be in Europe. If you want to be run by Europe, feel free to join Norway in the EEA”.

The Government should also stop trying to kid themselves that they can opt out of the social wage when rights for part-time workers, maternity leave and all the other workers’ rights enshrined in various directives have become part of the fabric of society and the expectation of a new generation of workers. Not just the trade unions will resist the undermining of those rights.

My second “not” is that the Government should not mistake Whitehall reorganisation for progress. Abolishing departments and even non-departmental public bodies is wasteful if the functions have to continue elsewhere. It halts momentum and it is costly. That is not to say that things should never change, but so often the problem is poor interdepartmental co-operation or a Government who want to prove that they are different from the previous one.

The proposal to increase the number of party-political appointees in government departments is another area that will help things grind to a halt. If the proposal is implemented, I doubt that the appointees will be from diverse backgrounds with plenty of management experience—or even engineers, as the noble Lord, Lord Bradshaw, urged us. They are more likely to consolidate the very narrow background of Oxbridge-educated political advisers who have already caused such alienation between the political classes and the population as a whole.

I turn to the areas on which the Government should spend more effort. Two weeks ago the noble Baroness, Lady Shephard of Northwold, initiated a debate on preparing young people for the world of work, and she made a powerful speech about the importance of careers advice in which she said that the Government’s own National Careers Service had estimated that,

“the cost to the economy of young people making wrong choices amounts to some £28 billion”.—[ Official Report , 4/7/13; col. 1330.]

In his summary of the debate the Minister acknowledged the importance of careers guidance. However, he preferred to lay emphasis on the role of good schools. Although that is an admirable sentiment for an individual, it does not constitute a national strategy. Without a more systematic reform, it is difficult to see how the reform of vocational qualifications will have the impact that we all desire. The noble Lord, Lord Cormack, and the noble Baroness, Lady Fookes, also took part in that debate and spoke about the “unfortunate attitude” towards those who work with their hands in craft and horticulture. A good vocational system needs to take account of these areas, which have the potential to employ hundreds of thousands of people.

The situation is even worse with engineering, science and technology. The Royal Academy of Engineering has predicted that in the next eight years there will be an average shortfall of 40,000 new graduates in science, engineering and technology every year. In Germany last year, engineering was the most popular choice in higher education, after law. I pay tribute to the university technical colleges, but we need many more of them; we need an initiative on the scale of the Robbins report for HE. As well as meeting the needs of employers, it is clear that an increase in vocational learning leads to lower youth unemployment. Surely there is a clear role for government here.

To conclude, the Government should focus on functions rather than wasteful institutional reform. They should focus on skills, advice and guidance on careers for our young people and do more to promote Cinderella industries, such as tourism, which could lead to quick results on economic growth and youth unemployment.

Photo of Lord Skidelsky Lord Skidelsky Crossbench 12:57 pm, 18th July 2013

My Lords, I am grateful to the noble Lord, Lord Haskel, for introducing this important discussion. He has been rightly impressed by the argument put forward by the noble Lord, Lord Sainsbury, that the state must play a key part in fostering innovation, and I agree with that. However, of course, that does not exhaust the role of the state in creating prosperity. In the last chapter of his General Theory, the economist Keynes pinpointed as,

“The outstanding faults of the … society in which we live … its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes”.

I believe that these are still the outstanding faults of the society in which we live and that the state has a vital role to play in remedying them. Moreover, that is clearly connected to the topic of the noble Lord, Lord Haskel. The worst environment for innovation is rampant economic insecurity and excessive inequality. The private sector will not invest in jobs and skills unless it sees a market. The state has a role to play in sustaining that market in general, as well as in providing support to particular sectors. Once again I apologise for being the only macroeconomist taking part in this debate—I feel very lonely.

Let us consider two arguments. After the Thatcher-Reagan revolution, politicians and economists no longer believed that government policy should aim directly to influence the level of employment. Noble Lords will remember the new doctrine announced by the noble Lord, Lord Lawson: government should concentrate on controlling inflation and leave employment to the market. Let us see how well the market has done. Between 1950 and 1973—the period when economic policy was influenced by the Keynes doctrine—UK unemployment averaged below 3%. Since 1979, when the Lawson doctrine held sway, the average has been almost 8%. Today, Britain’s unemployment rate of 7.8% tells only half the story. The widest indicator of joblessness, which includes unemployment, part-timers seeking full-time work and those who are economically inactive but who nevertheless want a job, is estimated at about 12%, or 6.4 million people. On top of that you have to add the much higher level of youth unemployment. The Prime Minister and the Chancellor constantly tell us that the nation must live within its means and that the Government cannot spend more money than they have. Has it occurred to these great thinkers that our means include those unused resources and that if they were being properly utilised, the Government would have more money to spend?

The second revolution that has been associated with Lady Thatcher was the abandonment of any commitment to equality. The ideology of the 1980s was that undue compression of incomes brought about stagnation: get taxes and welfare benefits down in order to increase the incentives to work and innovate and the result would be a more dynamic economy and one in which wealth would steadily trickle down without any need for obvious redistributionary policies. The trade-off has not happened—growth was slower than it was in the Keynesian period and we are waiting for the trickle-down to happen. In the past 30 years, the share of income captured by the top 1% has more than doubled to 14%, leading to the joke that the new class struggle is between the have-nots and the have-yachts.

The economist Tony Atkinson, the great expert on distribution, writes:

“Moves towards reduced income inequality were dramatically reversed in the 1980s with a sharp rise in inequality”,

a rise which was historically unprecedented. Margaret Thatcher and her successors—we should note this historical fact—dismantled two of the main drivers of equalisation: the system of progressive taxation, and strong trade unions. The old tax system set, in effect, a cap on post-tax incomes and profits. The call for caps on bankers’ remuneration today simply reflects the failure of the current tax system to limit its stratospheric rise. The main achievement of the trade unions was to push up pre-tax earnings in line with productivity. This function has now collapsed.

The triumph of greed over professionalism and restraint has been most obvious in the financial services sector, which, ironically, new Labour decided was to become the powerhouse of the British economy. I understand well the frustration of the noble Lord, Lord Sainsbury of Turville—as a Minister for Science and Innovation under new Labour, he was told that the financial services were a great source of innovation. When he asked for examples he was told that,

“tax avoidance is an art where we are very innovative”.

I have no doubt that we will recover from the present semi-slump; we may even recover sufficiently by 2015 to give the coalition—or the Conservatives at least—another term of office. My great fear is that, having got to something like normal, we will come to believe that we can continue much as before, except for a few watered-down reforms to the banks. I believe, on the contrary, that the system of political economy that has evolved since the 1980s has, for all its benefits, grave flaws that, if allowed to continue uncorrected, will land us in a succession of crashes and crises of differing degrees of severity, which will cumulatively destroy support for the free-market economy. The chief of these flaws in our system are, to repeat Keynes,

“its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes”.

