My Lords, I am delighted to have secured this debate and look forward to contributions from my noble friends and noble Lords across the House who have worked at the coalface in business and bring real experience to this debate. I welcome my noble friend the Minister to the Front Bench and look forward very much to his response.
Fluctuations in the level of the pound are not unusual, but the recent collapse in the pound sterling in October was remarkable, with a fall of 16% taking it to its lowest level for more than 30 years. For a while the pound has been stubbornly low, with stocks and shares relatively high. This has made for challenging and uncertain times for savers and investors. I declare an interest as a modest saver and investor.
Standard & Poor has already downgraded the AAA rating of sterling and has raised concern about the pound sterling losing its status as a reserve currency—a possibility which must be taken seriously. What has the impact been on various categories of economic activity, more particularly in rural areas where I have my roots? North Yorkshire and other rural areas attract many older people who live, work and retire there. Those who have saved in cash ISAs and bank savings—often older people who live prudently and put money aside—are often disappointed to find that their savings are worth substantially less almost overnight owing to a currency fluctuation. In any event, with such low interest rates as at present, they are receiving a much lower return on their deposits.
Pensioners and older savers are precisely the category of people who spend and put money into the economy in good times, so the current level of the pound discourages those savers from spending money, which rebounds on the economy. A low level of pound sterling against the euro and the US dollar means that the pound in your pocket is worth less and buys less in the shops. Spending by tourists now appears to outstrip and exceed that by locals. For UK holidaymakers visiting Europe and the United States, the pound will not go so far and holidays will cost more. Wine imports cost more, whereas English wine sales are booming—and exports of Scotch whisky, too. While this might be good news for exporters, the costs of imported materials used in goods made here go up. Latest figures show only a small reduction in the UK’s trade deficit over the months since June.
We are only 62% self-sufficient in food production. That makes us very reliant on food imports, which in turn pushes up the cost of food in shops. Government measures to boost exports are welcome and are already producing results in countries such as China, but these take time. Until the imbalance in food imports and exports is redressed, there will be an ongoing trade deficit. In the short term, the low value of the pound has meant an increase in basic farm payments for UK farmers, but these will cease when Britain leaves the EU in 2019. In any event, the cost of animal feed for their livestock will have increased incrementally.
Price increases will of course fuel inflation. Currency is important to farmers as it affects their ability to compete internationally, as well as their agricultural support and profitability. A year ago, £1 was worth around €1.35. It is now worth around €1.11. Some forecasts suggest that the pound will reach parity with the euro by the end of 2017. While a weak pound helps to support prices for farm outputs, the impact of exchange rate fluctuations on the agricultural sector has many layers. The pound/euro exchange rate impacts greatly on the value of support payments received by farmers in the UK. A weaker pound sees an increase in the value of basic payment scheme support payments, whereas when the pound strengthens the reverse is true. It is ironic that at the moment farm profitability depends almost entirely on the level of the currency.
Currency value is only one part of the equation for farming, alongside the vagaries of global markets and convoluted supply chains, so imports of fuel, fertiliser and machinery will negate many of the benefits of currency changes. In 2013, the UK’s trade deficit with other EU countries in raw materials amounted to €12 billion. The UK’s food and drinks industry, employing 400,000 people across the UK and contributing £21.9 billion to the UK economy, has seen significant increases in the prices of imported raw materials. Cocoa is up 50% since 2013 and skimmed milk powder is up 55% since April this year, and there have been steep increases in the cost of butter and coffee beans. The Food and Drink Federation envisages three possible outcomes if these extremes of price volatility persist: retailers will put their prices up; manufacturers and/or retailers will absorb the costs; or UK consumers will simply lose the choice when those products are taken off the shelves.
With a low pound, the cost of industrial component raw materials also becomes much higher. Only where there is substantial added value to the products will these products from the UK become more competitive. The weaker pound helps only the manufacturing companies that export, which is probably only about 10% of all those companies operating in this country. That means that 90% of UK businesses face increased costs from a weak pound sterling and no benefit whatever.
What has the impact been on pension funds? They are coming under increasing pressure with the low level of the pound combined with low interest rates. Pension funds are facing a potential deficit, compounded by a poor return on gilts.
