UK Economy: Growth, Inflation and Productivity - Motion to Take Note

– in the House of Lords at 2:47 pm on 29 June 2023.

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Lord Eatwell:

Moved by Lord Eatwell

That this House takes note of the low rate of growth of the United Kingdom’s economy, and the rate of core inflation and its differential effects; and of the necessity of increasing productivity.

Photo of Lord Eatwell Lord Eatwell Labour

My Lords, a few days ago there was an historic event: an inflation-busting 9.5% pay demand was submitted by that hotbed of union militancy, the clergy of the Church of England. This is just one further indication of the economic desperation suffered by most of Britain, including the clergy, as average real pay has fallen lower and lower. It is now down to the same level as 2007—and that is even before the impending rise in the cost of mortgages.

The only sustainable way to recover real incomes, and hence cut inflation, is to increase productivity—output per head. Increasing productivity requires investment that expands productive capacity and incorporates innovation. Investment requires the confident prospect of future growth. Achieving that nexus between investment, productivity and growth is the fundamental challenge that we face.

The past 15 years have been tough for the world economy. Every country has endured the shocks of the global financial crisis, the global pandemic, and the devastating impact of the war in Ukraine on energy and food prices. Yet since 2010, in the crucial variables of investment and productivity, Britain has done consistently worse than comparable countries. Since 2010, year on year, investment as a share of UK GDP has been the lowest in the G7 every year. On productivity, the National Institute of Economic and Social Research argued in a comprehensive study:

“In the years leading to the global financial crisis, the UK was closing the gap on its international competitors; UK productivity was growing at a faster pace than the United States in the pre-2007 period. This has changed since 2007, with productivity growth rates collapsing in the UK, more so than in most advanced economies”.

The result of this succession of low productivity and low investment is that, in 2009, typical household incomes in Britain were roughly the same as in France and Germany, whereas 10 years later they are 16% lower than in Germany and 9% lower than in France. The persistent economic underperformance of the past decade is the key to why Britain is today locked into low growth and high inflation, with ever-rising taxes and interest rates, and why the public realm is in an advanced state of breakdown as despairing public sector workers suffer even severer cuts in real income.

Why has this happened? The explanation is not hard to find. In the face of every major shock suffered by the economy over the past 13 years, the Government have time after time taken the wrong decision. In every case, misguided government policies damaged investment, growth and productivity. In the first half of 2010, the UK economy was recovering strongly from the shock of the global financial crisis, but the cost of rescuing the banks and supporting the economy in the downturn had left the UK with a high level of debt relative to GDP.

Any serious study of economic history demonstrates beyond doubt that the only enduring way to reduce the debt to GDP ratio is to grow GDP. Accordingly, in the first half of 2010, the Chancellor, Alistair Darling, had steered the economy on to a steady growth path, approaching an annual growth rate of 3%. In May of that year, the new Chancellor, George Osborne, reversed Darling’s policy and austerity killed the growth rate stone-dead. Austerity was supposed to cut the debt; the trouble was that it cut GDP too. To the Chancellor’s continuing puzzlement, despite his having eviscerated public spending, the debt to GDP ratio did not fall as predicted. He had chosen the wrong policy. The damage that Osborne’s austerity did to the foundations of growth and productivity lives on to this day.

The next major economic shock to the UK was the vote to leave the European Union just seven years ago. Following the referendum result, the Conservative Government took the wrong decision once again. Instead of negotiating a close relationship with our largest trading partner post Brexit, they decided on a so-called hard Brexit, raising trade barriers and exiting supply chains. The result has been that, since the referendum, while the value of French exports has grown by 16% and that of German exports by 23%, demand for UK exports has grown by just 6%. The growth of business investment in Britain, which had shown a sharp recovery in the three years before 2016, stopped dead and has never fully recovered to this day. That is what happens when you make the wrong decision and give up the supreme trading advantages of close proximity to the world’s largest free trade area.

Next came the double whammy of the pandemic and the war in Ukraine. The new Government, led by Liz Truss, correctly identified Britain’s fundamental economic weakness—the slow rate of growth. But once again, the Conservative Government chose the wrong policy—in this case, fiscal incontinence. Instead of tackling directly the low-investment, low-growth problem, they sprayed—or planned to spray—tax cuts on the better-off. They ignored the fact that similar tax cuts for the wealthy by Donald Trump had had no lasting impact on US growth. The result of that Conservative mini-Budget has been soaring interest rates and a collapse in confidence, hammering investment and growth yet again.

The 7 million-plus NHS waiting list, the 2 million-plus fall in the labour force, the world-beating rate of inflation and spiralling mortgage rates are all the result of a succession of bad policy choices made by Conservative Ministers at crucial times in the past 13 years. And now the Chancellor is at it again. He tells us:

“We have to do everything we can as a government … to squeeze inflation out of the system”.

Yet while the Government tighten their hands around the throat of the British economy, has the Chancellor not noticed that the inflation rate in France is just over 5% and falling and in Spain just over 3% and falling? What did they do? Both the French and Spanish Governments have deliberately targeted support notably on food prices and on the lowest wage earners. In doing so, they weakened the damaging link between the first round of food and energy inflation and the second round of wage inflation. Core inflation has been driven by desperate attempts to protect the standard of living. So, by contrast with the French and the Spaniards, Jeremy Hunt is determined to squeeze working people into accepting a lower standard of living, whatever damage may be done to investment in growth. This string of bad decisions, from austerity to EU trade, to fiscal incontinence, to squeezing the economy, has undermined investment and growth for the past 13 years.

That raises another issue. Why has Conservative economic decision-making been so bad? After all, everybody can make the occasional mistake. But to make decisions that damage investment and growth over and over again is more than just careless. Perhaps the answer lies in the Conservative characterisation of the state as a burden on the wealth-creating private sector, allied with an overarching faith in market-driven private sector efficiency.

All evidence from modern successful economies points to the foundation of investment and productivity growth being the essential complementarity of public and private investment. If we are to build a competitive economy with a high rate of productivity growth underpinning rising living standards for all, Britain needs a new relationship between government and industry, to be consummated in the pursuit of a single dominant objective: investment, public and private.

Public-private complementarity is vital, and not just in the oft-cited examples of education, law and infrastructure. Life sciences, as we know, are the jewel in Britain’s crown, yet the UK’s share of global pharmaceutical research and development has halved since 2012. Why? Quite simply, an overwhelmed, demoralised health service has struggled to prioritise the clinical trials that are a crucial component of pharmaceutical development—a vital complementarity between public and private sectors.

For years, Britain has not had the level of investment it needs because our economic institutions, public and private, have not been up to the job. We have proved unable to capitalise on Britain’s undoubted strengths in artificial intelligence, the life sciences and our research universities. What is needed is a long-term government mission to create a new institutional environment, financial and corporate, that sustains the needed investment with ideas, skills and finance and, crucially, is supported by the confident prospect of future demand. Without the prospect of future demand, including export demand, there will be no investment, however good the projects and however abundant the finance or tax incentives might be.

Britain needs not just to catch up but to use our technological and research expertise to leap-frog our competitors in a world economy that has changed fundamentally since the pandemic. We knew already that the successful economies of the future will be those that secure the lead in green technologies. We also learned that national security will require safe supply chains and strong, home-based industries and services. The globalisation free-for-all is over.

The United States has got the message. President Biden’s Inflation Reduction Act and the CHIPS and Science Act chart a green and secure future. We start from so far behind that we need to do more than the US. At the moment we spend 1.2% of our GDP addressing the demands of climate change; the US spends 1.9%, France 2.5% and Germany more than 5%. Nothing could illustrate more that Britain needs a public/private industrial policy to build the green industries of the future.

I accept—it is well known—that defining a credible industrial policy is much more difficult than focusing on the broad sweep of macroeconomic objectives. Industrial policy consists of a broad range of diverse initiatives: an enhanced British Business Bank, reform of the energy sector, rejoining the Horizon programme, funds for further education colleges, new financial institutions to support SMEs, university industrial parks, a substantially revised trade policy and so on. It even includes investment in the NHS to maintain a fit labour force and support pharmaceutical trials. Crucially, we need a stable macroframework that provides a sustained growth of demand.

The necessary coherence of all this is achieved by focusing all these policies on the common investment objective, bound together by a sustained commitment to the common mission. We have not had that sort of policy for 13 years. I hope that when she sums up the Minister will tell us what the Government have learned from their litany of grievous economic errors. Britain cannot take any more economic blunders. I assure the House that just “holding our nerve” will not do the job. Our future economy needs new management, and it needs it now.

Photo of Lord Lamont of Lerwick Lord Lamont of Lerwick Conservative 3:02, 29 June 2023

My Lords, I thank the noble Lord, Lord Eatwell, for initiating this debate. It is always very interesting to listen to him; he always makes very thoughtful contributions.

I hope he will forgive me if I do not follow him on the long-term issues he outlined. This is because I want to concentrate on one part of what he talked about: inflation. The immediate problem this country faces is extremely serious. This is not because I want to ignore growth, but because I believe we cannot have sustained growth without first getting on top of inflation. Stability, sound finance and low inflation are preconditions of growth.

It is possible to be too downbeat about the UK’s economic growth. In 2020 and 2021, the UK had the highest economic growth of any G7 country. The eurozone is in recession, as is Germany. It is true that the UK has not recovered to its pre-Covid level, unlike several major European countries, but these are tiny differences in very small numbers. Some people talk about economic growth as though they are the first people ever to have thought of the idea—“With one bound, Jack will be free”. Of course, growth must be the ultimate objective of economic policy, but it cannot just be conjured into existence by politicians snapping their fingers.

Sadly, I do not believe that we can return from the present situation to inflation at 2% without a contraction—not a recession, but some contraction in activity—to realign demand with weaker supply. Of course, we have also to do what we can to increase supply. We need to bear in mind that, in this situation, the UK has a very tight labour market, with unemployment at 3.8%, 1 million vacancies and rising wages. We have a level of wage demands and wage increases that is incompatible with the 2% target set by the Bank of England.

Largely as a result of Covid and Ukraine, we have taxes that are far too high—and borrowing, for the same reasons, is also far too high and leaves little fiscal room for manoeuvre. Some suggest that the alternative to present policy is to seek a return to higher real incomes through economic growth and targeted tax cuts—again, with one bound Jack would be free. The hope that tax cuts and growth, if it materialised, would moderate demands for higher pay in the tight British labour market seems to me plainly illusory. If such an approach could ever have been on the cards, it plainly now cannot be after last year’s mini-Budget. Challenging the current approach risks upsetting market confidence.

As the noble Lord, Lord Eatwell, said, the latest inflation figures were extremely disappointing and, not to put a fine word on it, bad. Not only did inflation stop falling but core inflation actually increased, as did services inflation and the increase in wages. The UK is now an outlier in inflation, as the noble Lord said. We have a domestically generated element in our inflation. The Bank of England has responded by putting up rates by half a percentage point, and mortgage rates had anticipated that development and already risen in line with the market.

