My Lords, I always seem to follow the noble Lord, Lord Desai, or he follows me, in these debates. Like terrible twins, we cannot be separated. He is always fun to listen to and has given us a lot to think about, although I shall not follow him on this occasion down the path of secular stagnation, which is certainly worth thinking about.
Ever since I entered this debate eight years ago, I have said that the austerity policy was wrong—that it would slow down growth, and therefore make it impossible for Chancellors to meet their targets. I do not think that I was wrong. As Larry Elliott wrote last week:
“A one-term deficit reduction plan has now become a 15-year slog”,
and it will no doubt go on.
True enough, public sector net borrowing has fallen from 9.7% of GDP in 2010-11 to 3.8% this year, and is expected to fall to 0.7% in 2021-22, but this reduction is not the result of any measures taken or cuts made by George Osborne; it is the result solely of the growth of the economy, which is due to a different set of factors of which monetary policy has been very important. This is a difficult issue, but one cannot have this debate without a tiny bit of economic theory being somewhere buried in its recesses, and I want to produce my little smidgeon.
What has happened is that growth policy, such as it was, has been outsourced to monetary policy since 2010. This is by far the weaker of the two instruments, because of the slippage between printing money and spending money which was discerned by Lord Keynes in 1936. In other words, you can print the money; the problem is to get it spent. If there are leakages on the way, there will be quite a weak impact.
The net impact of fiscal contraction and monetary expansion has been to slow down the rate of growth of the economy. Everyone now recognises this, except of course the Front Bench on the government side. Everyone recognises that austerity policies have slowed down the rate of growth of the British economy. Mark Carney, Governor of the Bank of England, said in his recent Roscoe Lecture that,
“sustained austerity … has, on average, subtracted around 1 percentage point from demand each year”,
since 2010. That is not a unique statement; we hear it from official bodies as well. Had George Osborne simply continued with the policies of his Labour predecessor, he would have left his own successor, Mr Hammond, with a nice surplus by now.
It is a bit disturbing to see that the penny has not yet dropped. The austerity rhetoric seems to be hardwired into the minds of Chancellors, although their practice is somewhat different from their rhetoric, but it is more disturbing to see that it seems to be hardwired into the minds also of Treasury officials. Two representatives of the Treasury view have spoken today, the noble Lords, Lord Macpherson and Lord Higgins—the noble Lord, Lord Higgins, was brought up and bred in the Keynesian era, so he is a bit more relaxed about these things.
Over these years, someone has been getting something wrong. Is it the Chancellors? Is it the Treasury? Is it the OBR? Is it the economics profession? I blame the economics profession quite largely for these wrong models of the economy, but the truth seems to be that all macroeconomic forecasting policy models were wrong, because the theory on which they were based was wrong. At least the IMF has admitted that it was wrong, but I do not see any admission from the Treasury to that effect. The Treasury, after all, has never been interested in growth; it is the Government’s housekeeper. That is why Harold Wilson set up the Department of Economic Affairs in 1964 as a counterweight to the Treasury view. Who now remembers it? Very few. It ran aground on the sterling crises of that era, but it is certainly something Governments should look at again.
The Chancellor followed many of his predecessors in mentioning the productivity question. How come the UK’s productivity is 18% lower than the average of G7 countries? It is not such a puzzle. In every single year between 1980 and 2015, Britain’s investment share of GDP was 3.7% lower than the G7 average. This level of underinvestment over a 25-year period is bound to produce a depressing productivity record.
The private sector is not picking up the slack. As Martin Wolf wrote last week, consumption in the last year rose by 3%, but investment fell by 1.5%. Chancellors have tried to help investment and I welcome some of the measures, but the amounts pledged have not reversed the cuts in the capital budget that have occurred since 2010.
Our infrastructure quality is ranked as the second worst in the G7. I must finish now, because the noble Lord, Lord Desai, said everything that I wanted to say about the burdens on our future generations and did so extremely well. But now that we have bond yields that are near rock bottom, we should take advantage of them to build a better Britain and not go on about deficit targets which present policy puts perpetually beyond reach.