The Government have a big role to play in addressing both. I am grateful to the noble Lord, Lord Haskel, for giving me the chance to set out my ideas on these matters.

Photo of Lord Hunt of Chesterton Lord Hunt of Chesterton Labour 1:03 pm, 18th July 2013

My Lords, I welcome this debate, which was introduced by my noble friend Lord Haskel, and the remarks made by the noble Lord, Lord Cope, following him, which very much set the tone for the importance of SMEs, which I will touch on. I declare an interest as a director of a small scientific consulting company in Cambridge and former director of the Met Office. I did a quick calculation while listening to the noble Lord, Lord Skidelsky, of what the ratio was of the highest and lowest paid people in those companies and it was somewhere between three and four, which is perhaps a bit less than in the City.

As my noble friends Lord Haskel and Lord Giddens explained, modern economies are partnerships of the public and private sectors. The present Government did not understand this when they came to power. I quote Mr Willetts, who made a speech at the Foundation for Science and Technology, under the watchful eye of the noble Earl, Lord Selborne, the chairman:

“There has been a real shift in thinking”— that means “our” thinking, Tory thinking—

“over the past few years. Many of us”—

Tories—

“used to think that the only thing Government had to do was to get out of the way. Large numbers of businesses still want that; they simply want lower taxes, easier planning rules, less red tape. Yet an increasing number of businesses and industrial sectors look to Government to play a far more creative role”.

Mr Willetts thinks quickly, of course, and in two years he has learnt what we now all understand. Perhaps the noble Lord, Lord Bates, might have a talk with the new Mr Willetts.

Lessons have, however, been learnt by this fast thinking Government and we now have the Technology Strategy Board, which has survived with some great successes—and I declare an interest as an adviser to the company, Tokamak Solutions, which has benefitted from important input. Nevertheless, many smaller companies, as the noble Lord, Lord Cope, said, find dealing with the TSB and BIS quite difficult, and the general view is that it is often easier for these companies to work through European Commission projects, which are much easier to enter and have been very effective, as I know myself. I also did a recent survey of some companies at the Cambridge Science Park, which also found that working with EC projects was at least as easy, if not easier.

Another important role for the TSB in future might be to assist smaller companies—SMEs—in providing technology to larger companies. In the United States, there is a very strong push by government to ensure that big companies sponsor smaller companies and use their products. The same thing does not happen so widely here in the UK. We need a survey of these developments. I hope that in winding up the Minister will explain these Damascene conversions of the Government, how current regional development assistance compares with the previous RDAs, and whether it meets the ambitions of the noble Lord, Lord Heseltine, for this.

What can the UK learn from the industrial and technology policies of Germany, France, and the USA, which we have been hearing about? One matter that we have not discussed is industrial democracy, which is no longer a very fashionable term. There was a great report by Lord Bullock in the 1970s. One of the important roles of the supervisory board in Germany, as some leading businessmen have told me, is its considerable breaking effect on the business of buying and selling companies. It sometimes seems that companies in Britain are just a higher form of gambling—buying and selling and buying and selling. The Evening Standard gets frightfully excited when there is more buying and selling. For the workers, however, this is not always brilliant, and in Germany there is a clear way of looking at this.

Nevertheless, despite the normal Manchester economic liberalism of the Treasury, it is now looking at the idea that industrial democracy, or employee partnership, might have some advantages. Everybody knows that when companies have strong employee involvement—notably, John Lewis—they tend to use UK suppliers, and they help to support other British companies. If a company is bought by an overseas company, it might put together cars, for example, but a lot of the research is often done abroad. I note the example of my noble friend Lord Bhattacharyya, who has been very successful in getting excellent research by incoming investing companies, but this does not always happen, as we have seen with the utilities and other companies.

Another feature of the question whether business is a provider provide services for the community or a higher form of gambling is that there is now a tendency to think that high-tech science is also a form of high-tech gambling—you find a company, its shares shoot up, it goes on the stock exchange, you sell it, then poof, off you go. I am afraid to say that we have seen a lot of that in the UK. If, in receiving government money, these companies had to ensure a much clearer relationship with the community and the Government, we might very well stop this gambling. I have friends now living in rather exotic places around the world because their companies went whoosh, and off they went. This is not business, it is not science, and it is not helping the country.

Mr Willetts also learnt through government laboratories, in his fast-thinking mode, that technology is very important. We used to have the world famous Royal Aircraft Establishment and the Royal Radar Establishment. Where are they? We had the National Physical Laboratory, which Sir Keith Joseph went to visit and which does survive. When he saw annual reports of research on the shelves of that laboratory, he said, “Why do you do that?”. Of course, Sir Keith Joseph went to Oxford and did not understand science. There are brilliant scientists at Oxford, but All Souls has a problem.

Nevertheless, despite these trends, we have world-famous laboratories. The Met Office has a world-famous laboratory, and we have others run by the Government. The important thing is to ask where we go from here when we have lost many of our laboratories in electricity, hydraulics, gas and so on. What are we going to do? We need a stronger effort to work in partnership with Europe, which has the world’s greatest laboratories, as we have seen with CERN and the European weather centre—and I helped to set up a thing called Ercoftac, which brings together all the aerospace companies and universities across Europe. This is the kind of networking approach that we need. I hope that some of these suggestions will be useful.

Photo of Lord Mitchell Lord Mitchell Shadow Spokesperson (Business, Innovation and Skills) 1:10 pm, 18th July 2013

My Lords, first, I congratulate my noble friend Lord Haskel on securing this debate. After his recent illness, it is wonderful to see him back in his place, giving them hell as usual. The noble Lord is my mentor in your Lordships’ House. Whenever I need advice, and often when I do not, he has been there to guide me and give me the benefits of his huge experience and wisdom. I thank him most sincerely.

Noble Lords will recall the atmosphere this time last year as we eagerly awaited the opening of the Olympic Games. When the Hammersmith flyover needed major repairs, a whole group of people could hardly conceal their glee. Noble Lords might remember the people who said that it was going to be too expensive at £9 billion, the transport system would not work and the whole place would collapse. They said that it was going to be a national embarrassment, and many of them decided to get out of the country. They went to France or America or wherever, and was it not good to see that we proved them so wrong? Who today complains about the cost?

One reason why the Games were so special was the extraordinary success of Team GB, but this achievement did not happen by chance. That glorious summer of Olympic success was not achieved by a Government who retreated and let the athletes get on with it, nor was it done through government picking winners. The unpredictability of sport, as with business, would have made that a foolish gamble. Instead, it was sustained by an active government programme that provided practical support and funding to British athletes. We in business can learn a lot from this, too.

