My Lords, I am delighted to move this Motion this morning. In fact, I rather feel like somebody waiting for the No. 59 bus and then two come along. Having two debates on productivity and the economy this week is most exceptional. Some of us were unable to get on the first bus, as it was slipped in during the summer, so I welcome noble Lords to this rather full second bus.
Now that the new Government may at last be thinking beyond austerity, I feel that it is very important to explore this, and I am grateful to all noble Lords and the Front Benchers for their participation. Perhaps debating this issue twice this week is an indication of its importance.
Let me start with the Government’s recent paper on productivity. Much was repeated in Tuesday’s debate. It certainly pressed most of the right buttons but, like many previous efforts, it is destined to achieve little. Why? It is because there is no strategy. It mentions everything; it prioritises nothing. It remembers everything; it learns nothing. If we want to move from an age of austerity into an age of productivity, it is management and leadership that should be prioritised, and then things will get done. That is because the first task is to encourage a culture of productivity, both in business and in government. Without this, much of the work that the Government do on infrastructure, housing, science and education will all be wasted. This is urgent because in the next 12 months, productivity has to make up for the gap between the recently announced withdrawal of in-work benefits and the rise in the minimum wage. Otherwise, it will lead to job losses. Quite rightly, one does not encourage productivity by driving down wages and making people poorer; that is what happens in an age of austerity.
This is especially true in local government, which has suffered twice the cuts that UK public spending has suffered as a whole. Over the past five years, the cuts in local government have not been so obvious because they are hidden: prisons or roads not being built, or reduced welfare for people whom we do not see outside of their homes. The public sector, which the Government are in charge of, is hardly mentioned in their paper. In an age of productivity, this kind of management is not good enough. If there has to be budget cuts, there must also be management and leadership to help cope with them.
After the age of austerity, the strength of our economy will rely on our ability to adapt to all the new changes coming from many directions. Our ability to manage things will be crucial. The old tools will not solve these new problems. I say this because technology is transforming everything. To start with, business markets and government services can be transformed in months as new apps and ideas reach millions of people in days. This means that it is the younger, digitally knowledgeable employees who will detect the coming change or indeed suggest one. This means that companies, particularly large companies, are going to have to change the way they manage their staff. Employees at all levels have to be free to come up with new ideas and exploit digital platforms. This kind of creativity is stifled by the more traditional forms of management.
Many jobs are now not jobs in the way they used to be defined. Many people are employed part-time or over the internet; it is called transactional employment. Many now work in an online market for casual labour, which is rapidly expanding. This is for not only on-demand or sharing services such as accommodation or taxis but, for example, computer programming. In Europe alone, there are some 20,000 freelancers registered with Upwork, which does this kind of business. The scale of this new world of work is only just emerging. Its impact on the age of productivity will be twofold. First, the Department for Work and Pensions will have to be creative and find a new form of employment arrangement that suits these changing circumstances, so that it does not just become old-style casual labour, with people losing out on training, pensions, holidays and sick pay. Secondly, as people become their own managers, so the economy becomes more productive, and the tax system will have to acknowledge and understand this.
Many noble Lords are concerned about skills shortages. By introducing a training levy, do we presume that the direction of travel is that business and industry will deal with the skills themselves? Is this why larger government contractors must now have apprenticeships?
The Government are obviously unsure about this policy because they have announced that they are going to create seven new national colleges for particular industries, such as nuclear and high-speed rail, with employers expected to contribute towards the capital costs. Meanwhile, resources are being put into university technology colleges, yet FE colleges, which offer the more expensive training and vocational qualifications, have had their funding cut. This kind of muddle confuses parents, and confuses students looking for a technical education and training for a career. To find out whether this is yet another example of the Government remembering everything but learning nothing, I have put down a Written Question asking who will pay the running costs of these seven new colleges. The crucial point is that the right technical education has to be available to those adapting to the technical change.
The age of productivity calls for a more progressive style of management, which ironically often means less management as people work with more autonomy. The Chancellor has asked Sir Charlie Mayfield to look into all this to see how corporate governance can look to the long term instead of the short term, and I am sure that his proposals will be very helpful. However, we cannot wait for yet one more report without getting the impression that Ministers are having reviews until they get the recommendations that they want, especially as there are signs that the change is already happening. The CEO of Unilever has stopped quarterly reporting. At its recent London conference, the Coalition for Inclusive Capitalism called for a more broadly based prosperity and is enlisting our major asset management groups in the City towards this end. Incidentally, Mrs Clinton is pursuing this in her nomination campaign in America.
Some companies have reviewed their governance in terms of stewardship—the kind of stewardship proposed by Tomorrow’s Company. The Bank of England is prodding banking in this direction. Some may say that these ideas have been around for a long time, but in an age of productivity, their time has come. This has to be the direction of travel. Ignoring this will once again be a sign that the Government are remembering everything but learning nothing.
The Government’s leadership on sustainability and the green environment is another important aspect of leadership in an age of productivity. The Government’s words indicate a green direction of travel, but recent actions indicate the opposite. For example, the Energy Bill will produce abrupt changes. Also, cancelling the requirement to build zero-carbon homes from 2016 adds to the feeling that we are not going to achieve the legally required targets for carbon emissions by 2020. This must be managed better. In an age of productivity, you have to carry people with you and have a purpose with which people can identify; otherwise, the very objective you are trying to achieve becomes discredited.