The changes in the mortgage market to more fixed-rate mortgages means that the impact of interest rate changes takes much longer today. The Resolution Foundation calculates that two-thirds of the impact of rising rates since 2021 still has to come through. Some 1.3 million people have fixed-rate mortgages expiring in the 12 months from 1 July. These figures have led to talk of a mortgage catastrophe impacting on the economy but, with a little flexibility and help from the banks, it need not be so. So far, mortgage holders have been remarkably resilient. This generation of mortgages were lent out far more cautiously than in previous cycles; the mortgage affordability tests imposed by the Bank of England mean that many borrowers already have a decent margin to cope with shocks.

Some voices have called for a government mortgage rescue package, but it makes no sense for the Bank of England to bear down on inflation by raising interest rates if, at the same time, the Government are to subsidise rising interest rates. Nor is it equitable to ask those not owning houses to subsidise those already on the ladder. Many renters pay a higher percentage of their income on rent than home owners do on mortgage payments. Regaining control is urgent, the best way to support home owners and essential for getting back growth.

Obviously, I support the independence of the Bank of England, and I supported it when Gordon Brown made that move, but the credibility of the Bank of England is on the line today. In the recent past, it has not sounded or acted as though it was determined to defeat inflation. In the summer of 2021, the Bank refused to halt the quantitative easing programme unleashed during Covid, even when it became inappropriate as prices accelerated and distortions in asset prices were obvious. In November that year, with inflation three times its target, the Bank was content to leave the base rate at 0.1%. If the Bank is to regain the confidence of investors, it needs to focus hard on this one core objective.

In recent years we have been through an extraordinary series of exceptional events. It is hardly surprising that growth, not just in this country but in many countries, has been slower than in the past. Some want to peddle illusory easy answers but, as the Prime Minister said, people know that if something is too good to be true, it is not true. Difficult as it is, I believe that the Government are on the right track, and I urge them not to be diverted.

Photo of Lord Wood of Anfield Lord Wood of Anfield Labour 3:09, 29 June 2023

My Lords, I thank my noble friend Lord Eatwell for this debate and for his excellent opening speech, which I agree with almost every word of. It is also a privilege to follow the noble Lord, Lord Lamont, from whom I always learn a lot, as I did again today on inflation.

I will make a few remarks about investment: how poor our record is, how fuzzy our thinking around it often is, and what we need to do to improve it. I fear that, historically, the left and the right have not served the cause of investment that well. The right tends to assume that investment will flow from lower taxes and a small state, when it does not, and my side of politics is often more enthused by state intervention in the cause of greater social justice than the cause of boosting business investment.

But our economy is in fundamental trouble. We have a strong record on employment, but it is no longer true for millions of families that working hard can keep their heads above water: 15 years of wage stagnation have left households £11,000 worse off each year on average. Productivity remains shockingly poor: the average of all other G7 nations is currently 16% higher. On the eve of Covid, levels of investment were the lowest in the G7, and they have been low for decades. The promise of liberalisation and deregulation has not brought the promised revolution in investment and productivity. Instead, it has brought the expected side-effects of lower wages and higher inequality.

An indicator of the depth of the problems that we face comes from just one statistic: the UK’s year-on-year inflation rate is currently 8.7%, with core inflation rising. This is the highest in western Europe and the highest in the UK since 1990. You would expect the growth rate that goes along with that to be middling to high; instead, UK growth is barely above 0%—we have an economy that is overheating at 0% growth. This tells us that something is fundamentally wrong with our supply side, with the way that the real economy works. Of course, Brexit is a huge part of that. That is the shock we chose to have, rather than the shocks like Covid and Ukraine, which we had to have. I will leave others to debate the Brexit issue, because I want to talk about investment.

In my view, the UK political debate around investment and growth suffers from considerable fuzzy thinking. Take the disaster of the mini-Budget last year, which the noble Lord, Lord Lamont, mentioned. It has left us with a national paranoia about the reaction of bond markets to policy changes but also with a misunderstanding about what alarms markets so much. The Liz Truss episode showed not that markets punish Governments who want to tax less or, indeed, borrow more but that, if you do so without setting out the fiscal plans that should accompany these decisions for the medium term, the uncertainty that that creates, for demand and for the anticipated reaction of the bank in interest rate setting, raises the risk premium on UK assets. Investment requires borrowing, of course—for people, families, firms and countries. Borrowing to invest makes sense. Sensibly planned borrowing does not spook markets, only badly planned borrowing.

The fuzzy thinking goes wider. The Government’s fiscal rules make no distinction between investment spending and current spending, which makes no economic sense. I am pleased to say that Labour’s pledge on eliminating the deficit in its own fiscal rules excludes investment spending, as it should, but there is a long way to go in the debate on both sides about a commensurate treatment of debt and targets on debt reduction.

The fuzzy thinking extends also to the relationship between investment and welfare. The health of our welfare state is crucially about the health of citizens, of course, but it also has huge implications for labour supply, as we have discovered with the link between rising sickness leave and labour shortages since Covid. Welfare policies in the UK are also far too little designed to help workers retain the skills that they have acquired when they become unemployed, because, in our country, we prefer instead the philosophy of getting people who are unemployed into any job as soon as possible. Thereby, we contribute hugely to significant skill scrapping over time.

Then there is the fuzzy thinking around how our public utilities work. The experiment of turning public utilities into privatised utilities with independent regulation has many problems, as we can see from today’s news. Chief among them is that the regulatory arrangements for utilities to have investment stimulated have not worked and the investment that has been generated is not consistent with their viability or the public purpose that they are supposed to serve. We need a mindset change, and a long hard look at the way we fail to put investment first: we use rules with contradictory approaches, and we fail to make connections between different policy areas and the drivers of productivity and investment.

So what can we do? I do not think that business investment will be transformed by tax cuts. For much of the last two decades, the UK has combined some of the lowest corporation tax rates in the G7 and the advanced world with one of the worst records in business investment in the advanced world. We need to look at the range of capital allowances; there is much more room to secure long-term expensing arrangements so that companies have certainty in the future. We should strengthen the R&D tax credits system, looking at better incentives for green and digital investment. We should be more courageous about speeding up planning laws and timeframes, especially for infrastructure projects. We also need to work on how to channel the trillions of pounds available in UK pension and insurance assets into UK companies. Currently, only just under 1% of that money goes to UK equities.

Mostly, we need a Government who use their fiscal, regulatory and procurement leverage to take a lead in public investment. Every major competitor around the world—from China to South Korea and Taiwan, from the EU to the USA—is using active state intervention on a large scale to promote investment, productivity and growth. The laissez-fairists, I am afraid, have lost the argument. The question is: what form should state leadership on investment take? I am happy that this territory is the area that my party’s shadow Chancellor is occupying at the moment. Whoever wins the next election is going to face very tough times. If Labour is in power, I hope to see a step change in the way that we as a country prioritise the stimulation of investment.

Photo of Lord Howell of Guildford Lord Howell of Guildford Conservative 3:16, 29 June 2023

My Lords, we heard just now a very authoritative speech by my noble friend Lord Lamont about inflation, which, obviously, is much too high and is a real disease. I think personally that it will take more than one weapon—monetary policy from the Bank of England, right or wrong—to curb the present inflation. Falling global energy prices, as oil and gas are falling fast, will obviously help.

I will concentrate on something slightly different which is mentioned in the Motion and in the speech made by the noble Lord, Lord Eatwell: namely, the productivity puzzle. To my mind, the answer to it is rather simpler than some of the economists and experts would have us believe. Productivity comes from capital investment in machinery and technology. Louis Kelso, the pioneer of thinking in this area, 60 years ago destroyed the Marxian theory of labour value, making it completely redundant. However, he rightly pointed out that, although productivity and rewards come from capital and machinery, the rewards should go much more to workers and wage earners than they have and do now. That is a major problem we should all be facing.

I know the noble Lord, Lord Eatwell, rightly emphasised the investment element, but, with respect, he was looking slightly in the wrong direction. The state can obviously help and underpin, but it is pretty well short of money. Every state is short of money now. The famous phrase,

“I’m afraid there is no money” came through to us 12 or 13 years ago, and it is not very different now. There is a shortage of state money for various obvious reasons we can talk about; they have heavy political context.

In our case, we should be thinking more about foreign investment funds and the way in which we can reattract those in a way we are not doing now. In the 1970s and 1980s, we achieved huge Japanese investment from the world’s second largest industrial power, as it was then; it is now third. That had a very definite effect on boosting productivity, not least because the Japanese insisted on firmly ending many of the trade union restrictive and demarcation practices which were holding back productivity drastically. In their new plants, they said, “We’re simply not going to have it. We must talk with one union leader, not dozens”, and they sorted all that out. We backed up that growing relationship with all sorts of innovative linkages, including the UK-Japan 20th century group, which our colleague Richard Needham persuaded Mrs Thatcher and Yasuhiro Nakasone to set up. I had the privilege of chairing it for 10 years, and that certainly helped the mood.

Japanese interest tailed off a bit after that as we entered this century, and it tailed off further after 2010 with the Cameron-Osborne pivot to China. The Japanese were enormously upset; there were almost tearful occasions when they felt that they had been virtually betrayed. That was bad enough but, when we got to Brexit, Japanese interest disappeared almost entirely. They simply could not understand why we had made that decision. They had invested here because it was a launching place to Europe but now suddenly we were going in the opposite direction.

Now, however, Japanese interest is returning. One example of that is the colossal defence project, the Tempest combat fighter, which I see helpfully promoted in advertisements in Westminster Underground station. With that come all sorts of Japanese links and ideas, developing a new relationship. Incidentally, I should declare an interest that I advise two large Japanese firms, Mitsubishi Electric and the Central Japan Railway Company, which runs the best and fastest Shinkansen system in the world.

I ask the Minister what we are doing to deepen relationships with Japan in an innovative way. They go well beyond trade links and beyond even investment incentives. Japan is our best friend in Asia, and Asia is where all the growth is going to be in the next 30 years. We need to be in on that, and Japan is going to be a great help.

How did we get that relationship in the first place? It was always claimed that the huge investment by Sony at Bridgend, which really started the flood of Japanese investment that came in in the 1970s and 1980s, was because Akio Marita had a son at Swansea University. Small things lead to big things. That is an example of all sorts of links, and universities are a part of that.

There is no scarcity of resources outside in the world. With respect, the noble Lord, Lord Eatwell, was looking in the wrong direction. There are billions, indeed trillions, waiting to invest in sovereign funds, pension funds and especially electricity infrastructure. That is the fact that we should now be dealing with.

There are many lessons to be learned from attracting FDI—or not attracting it now. When it returns, productivity will rise again. When other policies across the whole spectrum are regeared to attract FDI—from safe sources, of course—productivity will rise again, real wages will rise, trade deficits will shrink and real growth will resume, but not before we act in the ways that I have indicated.

