My Lords, let me start by echoing the thanks of others to my noble friend Lady McIntosh for securing this debate. Initially I was rather worried about the idea of a two and a half hour debate on an issue on which, as I shall state in a moment, the Government have no policy—but the quality of the contributions has allayed that concern. There have been some outstanding contributions, including the speech that introduced the debate.
The contribution by the noble Lord, Lord Skidelsky, took me back more than 50 years to economics tutorials in Oxford at the feet of Sir Roy Harrod. We also had a heroic challenge to current economic orthodoxy from my noble friend Lord Vinson. There was not a lot with which I agreed, but I did agree with what he said about infrastructure bonds, and he will be pleased that the Government already provide Treasury-backed guarantees for infrastructure bonds and loans. They can provide up to £40 billion-worth of guarantees, and have already supported 10 projects with a total capital value of around £23 billion. So even if I do not follow my noble friend down some of the other avenues he suggested, I hope he will take encouragement from that.
One message that has emerged from the debate is that things are not simple. The straightforward relationships between currency values and imports and exports we may have learned about in economics textbooks simply do not hold today. A number of contributions by my noble friends, and by noble Lords on all sides, have explained how, with complicated supply chains, the responses to fluctuations are not nearly as straightforward as they might have been. We also had some very helpful contributions to assist my right honourable friend the Chancellor of the Exchequer, as he puts the final touches to his Autumn Statement, and some advice to the Government on more clarity as we approach our negotiations on exiting the EU. But I am grateful to everybody who has contributed to the debate, and I shall try to pick up some of the points.
Exchange rate movements, the subject of the debate, attract a great deal of attention and are a topic of economic importance at the moment, both on a national level and for people in communities, as my noble friend emphasised. She mentioned the rural areas of North Yorkshire, which she knows so well. Changes in the value of any currency take place, of course, due to a wide and complex range of factors, both domestic and international. The fluctuations that we have seen following the outcome of the US election last week, not only in the dollar but in the euro, pound and peso in particular, are a clear case in point. It is no surprise that, since our decision to leave the EU on
My noble friend Lord Carrington explained how larger companies can hedge against currency fluctuations, but raised the issue also touched on by the noble Baroness, Lady Kramer, about the problems confronting smaller companies that cannot take the same precautions. I shall certainly pass that on to my right honourable friend in the Treasury.
As noble Lords will be aware, it is a long-standing Treasury policy that we do not comment on the level of or fluctuations in the value of sterling, which is allowed to adjust flexibly in response to economic conditions and market forces, as the noble Lord, Lord Haskel, described. Neither the Government nor the Bank of England set a target for the sterling exchange rate, which is a reflection of the UK’s long-standing economic framework—business as usual, as the noble Lord, Lord Paul, mentioned. Our monetary policy, which is set independently, has free-floating exchange rates and free movement of capital, which allows us to focus on targeting inflation. The UK’s inflation targeting framework prioritises price stability, which is a fundamental pillar on which our economic prosperity is based. The noble Lord, Lord Haskel, reminded the House of the risks of fixing the value of our currency. Noble Lords may recall the ERM crisis of 1992, where sterling was pegged to the deutschmark, only to collapse in the face of currency speculation. Noble Lords with longer memories may remember the problems that Harold Wilson had back in the 1960s, to which my noble friend Lord Vinson referred.
But although we do not set any targets for the value of sterling, both the Government and the UK’s financial supervisory institutions monitor closely the effects of any fluctuations in sterling on our economy. The noble Lord, Lord Bilimoria, for example, highlighted the impact that the fluctuations have on particular industries, such as the civil aviation industry. He also made the point that the impact on companies in the FTSE 100 has been slightly more uplifting because of the amount of overseas earnings that they generate. The Monetary Policy Committee took action in August, for example, to give an important monetary stimulus package which helped to ease financial conditions after the referendum, keep consumer confidence high, and return inflation to its target sustainably. The noble Lord, Lord Davies, mentioned inflationary pressures ahead; the MPC judged that there may be inflationary pressures ahead, as the depreciation of sterling may lead to a rise in the prices of imported goods and services, given our globally integrated supply chains. He made a point about the impact that that has on those on low incomes. As for the MPC’s guidance, I shall certainly see that it reads the speech of my noble friend Lord Carrington on his view of how the guidance might be improved.
My noble friend Lady McIntosh highlighted today the impact of the depreciation of sterling on prices, with a seasonal reference to mince pies as one example of the potential impact this could have on household budgets. Six mince pies sounded rather a lot to me, but it was a valid point that we need to keep an eye on the impact on the fluctuation of food prices. The MPC has been clear that the best course is to focus on supporting employment and output, and therefore tolerate a temporary period of above-target inflation, which is expected to return to target in the medium term. In the meantime, the MPC will closely monitor inflation expectations and respond if necessary. It is working closely with the Financial Policy Committee to ensure that any financial stability implications of our monetary policy have been considered and managed. The FPC, for example, has worked to support lending in our economy through this period, by reducing what is known as the countercyclical capital buffer to zero, allowing banks to draw upon the capital buffers they have built up.