The Minister’s regional policy of more independence is absolutely right for an age of productivity. But in an age of productivity regionalisation must be seen not as devolving the cuts to local government, as happened in the age of austerity, but as revitalising areas of Britain away from London.
The age of productivity requires this kind of management and leadership because of the growing impact of computers and technology on work and business. In an age of productivity, products and services have to be lighter, smarter and greener. Services in particular will become yet more data driven, using algorithms that self-improve.
Would my noble friend mind if I asked him a question that has puzzled me for a long time on exactly the point that he has just made? How is it that we never see any sign of these vast increases on paper of productivity through technology —10 times, 100 times—in the aggregate productivity statistics?
At present, we have a growing system where public administration, business and trading, shopping and entertainment, travel and leisure, and running our offices, our homes and our health depend more and more on computers dealing with each other. Sometimes, we are the only human in the loop. This is what the age of productivity will eventually look like.
The danger lies in our ability to control this complexity and interdependence. The complexity defeated us in the financial sector and helped cause the crash in 2008. This is why we need management and leadership that will remember everything and learn from it.
There is also a need for government to understand that much of this investment is intangible—difficult to see, so hard to finance. It is confusing to accountants, statisticians and apparently to the Government, too—so they set up a committee to look into it. But it is crucial to the stronger policies needed to support innovation. This is why the age of productivity needs arm’s-length organisations such as Innovate UK and the alternative forms of funding which are arising.
So what are the implications for the age of productivity? Since productivity has become disconnected from pay, pay rates have hardly gone up in the past five years. The proceeds of this have accrued mainly to investors and managers. In an age of productivity, the benefits must balance out and both must prosper equally. If they do not, the age of productivity, pursued to its logical conclusion, will create an unequal society the like of which we have not seen for generations. Are we just going to allow this economic process to continue unopposed? Surely not.
The Government claim that austerity is necessary so as not to impose on future generations. I say that we have to move to an age of productivity so as not to penalise future generations. In this way, we will learn something as well as remember everything. I beg to move.
My Lords, that was perfect timing from the noble Lord, but I remind other noble Lords that we have a very tight timetable if we are going get through this debate in two-and-a-half hours. There is absolutely no spare time, so, when the clock turns to five minutes, it means that your time is up.
My Lords, I welcome this debate promoted by the noble Lord, Lord Haskel, who made several points with which I agreed. I want to focus on the austerity aspect of the debate—we are looking at the concept of “beyond austerity”—and examine some of the myths that surround it.
Austerity may have become a loaded word in some quarters, but the truth is—and this is difficult to accept but essential—that there has to be a permanent downward pressure on public spending at all times. That is essential if we want a balanced economy. Those who want to end austerity and make speeches about it at the moment really want more spending. More spending means more borrowing, which means more taxes to meet the ever-bigger interest payments. That taxation inevitably comes from workers’ wages and salaries, however much you try to squeeze the rich. So ending austerity and calling for a clear anti-austerity agenda—as I believe the fashionable phrase is—are just weasel words for shifting the burden onto working people and the poor to pay for the ever-swelling state. I find it difficult to see why people cannot understand that very obvious point, but those who cannot see it should to my mind follow the advice on the Underground ticket gate, which tells you to “Seek Assistance”. Poor Scotland under Mrs Sturgeon’s economic policy, which is declared to be against austerity, and poor British workers if ever Labour take charge.
To maintain the essential downward pressure on public expenditure, which is needed at all times and not just over the next little while, I welcome the Chancellor’s new fiscal responsibility charter. But will that be enough? I will give a little history. Back in 1970, my colleague Mark Schreiber, who is now my noble friend Lord Marlesford, who I see is in his place, believed that we should import into Whitehall three powerful new tools: PPBS, which is policy and programme budgeting systems; PAR, which is programme analysis and review; and a central capability, subsequently called the central policy review staff, to drive the questioning of every government activity.
The art of questioning is of course to ask the right questions. This was the genesis of the original CPRS idea. We wanted a central capability with colossal and persistent questioning power to ask, and repeatedly ask, the right questions of every part and function of government—every division and every agency. “What are your objectives? Could you achieve them better? Do they need to be achieved in the public sector or could they be contracted out? Could they be achieved better by the private sector? Are they worthwhile and necessary at all?”.
To mount such questioning centrally of course requires massive intellectual power, and that is what we wanted to see centred in the CPRS. We wanted it to drill down into every public sector department, division, agency and state-owned industry systematically and penetratingly, insisting on constant rejustification for every organisation’s or group’s existence in the public sector, with privatisation or abolition as the alternatives if public sector operation and public expenditure could no longer be justified. We saw this as the only way to place a firm and disciplined hand on the whole public sector and on the constant tendency, which is always underestimated, of public activity and public bureaucracy to swell and grow at all levels, which it always otherwise does.
This is not an ideological impulse: it is a practical and managerial one. Government is mushroom-like. If left in the dark and out of the light of challenge and questioning, it always grows. That is inevitable. Pressures good and bad are pushing for expansion all the time. How often one hears the cry “There should be a law about it”, or “We need a new agency”— in a trice we have a new set of regulations, more committees and more spending. That is why we wanted then and still need a really powerful and well-informed inside mechanism to assist Parliament and the national interest, as we did in 1970.