Britain needs a proper British investment bank with strong regional presence and a long-term focus. We are the only country in the G8 without a state-backed institution like this. Its absence has made it much harder to correct the collapse in small business finance after the banking crisis in 2008. We need an active industrial strategy that can help to remedy one of the chronic weaknesses in British business—a lack of investment and a lamentable achievement in productivity. From the 1970s onwards, investment has been lower in Britain than in most of its competitors. The fall in investment after the financial crash has been greater and longer lasting than for any comparable recession since 1973 or 1990. Without radical change, there is a danger that any economic recovery will be based upon a consumer take-up, rather than an investment surge. It will leave us extremely vulnerable to future economic shocks.

I have serious concerns about the Government’s progress on infrastructure investment. Of the 576 projects that have been announced by the Government, only seven have been completed; 80% have not even been started. I simply do not understand the Chancellor’s recent statement announcing so many infrastructure projects, all of which will be delayed until after the election. Why wait? Why dither? Just do it, and do it now.

I am particularly concerned that poor planning and implementation have hampered the delivery of super-fast broadband to many areas of the country, particularly rural areas. Despite all this, e-commerce in the UK is thriving. We have a higher share of our GDP in this area than any other developed nation. This is brilliant, but we cannot take our feet off the accelerator. I have been horrified by how many business-led reports I have read recently that seem to totally ignore the digital revolution taking place before our eyes. Sometimes I think that politicians think that they are digitally savvy just because they use Ocado or Amazon. In their mind’s eye, too many still seem to regard the digital revolution as a bit player in the wealth of the nation. As I have said before, if business people are not having sleepless nights over their potential exposure to the digital onslaught, their future will be bleak.

Here is the truth: the digital revolution is Schumpeter’s creative destruction writ large. Just look how traditional channels of distribution have been destroyed by the new media—music, movies, printed news, books and photography—and the companies that have gone to the wall, including Jessops, HMV and Blockbuster. There are many more to come. The sectors just about to fall to the advent of this tsunami of technology include banking, medicine and education. The changes in these sectors are particularly breathtaking. This new digital order represents a flat world where my competitor and the person challenging me for my job may well live halfway around the world, and our thinking needs to reflect it.

I take as an example HS2, which I must say I first enthusiastically supported but which I am now having second thoughts about. I do not think that we have factored in the technological changes that are upon us. I do not understand the logic of spending £40 billion and more just to enable people to get from Birmingham to London 23 minutes earlier or Manchester to London 50 minutes earlier for them then to be stuck in monster traffic jams on the Euston Road. I adore using the TGV in France, and I have been envious of that country’s achievements, but could it just have been a 20th-century phenomenon? Just for once, why do we not try and project what the world will look like in 20 years’ time, when HS2 is scheduled to be completed, and in doing so remember what the world looked like 20 years ago? Which of us could have predicted Skype? Who would have thought it would be possible to speak to one’s children in Australia holding a small device in one’s hand, to receive the transmission in high definition and perfect sound, and for there to be no delay in transmission? Who would have guessed it would also be free of charge?

Now let us project forward. In 2033, can we imagine a technology that could transmit a perfect hologram of a person halfway around the world sitting on a chair in front of us—a hologram where you are hard pushed to tell the reality from the image? If this and thousands of other technologies are bubbling away, who in their right mind would journey to a meeting starting early in the day and getting home late at night, no matter how fast the train will travel? That is why we need to project the technology forward in all these mega-expensive infrastructure decisions.

I was going to talk about my new role, which is no longer on the Front Bench, but I shall leave it because I have hit my time.

Photo of Lord Kirkwood of Kirkhope Lord Kirkwood of Kirkhope Chair, Information Committee (Lords), Chair, Information Committee (Lords) 1:17 pm, 18th July 2013

My Lords, it is a pleasure to follow the noble Lord, Lord Mitchell, in his interesting and powerful speech, with which I entirely agreed. This is an important and timely debate. The thing that I am picking up from the debate—I hope that the Government are picking it up —is that things are really seriously changing, not just economically but technologically, in a way that is often hard to grasp. Governments need to make plans on the basis of a much longer-term perspective to try to accommodate some of these changes. We have heard that from the noble Lord, Lord Monks, with whom I agreed, the noble Lord, Lord Skidelsky, with whom I agreed as well, and the noble Lord, Lord Giddens. All of them made important analytical speeches and all were looking forward and trying to understand the significance of the extent of the change that we have seen. I certainly think that investment banks and digital revolutions are part of that consideration and analysis.

The role of Government is twofold. First, we need to start thinking about managing expectations better in terms of what the future is realistically likely to hold. As part of that discussion, we need to consider how sustainable growth will look and can be provided in the middle to longer-term future. I have real fears that the rather loose assumption that we are going back to the trend levels of growth that we have known in the past is likely to be wrong. The Government need to be brave enough, if they believe that the analysis justifies it, to start discussing these issues in a grown-up way with the public and shaping people’s expectations about wages, growth and living standards over the middle to longer term. That is a very important role for the Government at the moment because of the exponential levels of change that we may be witnessing.

Secondly, the Government need to plan a little more coherently and systematically what the future policy framework is. We had some powerful speeches from colleagues earlier about the need for continuity. Two or three colleagues mentioned the importance to SMEs of continuity. I agree with that. As a foot soldier in the modern coalition Government, I struggle sometimes to understand what the growth policy is. I understand what the austerity policy is because that hits me in the face every time I turn a political corner, but I struggle to understand exactly where the five to 10 year programme is heading. I am a little surprised that the important work of the noble Lord, Lord Heseltine, No Stone Unturned, has not been referred to more often today. I wonder whether the Government are founding their thinking on that. Many of the recommendations of the noble Lord, Lord Heseltine, are correct and should be pursued.

How are all of these major programmes—whether it is No Stone Unturned, the European structural funds, apprenticeships schemes or the Work Programme—melded into a vision that the coalition Government can put forward with confidence at the next election in answer to the middle and long-term challenges? That vision is absent at the moment. It is going to be quite difficult because the election is looming and that makes it harder for any sensible policy-making to be worked through and promoted.

The other thing is that in the spin and the stunts that are used to announce important policies—we had an announcement this week about the pupil premium—the policy gets lost in a lot of noise. The Government should really be much clearer in what they are saying. They need more focus, they need more persistence, and they need to concentrate more on delivery than on making public announcements. They need to separate the signal from the noise. I looked at the Financial Sustainability Report, which was published yesterday. Its long-term views about demographic assumptions, climate change costs and a decline in North Sea oil revenues compound my fear that there are some real problems that we are not yet properly addressing.