Photo of Baroness O'Grady of Upper Holloway Baroness O'Grady of Upper Holloway Labour 3:22, 29 June 2023

My Lords, I declare my interests as set out in the register.

I have three questions for the Minister. First, why does the UK have the highest inflation in the G7? Ministers cannot explain that away with the war in Ukraine and Covid recovery; many other countries face exactly the same challenges but Britain has been much more exposed to high costs of imported energy, and there are domestic policy failings that help to explain it. Secondly, why is investment and growth in the UK so low and our balance of trade so poor? Thirdly, why are real wages still no better than they were before the financial crisis? According to the ILO, only Italy, Japan, Mexico and the UK have real pay below 2008 levels.

The UK economy is not working for working people. From austerity cuts to public services that left us so poorly prepared for the pandemic to Liz Truss’s mini-Budget that caused maximum damage, the Government, as my noble friend Lord Eatwell said, keep making the wrong policy choices. At the start of the pandemic, when the TUC proposed a furlough scheme, the then Chancellor grabbed the idea, but when the TUC then called for a national recovery council, involving business and unions as well as Ministers, to plan and prepare for reconstruction after the pandemic, the same Minister said no. Many had hoped that the Government would build on people’s sacrifice and solidarity throughout Covid to create a stronger society and a fairer economy—surely we could not go back to business as usual. However, it now seems that the Government have given up on growth, on an industrial strategy and on the aspirations of the working people of Britain.

We have an economy that rewards wealth, not work. Of the 15 million people in the UK in poverty, more than half have a job. In contrast, TUC analysis shows that since the global financial crisis financial wealth has more than doubled and shareholder payouts are rising three times faster than nominal pay. Think about what that inequality means for demand in an economy that is now dominated by the service sector. Working families cannot afford to spend on the high street and the growing ranks of the super-rich do not. As economist Matthew Klein put it:

“You can only throw so many million-dollar birthday parties”.

Our economy does well only when working people do well. Without demand, we cannot grow our economy. Without growth, we cannot repair our public services. Without investment in health, skills and education, productivity suffers. We have to break this doom loop. It is high time that we had a plan for economic security and sustainable growth. AI alone offers the potential of multibillion-pound productivity benefits that if shared fairly—I recognise it is a big if—could turbocharge our economy. An ambitious green industrial strategy with a practical job transition plan would cut carbon and help the parts of the country that need it most.

We desperately need investment in apprenticeships, skills, affordable homes and public services. Instead of making it harder for workers to defend themselves against real pay cuts by attacking their trade unions, let us have a plan to get living standards rising again. Let us be honest about the economic price of a hard Brexit. We need to roll up our sleeves and improve the trade deal that matters most to our economy, the one with our nearest and most important trading partner, the EU. Britain has many strengths that can lift us up the G7 league, not least the ingenuity and talent of our workforce. There is hope in the future, but we need a Government that will make the right policy choices and put the people of this country first.

Photo of Baroness Thornhill Baroness Thornhill Liberal Democrat Lords Spokesperson (Housing) 3:27, 29 June 2023

My Lords, I add my thanks to the noble Lord, Lord Eatwell, for securing this important and timely debate. Although I am not an economist nor a financial expert—but feel very much that I am surrounded by them today—I do know housing and am going to focus on the contribution that housing and construction bring to our economy and the housing impact of the current financial crisis on millions of households.

In the longer term, the construction industry can and should be part of the solution to the economic crisis and low levels of productivity. We know we need more homes, though it seems that the nimbys have gone bananas—“build absolutely nothing anywhere near anybody”—and the yimbys’ voice is not being heard loudly enough. It is devastating that progress made in recent years, though still short of the much mentioned 300,000 homes a year, has been slammed into reverse by recent ministerial announcements and proposed changes to the planning framework and the National Planning Policy Framework.

Building homes supports local jobs and apprenticeships, generates billions in economic activity, provides investment for much-needed affordable homes and improvements to local infrastructure, not to mention billions in tax and millions in council tax. More employment means more money cycling through local communities, as well as opportunities for regional growth. The real need is for homes for social rent. Last year, 29,000 were demolished or lost under right-to-buy sales, yet fewer than 7,000 were built as replacements. A nationwide programme would surely kick-start the economy—if only.

In the meantime, millions of people are forced to live in poor-quality, prohibitively expensive private rentals, or are stuck in temporary accommodation or sleeping on the streets. All of these are increasing. Private rents are up; the latest figures from Zoopla see rental inflation running in double digits for the 15th consecutive month. Rents are growing faster than average earnings; rental costs as a proportion of earnings have reached their highest for a decade. Of course, it is the lowest paid, as ever, who are the worst off. Crisis reports from its findings that the poorest 10% of households are spending more than they earn on just rent, food and energy. That is clearly unsustainable.

After the low-waged, who is hurting the most? According to the Institute for Fiscal Studies it is the under-40s and those in London who have been bashed hardest by the mortgage-rise tsunami that is hitting Britain. It estimates that some 1.4 million mortgage holders will see their payments rise by at least 20%. Given that many have borrowed to their maximum, due to an unprecedented period of low interest rates which lulled everyone, especially the mortgage lenders, into lending and therefore borrowing much more, that could mean increases of several hundred pounds a month. Very few people have that kind of headroom in their disposable income simply to absorb these costs.

As a further blow to the economy, the latest figures on GDP growth from the ONS show that monthly construction output is falling. The greatest decrease is in private house repair and maintenance and in new build work, such as extensions and conservatories. That seems to be the first inkling that home owners are putting on hold any repairs or home improvements while times are uncertain. This will surely create a domino effect on employment and jobs and productivity in the sector.

We have not heard much about those in shared ownership agreements, who are seeing both their rents and mortgage payments simultaneously go up by 10%—that is not uncommon. It is worth noting that one person’s rent is another person’s mortgage—usually the landlord’s. They too face the same cost of living and mortgage rises, and are choosing either to sell up or to pass them on to their tenants, so those in the private rented sector are suffering considerably.

The average rent in the UK has risen by 11% across all tenures, with rent in the private rented sector rising much higher. Would the Government consider at least unfreezing the local housing allowance, which leaves renters facing an increasing gap between housing benefit and their actual rent? Given that we have yet to see the much-promised end of no-fault evictions, would the Government consider an eviction freeze under certain circumstances, as was seen during the pandemic? The Government have ruled out—rightly, in my view—a rent freeze for the private rented sector, but they have felt happy to impose one on the affordable housing providers. That helps tenants a little, as theirs is a much lower rent anyway, but not the associations whose finances are already challenging.

Perhaps the Minister can assure us that the Prime Minister, in his talks with mortgage lenders, will seek reassurances from them that the stress and affordability tests introduced after the 2008 crash will be stuck to, so that those in arrears will not have their homes repossessed. That would prevent the domino effect that that would then have on an already stretched system, with cash-strapped councils picking up the evicted and the homeless.

For now, the message from the Bank of England—and possibly from the Government—is clear: it is prepared to sacrifice the housing market to bring down inflation. However, there is a very fine line between tackling inflation and pushing people into the red and out of their homes. That has a cost too. What are the Government’s short-term plans for those in immediate crisis? What is the longer-term game plan to get us building, at scale and volume, those much-needed homes?

Photo of Lord Griffiths of Fforestfach Lord Griffiths of Fforestfach Conservative 3:34, 29 June 2023

My Lords, I thank the noble Lord, Lord Eatwell, for securing this debate. I will focus on one item: inflation. When I saw the breadth of this debate, I suspected that we would discuss different things at different times, which we are.

The noble Lord, Lord Eatwell, made some very good points about the relationship between investment, productivity and growth, but the one word I never heard in his speech was “money”. Perhaps that reflects Cambridge economics. There was no mention of it, and yet, as we just heard, we have a central bank that has a target for inflation and uses the instruments at its disposal to control the stock of money, among other things. Inflation is very important to growth because it invariably creates changes in interest rates, tax rates, spending rates and so on, and because of the turbulence that it provides, which is a disincentive to investment—and that business investment is key to growth.

If we do not tackle inflation, I am afraid that we will live with the current stagflation that we are experiencing of high inflation and very low growth. The Bank of England is responsible for a 2% inflation target and, as we just heard, inflation is between 7% and 8%. The Bank has not had an easy task over the last few years. We have had Covid, Ukraine, and half a million people aged between 50 and 65 leaving the labour force as inactive. In addition, like the Bank of England, other central banks forecast that inflation would be transient, and independent forecasters predicted the same thing. But the one equally great shock that the Bank failed to mention was the increase in the stock of money.

Until 2020, the increase in the stock of money—broad money—had been 2% for a number of years. In 2021 it jumped to over 10% and in 2022 it gradually came down, although it was still very high. The shock we have had from this has been enormous. The same effect was felt in the US, Germany and other countries, as we have seen. There was a monetary expansion on the back of Covid in particular—a tremendous increase in public spending to deal with Covid in 2020-21, which was at the heart of money supply creation.

You do not have to be a monetarist or an ideologue to believe that money matters. One problem we have with the Bank of England at present is that the Monetary Policy Committee seems to feel that it can analyse the problems we have without reference to money.

What should we now do to bring down inflation? It is not something I like saying but, first, interest rates must be raised to a level which reduces overall spending so that inflation will come down. Since December 2021, the Bank has consistently raised rates. However, the Bank rate is only 5%, and the rate of inflation is 7%. That means that real interest rates are minus 2%.

I bring your Lordships’ attention to the following. When Roy Jenkins in the late 1960s had to deal with relatively modest inflation, he raised the interest rate to 8%. When Tony Barber in 1973 raised the interest rate in order to deal with excess money, he raised it to 13%. Healey in 1976 raised it to 15%, Geoffrey Howe in 1979 to 17% and John Major in 1989 to 10%. Therefore, the terrible news is that every other inflation we have had in the post-Second World War years in this country saw interest rates go into double figures, except for under Roy Jenkins.

Secondly, although I sincerely hope that we do not have to go into double figures, 5% is certainly not enough. I think the Governor of the Bank of England said that yesterday in a meeting in Switzerland, and certainly the Bank for International Settlements has said something very similar.

Thirdly, the Chancellor should stick to a 2% price inflation target; fourthly, if the Treasury wants to help borrowers, it should really deal with it through fiscal policy; and fifthly, reflating the economy is at present out of the question. The Government have taken very tough measures, and we should be supporting them in a very difficult economic climate.

Photo of Lord Leong Lord Leong Shadow Spokesperson (Business and Trade), Opposition Whip (Lords) 3:41, 29 June 2023

My Lords, I thank my noble friend Lord Eatwell and congratulate him on securing this debate.

Many of us will remember the phrase “broken Britain” being used frequently by the Conservatives in the 2010 election campaign. Few of us welcome the fact that 13 years later, it is one of the very few Tory slogans which we can say they have actually delivered.

Last week’s inflation figures showed that not only is CPI falling less quickly than was hoped but core inflation has risen to 6.5%, as several noble Lords have already mentioned. Economic forecasts for the medium term are being revised down, as interest rates are going up. Growth remains anaemic: almost two years after the pandemic lockdown ended, our national economy is virtually flatlining, and the spectre of recession still looms.