There was support then from the very top, but Civil Service chiefs were very suspicious of too much power in No. 10. Finding the right people to ask really penetrating questions was extremely difficult. One person whom we approached said, “I’m not going around Whitehall asking awkward questions. Socrates did that, and look what happened to him”. So in practice, the CPRS began the right way but it really lost its direction after the 1970s and ceased being a powerful questioning and challenging agency. Instead, it started generalising about the broad direction of government and of macroeconomic policy, so it was abolished. Today we need central spending tightly controlled at all times, and not just in the short period ahead. We could call it austerity. I am afraid that the word “prudence” has been discredited. But whatever others call it, I call it common sense.
My Lords, it is a pleasure to participate in this debate and to congratulate my noble friend Lord Haskel on it, particularly as it comes on top of the debate in the name of my noble friend Lord Monks earlier this year.
As has been mentioned, productivity has collapsed in the United Kingdom and, by the way, that is why employment is buoyant. The
Economist had it right on
“cannot get more from its legion of cheap workers, the recovery will stall”.
Output per worker is still 2% below the pre-crisis peak, while in the rest of the G7 it is 5% higher. The French could take Friday off and still produce more than Britons do in a full week, while, confounding stereotypes, the Italians’ output is 9% higher. When people are cheap, rather than invest in machines and technology, firms will hire them, so productivity is held down. While the Government’s report, Fixing the Foundations, is admirable in its rhetoric, we are still to find out what flesh there is on that issue.
On the austerity agenda, I welcome the debate because there is a need to highlight the nonsense that is spoken about it. We have to strip away the hype and expose the reality. What has happened with the Chancellor’s policy is that there has been a prolonged recession that has produced a lopsided and unbalanced recovery. Millions of people in Europe and elsewhere rightly feel that the current economic order is not serving their interests, hence Syriza in Greece, Podemos in Spain, Le Pen in France, Beppe Grillo in Italy, Trump in America and, dare I say it, the SNP in Scotland. The key is to change the nonsense on deficits and perpetual balanced budgets that the Chancellor comes out with. We need to give serious consideration to the development of a positive narrative on why running a deficit now holds the key to future growth.
In 2009, the United States was running a 10% deficit, yet today its economy is growing more than that of any European country which is running a surplus. We do not need to go back too far, just to the Second World War, when we had debts worth 250%, but at the time we had the National Health Service, a debate on welfare and a Conservative Government who, in the early 1950s, built 300,000 houses a year, a record that still stands. That has to be recognised.
I have been calling in Parliament for a state bank since 2009. We can see the example of the Nordic banks, while when the European Investment Bank gets up, it is set to finance more than £220 billion of investments by 2017 with a fiscal outlay of less than £20 billion. There is a lesson in that. Despite this Government failing to meet their fiscal targets, interest rates on UK public debt are still astonishingly low: 30-year and 50-year gilts yield 2.4% while the yields on comparable index-linked gilts are close to minus 1%. If anything comes near being a free loan, that is it, so there is a need to invest and for growth-promoting borrowing. That is what is required.
We also need to expand our thinking. Yes, businesses are wealth creators, but it is more than that. We need a fusion of business, the state and the working population to create wealth. I remind noble Lords of Google and Apple. Google was given a grant by the US National Science Foundation which allowed it to discover its own algorithm. Without that state funding, it would not have happened to Google. If one side of the triangle of business, the state and the working population is missing, we will not realise our aims. We have to reject the Chancellor’s narrow and woefully misleading view that the sole economic problem is the budget deficit. The main obstacles are pitiful productivity levels, the poor performance of manufacturing industry, a lack of capital investment and the resulting balance of payments deficit. We need new policies, but above all we need a new mindset. If my noble friend Lord Haskel’s debate today has introduced a chink of light for that, it will have done the House a great service.
My Lords, the Chancellor’s declared aim is to shrink the state—to turn Britain into a country with a strictly limited role for the public sector and low taxation. In fact, the Government have even gone so far—incredibly—as to commit themselves to a legislative ban on certain tax increases.
The result of this policy in the next few years will mean, as has been pointed out by the noble Lord, Lord Haskel, major cuts which will have to be borne by local authorities; welfare budgets will be seriously affected, as will public services such as the police. It is probable that we will find that even education and the National Health Service will not prove to be exempt. The Government, in effect, plan the withering of the welfare state. They rely on the free market and deficit reduction to produce growth.
Free markets are not efficient; reckless deregulation and the failure of financial institutions, not profligacy and borrowing by Governments, were the main causes of the crash in 2008. Spain and Ireland, for example, were running budget surpluses before the crash. What could be more convincing evidence of market failure than the emergence of banks which were able to take huge, unjustified and disastrous risks, and had to be rescued because they were too big to fail? The best way to reduce deficit, as history shows, is by growth, not austerity. As the noble Lord, Lord McFall, pointed out, Britain’s record between 1945 and 1970 and that of the United States during the Clinton presidency are only two of many examples.
In fact, contrary to the mantra propagated by market fundamentalists, public investment is generally not less productive than private. Not only does it promote essential public goods but, as the noble Lord, Lord Haskel, pointed out, it promotes innovation through basic research which the private sector regards as too risky or unprofitable. That has been essential in the United States, for example, to the success of private IT and technology companies. In Britain, the National Health Service is far more efficient than private health provision in the United States. Of course, public investment must be paid for by taxation, but as the famous American judge Oliver Wendell Holmes pointed out:
“Taxes are the price we pay for civilisation”.