Finally, I turn to some issues which are second order but are very important to me. They come into the category of inequality to which the noble Lord,

Lord Skidelsky, rightly referred. The Government need seriously to address long-term and youth unemployment. Incidentally, if people are trying to address the housing benefit budget in a meaningful way, we need to have some plans for development of social sector housing units over the next five to 10 years. There is a huge agenda that the Government need to be addressing in the middle to longer term. If we do not do that, in the near future we shall find ourselves during an election with only half a story to tell. That would not be in our interests as a coalition Government and it would not be in the long-term interests of the country.

Photo of Lord Ahmad of Wimbledon Lord Ahmad of Wimbledon Lord in Waiting (HM Household) (Whip)

Before we continue, I remind noble Lords that this is a time-limited debate. When the clock strikes five, noble Lords should be looking to make their concluding remarks.

Photo of Baroness Turner of Camden Baroness Turner of Camden Labour 1:24 pm, 18th July 2013

My Lords, I thank my noble friend Lord Haskel for introducing this debate and for the way in which he did so. Of course, the Government have a major role in generating prosperity and the employment prosperity should promote. The problem is that, as many of us see it, the present Government appear to believe that it all should be left to market forces, even though experience indicates that this is mistaken. We are told that there are “green shoots” and that things are improving, but I have doubts about that. Living standards are continuing to fall. Vital benefits are being cut or frozen. Housing is in crisis, particularly in London. I have said repeatedly in this House that rents are too high and wages are too low.

It is said that employment opportunities are improving. Only a little, it seems to me, and not for young people—or older. Those over 50 have great difficulty getting other employment if they are made redundant. All this indicates that the Government’s policies are not working, and we have yet to feel the effects of the public service cuts due to come onstream in the autumn.

Meanwhile, the Government are proceeding with their policy of cutting back employment rights. Access to tribunals is being made more difficult and will now be charged for. Changes in the law will make it more difficult, if not impossible, for an injured worker to claim compensation. Whistleblowers intent on drawing attention to dangerous situations are to lose some protection. The ridiculous scheme—defeated in this House but endorsed by the Commons—whereby workers can give up all employment rights in return for shares has nevertheless been introduced by the Government, although I think without much success. The Government seem to believe that all this will increase employment opportunities. I do not think so. The Government should understand that an enthusiastic, committed and well paid workforce is a major asset. SMEs have already benefited from a low-paid workforce, and this has not produced an economic revival: quite the contrary.

The role of the unions should not be underestimated. My own union has recently drawn attention to the work being done in the automotive industry, which is currently very successful. There is an industry committee, on which unions participate. The union has drawn attention to the very successful arrangements in Germany where the workforce is involved through workplace committees. Unions are not enemies, although some newspapers insist that this is so. Their contribution in the field of education and training should be encouraged and respected. The TUC programme, Unionlearn, is well known and successful.

Investment, however, is of course the key. There are many areas of the country which were once thriving but where the factories and workshops which once employed the local population no longer exist. As a result, the local economy is stagnant. There is a need for area development. It is now generally agreed by speakers in this debate this afternoon that our economy needs to be rebalanced; we cannot rely just on financial industries, which we have done in the past. There needs to be an investment bank under government direction so that appropriate investment can be made.

None of this will be easy, but current policies are making things worse, not better. Inequalities are becoming wider—a small minority is rich but others are much poorer. It is time to review current policies.

Photo of Lord Stone of Blackheath Lord Stone of Blackheath Labour 1:28 pm, 18th July 2013

My Lords, what I am about to propose in this debate possibly applies more to the following debate on the future of civil society, but I am only going to speak here. Perhaps Hansard can cut and paste my speech into the next debate so that I do not have to speak twice.

Seriously, these two issues are inextricably interlinked. The way in which we generate economic activity affects civil society enormously, and when we use terms such as “businesses”, “the Government”, “society” and “the economy”, we must remember that they comprise unique individuals interacting together as a whole, and that the way in which we conduct ourselves as individuals within government, in generating prosperity, and in civil society is greatly affected by our self-knowledge.

I am pleased to be associated with an organisation called Self Knowledge Global Responsibility. It exists to educate and to raise greater awareness of the connection between individual self-knowledge and sustainable development and civic responsibility; and to encourage people to be better citizens in fields such as social business, sustainable agriculture, ethical investment, low-impact buildings, and education and conflict resolution. Essentially, it is saying that if you are globally responsible you must strive for self-knowledge, and with self-knowledge you must be globally responsible. The founders of SKGR, Aaron Cass and John Hill, know that self-knowledge can be engendered by mindfulness. Mindfulness is the gift of mental functioning that can be engendered with practice and, with it, insights and awareness arise.

Your Lordships may feel that I am straying from the subject and that I am talking like some head in the clouds 1960s “flower child”. I suppose I was that—but I was also the joint managing director of Marks & Spencer when we were generating profits of more than £1 billion a year. David Sainsbury was running Sainsbury’s at that time. When we both entered your Lordships’ House both businesses were profitable and growing because the management and the whole team treated as individuals our customers, our staff, our suppliers, even our competitors, our shareholders, the community in which we traded and the global environment. We sought to manage in a caring, responsible, enabling way, with long-term vision. We understood that the effects of our actions in running these businesses were felt by all people at all times.

Coming back to the role of government, Congressman Tim Ryan of Ohio brought out a book recently entitled, A Mindful Nation, in which he shows that mindfulness is being taught and used effectively in classrooms, hospitals, research labs, military bases and in boardrooms and businesses across his country A brilliant business coach, Manj Weerasekera, says that mindfulness can positively impact productivity in all areas because mindfulness is paying attention on purpose in the present moment and in a non-judgmental way and, through this, insights and awareness arise. By the way, studies also show that mindfulness can lead to happier communities.

Returning to the theme of my noble friend Lord Haskel, we have a duty of care to lead the way to economic prosperity and to look at new options with an open mind, especially as so much of the old has failed. Alongside the suggestions made today by noble Lords about quality institutions, pragmatic regulation and enabling government, we must also consider a mindfulness strategy for Britain. I was delighted when David Cameron, the Prime Minister, introduced a well-being measure into the Office for National Statistics, and said that it was not all about GDP. This is a cross-party issue. Mindfulness is the path leading back to the individuals who comprise our society and handing responsibility back to them. It is an energy model based on self-knowledge that is designed to increase productivity. When people are more self-aware, they become more aware of the contributions they make in business and in society as a whole.