My noble friend Lord Wood of Anfield has already mentioned investment. The UK’s level of investment as a proportion of GDP fell below the median G7 level in 1990 and has been declining in real terms since then. A recent IPPR report, which I recommend noble Lords read, noted that:

“The UK fell to the bottom of the”


“ranking in 2019, but other countries increased their levels of investment after the pandemic faster than the UK, further widening the gap. In 2021, the UK ranked 27th on business investment among the 30 OECD countries”.

These most recent figures show that the only developed countries with proportionately less private investment were Luxembourg, Poland and Greece. We absolutely must address this.

However, no matter how difficult the situation, I do not intend to advocate despair. My noble friend Lord Eatwell so clearly set out the dire set of figures. Therefore, having honestly assessed where we are, let us consider what we need to do to get where we want to be. We want to see a country where all regions and communities have access to the same opportunities and can benefit from economic growth. Part of the problem in the United Kingdom is the dominance of certain sectors, such as financial and professional services, which has led to a disproportionate concentration in London and the south-east.

With targeted investment and research and development support, coupled with policies that encourage investment, innovation and entrepreneurship, we can create a more diversified and resilient economy. We can unleash innovation and growth in industries such as manufacturing, clean energy, technology and the creative sectors by encouraging economic clusters of interconnected businesses in various geographic locations outside London.

Our devolved nations and metro mayors are bursting with ideas. They have a deep local understanding of the industries and skills in which their areas excel. By fostering collaborative regional partnerships, improving local infrastructure, attracting private investment to emerging centres of excellence and international excellence, we could transform the economy.

Alongside this, we must develop our skills agenda, especially in STEM subjects, which have to be embedded in the school curriculum and extended into lifelong learning. To face the fast changes of the 21st century, workers will need to think about skills for life, rather than jobs for life, to remain resilient and adaptable throughout their working lives in a climate of increasing technological disruption. We need a targeted plan of investment which supports people to return to and remain part of the workforce, which enables them to learn and develop skills leading to well-paid jobs and which reinforces local and regional networks, which deliver the much-needed sustainable long-term growth that we all want.

The people of this country are, and have always been, our greatest asset. Let us invest in them, unleash their potential and hear the British lion roar again.

Photo of Lord Whitty Lord Whitty Labour 3:46, 29 June 2023

My Lords, I thank my noble friend Lord Eatwell for his masterly introduction to the debate, which means that I am scrapping half my speech, and my noble friend Lord Leong, particularly for his last point: that we need to invest in our workforce, in our people, in this country as part of solving the productivity problem.

Productivity is part of the intent of this debate, but it is of course simply a statistical calculation: it is output over the labour force. To that extent, I suppose I could say facetiously that the fact that we have cut the workforce by older workers being deterred from staying at work and by cutting off the flow of migrants post-Brexit means that the Government have at least inadvertently managed to achieve part of keeping productivity up, but, as other noble Lords have said, we are behind on productivity and growth of output compared with almost all our competitors.

In order for productivity to be raised, we need three things: we need increased quality of input, both capital and workforce, increased quality and dimension of output but also general macroeconomic stability and context in which those things work. As other noble Lords have said, we have seen a serious relative decline in investment in the UK. As the noble Lord, Lord Howell, said, we are losing our share of international corporate direct investment. We are also failing in domestically generated investment. There is quite a lot of money around, and quite a lot of foreign money around, but it is coming in by slightly shady methods and is not, by and large, being invested in productive industry but in property, land and housing, distorting the housing market and worsening problems in it as a result of investment in what is basically a dead asset, making it impossible for families and landlords to operate efficiently in the housing context.

One of the difficulties of an overall debate is that the Government blame everybody. They blame the greedy workers going on strike. They blame, as I see the Chancellor did this week, “greedflation” in the supermarkets. They blame President Putin, maybe rightly, and they blame world economic conditions. But those world economic conditions apply to every one of our competitors. What is so unique about this country is that economic policy has been seriously incoherent for most of the past 13 years, as we move from austerity to quantitative easing to the Kwarteng/Truss debacle to the present incoherence and lack of direction. That is what the Government need to address at this stage. They even, of course, blame the previous Labour Government, but I will not go there.

We need to provide the context in which the owners of money—capital, or whatever we like to call it—put it into productive investment. In order for that to happen, we need to ensure that we have workers trained to operate that capital and the management to manage it. According to statistics published last week, one in four British workers is a manager but very few get any training in management, and the lack of organisation and incoherence of many of the decisions—in both the public and private sectors—is caused by the failures of our management class. It is not a result of their own failings, but of our failure to put enough into management training.

It also means that the regulators have to operate effectively. By the regulators, I do not just mean the Treasury and the Bank of England—although it would be handy if they had the same policy and were not pulling in opposite directions—but the rest of the regulators. I understand that the Chancellor, who has been quite busy, met the economic regulators this week. We have seen the failures of Ofgem and the incoherence of the energy market in recent years, moving from an oligopolistic system with six companies to one of nearly 70 companies, and then back again, as many of those companies went bankrupt. We have seen the failure of Ofwat in the water industry. There is not only sewage in our rivers but now, apparently, a complete overgearing of several companies within that sector. The economic regulators, the Treasury and the Bank of England need to get their act together, and it is only really the Government and the Chancellor that can get them to do so.

One other aspect is our own savings. It is ridiculous that the recent high interest rates are not being passed on to savers. The reality of the broader role of the Bank of England is to ensure that the financial sector operates to encourage saving in this country. If we encourage saving, even by 2% or 3% more, we will have additional investment moneys to go into our industries. I accept that that is a failing of successive Governments—we have always had a relatively low savings rate—but we cannot continue in the way we are.

There is real incoherence in government. Let us get some coherence. Abandoning the industrial strategy was daft but there is an industrial strategy—it is called the net zero strategy. However, just yesterday, the Climate Change Committee produced a chart which shows that most of the objectives of that strategy are at red or amber. In other words, it is failing so far. Let us get back to a clear strategy for the medium to long term, but one that is coherent and through which all aspects of government work together.

Photo of Lord Hannan of Kingsclere Lord Hannan of Kingsclere Conservative 3:53, 29 June 2023

My Lords, when the Government announced a windfall tax on energy companies, the Treasury said it would bring in £42 billion. That sounded great. In March this year, the OBR revised that figure down to £26 billion, and now the first independent study, by Wood Mackenzie, says it will be £16 billion. These are not small figures, but it is a small example of what I think is going wrong with our economy. There is a repeated readiness to do something that is popular in the short term rather than something that is in the interests of our long-term prosperity.

To some degree, this is, if you like, the institutional view of a lot of our economic bodies. I have spoken many times here about the reluctance of the Treasury to take into account the secondary or dynamic effects of tax: in other words, how cutting tax rates can generate more economic activity. We saw it with the 45p rate and with corporation tax. One reads that the plan the Chancellor has for a big bang 2.0 in the City is being held up by the Financial Conduct Authority, which is now against reversing the EU ban on short selling and all the rest of it. One reads that proposed tax cuts would fall short of the OBR, although I have a feeling that if the Government change at the next election, the OBR will suddenly have no problem at all with borrowing the £28 billion for green investment. We will see whether that comes about; but that, of course, is under a different sort of moral category.

The real point is that we are reluctant to do things that challenge people’s intuitions and this leads us into bad policy decisions. People are always in favour of windfall taxes because they think that somebody else is going to pay. They do not really understand that, as Ronald Reagan said, businesses cannot pay taxes; they can only collect them. In other words, all taxes are passed on to consumers, customers, shareholders and so on. They are always a popular idea, in the same way that a wealth tax is: people think somebody else will pay it. The idea that the wealthy will not sit around waiting to pay tax but may move jurisdictions or retire earlier is a counter-intuitive and difficult one.

The real problem of our modern economy is the failure to take on some of the false intuitions caused by our maladaptations. Brian Caplan of George Mason University did a survey in which he looked at stuff that is consensual among all economists, left and right, and at how that diverges from the general view of things. He found that there were three particular areas of widespread public bias, the first of which is a general reluctance to understand how prices and competition work. Most people intuitively think that prices go up because of what the seller feels like charging. The noble Lord, Lord Whitty, just referred to that as greedflation, but of course, that is not the reality of how markets work. I am struck that the people who blame inflation on excess profits never make the converse argument: that when prices fall it is presumably, by their own logic, because of the generosity of these big corporations. That is a huge rift between how things work and how most people see them working.

The second area is what Caplan calls the make-work fallacy. Most people insist on seeing jobs as a benefit rather than a cost, or rather, they do not understand that jobs are a means to an end, the end being greater prosperity, hence the constant pressure on Governments to create jobs, as though that is a good thing in itself. We could create jobs if we banned mechanical diggers and had hundreds of men with shovels taking their places. That would create jobs in one sense but it would make everybody poor. It is a very difficult argument to get across that if we are able to exploit technology, we should be able to work shorter hours while living better, and that that is not a bad thing.

Then there is what Caplan calls the anti-foreign bias. People are irrationally suspicious of imports and always tempted into the argument that security depends on producing everything yourself, when of course real security depends on sourcing from as wide a variety of producers as possible, so that you are not subject to a local shock which might as easily happen on your own territory as anywhere else. All these things are counterintuitive and have to be learned. That is why economists are ahead of the people who have not looked at them.

One of the oddities in this whole debate is people talking about free-market dogma. Free markets are the least dogmatic thing because they run up against all these intuitions. It seems completely plausible that a planned economy would work much better than one where things are left higgledy-piggledy to arrange themselves, or that if you have two factories doing the same thing, a wise and disinterested committee of government experts would say, “Why don’t you carry on with factory A, but factory B can be reclassified to something else?” All these things sound plausible. It is just that they lead to absolutely catastrophic outcomes.

The understanding of how markets work is the opposite of a dogma; it is a pragma—an application of observed experience against intuitions. But most people will stick with their gut and then reason backwards, which is why rent, price and wage controls and all the rest of it are perennially popular. The challenge for a Government in the age of instant media is to be able to have the patience to look beyond the immediate headline and do what is right in the long run. My noble friend Lord Griffiths quoted all those old Chancellors—Barber, Healey, Howe and so on—but none of them was in an age of Twitter. They were able to think in terms of an electoral cycle and say, “Judge us at the end of four or five years on the overall package”. Every one of Margaret Thatcher’s privatisations was unpopular when it happened. Even the lifting of exchange controls was unpopular when it was polled in advance. However, she understood that the important thing was to look not at the popularity of a policy when polled in isolation, but rather at its overall effect.

I hope that, if indeed there is a change of Government, there may be some longer-term thinking. The Labour Party could get away with things where it would be a little more trusted than this Government—on NHS reform, building more houses, and maybe on allowing the pension age to rise in line with longevity—but only if it is prepared to look beyond the immediate headlines. Is that possible in this day and age? Well, as the poet said:

“An’ forward, tho’ I cannot see,

I guess an’ fear!”