Further, contrary to the mantra of market fundamentalists, high taxation has not historically proved incompatible with economic growth. Indeed, periods of high and progressive taxes in the United States as well as Europe after the war were, as Piketty has shown, times of unusually fast growth, particularly in high-tax Scandinavian countries. In fact, it is inequality that can seriously hold back productivity and growth; it destroys good will and a sense of fairness about relative incomes, which are essential to trust and effective teamwork which, in turn, enhance productivity.
A shrinking state is the creed of the Tea Party. It is the path to a dysfunctional society. We should not travel one more miserable inch along such a fearsome road.
In politics, current issues can obscure future opportunities. Ministers must have sweated over their deadline to offer 40% budget cuts last Friday. We have had a few pressing issues to absorb us on these Benches too. So it is a pleasure to be able to think of the future.
In the search for growth beyond austerity, we must look beyond our own borders. This may not feel comforting; we know the problems of the eurozone and now fast-growing economies appear unstable as well. Yet for all the headlines, China is still growing. Domestic retail is up 10%, innovation spending is surging and infrastructure spending is a quarter of a trillion dollars. Yet our exports to China are just 1/20th of our total. So why, as the EEF says, are half of our manufacturers and the Government concerned about China? It is not simply exchange rates—Chinese firms now produce quality products and are stronger competition, as we have seen in the automotive sector. Western growth depends on partnerships with economies with expanding domestic demand and quality exports, so we gain from trade and investment.
The latter is crucial for us. British capital formation is behind that of our competitors—just 17% of GDP. Our infrastructure spend has lagged the G7 for three decades. Our science base is excellent but business R&D is well below the EU average. Where will we get the resources to change this? Trade is welcome but British goods exports will be only a small part of our economy in the medium term. We do better on services, despite handicapping ourselves with restrictions on our premier education exports—or degree courses, as we usually call them.
The best strategy is to attract inward investment. A good parallel is Japanese firms in the 1980s. They wanted to expand into Europe, so there was a real commitment to securing that investment for Britain. At WMG, we worked with Ministers and unions to offer what Japanese companies needed. As a result, Britain secured one-third of all European FDI. That did not happen just in the 1980s. Foreign firms created more than 1.5 million jobs in the last decade.
Today, we need to commit to getting investment again. Hitachi in Durham shows what can be done. It seems that we are to spend two years discussing leaving Europe. This is a real risk to growth. We must resolve that quickly. If securing investment is our external priority, our internal need is to improve productivity. The CBI and the TUC are not soulmates but both endorse Krugman’s view:
“Productivity isn’t everything, but in the long run it is almost everything”.
The Government agree. On high-speed rail, skills, science, the northern powerhouse and the Midlands engine, their agenda is attractive.
There is consensus across politics. Last week, Chuka Umunna and Vince Cable gave support to policies such as the apprenticeship levy, protecting research funding and the Business Bank. But, as in the 1980s, delivery is what counts. Increasing innovation spend requires more work than a tax cut. On infrastructure, it is easier to review than to decide. We need an infrastructure commission to get projects agreed, as Sir John Armitt has proposed. While we must demand business investment in skills, it would be a mistake to cut FE spending before they do.
The summer Budget had good strategies. There are rumours that the spending review will show slow progress in the winter. I hope that the details of November will match the ambitions of July. If they do, we will all be more confident in our economy beyond austerity.
My Lords, I congratulate the noble Lord, Lord Haskel, on his introduction of this subject for debate. I welcome the wording that he chose about economies after austerity. I will follow his lead. He did not try to define austerity or when “after austerity” might happen. Unlike others who are better qualified than me, I will not involve myself in deep, economic theory. I will simply highlight two issues that have plagued this country for a very long time. I have chosen them in part because they have plagued Governments on all sides of this House, so they are not in any sense party political.
The first issue is the present level of inequality in our society. I commend the Government because they have recognised that; at least, that is the interpretation I put on the fact that the Prime Minister has repeatedly said that he will govern as one nation. He has also made it clear that, in his view, we are now the party of working people. The House will know that one-nation Toryism has a resonance within the Tory party as well as outside it, but I take my right honourable friend at his word: he will govern as a one-nation Tory and on behalf of working people.
If that is the case, there flows from it an inevitable focus on inequality. The Government have done well. They have addressed inequality at the low end through taxation measures and through commitments to living wages. Tackling it at the upper end is much more difficult because it immediately runs into fundamental questions about the role of government alongside the role of the private sector and the market. I am a good enough Tory to believe that you tread in those areas at fairly considerable risk. Yet, if we are to be serious about being one nation, the inexorable rise of inequality under all Governments—I stress again that this is not a party-political point—needs to be addressed. That is likely to be the test in the future of one nation for working people.
The second point that I have heard discussed in the 36 years that I have been privileged to be in this building—26 at that end, 10 at this—is that manufacturing in this country has not prospered. It has gone down. That fact sometimes gets masked by the success of service industries, but manufacturing is fundamental. It is affected by issues outside the Government’s control:
the economies of other countries; the exchange rates of currencies; the tendency of other countries to help their economies by dumping in the world market.