This year, a mindfulness strategy is being designed by my honourable friend Chris Ruane MP and my noble friend Lord Layard and others. It builds upon the work currently being done in this field by universities such as Bangor, Oxford and Exeter. They are working on mindfulness in schools and universities for students and teachers, in the health service for patients and staff, in business for employees and management and in the criminal justice system for offenders and police. By the way, for information, noble Lords may wish to know that a mindfulness course is operating here on the estate, with Members of the other place from all parties and a number of Peers. It is run by Professor Mark Williams and Chris Cullen, using their scientifically proven method of training contained in their book, Mindfulness:A Practical Guide to Finding Peace in a FranticWorld. We have a new series starting here in the autumn.

Her Majesty’s Government, in considering our approach to the role of government in addressing the need to invigorate the economy, sustain the environment and create a civil society, may wish to help us develop a strategy for mindfulness across several areas of society where scientific proof of its beneficial effects is already on record. Drawing all this together in a cohesive plan could engender widespread well-being and stimulate the economy at the same time.

Photo of Lord Shipley Lord Shipley Liberal Democrat 1:34 pm, 18th July 2013

My Lords, I thank the noble Lord, Lord Haskel, for enabling me to say that I count myself as a progressive capitalist. I understand the importance of profit and the private sector to drive growth and tax revenues and the central role of government to intervene in market failure and to prevent abuses of capitalism when it consumes excessive wealth rather than creating it. It is for the public sector to provide leadership in infrastructure, education and training, public research and particularly leadership in business and innovation, identifying and helping to finance growth areas that will increase our competitiveness.

It is, of course, a fundamental task of government to redistribute wealth to reduce social and regional inequalities, otherwise capitalism cannot be progressive. I therefore support the concept of the enabling state. Are the present Government enabling? We have low interest rates, competitive tax rates, an increasing emphasis on science and technical subjects in education, significant investment in infrastructure and increasing access to finance. The Government have, among other things, supported innovation, seen the creation of 1 million private sector jobs and made major investment in roads and railways. There is the Green Investment Bank, the business bank and improved access to superfast broadband. This is all happening as we pursue the rebalancing of the economy away from an overreliance on London and financial services. In this respect the Regional Growth Fund, which is now worth £3.2 billion, is helping to drive that change, so, yes, I think that the present Government are an enabling Government.

There are three areas to which I wish to draw your Lordships’ attention and to which I hope my noble friend the Minister will respond. The first is skills. Employers in manufacturing, processing and engineering have problems recruiting right across the UK. It is a sad reflection of all the money that successive Governments have put into skills that we still have major skills gaps in our economy. Local growth funds may well provide an answer as they can require skills providers to be locally accountable for failures to meet demand, and much better forward planning should result. The concept of local growth funds is drawn from the report by the noble Lord, Lord Heseltine, No StoneUnturned.

Secondly, the Government are doing well on apprenticeships but we need to do much more. Fifteen per cent of our under-24s are unemployed but only 5% of graduates are unemployed. As the noble Lord, Lord Bradshaw, pointed out, we need more high-quality apprenticeships in the right high-level skills. Rightly, we compare ourselves with Germany, where there is much greater structural coherence between the private and public sectors in creating apprenticeships that turn into sustainable jobs. The Higher Apprenticeship Fund is an important contributor but we need to learn much faster from the German experience than we have done.

The third thing that I would like my noble friend the Minister to respond to relates to public procurement policy in the construction sector. We seem to be developing a procurement system between national and local government that favours big national construction companies at the expense of mid-sized regional ones. This is potentially damaging to regional growth. Building firms working up and down the country have recently bid for a place on a national procurement panel for the Priority School Building Programme. While 12 firms have been selected for the north panel and 12 for the south, nine of the firms selected are on both panels. We talk a lot about a lack of competition in the banking and audit sectors, but are we heading in the same direction in the construction sector with the big nine? It is impossible for medium-sized firms to qualify for a place on these procurement panels. Even as a joint venture with a combined annual turnover of £250 million, they are still ineligible even though they may have done excellent and relevant work in the past. Since all these firms ask for is the right to compete and to tender, it is hard to see what public interest is being served in preventing them doing so. There are serious implications for the prospects of regional firms because they will lose the opportunity to grow bigger and generate more jobs and wealth in their local areas.

Then there is the Scape framework used for procurement by some local authorities, housing associations, some parts of the NHS, some police authorities and universities. This framework requires contractors to have an annual turnover of more than £500 million to be eligible to carry out jobs starting even as low as £2 million. Very few mid-sized regional contractors can meet this turnover requirement but they could carry out the work just as well. There is a requirement to take into account local supply chains and subcontractors because they are supposed to be used by national contractors, but it seems that this is frequently not the case. That is an erosion of job opportunities for local people, often in areas of high unemployment.

Then there is the question of the reinvestment of profits. Ten of the contractors on the northern panel that I referred to are headquartered in the south. Do the surpluses made on the projects undertaken in the north of England get reinvested in the place where the work was done, or do they get siphoned off to spend elsewhere? We need to know. The Government accept the need to boost the regions but I ask the Minister to look very closely at regional procurement so that local people can get jobs, skills can be maintained and enhanced in all regions and cash surpluses can be reinvested locally to train the workforce of the future.

Photo of Lord Hoyle Lord Hoyle Labour 1:40 pm, 18th July 2013

My Lords, this House is at its best in debates like this. Everyone who has taken part has tried to be constructive and point the way for the future. We would not be having this very useful debate if it had not been introduced by my noble and good friend Lord Haskel.

I was very pleased that the noble Lord, Lord Bradshaw, talked about engineers because they are not very often talked about anywhere. I say that because I started my career as an engineer in the railway workshops at Horwich. Although locomotives, particularly steam locos, look extremely glamorous when they are going up and down the track, it is not quite so glamorous when you are working in a smoke-box and doing repairs on them. I followed what he was saying on taking National and Higher National Certificates. If you live in a village they know everything about you, and I remember two people talking about me in my own village. One was saying that I started as an apprentice engineer and then took my National Certificate, then my Higher National Certificate, then my Post-National Certificate. The other one said, “You’ll tell me he’s won the ruddy Grand National as well in a moment”.

I start from the importance of manufacturing industry in those days when it was all about manufacturing. From the 1970s onwards we lost about 30% of our manufacturing industry. It was not fashionable to talk about manufacturing industry then; it was all about the service industry. My noble friend Lady Turner and I know this perfectly well, as service industries were a recruiting ground for our trade union activities. We have to have a balance and do all that we can to help the manufacturing industry to succeed. Manufacturing industry went down from 32% in 1970 to 11% in 2010 but, despite that, 46% of our exports are from manufacturing industry. That is why we need to look at where the growth areas are in those fields. We would all agree that the one great manufacturing industry that remains is the aerospace industry, where our success is quite remarkable. I could mention the defence industry but we have to be very careful, given the press reports on some of the countries that we are exporting to—that is a debate for another day, isn’t it? There is room for growth in the pharmaceutical, micro-electronic and chemical industries.