Household budgets are also being squeezed. There are more young people living at home, and less income in households means that people are more wary of spending money. We have seen Marmite wars in the supermarkets, with Marmite jars costing over 10% more owing to the value of the pound. That took the country by complete surprise. More recently, the manufacturers of crisps made entirely in this country with UK products, and the manufacturers of fish fingers, have been saying that the costs will rise by 10% or more. We must wait to see what happens at Christmas, which is a time of major expenditure for hard-pressed families. What bought 12 mince pies last year may buy only six this Christmas.
It is understood that market forces will prevail and that the pound will find its own level. What would help would be for interest rates to rise before Britain leaves the European Union, yet the Bank of England appears to be focusing more on those in work and keeping employment high. If anything, looking at the figures today, unemployment is at record low levels. The main concern of employers across the country is a shortage of much-needed skilled workers. Sectors facing skills shortages include farming and horticulture. Horticulture alone requires some 80,000 seasonal workers a year to hand-pick fruit and vegetable crops.
When Alabama, as an exercise in trying to go it alone, put Alabama first and tried to get Alabama people to pick their fruit and vegetables, the fruit and vegetables rotted in the ground. This is a feature that the industry in this country wants to avoid. Currently, around 90% of those working in horticulture come from abroad, of which the majority are from EU countries. Their status post-Brexit is causing great uncertainty, and every effort must be made to encourage these workers to stay—to both live and work in the UK.
Shortages are seen also in industrial units in small market towns in north Yorkshire and elsewhere. Areas of the economy such as the NHS, the care sector, light engineering and mobile phone networks, as well as farming and other sectors, depend on EU and other non-British workers.
Another consequence of the lower level of the pound is to see inflation rising. The Bank of England forecasts that inflation will almost triple in the next three years to reach 2.75% by the end of 2017, before falling to 2% by the end of 2019. The governor, Mark Carney, predicts that inflation will rise owing to an increase in the cost of the production of food and other items caused by the weakness of the pound. The Bank must decide whether to dampen inflation and slow any level of wage growth or allow inflation to rise and manage the consequences. A worrying sign at present is the decline in business confidence across the board in most sectors and businesses of all sizes. The pace of change and the nature of the challenges ahead are huge. The growth forecast of 1.4% and the 2018 forecast are down. Again, the level of exports to EU markets is predicted to reduce sharply from 2019. Although the independence of the Bank of England enjoys cross-party support, this leaves government with few tools to manage the economy.
I will conclude, if I may, on an optimistic note. Looking ahead to the Autumn Statement with great interest, I think that one area of spending which would boost the economy and economic growth while easing the pressures on the low pound is that of infrastructure—in particular, flood protection and flood defences. Small flood protection measures are already happening using CAP money to retain flood water temporarily on farmland, to plant trees and to encourage natural flood defences to slow the flow of flood waters, as has been so successfully engineered in Pickering. Water companies have a role, too, as well as internal drainage boards doing key, regular maintenance, delivering local solutions to flood risks.
A game-changer would be either pump-priming or the insurance sector and pension funds making a return on investment in flood defences on a grand scale. One alternative would be to reward insurance firms for investing in those areas most at risk of flooding, which, in turn, could save the insurance sector huge losses—approaching £1 billion for one flood event and often £3 billion in insurance costs in one year alone in the wake of major floods. Local communities, as well as the national economy, would benefit, and good use could be made of this with regard to even a small percentage of the flood insurance premium tax we all pay, which was increased at the last Budget. In my view, it would be hypothecation at its very best.
The model that comes to mind is that associated with shadow tolling for roadbuilding, known as design, build, finance and operate, or DBFO. My noble friend the Minister will be familiar with this model from his days as Secretary of State for Transport. I hope it is a model that the Government will look to, either in the Autumn Statement or the Budget, to protect the country and boost infrastructure spending and economic growth.
The contribution that rural businesses, including farmers and growers, make to employment and economic growth has long been overlooked, yet they are the drivers of the local economy in rural areas. Perhaps the current economic climate, along with currency fluctuations, will encourage them to take more control of their own destiny.