My introduction to the Conservative Party was in part that I was taught that what we made and sold was an integral and fundamental part of our national wealth. I am old-fashioned enough still to believe that. If we are a one-nation Government, strengthening and addressing that long-standing manufacturing problem—which was true under all Governments; I am not making a party-political point—needs to be addressed. The future will tell us whether and how effectively those two issues prospered after austerity.
My Lords, I thank the noble Lord, Lord Haskel, for introducing this important debate on a subject that must be on all our minds: what kind of state the economy will be in once we get beyond this damaging austerity—not that the prospect seems all that imminent.
I say “damaging austerity”, but not everybody seems to see it that way. Some people—let us not be mealy-mouthed about this: the Chancellor and his acolytes—far from seeing austerity as a bad thing, or at best a regrettable necessity, seem to see it as a good thing. As the noble Lord, Lord Turnbull, said the other day, they seem to relish the opportunity to shrink the state back to levels not seen since the 1950s, except perhaps for a time at the end of the last period of Conservative government in the 1990s, with public expenditure set to fall to just over 36% of GDP by the end of this Parliament.
In contrast with the noble Lord, Lord Howell, I wish to take issue with this perspective and maintain that public expenditure, properly managed and controlled, is a good thing. It has been responsible for the vast improvement in the welfare of our citizens over the last 100 to 150 years. It has made major inroads into Beveridge’s giant evils of squalor, ignorance, want, idleness and disease. To take just a few examples at random, it has given us old age pensions, compensation for industrial injury, great improvements in access and provision for disabled people, a flourishing of the arts and much more besides.
One good thing to have come out of the Labour leadership election is that it has brought discussion of an economic policy aimed at combating austerity, rather than imposing it, into the mainstream. More than 40 economists wrote to the Observer in support of Corbynomics and 55 to the Financial Times against, which I suppose just goes to confirm that, however many economists you put end to end, they would never reach a conclusion. But the important point is that there is a discussion. In passing, one thing economists do seem to agree about is the wrong-headedness of the Chancellor’s plans for permanent Budget surpluses. To me, as a non-economist, it seems that the Corbynistas are getting the best of the argument.
The charge against Corbyn was summed up in a NewStatesman editorial in the issue of
“the policy of a ‘people’s quantitative easing’ would risk rampant inflation and is not a sustainable means of financing infrastructure programmes”.
Let us take that in bite-sized chunks. “People’s QE” is rather disparagingly referred to as “printing money”. It is, but that is no different from what the Bank of England has been doing for the last few years. As regards rampant inflation, this policy might contribute to inflation in the longer term but that is not a risk at the moment with interest rates still at record lows in a very lukewarm recovery.
As regards this policy not being,
“a sustainable means of financing infrastructure programmes”,
the operative word here is “sustainable”. QE is probably not a sustainable means of financing infrastructure programmes in the longer term for the reason just stated, as well as Bank of England independence, but it might kick-start the process. However, this would probably not be necessary as Corbyn has other proposals for funding infrastructure investment—namely, a national investment bank.
There is discussion among Corbyn supporters on whether conventional borrowing would not be a more appropriate way of capitalising a national investment bank. These are matters of emphasis which can probably be resolved. The important point is that even the 55 economists critical of Corbynomics agree that, at this time of very low interest rates, much-needed public investment can be financed by conventional borrowing.
The time limits have not left much time to talk about the key question posed by this debate—namely, what awaits us post austerity. I fear that the answer is not very encouraging. This is one of the most fragile recoveries in history. Fuelled by ballooning household debt, it contains the seeds of its own destruction. What happens when interest rates rise? Another crash, but that is likely to be only a staging post in a self-reinforcing downward spiral, and the Chinese slow-down is not going to help either.
The demise of capitalism has oft been predicted, but it has shown itself to be remarkably resilient. The future of capitalism is a subject for another debate, but there must be a question about how long we can continue to rely on this resilience.
My Lords, I thank the noble Lord, Lord Haskel, for initiating this debate and for the passionate and comprehensive way in which he did so. It is a positive move to encourage us to look and plan ahead. I intend to say something about good employment relations.
First, I congratulate the Minister on emphasising the importance of productivity. If I were his public relations adviser, I would caution against setting himself up as such an easy target. In planning for the future we do not know what the state of the economy will be by the time of the next general election. It is clear that thousands of jobs will be lost in local government, which will decrease its capacity and capability at a time when it is being given more responsibility for both local entrepreneurial development and picking up the pieces of the human cost of our unequal society. The future must include better financial settlements for local government, as well as for capacity building in what will be a much diminished area.
There is also huge uncertainty about the future of pensions, which will impact on a generation and on our economy. I believe that the abolition of annuities was foolish and that reform, which was of course overdue, would have been more sensible. The rush to swap pension pots for buy-to-let properties might look good at present but there is great risk. Pensions are so complicated that the state has a duty of care to protect its citizens from the market. I do not believe the Government are doing this.
On higher education, if the Government do not take action on the unsustainable student debt levels, that will also impact on our economy. Inflexible restrictions on foreign students going to British universities will mean that vital courses in STEM subjects and languages will close. Engineering firms are crying out for well-qualified postgraduates—who, unfortunately, are primarily from overseas—but they are not being allowed to stay. They are needed for those jobs now.
On skills shortages, particularly in the construction industry, there needs to be a step change in government action. The suggestion of a compulsory levy on the larger employers is welcome but further government intervention is vital if we are to tackle what I accept is a systemic problem.