This has been a very progressive and helpful debate. I agree with almost everything said by my noble friend Lord Mitchell. There is a need for a business investment bank to help to promote industry and small industry in particular—a business investment bank that leads and, as my noble friend rightly said, is backed by regional banks. We need to do all that we can and I hope the Minister will agree that the Government ought at all times to favour British industries in its procurement if they possibly can. In this way, and by going for research and development, we can begin to reverse the decline that has occurred in manufacturing industry. If we do that, we have a great future in this country.

As my noble friend Lord Haskel said, Germany, quite unlike us, has always relied on the manufacturing sector. It is the most successful country in Europe and we can learn a lot from it. As my noble friend Lady Turner also said, we must increase the participation of employees and look at the German model of including employers and trade unions in management. They have benefited from that and there is a lot that we can learn.

I see that my five minutes are nearly up. I hope that the Government, who have a central job to do, take note of a lot that has been said in this debate. There is a big role for the future of a business investment bank, backed by regional banks. If we do that, not only will we benefit, but all of us in the country and the country as a whole will benefit as well.

Photo of Lord Davies of Oldham Lord Davies of Oldham Shadow Spokesperson (Transport), Shadow Spokesperson (Treasury), Shadow Spokesperson (Wales) 1:46 pm, 18th July 2013

My Lords, the House owes a debt of gratitude to my noble friend Lord Haskel for introducing a debate that has produced so many varied but constructive speeches about the circumstances in which we find ourselves. My noble friend emphasised the advantages to be derived from business and Government working together, and identified the way in which this co-operation was essential if we are to get out of our present difficulties.

Two speakers also put the present position into a more general perspective. My noble friend Lord Giddens stressed the fact that the crisis is very far from being over. No country has successfully re-established itself from the crisis which obtained in 2007 and 2008. In any case, Britain is well down the list. That helps to explain why there are so many difficulties right across our economy and puts into perspective the anxieties of noble Lords such as noble Lord, Lord Cope, and the noble Baroness, Lady Kramer, about SMEs. The reason why the banks have been reluctant to lend is because they have been at the centre of this devastating crisis. That has presented them with problems so great that the state had to step in for two of the major ones, and huge sums of money are at stake.

The noble Lord, Lord Skidelsky, also indicated that if the Government took no responsibility for restoring demand in our economy then it was likely that we would continue in the present difficulties, which are not to be underestimated. Real wages are lower under this Government and, when they go out of office in 2015, will have fallen by 2.4%. We all know about cuts in benefits, so that section of the community is paying the price. So wage-earners and those on benefits are suffering, and we all recognise that unemployment goes right across the economy and affects a very large number of people.

In its economic survey of the UK economy, the OECD made the nature of the problem quite clear: productivity underperforming in relation to the rest of the OECD countries. We had fallen, at the onset of the recession, by more than other countries in the OECD. The noble Lord, Lord Bates, indicated successes with regard to exports, but we have an increasing balance of payments deficit. Despite a 20% sterling depreciation, Britain is still nowhere near earning its way. That is the depth of the crisis into which we must put the context of what we need to do about policy, particularly in relation to industry.

It has been argued that we are making clear success in some areas, and indeed we are. The noble Lord, Lord Bhattacharyya, speaks with great authority about the relationship between science and research, and the fact that we have high-class universities that help our industry. However, the noble Lord emphasised that we need to identify the results of such investment. That surely must be critical because we can live in a fool’s paradise if we think we are doing the right things but have no measurement of the outcome of policy.

This is crucial in one area that emerged in this debate and was raised by many speakers on both sides of the House; I refer to the skills gap and the skills dimension. Successive Governments have addressed themselves to this and gone in with great intentions to invest. Certainly, the previous Labour Government invested greatly in colleges and the Learning and Skills Council, and addressed the skills deficit. We have not solved the problem; indeed, far from solving it, as many noble Lords have identified, we are well behind other European comparators. It is not easy for the British economy and society to adopt German perspectives on how to run industry and develop skills. The German apprenticeship system is very different from the situation that confronts British industry. However, we certainly need to address our minds to the level of skills, which is palpably too low to serve the needs of the nation.

The other question is what can be done to invest in infrastructure to promote jobs and demand, as the noble Lord, Lord Skidelsky, mentioned. One can only say that the Government are acting late on this. They have so far done nothing of any merit with their programme, and it will still be the case that capital investment will be lower in 2015 than it was in 2010. That is not a recipe for success or for the development of our economy. That applies to schools policy and particularly to housing. After all, there should be investment in the construction industry to give some stimulus to the economy but, of course, the Government have done little about it. It is therefore not surprising that the noble Lord, Lord Cope, and the noble Baroness, Lady Kramer, can identify the difficulties faced by small and medium-sized enterprises in obtaining resources.

On our side, although we have faint hopes on this, we think that the Government ought to do what my noble friend Lord Mitchell first referred to, as did my noble friend Lord Hoyle, and establish a business investment bank. We need a bank with a network of regional banks because if there is one clear casualty of this crisis it is the complete collapse of our regional infrastructure. We all know that the Government dispensed with the RDAs and then discovered that the noble Lord, Lord Heseltine, had some pretty sharp advice for them on the problems and how the RDAs actually produced investment in the regions. At present, precious little is being done.

My noble friend Lord Haskel and other noble Lords—generally those on my side, including my noble friend Lord Monks, who was emphatic—raised the issue of how we tackle short-termism in British business. “Quick results reflected in share value” is the nostrum of how our businesses work, and it is not therefore surprising that if one is faced with potential takeover bids, to which the only defence is to enhance share value, that becomes the issue rather than investment in research, skills and development of a longer-term perspective for industry.

My noble friend Lord Haskel referred to the noble Lord, Lord Sainsbury, whose absence from this debate we greatly regret. He is concerned to see how we can build a business model in which shareholders have greater strength to hold boards to account. If anyone wants an illustration of why boards need to be held to account, just consider the salaries of chief executives, board members and directors over the past 20 to 30 years. The enormous disparity between them and the people who actually do the work in industry and companies is a reflection of the power of the boards, which we do not challenge effectively.

We may have to go some way before we follow what my noble friend Lord Stone suggested in relation to Marks and Spencer or the illustration given by the noble Lord, Lord Hunt, in terms of John Lewis Partnership. It may be a considerable time before we are able to engender a framework within which businesses can be organised on those bases. However, at the very least, surely the other side, having preached for so long that the Government must lay off business and let it pursue its own objective, must recognise that the cost of the short-termism of British business—particularly the absurdity of the short-termism of British banks—is that it has contributed to the crisis that we are all facing, which we desperately need to remedy.