Photo of Lord Londesborough Lord Londesborough Crossbench 4:00, 29 June 2023

My Lords, I too thank the noble Lord, Lord Eatwell, for bringing such a timely debate to this House. It is timely because the twin evils of stagflation—rising prices and low growth—sharpen the need for higher productivity while presenting formidable challenges.

Many businesses in the UK are currently financing wage inflation of 7% to 8% but seeing no growth in output or sales. When that happens, profitability heads south, resulting in diminished appetite for businesses to invest. Chronic underinvestment, both public and private, has become a constant drag on our productivity.

As we have heard, low productivity growth has been with us since the 2008 financial crisis. In fact, over the decade leading to the pandemic, GDP grew on average by an underwhelming 1.8%. But look under the bonnet and we see that 1.2% of that growth came from working longer hours, only 0.5% from capital investment and just 0.1% from innovation and better working practices.

I find that last figure extraordinary when we reflect on the innovation we have all witnessed as consumers and in our professional lives since 2010: the digital revolution, e-commerce, online payments, videoconferencing, automation, online education and, of course, working from home. Although many of these innovations appeared to be transformative, the productivity needle has barely moved. Now the great hope is AI, but the danger is that we witness a new era of automation but, like before, see no net growth in aggregate terms.

I will focus on human capital—the workforce. During the last decade, the UK created over 3 million new jobs and, with the help of immigration, we were able to fill those roles and generate modest economic growth. The problem was that growth came from employing more people, often in low-skill jobs, and making people work longer hours. As an example, in 2019, the average German worked 1,380 hours a year, but the UK average was 1,537 hours. Yet Germany’s output per hour was 10% higher than here. Over the border in France, it was a staggering 18% higher.

We need a qualitative approach to growing the economy. Frankly, there is no choice: we now have a shrinking workforce alongside an ageing population, with record numbers of long-term sick. The demographic and health trends alone tell us that we are running out of road in terms of capacity for working longer hours and adding yet more workers. That model is no longer sustainable.

Let us focus for a moment on the term “working smarter”. Here, I fall back on my own experience as an entrepreneur and employer of 300 staff, with 40 nationalities working across five different continents in the area of online media. Over 30 years, we learned that the most important factors behind our growth were: recruiting and retaining high-calibre staff; skills and training; management, in particular; and proper incentivisation—working smarter, not harder, in a competitive environment, and competition is good.

The Chartered Management Institute makes a telling point. It estimates that there are 8 million managers across the UK’s 32 million workforce, yet 70% of them are “accidental managers”—managers who have received no proper training from their employer to develop the skills required to lead in an effective, productive manner.

Let me quote the recent survey from CIMA, whose members stated that the top three blockers of productivity all related to lack of skills both within their organisations and nationally. It sounds obvious that recruiting the right people to the right job is crucial, but currently 30% of the workforce is overqualified for their job, while barely one-third of jobs in the UK require higher education qualifications, which is one of the lowest rates in the OECD. This is not consistent with the oft-stated aim of achieving a high-wage, high-growth economy.

All of this, to me and many others, provides further evidence of the need for the Government to set up a productivity commission with the private sector to produce a future workforce strategy and ensure that our immigration policy is aligned with that strategy. We need to raise our game in terms of recruitment, training, managing and incentivising performance—in other words, in developing a stakeholder and entrepreneurial culture in both the public sector and the private sector.

Photo of The Earl of Effingham The Earl of Effingham Conservative 4:06, 29 June 2023

My Lords, I thank the noble Lord, Lord Eatwell, for raising this important debate. Although sentiment was buoyed slightly on Tuesday by the news that shop price inflation fell to 8.4% in June, core inflation remains stubbornly high, suggesting that higher interest rates are here to stay. If the tool of low interest rates will not be available to us for some time to stimulate growth and the outlook is weak, we have to focus on alternative means by which economic growth and productivity can be increased and improved.

I refer to the comment made by Andy Haldane, the former chief economist at the Bank of England, that economic growth improves health, wealth and happiness. I would say that health is wealth. If we have a fully functioning, healthy workforce, our economic growth and productivity numbers will rise dramatically. The number of working days lost in the UK to sickness or injury was an estimated 185 million in 2022, which represents a new record high. We know that the six best doctors in the world are sunshine, air, water, exercise, diet and sleep. We should be placing a huge focus on educating people on this and encouraging them to follow a nationwide gold standard which can only lead to enhanced performance and productivity at work. Education is key. We have all been told to drink lots of water and to sleep well, but the facts are that if an individual drinks two litres of water a day and achieves eight hours of sleep, their cognitive performance can increase by between 10% and 30%. That 10% to 30% improvement in performance will feed into economic growth and productivity.

As for exercise, sport and physical activity can change lives and, most importantly for this debate, sport and physical activity benefit both national and local economies. People will feel good, they will work harder and faster, consumer confidence will be higher and they will spend money. That will result in economic growth and increased productivity. When it comes to diet, having a fit and healthy population is essential to reducing pressure on the NHS and supporting the economy. It is a concerning statistic that obesity currently costs the NHS £6 billion per year, which is set to rise to £10 billion per year by 2050. By trying to solve obesity, we secure a two-pronged attack on reducing the NHS funding requirement and getting people back into the workforce.

None of these problems is easily solved, but they should be achievable with increased levels of local authority participation, education and funding. The House of Lords National Plan for Sport and Recreation Committee’s report recommended the establishment of a new ministerial post with a responsibility for sport, health and well-being. I hope this is something the Government will reconsider.

Department for Transport investment into walking and cycling has huge benefits for public health and the economy, but the active travel budget was recently cut. I ask the Government to consider ring-fencing a certain amount of funding for this investment.

The Government recently introduced new calorie labelling laws under which it is now a legal requirement for large businesses—those with more than 250 employees —to display calorie information on non-prepacked food and soft drinks. It would be helpful if the Government could encourage and help businesses with fewer than 250 employees to do the same, so that we have the full picture wherever we are eating. We need to do more to help people understand healthy eating. At schools, we need more parent communication and cooking demonstrations—whatever we can do to send the message to children and adults alike. This will form the base for their future and the economy’s future growth and productivity.

These are a small number of the ways in which we can tackle this issue. On the basis that we currently do not have the ability to pull the traditional economic levers, we must look for alternatives. I truly believe that improving the health of the nation is a key solution not just for the short term but for the long term and for future generations. Health is wealth. Through it, we will achieve economic growth and increased productivity.

Photo of Lord Monks Lord Monks Labour 4:11, 29 June 2023

My Lords, I add my congratulations to my noble friend Lord Eatwell for launching this debate in such a stimulating way. It has produced a lot of interesting contributions so far. While I am passing out congratulations, I also congratulate those British businesses, and their workforces, which are world-class and have excellent productivity. They are often based on respect and on working closely with employees and their trade unions. These companies have one thing in common: they take a long-term view of their operations and do not swim in the short-term waters that infect so many British companies.

We are in this mess mainly because we do not have enough companies which take this long-term view and can sustain their position in that world. We do not have enough that invest in skills, innovation and technology. Those that we do have are concentrated in the south-eastern corner of this country, our only region which matches up to the most productive regions on our near continent.

We have been aware of this problem for a long time, with the earliest echoes way back in the 1870s. There have been many initiatives by successive Governments and others over the years to see whether we can improve matters. Some useful improvements have been made, but no real game-changers have resulted in Britain being promoted into the premier league of economies. We may have been up there for very short periods of time but not in any sustained way.

The problem is that things are not getting better—they are getting worse. As has been said by others in this debate, the gap between our productivity and that of the French and Germans is widening. There has been no Brexit dividend, as was claimed by the campaigns during the referendum. The only result has been self-harm, with more to come, I fear, when EU and UK standards inevitably diverge—and they will—as people develop new products and so on in different contexts.

As reports issued this week by the Resolution Foundation and the Midlands Engine trade body highlight, this convergence carries the risk that the UK could be squeezed out of supply chains in the advanced manufacturing markets. By the way, manufacturing is sometimes written off by many economic commentators, but nearly half of UK exports are manufactures and nearly half of them go to the EU. Manufacturing really matters to this country.

What can we do to handle the divergence? First, it is important that we recognise it and that government, industry and trade unions start to think strongly about how we can avoid it. Will we copy the EU as much as we can to minimise divergence or do we have exciting new avenues to go down that will lead us to a better situation than we are in at the moment?

Would the Minister perhaps agree with me that the UK’s unique economic model might deserve some urgent attention? There are different models of capitalism: American, Nordic, German and, as we heard from the noble Lord, Lord Howell, Japanese. Ours, compared to theirs, is exhibiting some alarming, glaring weaknesses.

How is it that a private equity outfit such as Macquarie can acquire public assets using debt-laden finance, and then borrow further against those assets and the stable income streams that infrastructure companies generally have, and then pay out generous dividends and executive bonuses unrelated to the service levels that are being provided? Look at Thames Water. It has been in the news recently for its appalling performance in managing the biggest water catchment area in the country. Now we know that, financially, it is in big trouble and a possible candidate for nationalisation, because nobody else is likely to take it on. That is because of being initially laden with debt by Macquarie. Other British companies are labouring with the weight of debt not borrowed for investment in technology or for improving the skills of their workforce but to pay out dividends and executive bonuses related to shareholder value.

What can be done to make our model more long-term? Maybe we should look at how others are handling matters like this and aim for those kinds of cultures, encouraging social partnership and worker participation to grow companies’ world market share—get everybody involved in it. As my noble friend said earlier, there are many lessons to learn from other countries. We should not, by the way, be afraid of intelligent protectionism. I would like us to look closely at what President Biden and his team are doing.

Finally, what are British business schools doing to rectify some of the problems we have been talking about? I think there are too many financial engineers being turned out and not enough real engineers.

Photo of Baroness Fox of Buckley Baroness Fox of Buckley Non-affiliated 4:17, 29 June 2023

My Lords, I too appreciate that the noble Lord, Lord Eatwell, has tabled this debate. It feels like at last the productivity problem and the lack of business investment is being discussed. For too long, many economic policies have amounted to financial tinkering or rows over distribution. Meanwhile, growth has been demonised as either bad for well-being or destructive of the planet. Even those espousing growth rhetoric have often neglected productivity. However, it is only in raising productivity that we have the basis for improving living standards and a vehicle for new skilled, well-paid employment opportunities, rather than low-paid, insecure, unskilled jobs. Productivity increases are the only way we will escape our high-debt, low-growth economic trap.

Until recently, we have been in denial. Productivity started flatlining before the 2008 financial crisis, and indeed before Brexit. However, throughout the last decade and a half, politicians of all stripes have repeatedly claimed that the British economy was fundamentally sound and robust, and arguments instead concentrated on how it was managed. It took the triple whammy of lockdown, the post-lockdown disruption of the global supply chain and the war in Ukraine to finally force the political class to admit we have a problem and put growth on the agenda.