Turning to good employment relations and their link to a successful economy, the general secretary of the TUC, Frances O’Grady, has said:
“When workers are engaged and getting a fair share from growth, they deliver better results”.
The Minister referred to the excellent work by ACAS in his speech on productivity earlier this week. His praise of ACAS is very welcome and I am pleased that he indicated that he would continue that dialogue. I had the privilege to chair ACAS for seven years. It has produced some excellent policy papers on UK productivity and the link with good management and good employment relations. One of the publications, Closing the Gap: Workplace Innovation and UK Productivity, suggests that,
“we need to rediscover the importance of how people are managed and deployed in the workplace if we are to make inroads into the productivity problem … Well under 30 per cent of UK workers are involved in decisions about how work is organised and the number has been declining steadily since 2001 … The UK compares unfavourably with several other Northern European countries against many comparable indicators. Unlike these countries, the UK also lacks a coherent policy framework to stimulate the adoption of better ways of working”.
Ineffective management is estimated to be costing UK businesses more than £19 billion a year in lost working hours, and 43% of UK managers rate their own line managers as ineffective. Yet how many line managers are given sufficient training and support to manage change effectively, to have that difficult conversation and to motivate? These workers are key to the solution but too often they are the weakest link because they are unsupported.
ACAS has also produced a paper giving seven practical solutions to improve workplace productivity. As my noble friend Lord Monks said on Tuesday, I hope the Minister will continue his welcome approach to good employment relations and his dialogue with ACAS. It makes a pleasant change from his Government’s ghastly Trade Union Bill and its shopping list of shoddy measures.
My Lords, I regret that I do not have time to make my intended comments on the wider economy as I wish to focus on the importance of entrepreneurship and the problems now presented by the new EU state aid rules for the provision of risk equity finance for SMEs. It is vital to maintain and encourage the growth of entrepreneurship and new businesses, much of which is based on new technology. That is what provides for a dynamic economy. I declare my interest as chairman of the Enterprise Investment Scheme Association.
By way of background, Britain has been easily the best country in which to start new businesses. It is much easier here than in many other EU countries, and there has been great success, with 1.5 million new companies over the last two and a half years. Universities are collaborating with business to exploit inventions and developments. But SMEs need risk capital as well as bank finance, and the EIS scheme here has been a great success. It has raised £13 billion since it started and the amounts raised over the last three years have virtually trebled. This has been largely the result of the reforms which the Government brought in in 2011, widening the parameters for companies to qualify for both EIS and VCT finance. The crucial thing here was that it meant that small businesses which were starting to expand and cut their teeth could thus get the necessary equity finance.
I was therefore horrified by the changes to the state aid rules that the EU Commission is forcing on the UK. These changes will reduce and, in some cases, cut off the flow of risk equity funding. So far the Government are seeking to make the best of things and argue that the changes have gone beyond the state aid rules. However, I do not think that the Commission is listening to the widespread complaints and concerns of the venture capital industry. The changes discriminate against UK private sector incentives for providing risk equity under state aid. Many continental European companies are substantially financed by state aid—for example, biotech in Germany. However, that happens in the form of grants, which have no restrictions on companies acquiring other companies or being acquired. Such restrictions are now being imposed on the UK. The brief of the noble Lord, Lord Hill, to increase capital market funding for SMEs will be made much more difficult. Indeed, I had urged him to promote the EIS scheme across the EU, as France has done extremely successfully in the last two years.
A major objection is that there is no apparent economic or commercial logic to the new rules. There are several problems. The rules will disqualify companies that have existed for more than seven years, cutting out for no reason the ability to redevelop and drive forward such businesses with necessary equity funding. We have had a limit of £10 million per annum for combined EIS and VCT investment, and it has worked satisfactorily. The limit is now to be reduced to £12 million over the life of the company, and on a retrospective basis, which will cut off funding particularly for SMEs that are expanding. It will also not always be easy to check all the historic state aid funding that has been received, which brings with it the danger of disqualification. The new rules relating to subsidiaries and the seven-year rule are unclear. When a qualifying company has a subsidiary that is over seven years old but is not old itself, and when the EIS funding it has raised is not for its subsidiary, will the seven-year rule disqualify it because its subsidiary is over seven years old?
The new rules maintain the requirement for major monitoring and record-keeping, especially in relation to any subsidiary. The requirements to monitor staff composition in knowledge-based companies is unrealistic, if not impossible. The bias against investment in intangibles is wrong in today’s world, where much capital investment is in the form of intangible knowledge-based assets rather than old-fashioned physical capital. The rules banning the use of EIS and VCT finance for buying companies or acquiring a business by way of purchasing their plant, machinery and good will have no economic logic and stop the valuable economic benefits of such businesses being rescued, keeping their skills and keeping the jobs. The rules are not clear, as they permit purchases of assets such as plant and machinery as required. Where is the line drawn between buying a trade and buying its plant and machinery?
The Commission has also made it clear that it will monitor the UK closely and if it believes that UK law for VCT and EIS investment is outside its interpretation of the new state aid rules, it will override UK law and demand recovery of the tax incentives. Should that happen, it will be a major turn-off. The Commission is overstepping its reach here and is unfairly discriminating against the UK. The new rules will slow the flow of this funding to equity businesses, and there is considerable resentment in the industry.
