My Lords, this is a timely debate and we are extremely grateful to my noble friend Lady McIntosh, but I fear that I am going to take a rather different line to hers. The fall in sterling gives us a chance to rebalance the economy and make jobs here, rather than use ever rising borrowing to buy goods from abroad.
How did we become such a heavily indebted nation? We kept borrowing without a care. Today, £730 of every taxpayer’s tax goes to pay interest on our international debts and that is steeply rising. When the history of central bank policies comes to be written, I believe that few economic orthodoxies will appear sensible, years after they were fashionable. We now rightly decry sticking to the Gold Standard in the 1920s and the harmful consequences. We recognise the damage done by sadomonetarism, when Geoffrey Howe put interest rates up to 17%, bankrupting thousands of companies in an attempt to control inflation but in effect setting it alight through wage demands. Incidentally, I agree that the causal relationship between raising interest rates and lowering inflation is highly questionable, though accepted as gospel. Then Greenspan got it wrong when he failed to do anything about fiscal exuberance and the American economy took off.
Today, our economic policy joins that list of follies. Keeping interest rates at 0.5% or less to encourage even more borrowing, when both individually and nationally we are borrowed up to our eyeballs and the mountain of debt is ever higher, must be madness. We should be saving more and using those savings to invest more. Up to now we have done little to correct our massive trade deficit.
How did we get into this problem? It started when we decided to let the pound go free and float in principle but not in practice, muttering, “The market knows best: we should show by example and not indulge in competitive devaluation. If China does it, what does that matter to us?”. We are indeed a trading nation that forgot about the importance of exchange rates during an orgy of credit-fed consumption. Because the Bank of England was mandated to be concerned about inflation, the pound was left to stay high and the damaging effect of that level ignored, making imports easier and exports harder.
There was another reason that the pound stayed high. So much of what is called inward investment was nothing of the sort, though inward investment of a certain sort was unbridled. That investment was not to improve and expand the economy but, often, a straight purchase of assets to secure income for overseas owners. It was still considered beneficial. We have sold hundreds of companies. We have sold not only the silver in this country; we have even started to sell the furniture, turning what used to be valuable foreign income for us into a massive outward flow of cash to others. We effectively rent many of our own businesses and utilities from overseas owners—Heathrow, ASDA, Cadbury, Northumbrian Water, and now ARM, which was sold for £30 billion pounds, to name but a few. But there are hundreds of them, and the effect has been damaging.
Uniquely, Britain—and only partially America—is alone in the belief that it is beneficial to extend the free market in goods and services to include companies. We have got it wrong. That belief is entirely unsupported by evidence, and I am very glad that our Prime Minister has noted it and has begun to be concerned.
The end result of this benign neglect is that the pound was substantially propped up by asset sales well above its fair parity. Its height was welcomed as virtuous and praised for the cheap holidays and imports it encouraged. Few economists thought outside the box or would admit that its height was causing our huge trade deficit, deindustrialisation, too much borrowing, too little investment, unstable, low productivity growth, stagnant wages and too many people losing out from globalisation. We only have to look to Germany, by contrast, to see what a converse economic policy can do. Unfettered free trade has left us in a mess, and I say that as a passionate believer in fair free trade; I declare an interest as someone who has spent a lifetime promoting the market economy. I just hate to see capitalism get it wrong and damage its whole cause.
We must recognise that the correct parity of the pound is essential to a trading nation, and we should make it a key part of our free trade policy. In so doing, we must accept that world prices are not necessarily fair prices reflecting the cost of production but are often, as in the case of Chinese steel, dumped market-clearing prices, lowered to obliterate competition, before raising them again. Reasonable protection against such practices is essential, or it should be, for key capital assets. This is sanity. It is not protectionism but self-preservation.
I realise that this may go against the sacrosanct dogma of the free market purist, but it is a necessity in the real world. Just look where present attitudes have got us. I also accept that this sort of view may not be welcomed by many in the City. Much of its work is beneficial and essential, but, because they are wrongly incentivised, many there would sell their grandmother for a quick gain. This results in much short-term thinking and consequent harm to the economy. The huge tax revenues the City brings to the Treasury have little to do with profit as a consequence of productivity but are mostly gained by a straight deduction from the capital assets the City handles, often through excessive commission. For example, the commission on the takeover of British Gas by Shell was more than £100 million. It could not possibly cost that if it was properly looked at. Such people take the icing off the national cake baked by others, and are overrewarded for so doing. The City makes money, but it creates less wealth. Its contribution is overrated. It also explains why our GNP per head has hardly risen over the years.
If we want true growth, we cannot do it through financial services, but we can do it with a fall in the pound with modern manufacturing, mineral and food production, which the noble Lord, Lord Skidelsky, touched on.
As we reset economic policy to reduce our indebtedness I hope the Chancellor will, apart from other proposals, mandate the Bank of England to keep sterling at fair parity, as best he can, to help rebalance the economy. Secondly, the Bank should get interest rates gradually back to sensible levels that reward saving and make pension provision worth while. For example, how about a 2.5% indexed infrastructure bond, used for that purpose but reserved exclusively for UK pension funds only? Thirdly, the Chancellor—and there are many other things he can do—could stimulate high productivity by letting companies recover the cost of the purchase of capital goods in the same year, not over 10 years or so as is done now. Our productivity is 21% below the G7 average and it is unlikely to be raised by opening ever more coffee shops, which are difficult to automate. Finally, we must accept sensible limitations on free trade, by bringing back the national interest test for mergers and acquisitions and dumping. It was part of the brief of the Monopolies and Mergers Commission and should be part of the brief for the new Competition Commission. I hope the Minister will note that.
The time has come, thanks to devaluation through Brexit, to rebalance and invigorate our inventive, creative and capable nation. I hope we can all grasp it and find a more stable and less indebted way of living with the global economy.