I conclude with some questions. I wish to come off the macro and step down a notch. My noble friends Lord Mitchell and Lord Hoyle mentioned the Department for Business, Innovation and Skills. It is a Treasury Minister who is responding to this debate but if we are to make a change to business structure, the Department for Business has to be reformed also. The department is being reduced in size; its staff are recruited increasingly from the south-east, where it concentrates its resources; and it has very little representation in the regions. It is small wonder, therefore, that we have real anxieties about the capacities of that department.

Photo of Lord Newby Lord Newby Lords Spokesperson (HM Treasury) (Whip), Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 1:56 pm, 18th July 2013

My Lords, I join other noble Lords in thanking the noble Lord, Lord Haskel, for introducing this debate, particularly because he gave me advance notice that he was to draw some of his remarks from the recently published book by the noble Lord, Lord Sainsbury, which meant that I spent a happy time reading that book while watching the cricket last weekend. I recommend it to all noble Lords.

One of the challenges for a Minister in my position after such a wide-ranging debate is to try to have a theme running through my concluding remarks. I would like to take as my theme—my text, if you like—two of the three defining beliefs of the noble Lord, Lord Sainsbury, in what he calls progressive capitalism. They are the importance of institutions, which he says need to be market-supporting rather than directed, the need for an active and competent state and the need for fairness. We have been talking very much about the first two today and I shall concentrate on those. I should like to take as my core text one sentence from the book of the noble Lord, Lord Sainsbury, which underpins a lot of what noble Lords have said. It states:

“I can think of few more challenging or socially valuable jobs than building up a high value-added business in today’s knowledge economy”.

If that is the text, I think that we are all progressive capitalists now.

The noble Lord, Lord Haskel, discussed these themes and made the point with which no one would disagree: we need to raise our game in a number of respects. I start with skills, and draw noble Lords’ attention to a press release issued today by Young Enterprise about the skills challenges that employers face, and they are quite interesting. The press release states:

“The five most important skills British employers think young people should have when entering the workforce are: communication and literacy … a positive attitude … self-management … people skills … and team working”.

As we discuss curricula and structures, at least four of those five areas of core skills are very rarely debated. I will not spend much time on them today, other than to say that we need to think about them more. I am very pleased to see that the noble Lord, Lord Stone, agrees.

In terms of raising the game, I agree with the requirement of the noble Lord, Lord Haskel, that Whitehall must raise its game. The noble Lord, Lord Mitchell, also talked of games—the Olympic Games. He commented on how much was achieved by the Government working well with high achievers. There are lessons to be taken from that, and the Government have taken one of them in appointing my noble friend Lord Deighton, who oversaw the Olympics, to bring some of the disciplines that he used there to government, not least in terms of the way in which we manage infrastructure. Everybody agrees that Governments in this country have been poor at delivering infrastructure projects to time and on budget. He is focusing his attention on getting government departments to produce infrastructure capacity plans, use private sector expertise and worry, a lot more than they have sometimes done under past Governments, about delivery.

I agree very much with another comment by the noble Lord, Lord Haskel, about the need to replace short-termism with long-termism. I commend to all noble Lords the LSE Growth Commission, which specifically looks at these issues. I am very pleased to say that members of the commission are in detailed discussions with Infrastructure UK to look at how some of their learnings can be brought to bear in the way that we do things.

The noble Lord, Lord Cope, and the noble Baroness, Lady Kramer, concentrated their remarks on SMEs, which they said were crucial. That is something on which we all agree.

The noble Lord, Lord Cope, talked about UKTI’s shift in focus towards SMEs. This is very welcome and is having a real impact. The other specific initiative taken by the UKTI—one of the most cost-effective initiatives that the Government have undertaken—is its appointment of trade ambassadors from across your Lordships’ House. These are having a material impact on developing trade links with some of the countries that we have traditionally ignored; my noble friend Lord Sharman in Morocco and my noble friend Lord Risby in Algeria, for example. We are finding that there is considerable scope for enhanced UK trade with parts of the world that we have tended to ignore.

The noble Lord, Lord Cope, talked about the challenges of the PAYE system. I agree with him. He may be right in saying that companies will find it simpler in the long run to adopt the latest technology. With regard to national insurance, we have introduced a £2,000 per year allowance for businesses. That will be particularly beneficial for SMEs. That is not a mechanical point but it is a hard cash point.

The noble Baroness, Lady Kramer, talked about funding, particularly the challenges in getting new forms of funding into SMEs. I very much agree with her. One of the leitmotifs of this debate has been people drawing on experience from elsewhere in Europe and North America. We can learn from these countries but it is quite difficult, as the noble Lord, Lord Sainsbury, says in his book, to replicate exactly their institutions. The American community development and investment funds work very well in the States, but it is not easy simply to transpose them here. On the question of new sources of funding for SMEs, one of the key things to have happened is that the PRA has in effect torn up the old methodology of the FSA in terms of getting new banks going. It was virtually impossible to start a new bank in the UK and we clearly need a raft of new banks, not least business banks. I believe that the PRA’s approach to this will prove to be extremely beneficial. In the meantime, the Government have introduced the Funding for Lending scheme, which should help small business funding and is in the process of establishing a business bank.

The noble Lord, Lord Giddens, thinks that we should be academic-led in the way that we look at these issues—I suppose that, as an academic, he would. I hope that we do not need to wait to have a raft of academic literature in front of us before we can start doing a lot of the things that he would like us to do. He talked, for example, of shale gas and whether we could take that opportunity quickly enough. As he will know, when the spending review was announced, we announced that we were taking a series of steps in the very near term to move forward on the development of shale gas here. These include developing technical planning guidance for shale gas exploration and looking at how we can put in place a generous community benefits scheme so that those communities that will be affected will be fairly recompensed. We are also consulting on tax incentives to encourage exploration. Hopefully, we are making a lot of quick progress in an important area that is bound to be controversial.

The noble Lord, Lord Monks, used a phrase that I have not heard for a considerable time, “the commanding heights”. It used to be extremely prevalent in political discussion. One of his main concerns was that too many UK companies have been bought by foreign companies and that foreign owners have different priorities from domestic ones. That is right, sometimes. However, we must have a more nuanced view. One of the most impressive success stories in British industry in recent years is that of Jaguar Land Rover. Does anyone think that there was a company in Britain that could have taken over Jaguar Land Rover and made the success off it that Tata did? I do not. It has been a phenomenal success. The Kay review, looking at short-termism and long-termism, will play a part in trying to redress the balance here, but I do not think that a great constraint on foreign ownership of British companies is a good idea.