It is also, of course, the Government’s role to monitor any economic impacts of the lack of sterling on individuals and businesses across the country. My noble friend Lady McIntosh raised the example of the impact of exchange rate movements on farmers. I agree with her that farmers will see the cost of fertiliser and other tradable inputs rise, as a result of the weaker exchange rate, but the impact on other inputs is more lagged, and at the same time they are seeing higher product prices, as well as a 16.5% increase in the sterling value of CAP subsidies—a point made by the noble Lord, Lord Skidelsky—for the 2016-17 payment window, compared to the previous year. So while I agree that a weaker exchange rate is not one-way traffic for farmers, I am sure that overall the farming sector will see benefits from recent movements in the exchange rate.
The Government recognise the impact on the agricultural sector of our withdrawal from the European Union, which is why we have announced that it will receive the same level of funding that it would have received under CAP until 2020. The noble Lord, Lord Skidelsky, made the point about the rising cost of our EU contribution, which we take on board. I agree with what my noble friend Lady McIntosh said on agriculture. We should try to be more self-sufficient and grow more at home, driving up from 62% our current level of self-sufficiency.
My noble friend touched on the impact on savers and pensioners, as did other noble Lords. The Government are committed to supporting savers of all income levels and at all stages of life by reducing the taxes on savings. Savers have benefited, for example, from the new personal savings allowance of up to £1,000 for basic rate taxpayers and up to £500 for higher rate taxpayers. Throughout this period of economic adjustment, we will continue to plot the same course that we have taken from the start—namely, to make sure, as the Prime Minister has reaffirmed repeatedly, that our economy works for everyone.
I return to the question from my noble friend on how fluctuations in the pound have affected our economy since the referendum. Although this is a period of adjustment, there are none the less some heartening signs of the resilience of our economy that we should take note of. I was struck by what the noble Lord, Lord Paul, said about how change brings opportunities. Our financial markets, for example, have continued to function effectively. Employment remains close to a record high, with total pay up, too. Our first official growth estimate in the post-referendum period shows an increase of 0.5% in our GDP for the third quarter of 2016, and there are additional signs of resilience in other data that have come through in the last four months.
Consumer confidence, although it fell in July, has since recovered, and last month returned to the levels we had seen just prior to the referendum. Retail sales have actually grown 1.8% in the three months to September. There are also positive signs that the fall in the pound may have helped to revive tourist spending in Britain. I am not sure that anyone comes to the United Kingdom for the weather, as implied by the noble Lord, Lord Skidelsky, but I think that I read that this is the warmest year that there has been for some time—so maybe the gap between us and the Mediterranean, where the noble Lord may prefer to take his holidays, is beginning to narrow. But the downside is, as my noble friend Lady McIntosh, said, that if we go to the Mediterranean we may be able to buy slightly less abroad. I hope that the impact of a lower pound may help tourist spending in north Yorkshire, which my noble friend directed our minds to today and which I am sure is a fantastic part of the UK for tourists to visit. I understand that Yorkshire’s annual White Rose Awards will take place on Monday in Harrogate.
To return to our theme, the latest manufacturing PMI data also show some positive news, with the suggestion of increased activity in the manufacturing sector, which some have attributed to the depreciation in sterling. Indeed, some exporters are reporting fuller order books. It may be the case, as some in this debate have suggested, that the lower value of the pound could lead to a boost here. But here I agree with what a number of noble Lords said about being cautious about oversimplification. I think that it was the noble Lord, Lord Skidelsky, who referred to the global financial crisis of 2008, when sterling depreciated by 25%. Yet, with weak global growth, UK exports did not actually expand markedly, as exporters boosted their profit margins instead of their market share. Of course, the ability to boost one’s exports depends on the financial position of those countries to whom one is exporting; if they are in a downturn, it obviously makes it more difficult.
Another point that has been made in this debate is that exporters compete not merely on price but on quality and reputation. These are particularly crucial points when it comes to the service industries. It could also take time before demand catches up with our more competitively priced exports—a point made in an intervention by my noble friend Lord Vinson—and as businesses adapt their processes to sell more overseas. In the meantime, the Government will continue to help our businesses, including our agri-food sector, to boost exports. But I have to say to my noble friend—or maybe it was the noble Lord, Lord Skidelsky, who put the position forward—that import controls are not on the agenda.
I will touch on one or two of the other points raised in this debate. One concerns inward investment levels—and investment levels generally—during this period of adjustment and low interest rates. We might expect some potential impact as the UK adapts to new relationships with the European Union and the rest of the world. Anecdotally, as we have heard in the debate, it has been suggested that some businesses are waiting to see what happens in the negotiations with the European Union. None the less, thanks to the combined strengths of British businesses and our wider economy, we remain an attractive place to do business.
Following the referendum, we have continued to see investment into the UK. Immediately after the referendum, for example, we saw the largest-ever investment from Asia into the UK, as SoftBank invested £24 billion into ARM Holdings. Large car manufacturers have expanded their investments: Jaguar Land Rover announced a £500 million expansion in Coventry, Honda confirmed a £200 million investment in its plant in Swindon and recently, of course, we had the Nissan Motor Company announcing that both the next Qashqai and X-Trail models will be produced at its Sunderland plant, which will be expanded through new investment to be a super-plant manufacturing more than 600,000 cars a year. We have also seen investment in the pharmaceutical industry.