However, whether lockdown or war, these recent global events are not to blame for the state we are in. The UK was affected badly precisely because our internal productive capacities have been hollowed-out by decades-old deindustrialisation and our dependence on imported goods, which means much less domestic scope to compensate for foreign supply shortages. The contrast with Asia illustrates this point, where they have been better able to offset supply bottlenecks. As developing countries, they are building up, rather than eroding, their domestic productiveness. That gives them more adaptability in the face of global disruptions. As a result, consumer prices in lots of Asian countries have not risen as much as they have in the west. There is a lesson there.

I have a nagging question: could narrowly focusing on inflation levels become a distraction from deeper, protracted problems? Surely, tweaks to monetary policy cannot fix the productivity slump—quite the opposite. After all, central banks’ monetary policies and cheap borrowing from 2008 camouflaged and extended productive decay. The Bank of England pumped masses of liquidity into the economy, created all sorts of price bubbles, printed money to fund the Government’s huge pandemic shutdown and never uttered a word of opposition to the wholesale closure of the economy.

But, despite the temptation, indulging in bank bashing lets culpable politicians off the hook. Ever since Gordon Brown made the Bank of England independent in 1997, successive Governments have wilfully outsourced their responsibility for economic decisions and have distanced themselves from, for example, interest rates. Worse, this has turned national economic policy-making into a seemingly technocratic exercise, far removed from democratic accountability or voters’ influence. This must change. It is time that the state assumes transparent responsibility by taking back control of the Bank of England. I want more of the state there, running the economy.

However, I think we need less state intervention on productivity. I get nervous when, in different ways, the Tories and Labour seem to think that government should take an active role in business, whatever form that takes, whether industrial subsidies, tax incentives or public investment. My fear is that this will hinder the very innovation that it is meant to promote. State aid damagingly sustains a business status quo that can keep inefficient, low-productivity firms afloat. This zombified economy is the antithesis of dynamic, future-orientated innovation. These state policies—state aid, and monetary, fiscal and regulatory policies—tend to favour larger legacy companies at the expense of smaller start-ups, which would usually be more inventive and experimental, and likely to drive productivity higher.

In other words, state handouts encourage corporate dependence and reduce pressure on businesses to become competitive, blunting the incentive to experiment and develop better technologies. They often come with political strings, which are usually prescriptive and distort business investment activities. My pet hates are those brought on by infernal net-zero targets, let alone the dreaded mandated ESG reporting and so on.

There is plenty that the state can do to create conditions that will allow investment to flourish. It can invest heavily in public research and science R&D, as so well described by the noble Lord, Lord Eatwell. That is essential for new ideas and technological breakthroughs to occur. It can end the fixation on decarbonisation, which narrows the horizons of economic development, as well as costing working people a fortune. It can prioritise cheap, efficient and reliable energy sources, from nuclear to North Sea oil. It can focus on infrastructure deficits—for God’s sake, let us build some more reservoirs; we might even get some hydropower out of them. It needs to tackle with urgency the broken and expensive transport system and drop the ideological war on cars, vans, lorries and flights—by the way, if that means nationalising the railways, I am all good with that. It means that we drop support for the nimbyist antagonism to housebuilding and ambitiously build new towns, cities, and sites for newly emerging productive industries, as was so brilliantly motivated by the noble Baroness, Lady Thornhill.

Perhaps we also need a productivity cost-benefit analysis on legislation and regulation. Sitting through the levelling-up Bill and listening to the plethora of amendments suggesting barriers to construction, I think that it will be a miracle if anything ever gets built in the future. We need to remove the blocks to construction. Finally, we must stop relying on cheap migrant labour as a solution. We need widespread and long-term training of domestic workers at home, especially the young.

Photo of Lord Sikka Lord Sikka Labour 4:24, 29 June 2023

My Lords, I thank my noble friend Lord Eatwell for facilitating this debate. I will say a few words about investment and productivity. Between 1974 and 2008, the UK’s productivity grew at an average rate of 2.3% a year, and it has really stagnated ever since. It is not the workers’ fault. UK workers work for longer hours than many of their European counterparts. In 2022, average annual hours worked by a German worker were 1,341, compared with 1,532 for a British worker. Yet, productivity of a German worker is up to 19% higher.

The reason for that is higher investment into productive assets and skills. With 17.3% of GDP going into productive assets in 2021, the UK is ranked 27th out of 30 OECD countries. This is despite a period of low inflation, low interest rates and low corporate taxes, with high tax incentives and negative real wage growth. None of those managed to address the block to investment—what I call the investment strike.

Private sector investment is some £354 billion less in real terms compared to the G7 median position from 2005 to 2021. The major reason for that is that British workers’ spending power has been depleted. Why would somebody invest when people just do not have the money to buy goods and services? The UK is a major financial centre, but the City of London is hooked on short-term returns, which is aided by a shareholder-centric model of corporate governance. The Bank of England chief economist, Andy Haldane, noted that in 1970 major companies paid out £10 in dividends out of every £100 of profits, but by 2015 that became between £60 to £70. I have been looking at the accounts of water companies, and they have been paying up to 80% and even more of their earnings in dividends, which is accompanied by a squeeze on labour and investment.

The private sector has little appetite for long-term risks. The state traditionally filled that void in a mixed economy. After the Second World War, the entrepreneurial state built ships, railways, steel, water, gas, electricity, mining and many other industries. It directly invested in emerging technologies and emerging industries such as biotechnology, information technology and telecommunications industries. As a result, by 1976 the proceeds of prosperity reduced the national debt from 270% to 49% of GDP.

But now the state has basically been sidelined—the mantra of the neoliberal coup that has plagued this country from the late 1970s. The state has been restructured and become a guarantor of corporate profits, as evidenced by PFIs, privatisations and outsourcing. Privatised industries have rarely provided the promised investment—just look at the water industry. Since its privatisation in England in 1989, no new water reservoirs have been built, while the population has increased. It just does not respond. If the UK public sector had emulated the G7 median practices over the period 2006-21, an additional £208 billion in real terms would have been invested, but the Government basically opted out of that.

UK productivity is damaged by what I call dead weights. One good example of that is the City of London and the finance industry. We all need bank accounts, insurance, pensions, debit and credit cards and so on; what we do not need are the destructive practices of the City, such as frauds, mis-selling, rigging interest and foreign exchange rates, money laundering, tax abuse and unrestrained gambling. None of that generates any productivity. One study at the University of Sheffield estimated that between 1995 and 2015 the finance industry made a negative contribution of £4,500 billion to the UK economy—and it sucks up a lot of graduates, which denies other industries skilled labour.

Accountancy is another dead weight. We have nearly 400,000 professionally qualified accountants in the UK, the highest number per capita in the world. About 100,000 of these are devoted to tax abuse, although they call it tax planning—a euphemism. It does not generate any productivity; it actually takes money away from the public purse and ensures that the state cannot invest in social infrastructure or other industries. The Government do absolutely nothing, and have not investigated any of the accounting firms involved in this—they have not prosecuted any or fined any. It is business as usual.

I hope the Minister can tell us whether the Government are willing to change their economic and political model and address the systemic problems that are plaguing this country. That will include reforming the shareholder-centric model of corporate governance, which will mean addressing issues about equitable distribution of income and wealth, dealing with the dead weight and, above all, giving the state a direct role in the economy. If the state will not take long-term risks, nobody else will.

Photo of Baroness Lea of Lymm Baroness Lea of Lymm Conservative 4:30, 29 June 2023

I welcome the opportunity to participate in this very important debate today. It is of course a wide-ranging debate and, rather than trying to cover all the points, I shall just make some observations that I trust are relevant.

First, I would like to put our recent growth performance into some sort of context. Between 1997 and 2010, GDP grew by an average annual rate of nearly 2%, although this was depressed by the sharp recession in 2008-09, associated with the 2008 financial crisis. Between 2010 and 2019, GDP grew again by an average annual rate of nearly 2%, despite the coalition’s restrained fiscal policies, introduced to regularise public sector borrowing, which had ballooned in the 2008-09 recession. Note that the economy did not go into recession after the Brexit referendum, despite the blood-curdling warnings by the Bank and the Treasury.

However, GDP slumped by 11% in 2020, during lockdown. This appears to be much more severe than other major economies experienced, although, as the ONS has pointed out, this partly reflects methodological differences. Believe me, international comparisons are fraught with statistical problems. GDP has just about reached its pre-pandemic level now, but it has been a hard and cruel path. Given the severity of the lockdown, any impact on the economy from Brexit is incredibly difficult to assess. It is reasonable to suggest that the introduction of various trade frictions would dampen trade, but the data show that the goods trade picked up strongly in 2022 after weakness in 2020 and 2021, which was more connected with the lockdowns.

Looking ahead, growth prospects are not encouraging. Granted, the IMF, the OECD, the Bank of England—Uncle Tom Cobley and all—have all revised up the exceptionally gloomy forecasts they made earlier this year and so far the UK has avoided recession, unlike Germany. Even so, the forecasts remain disappointing. For example, in May the Bank projected growth of just 0.25% for this year, followed by 0.75% next year and in 2025. Moreover, given possible further monetary tightening to tame inflation, I still do not rule out a possible recession.

Secondly, it cannot be exaggerated how profound the economic hangover from lockdown has been. Three things stand out for me. The first is the huge cost to the Exchequer, which the National Audit Office estimates to have been nearly £380 billion. The second is the continuing hit to output, and hence to productivity, of public services, including education and health. I welcomed the Chancellor’s recent announcement of a public sector productivity review

“with the Treasury acting as an enabler of reform”.

Well, come on, Treasury—enable. The third thing is the decline in the workforce, which the Chancellor sought to address in the March Budget with his “back to work” measures. According to the ONS, in the three months to April the number of “economically inactive” people, those aged between 16 and 64 who are not in work and not looking for work, was still 350,000 higher than in the three months to February 2020. This helps to explain the tightness of the labour market, which is a major supply problem.

Thirdly, I agree that inflation has to be a major concern. The CPI inflation rate was 8.7% in May, unchanged from April. The core rate picked up to 7.1%. As we know, inflation started picking up in mid-2021, reflecting supply-side constraints and disruptions after lockdown. I remember the Bank’s then chief economist Andy Haldane warning about inflation; he was very clear. Incidentally, he voted to curtail QE in May 2021. The rest of the Bank, unfortunately, was not listening.

This was followed by the specific energy price shock following the Russian invasion of Ukraine in February 2022, which gave another kick to price inflation, and an understandable pick-up in wages enabled by the tight labour market. Now, even though producer price inflation abates, these higher labour costs are feeding into consumer prices—the wage-price spiral of old. Rather late in the day, the Bank began tightening policy. Despite voices urging a pause—after all, monetary policy acts with long lags—more interest rate rises seem likely. As I have already implied, this risks recession.