My Lords, I thank my noble friend Lord Haskel for bringing to our attention the need to face some serious, ongoing problems with the British economy and to face some of the truths about our position, which, as the noble Lord, Lord Low, and other noble Lords have said, is fragile in some important respects.
First, I will just mention a truth about our position from economic history. The crisis of 2007-08 did not result from lax public spending; it was caused by banks acting irresponsibly and by the failure of too-light-touch regulation. My view is supported by a recent House of Commons briefing, which points out that the average public deficit from 1997 to 2007—the year of the subprime problems and the crash—was 1.4%, half the average public deficit under Margaret Thatcher and John Major. Even after the crash, yields on 10-year bonds rose only marginally up to the 2010 election. The idea that public spending bust the British economy is completely wrong. I know that there was success in standing up that view at the general election and more generally, but it is important that, after the election, we face up frankly to what the real position was.
In the short time that I have available, I will talk about two current matters. One is the manufacturing sector, which, let us face it, is too small in Britain now. There is not enough of it, and when we talk about rebalancing the economy, we are looking round for areas to promote the growth of manufacturing. I was a member of the advisory panel for the regional growth fund under the last Government, and we struggled to find suitable places to put public money behind manufacturing. I was struck too, as many are, by the preponderance of foreign-owned companies in many of the key sectors—not just the car sector but many others. The leading companies are not British. There is welcome inward investment, which sets a good example to others, but none the less they are not British-owned. It puzzles me why Eurosceptics are so touchy about any infringement of national sovereignty that might squeak out of Brussels but are totally relaxed as soon as it comes to takeovers and deals from abroad. I do not know whether this is about the fees they are earning from the deals being cut, but I would ask the other side why there is this difference in their approach to our national assets.
That brings me on to a quick word on the City, which still seems largely disengaged from attempts to inject dynamism—or balance, as the Government call it now—into the British economy. The City seems to remain short-termist. It is wedded to the deal and financial engineering and to trying to generate fees from as many rearrangements of companies as it can find, rather than being interested in the organic growth of the British economy. It is a paradox that we are in the middle of a city that is perhaps the most dynamic in the world for financial services, yet we are dependent, for example, if there is a third runway at Heathrow, on Chinese and Middle Eastern investors. It will not be British investors behind what I would think would be a sure-fire return.
My final point is about business schools. Does the Treasury take an interest in what they teach? Those of us who have some experience in business schools know that the demand from students is to learn more about financial services and financial engineering and how to arrange money in the most lucrative ways. It is not about training people to be cadres in manufacturing and to lead organic growth in great businesses over the next period.
So there are questions for the Minister on the City and business schools, in particular, and on foreign ownership. We debated productivity the other day, so I will not run over those points again.
My Lords, in his excellent introduction, the noble Lord, Lord Haskel, spoke of a green direction of travel for the economy. We must think of that direction of travel when reviewing the form that the future economy may take. When does the Minister think that the green economy and the economy will merge? Surely the economy of the 21st century must be one that respects the fact that low carbon is a given. It needs to create jobs and value, but also respect the environment and recognise that resource extraction is finite. Many smart companies already vastly reduce their use of virgin materials—for example, they reduce and recycle the water they use—thereby reducing their costs and their impact on the planet. A 21st-century economy should bring together industry and ecosystems. In fact, it is a completely new paradigm from that of the 20th century economy.
When the Prime Minister, David Cameron, signed the climate pledge in February, he talked of the need to accelerate the transition to a competitive, energy-efficient, low-carbon economy. However, since the election, we have seen no measures to grow that low-carbon economy—quite the reverse. As the noble Lord, Lord Haskel, mentioned, we have seen the cancellation of the zero-carbon homes policy six months before its full implementation, despite significant investment from house builders and their supply chain. The zero-carbon building commitment, due to be implemented in 2019, has also been cancelled, despite huge support from the construction sector.
Investment in renewables has faltered, given the Government’s decision to end subsidies for onshore wind and further free up the oil and gas sectors. In transport, new rules for vehicle tax will result in owners of the most polluting and most efficient cars paying the same after the first year, despite the UK car industry investing in design and technology to make it one of the world leaders in fuel-efficient vehicles. The car industry expects that tax change to reduce UK sales of those efficient vehicles.
I turn to agriculture. Bees, pollinators worth more than £650 million to the economy, remain under threat, with no real action on the national pollinator strategy. Indeed, the Government have given permission to restart the use of neonicotinoids—the pesticides implicated in pollinator decline.
All of that flies in the face of the data that demonstrate that money spent on protecting the natural environment is a wise investment. The Government’s national ecosystem assessment states that if the UK’s ecosystems were properly protected, they could add an extra £30 billion to the UK economy, whereas neglect and loss of the free services that nature gives us may well cost as much as £20 billion to the economy every year. The Natural Capital Committee has shown that spending on biodiversity protection provides a real and significant return on investment: £10 billion is spent by tourists in England’s rural areas each year. That is in large part due to the quality of the natural environment.
The Exchequer must provide co-funding to draw down England’s European agricultural fund for rural development. Any cuts to that funding would mean sending money back to Europe, losing a further £3 for every £1 that the Government might consider to be saved. Cutting that co-funding will render quite impossible the Conservative manifesto commitment to spend £3 billion on the environment through the CAP and to plant 11 million trees.