The noble Lord spoke of the problem of top salaries and growing income inequality. That has been a very significant development in recent years, driven largely, but not exclusively, by the financial services sector. When I served on the top pay board, we looked at methods of beginning to redress this, not least by shareholder activism, and the Government are implementing a large proportion of those measures. Bank bonuses, without a bank bonus tax, have fallen very significantly—they are down 70% in the case of RBS and 40% in the case of Barclays.

The noble Baroness, Lady Valentine, raised a number of issues. I cannot deal with all of them. On airports, all I will say is that the Government taking quick, decisive action would be extremely easy if there were no such thing as public opinion. In this case, any Government would, quite rightly, take public opinion into account, as well as the narrower, though crucial, economic analysis that would underpin any decision.

The noble Baroness made a point about immigration and visas. As she knows, we are looking at methods of improving the situation in respect of visas, not least for China. We have introduced a VIP visa service for visitors from China. I could not claim that we have this right. It would be easier, in a narrow respect, if we were members of the Schengen agreement, but she knows as well as I do that that simply will not happen. We are looking at other ways of redressing the problem.

She pointed out that London is a centre for businesses that want to trade in Europe and that we need to engage in the EU as an equal partner. I agree with everything that she said on that subject. I also agree with the noble Baroness, Lady Donaghy, who pointed out the costs of adopting a Norwegian posture. To me, that is simply a risible option.

I thank the noble Lord, Lord Bates, for his speech, not least because he has saved me from saying a great deal of what I would otherwise have said about what has been happening.

The noble Lord, Lord Bhattacharyya, referred to protecting the science budget. The Government have done that. Any debate about science, particularly this one, should recognise the seminal role that the noble Lord, Lord Sainsbury, played as the first politician for a very long time to take science seriously. Without his persistence, we would not have had the expenditure on science in the previous Government that this Government have been able to build upon.

I share the support of the noble Lord, Lord Bhattacharyya, for HS2. While I agree with the noble Lord, Lord Mitchell, that the way we do business is changing, I have spent a great deal of time travelling to Birmingham over the past 20 years—once to do with developing Brindleyplace, as it now is, in its early stages and, secondly, working for a charity—and in both cases there is no way I could have done that without being there and engaging people face to face. While I am sure that a hologram of myself in front of Birmingham City Council or a head teacher would have been mightily impressive, I simply do not believe that at any point in the foreseeable future we will be able to do without transport.

We will need more of it. One of the things that has not been mentioned is that the population of the UK is set to increase significantly over the coming decades, which means that all forms of transport will need to be enhanced. That is why the Government have put so much effort into looking for longer-term infrastructure proposals, and why those proposals are included in, and form the basis of, the spending review last week.

I liked the point of the noble Lord, Lord Bhattacharyya, about evaluating the way in which we do things. I shall certainly raise that issue with my colleagues in BIS.

The noble Lord, Lord Bradshaw, referred to the value of engineers and said that there were too many apprentices who were not engineers. What we have got to do is to increase the number of engineering apprentices and not reduce the number of apprentices in a range of other industries. An apprentice in the catering industry is as important to me as an engineering apprentice. There are good examples of leading companies in the UK who have terrific records on apprentices—BAE and Rolls Royce, for example. The university technology colleges will help to change, to a certain extent, the bias against a vocational approach to careers and I hope that they succeed.

I have referred to the points made by the noble Baroness, Lady Donaghy, but I would like to comment again on the shortfall in engineering graduates. One of the matters that the noble Lord, Lord Sainsbury, mentions—and with which I strongly agree although it is controversial—is that we need to better align the courses that we provide in further and higher education with labour market needs. This is a major challenge, not least because many young people are working very hard to obtain degrees in subjects that they think are quasi-vocational, such as law, and then find that the careers that they had envisaged for themselves simply are not available because of the excessive competition. I agree with the noble Baroness that tourism is a hugely important sector that is sadly overlooked.

The noble Lord, Lord Skidelsky, raised a raft of macroeconomic conjectures. The only part of Keynes that I would like to quote back to him is the importance of animal spirits. It seems to me that animal spirits are now operating in a different direction than they were a year ago. That is one of the key reasons why we are seeing growth, and will see faster growth in the future.

I agree with him completely about looking at the unemployed as a resource. However, I think his analysis is flawed because when you look at the level of unemployment in London—8.6%--who can say that there are not jobs in London for every Londoner who wants one? London has hundreds of thousands, if not millions, of people who come from the rest of the world to take up jobs that could be done by Londoners if they were properly trained. This is not a macroeconomic failure. There is a huge supply-side failure that we have completely failed to grapple with over the years, and we need to do better.

The noble Lord, Lord Hunt of Chesterton, referred to the Damascene conversion of Mr Willetts and asked me to comment on it. I am afraid that I cannot see within the mind even of my own colleagues, far less those of my coalition partners. I am sorry that he did not mention the fact that the Government have confirmed that they are investing in the new high-performance computer for the Met Office, which I am sure he will welcome.

The noble Lord, Lord Kirkwood, talked about long-term unemployment, which is a huge problem. The work programme is designed to address that. Although it is doing better it needs to be more flexible, and I hope that it will be.

The noble Baroness, Lady Turner, referred to investment being the key. Indeed it is. The Green Investment Bank has £3 billion of government funding, and so far, of the £633 million it has committed, for every government pound committed private investment has brought in three.

The noble Lord, Lord Stone, raised the question of self-awareness. I hope that he will start with Members of your Lordships’ House.

The noble Lord, Lord Shipley, raised a number of key points, some of which I have dealt with. On public procurement policy, the problem that he raised, which was new to me, seems to be a very real one. I shall take it up with my colleagues and write to him.

The noble Lord, Lord Davies, basically suggested that things were extraordinarily gloomy. The only thing I would say to him is that there was a 1.4% growth in real household disposable income last year; over 1.3 million more people are now working in the private sector; last year employment grew faster than in any G7 country; and the number of women employed is the highest it has ever been.

This has been a fascinating debate. We have discussed fundamental issues relating to the economy and society and I am extremely grateful to the noble Lord, Lord Haskel, for initiating it.

Photo of Lord Haskel Lord Haskel Deputy Chairman of Committees, Deputy Speaker (Lords) 2:17 pm, 18th July 2013

My Lords, unfortunately our time is up and I cannot respond to each individual speech. I hope that the Minister on the Woolsack will give me a moment to say that this has been an informed, interesting and lively debate. I thank the Front Benches for their responses, which have been most fulsome. I hope that the rest of the Government are listening with an open mind because an awful lot has been said today that is based on knowledge, experience and an enormous amount of good will, which we can all value.

Motion agreed.