Finally, and briefly, I come to productivity, which is usually taken to mean labour productivity as calculated by output divided by a measure of labour inputs—whether hours, jobs or workers. At one level this is just a statistical calculation and not an end in itself. Any policies that increase output growth, excluding policies specifically geared towards increasing labour market inputs, will increase productivity growth. But we all know that productivity growth is not just a matter of statistics. If we are to improve our growth prospects, we must raise our productivity game, especially given the tightness of the labour market. This includes encouraging capital investment and, of course, investment in people and skills.

Photo of Viscount Hanworth Viscount Hanworth Labour 4:37, 29 June 2023

Britain has a lower rate of economic growth than—and its per capita income compares poorly with—many of its European neighbours and others further afield. Questions must be asked about the causes of these deficiencies and what can be done to overcome them. People of different political persuasions give quite different answers.

Prime Minister Liz Truss and her close colleagues had answers to these questions. They proposed that our low rate of growth was attributable to the laziness of the British workers and a lack of sufficient incentives to activate managers and entrepreneurs. In their opinion, the economy was entrammelled by bureaucracy and burdened by a Civil Service and a public sector that were required to be drastically reduced. These aspersions paid little attention to economic reality. The programme of tax cutting and job cutting met with an adverse reaction from financial markets, and Truss was expelled from office.

An indication of the unreality and carelessness of Truss’s programme was her proposal to cut £11 billion in Whitehall waste, to be accompanied by reductions in the salaries of public servants not working in the metropolis. It was quickly revealed that the entire annual salary bill of the Civil Service amounts to some £8 billion. That is significantly less than the size of the proposed cuts. It seemed that there had been an error of categories. Truss was mistaking the size of the public sector for the size of the Civil Service. The idea that the economy is entrammelled in bureaucracy and regulation that needs to be swept away is an enduring, atavistic notion of the Conservative Party that continues to inspire its policies.

The proponents of Brexit assert that we have been suffering from an oppression of regulation imposed by the EU. The falsity of that opinion has been demonstrated during our consideration of the Retained EU Law (Revocation and Reform) Bill. The complaints of bureaucracy tend to be loudest when bureaucratic agencies are understaffed and when, as a result, they are forced to make decisions in a summary and inflexible way. Some of the loudest complaints nowadays are aimed at local authorities, which lack sufficient resources and manpower adequately to fulfil their many bureaucratic functions.

An explanation for Britain’s low economic growth is easy to come by: there is little in the economy on which to base that growth. Britain’s industrial sector, which is where one would expect to find the growth, has been severely diminished; nowadays it accounts for a bare 10% of our gross domestic product. What may not be so evident to many observers is that the hypertrophy of our financial sector has been both an accompaniment to and a cause of our industrial decline. The financial sector has been mediating the sale of our national infrastructure and of our industrial assets to foreign owners. That has maintained demand for the pound and inflated its value, and the overvalue of the pound has made Britain’s exports uncompetitive while lowering the costs of imports. That has been a major cause of our industrial decline.

Among the dogmas that have prejudiced our economic prospects is the belief, which has been central to Conservative economic policy, that the private sector must be relied on to undertake investments that maintain our industrial infrastructure. According to this doctrine, the Government should minimise their involvement and any initiatives that the Government might propose should be assessed on strictly commercial criteria.

The dogma has been maintained in the face of undeniable evidence to the contrary. It has been responsible for a failure to develop our energy infrastructure and for the collapse of the crucial programme for nuclear power, which cannot be sustained by private finance. An industrial transformation is required in order to staunch the global emissions of carbon dioxide. The British Government have been prominent in declaring the need for that transformation but have failed to take the necessary actions. Our targets for the electrification of road transport have been the most ambitious among the European nations, but our support for our automotive industry has been the very weakest. We have failed to promote the manufacture of batteries and hydrogen fuel cells, and the inevitable consequence will be the loss of our automotive industry.

An industrial transformation aimed at achieving net-zero carbon emissions requires strategic economic planning organised by central government. It requires a major expansion of the supply of carbon-neutral energy, which is bound to come preponderantly from nuclear energy. The experience of the present Government indicates that we cannot expect the necessary investment to come from the private sector.

As in the immediate post-war era, we must look to the Government to provide the necessary finance via taxation and government borrowing from the financial sector. Indeed, the taxes should be imposed on those who can afford to pay them, including the large corporations, which have proved adept at avoiding taxation while reaping exorbitant profits. In the absence of major government initiatives to support the necessary industrial transformation, our economic decline will continue. The consequence will be widespread economic and social misery, which may be accompanied by increasing political instability. Further opportunities will be created for populist movements proposing spurious panaceas, such as we have witnessed in the Brexit movement.

Photo of Lord Desai Lord Desai Non-affiliated 4:44, 29 June 2023

My Lords, I thank my friend, the noble Lord, Lord Eatwell, for introducing this debate. I recall that in June 2022—almost exactly a year ago—we had a similar debate on this question. My friend, the noble Lord, Lord Griffiths, was also there. I said then that we were about to enter an era of stagflation. My idea was that we are going through a repetition of what the British economy went through between 1970 and 1990; I think the noble Lord, Lord Griffiths, made reference to that.

I think we are in a very bad situation and likely to remain so for another 10 years or so, I am sorry to say. Although we are not in recession yet, we are going to be in a recession because, as some noble Lords have said, the Bank of England is failing right now to tackle inflation. It has lost the habit of tackling inflation because, between 2000 and 2020, we had such low rates of inflation that central banks around the world attempted to increase the rate of inflation slightly, to get nearer their target rate. It sounds cruel to say it, but the rate that the Bank of England has fixed right now is not enough to tackle this inflation. I am sorry to say that. I think we are going to get a recession, and it is very hard to say when we will get out of it.

I am now old enough to have cranky views. I believe in something called Kondratiev cycles of 50 years, and I think we are now going to a new phase of a Kondratiev cycle, between 2020 and 2070, as we went through between 1970 and 2020. I am not just making this up. The problem with the British economy is that we deliberately deindustrialised in the 1970s and 1980s as a way of tackling inflation. I cannot give the numbers, but for example the share of industrial trade unionists in the total membership of trade unions was much higher than it is now. We have become a service economy, but our services sector is not as productive as it used to be.

If we look at other economies which are relatively industrialised, such as the US, the US transited to a very productive service sector economy, with digitisation and all that, much faster than we did. We tried to substitute our financial sector for our industries, and our financial sector right now is going through a recession. The City of London is losing business both to the US and to the EU. We have to think of this issue in a slightly longer view than we have been thinking. My guess is that, given where we are in this cycle, if we are going to invest, we will have to invest in higher education, research, fintech, AI and things like that, because that is the only way we will grow.

We are not going to re-establish a steel industry, a car industry or anything like that: those things have gone to Asia. They went to Asia during the 1970 to 1990 cycle. Indeed, very few people know that we conquered inflation not so much by central banks being very efficient, but by our losing industry and that industry moving to the low-tax, low-wage region of Asia. Our imports became cheaper and therefore inflation went down. All the central bank chiefs claim credit for that, but I think it had nothing whatever to do with central banks; it was the transformation of the economy. Basically, the capitalists decided to abandon the West and went to Asia, and that brought inflation down.

We have not actually understood that process: we still think that we are in the old world and we still talk in terms of productivity growth. Productivity growth is very much more difficult to measure or to target in a service industry. One thing we ought to do, if nothing else, is have a commission, or some such thing, to re-examine the notion of productivity. Productivity is a very different thing in a service economy.

Finally, we need a thorough reform of our education system, so that more of our young people get a proper education, including higher education, and can then contribute properly to the service economy.

Photo of Lord Sahota Lord Sahota Labour 4:50, 29 June 2023

My Lords, it is a pleasure to follow my friend the noble Lord, Lord Desai. Earlier, the noble Lord, Lord Griffiths, listed the interest rates for the past 50 years. I may stand corrected, but I think he missed out the one for Black Wednesday.

I thank my noble friend Lord Eatwell for bringing this debate on economy, inflation and productivity to our Chamber. One thing, if anything, that unites all the countries of the world is the economy. Every Government want their citizens to be happy and prosperous and to enjoy the fruits of their labour. Before the Brexit vote, our economy was chugging along reasonably. Growth wise, we were up there with Germany and the US. Our pound had been steady against the dollar for many years. Our exports to the EU were well over 40%. EU migration kept our agriculture and other industries going. EU nurses, care workers and doctors kept our hospitals going. We were never short of a labour force for our economy. Inflation was reasonably under control, and the housing market was doing well on a low interest rate.

Then we had the bombshell of Brexit in 2016. Look at where we are now. Our pound was devalued by 15% from day one of Brexit, and it has never recovered. Our economy is performing well below those of the US and Germany. Our migration and inflation policies are out of control, like some spacecraft out of control in space. Our interest rate is going through the roof, and it will not be long before some house owners start to hand their keys back to their lenders, as they did in the 1980s.

The IMF forecasts that, of the leading G7 economies, ours is the only one that has shrunk. Business investment in the UK is 31% below the pre-referendum trend. The red tape has increased, as has bureaucracy. The UK economy is 5.5% poorer now than it would have been had we stayed in the EU, and our tax revenue would have been £40 billion higher, so do not tell me that all those slogans on the sides of buses were correct.

What is worse is that we sat at the top table of the world’s biggest economic club, and other countries were always trying to catch our eyes to do them a favour. Now, we are the ones trying to catch their eyes, so that we can do a trade deal with them. Our status in the world is not what it used to be, however hard we pretend it is.

However, we are where we are, even though some politicians during the EU referendum were less than honest with our people. I hope people will remember them for their lack of honesty and integrity. As I said, we are where we are, and we have to make the best of Brexit and make sure that it works for the best of our country.

A recent poll shows that people would prefer some sort of closer economic ties with the EU. I hope people will remember that. Next year, I hope there will be a new dawn of a Labour Government, with vigour and energy, to deal with our new challenges, make the best of Brexit and once more restore our status in the world to where it should be: at the top table.

Photo of Lord Liddle Lord Liddle Labour 4:55, 29 June 2023

My Lords, I congratulate my noble friend Lord Eatwell on the brilliant clarity of his introduction to this debate. I also congratulate the noble Lord, Lord Sahota, who is a relatively new noble friend. I am not going to talk about Brexit, but I agree with virtually everything he said.

If we have a change of Government, which I am sure we will, it is clear that a Labour Government are going to inherit a situation of great economic difficulty, if not crisis. How do we deal with that? Robert Shrimsley had a very good column in the FT this morning about how to offer hope in this situation. One thing we have to do is to listen to a former Chancellor like the noble Lord, Lord Lamont. Inflation is a big problem, and a Labour Government will have to tackle it. I did not agree with everything he said, but on that fundamental point I think he is right. So how do we tackle inflation and do something to offer people hope as well?