When you talk of the economy, you need to think of the green economy, because that is the 21st-century economy. At the rate the Government are going, we risk being left far behind those countries that are really implementing the green economy.
My Lords, we are struggling to recover from one of the greatest economic crises in modern history. Anyone who offers simple nostrums about how this can be achieved needs his or her head examined. The crisis is structural, not just cyclical, and a great deal of innovative thinking will be needed to get the world economy back on track.
I do not see where this innovative thinking is coming from at the moment, but the group of doctrines that has become known as “austerity” is certainly not it. I am not sure that current Keynesian doctrines can supply more than part of the answer either. The idea of austerity is intuitively attractive, and would even seem to comply with common sense: when in debt, cut back on spending. Yet what applies at the level of an individual or a household manifestly does not apply at the level of the economy. I always respect what the noble Lord, Lord Howell, has to say, but on this matter I fundamentally disagree with him. The principles of austerity have failed wherever they have been applied. Not only that, they have acted against the very outcomes they are supposed to achieve.
Although halting and beset with problems, the US has made the best recovery among the advanced economies, which is the result of dynamic policies of an activist central bank coupled with a range of large-scale government interventions. The $800 billion stimulus Bill introduced by the US Government increased GDP by two percentage points from late 2009 to 2011, avoiding a double-dip recession. The contributions the Bill made to helping the less well-off were very substantial. Some 5.3 million people were prevented from slipping below the poverty line—a very considerable accomplishment.
Progress that has been achieved in the UK is in spite of the austerity measures adopted or, to put it more accurately, because at certain points they were relaxed. Employment has held up well, but that is largely because of depressed conditions at the lower end of the labour market. GDP capita as of 2014 was fully 16% below what it would have been if trends before the crisis had continued.
Among the extraordinary features of the aftermath of the crisis, which have been referred to by my noble friend Lord Monks, is that private irresponsibility has become redefined as public debt, and that the poor are being held accountable for the fecklessness of the rich. The former Governor of the Bank of England, the noble Lord, Lord King, put this quite well:
“The price of this financial crisis is being borne by people who absolutely did not cause it”.
The huge further cuts planned to welfare will have damaging consequences for those working on low incomes, the unemployed, young people and the disabled. The raiding of Labour’s cupboard to provide a veneer of social justice will not stop this becoming a toxic mix. In the mean time, disparities of wealth and income between the top 1% and the rest continue to soar. The structural causes of the crisis are to date at best only partly addressed, and remain dangerous.
I have one major question for the Minister, who will forgive me for losing my voice through this speech. RBS is being sold back to the public sector. Does that mean that it is no longer too big to fail? I would like a yes or no answer to that question.
My Lords, I am a little confused. I am not sure what austerity is. I do not see abject poverty around. Therefore I will use what the Financial Times says as an introduction: austerity marks a period of adverse economic conditions where the Government cut their spending or increases taxes in order to reduce their budget deficit.
The factors that I considered when I was in the banking world are rather favourable. The pound is strong and stable. Our balance of payments is reasonable because of services, but we have always had a balance of payments deficit on manufactures and that is agreed year after year. But when you look at that balance of payments deficit on manufactures, you realise that many components are already imported. So if you try to search through the pattern, you want to look and see what is wrong, or whether you can prove what is wrong.
At the other end of the scale, we have vast sources of wealth in other parts of the world looking for investment. I know that my noble friend Lord Howell has visited some of the major funds around the world. They have visited me, too, and they have asked what opportunities there are for investment. Well, there are not many requirements from the United Kingdom other than new infrastructure. Our balance of payments deficit has not caused us any problem, the universities are doing well, technology is in the forefront of activities, and it is a question of where and what direct investment we should be encouraging more of into the United Kingdom and in what sectors. I am asked regularly during my international trips, “What would you invest in?”. In the early days, suggestions were made to me that they should invest in the automotive industry, which I thought would be a complete waste of time. I never realised that the automotive industry in the United Kingdom had virtually fallen into foreign ownership.
So what is foreign ownership and where are the problems at the moment? I detect that those economic minds I see around me—for whom I have great respect; I used to study some of their papers—are perhaps at a loss to find any reasonable conclusions as to what the Government or Governments should do next. Our balance of payments is not a difficult one: we have, as I say, the surplus on services and that surplus will continue.
So I ask the Minister: what is wrong? I spend most of my life internationally and find great respect for the United Kingdom these days. Probably one of the weaknesses is that everybody wants to come and live here. One factor that comes up is the element of personal taxation, which is unfair if it is levied upon the British and not upon foreigners, but this is more of a social issue. Therefore we find that the investment that comes in is not necessarily direct, but comes through all sorts of corridors. There is no pressure on the pound sterling, there is no pressure on inflation. There is pressure for a slightly better bus service and fewer strikes in London. But when you are confronted by some of the sovereign wealth funds who say they would like to invest in our country and ask what our future plans are and what major exciting projects they could invest in, the answers are not necessarily there. So I have no concern at all. In fact, I am worried that I cannot find a worry—and maybe some noble Lords could demonstrate what is wrong. It is not a party-political issue. In general, those who come out of university are finding jobs. The training schemes are getting better and better. The arguments seem to be only about major jumbo projects about where we should put an airport, which international people cannot understand. I would like someone to say, “What do we need money for?”—because I am not sure.