I do not think there are any quick fixes. My life in politics started off with the Maudling boom, which led to the balance of payments difficulties that Harold Wilson had such difficulty grappling with. We then had the Barber boom, the second Wilson Government and the problems of very high inflation and all that. We had the Lawson boom at the end of the 1980s, which contributed to some of the difficulties that the noble Lord, Lord Lamont, had to grapple with. In a way, the Truss experiment was a repeat of that. The only thing is that in the intervening decades, the financial markets have got much quicker at reacting to problems.

It is very important that the Government do not think that they can break their own fiscal rules. They have to maintain the confidence of the financial markets if they are going to succeed. I am not an advocate of austerity—I think mistakes were made in the post-2010 period—but I am an advocate of stability. We have to prioritise stability.

If there is a parallel, it is when I first started working as an adviser for Tony Blair and Gordon Brown. It was in the 1992 Parliament, when the noble Lord, Lord Lamont, was Chancellor, and there was tremendous pressure from Back-Bench Labour MPs for us to support a great Keynesian expansion. Gordon stood out against that with absolute firmness and determination because he knew that that was not the way forward. I expect the same of Rachel Reeves, and I am very hopeful about that.

We have to somehow find a means of prioritising investment. In public services, the focus has to be on investing money now to save money in the medium to long term so that we reduce the pressure for further public spending increases. I can cite lots of examples where you could make a case: adult social care, the MacAlister report on children’s social care, education catch-up and making the NHS more community-focused and less hospital-focused. If we come up with those kinds of proposals, we have to have rigorous independent monitoring of them to ensure that their objectives are achieved and the targets met. We have to bring into government people with fresh ideas about how to run public services.

More importantly, we have to invest to grow. If we can find projects that produce a higher return than the borrowing we have to secure, it is logical to go ahead with them. However, at the same time, we have to find a way of meeting our debt rule in the medium to longer term. I support a modern industrial policy. We have to have policies that focus on competition; getting better access to the European single market; skills; R&D; and infrastructure. We also have to have a modern industrial policy that looks at sectors, such as the car industry, and sees what can be done to save them. Production has halved in the past three years; what are we going to do to save it? There seems to be a lack of urgency on the part of the present Government.

My final point is also on industrial policy. Again, it has to be rigorous. We have to have independent assessment of the investments we make; it cannot be done on the basis of ministerial favours and handouts. The next Labour Government should prioritise the policy of investing prudently in our future. That is how they will make a difference.

Photo of Baroness Bowles of Berkhamsted Baroness Bowles of Berkhamsted Liberal Democrat 5:02, 29 June 2023

My Lords, we have had an interesting and important debate and I thank the noble Lord, Lord Eatwell, for putting it on the agenda. We have had wide-ranging speeches about the macroeconomics of inflation, higher interest rates and the woes of productivity and growth. As a business owner in the 1980s, I remember all too well having a commercial mortgage rate around 17%, and inflation being rampant.

While people are hurting again now in a similar way, the remedy exercising my mind is at the more microeconomic level of getting investment into the real economy—for that is the way to growth, productivity and prosperity. My focus is founded on my experience as a patent attorney working with scientists, engineers and management in start-ups and big business alike, because innovation and how to fund development must march together for growth.

An irritation frequently voiced is that the UK’s capital markets have not served UK innovators all that well. Headlines about tech listings going to the US rather than the London Stock Exchange have featured recently, but my heart was breaking long before I became a non-executive director of the exchange —which, by way of a declaration of interests, is a position I still hold, along with other interests as set out in the register. But in this place, I speak for myself.

I am glad that there is now a focus on how to get more investment into productive parts of the UK economy, including from pension funds. That is the right direction of travel, despite the complexities that exist around trustee fiduciary duties and regulator priorities. Pension contributions and investments are so tax-advantaged that looking for public good in the economy from these investments is justified. However, we need to look at the way in which we manage to shoot ourselves in the foot at the microeconomic level, seemingly at the first opportunity.

On Tuesday, we completed the Financial Services and Markets Bill, which includes a secondary competitiveness objective—albeit this was controversial for some, given the misguided approach of the old FSA to its competitiveness objective. However, now that it is there, it is important that it is used to enhance the competitiveness and soundness of the UK’s economy as a whole, and is not just inwardly focused on financial services.

However, all this will be meaningless if the FCA continues to sit on the obvious and unnecessary regulatory damage to the real economy happening now through the decimation of the listed closed-end investment fund regime, also known as investment trusts. These were once a jewel in the London funding ecosystem and a major route for investment in strategic industries and infrastructure, including by pension funds—a jewel of vital importance in the green sector for renewable energy and battery storage, where over £30 billion has been raised and invested in recent years. That is, until July last year, when the FCA and the Investment Association switched off investment funding through new guidance on cost disclosures.

It boils down to ticks in wrong boxes, as I have previously elaborated in detail and recorded in Hansard for 6 June at column 1348. The new guidance came from the Investment Association, on the request and/or instruction of the FCA, even though the FCA website said in January 2022 that, following the extension of the UCITS exemption in the UK’s PRIIPs regulation to 2026, there would just be end-date changes relating to the supply of investor information documents. There was no mention of other changes, implying that the situation would remain as it was until 2026. But, despite a suggested status quo, other changes were initiated, seemingly by this instruction from the FCA to the IA on new guidance.

The guidance has its inspiration in the PRIIPs directive, which is just about to be revoked as unsuitable for purpose in the UK. I can personally attest that the investment trust structure was not properly understood in Brussels when PRIIPs was negotiated, but it has taken this latest UK initiative for guidelines to bring havoc that PRIIPs never did before, nor has in other countries. This is not just a trivial, irritating matter; it is huge, because of the important place that investment trusts have had in the market as a route to collective investment in less liquid instruments, with the holding being made liquid through the listing.

There are various consultations around, to which industry associations and industry participants have made submissions that the new guidance should be revoked. The IA itself has responded to a Treasury consultation, asking if it can revoke the guidance, and letters have been written to the FCA by industry participants. Yet, somewhere in the FCA this is being sat on, instead of rapid corrective action being taken, with the IA saying that it needs amended guidance from the FCA for it to be able to make any changes.

So, while the IA and the FCA each point to the other for updates, new money has been all but shut off since last July because ticks have been put in the wrong boxes. These are multibillion-pound levels of lost investment if you consider the more than £30 billion raised in well under a decade just for the renewable energy and battery storage sector. If we wait much longer, still more enterprises will be starved of funds or, as is already happening, investment will go to Dublin, which, of course, has all the same PRIIPs and MiFID legislation but just has not put ticks in the wrong boxes.

My challenge to the FCA is this: show that you are up to the job and fix this before the end of the summer holidays so that IPOs and fundraising can start again in September. It takes but a word—“stop”—to flick the switch to where it was, doing nobody any harm over a great number of years, and to where the public pronouncements of the FCA seem to indicate it should have remained. We had investment trusts that worked and were lauded for years. We need them back. Every day of delay equates to around £12 million of lost investment to the strategically important clean energy sector. Twelve months, already gone, means over £4 billion and counting since the switch was flicked.

This is not competitive and it is not consumer protection. It is destroying markets, not protecting them, and it is damaging existing funds, blocking both investor opportunity and economic growth. It is setting us behind in meeting environmental targets and it is wrecking the closest thing we have in this country to a sovereign wealth fund.

What is expected of the regulator is continuous monitoring of the impact and outcomes of any guidance or rule, a keen interest in feedback of the market participants, and swift intervention where necessary. The industry body should be equally swift in delivering the decision-useful inputs to the regulator. Heads must be knocked together now for a quick solution, or heads should roll for the billions in lost investment.

I cannot understand why the Government stand by helpless when this disaster is contributing to missed growth and productivity targets, and slipped aspirations to be a global leader in clean energy, as just reported by the Climate Change Committee. The FCA stands in the way of capital queueing to invest in net-zero commitments, and for which the new FiSMA gives an obligation to contribute. Let us do something real for the economy and just get this done. This is a big dent in green finance, for which the Minister has responsibility. I am happy to meet her, or anyone, to help progress this matter. I am again grateful for the opportunity to make this important issue of public and ongoing record.

Photo of Baroness Chapman of Darlington Baroness Chapman of Darlington Shadow Minister for the Cabinet Office, Shadow Spokesperson (Business and Trade), Shadow Spokesperson (Treasury) 5:13, 29 June 2023

My Lords, it is a pleasure, as ever, to follow the noble Baroness, Lady Bowles, who brings such knowledge, experience and specificity to our debate this afternoon. She made a clear pitch to the Minister and I await the Minister’s response—I am interested to know what she will say.

This has been a wide-ranging and thought-provoking debate. There have been too many quality contributions to mention them all. However, I assure my noble friend Lord Liddle that Rachel Reeves rules the Parliamentary Labour Party with an iron grip, and I am one of many hopeful Labour parliamentarians to have gone to see her to ask her to invest in something of absolute importance without which we will never win another election, only to be given a very hard no. Obviously she was right and I was wrong, and I am sure that is where it will remain.

We have shared some disagreement this afternoon on the issues of inflation, productivity, investment and the role of government. To generalise and perhaps simplify, we on these Benches favour an active, engaged state with a mission. We do not agree that it is good enough for a Government to leave the pitch—to deregulate and then allow our citizens to sink or swim in all but the most extreme of circumstances.

In his introduction, which I agree was delivered with absolute clarity, my noble friend Lord Eatwell said that investment requires confidence in the prospect of future growth. For this we need the foundation of a stable Government with a plan that is shared and understood by the country.

My noble friend Lady O’Grady talked about AI and its potential to increase productivity. I think most of us would wholeheartedly agree with that, but we need it to happen as part of a modern industrial strategy. How do we think our life sciences have done so well? It is because the then Labour Government made it a priority and created the framework and support in higher education and investment in research to enable it to happen.

The truth is that economic growth in the UK has been weak since the global financial crisis. Had the pre-crisis trend continued, our economy today would be 26% bigger than it is. In 2010, growth had begun to return but austerity sucked demand away, and we know what has happened since. We have heard various judgments today about the relative significance of different factors, including Brexit, Covid and austerity, and how they have affected productivity growth and stagnating business investment, and more recently labour market inactivity. The points from the noble Lord, Lord Londesborough, about leading a productive workforce were very well made. We agree with him on the need for strategy.

The arguments from my noble friends Lord Leong and Lord Wood about investment are important. I observe that skills degradation over time is undermining what should be one of our strongest suits as a nation. The graduate salary premium outside the south-east is declining, which tells us that too many graduates do not leave university with the skills that businesses are prepared to pay more for.

That is not all. A report published just this morning by the Sutton Trust showed that highly able disadvantaged pupils achieve, on average, a whole grade lower per subject at GCSE than the most affluent highly able children. Some 62% of better-off high-potential pupils got five or more 7 to 9 grades at GCSE in 2021, compared to 40% of disadvantaged high-potential children. Over 28,000 disadvantaged young people who would have been expected to achieve top grades at GCSE between 2017 and 2021 did not do so. It is impacting their future life chances. Despite their high potential, disadvantaged highly able pupils are twice as likely as their better-off peers to say that people like them do not have much of a chance in life. This is a criminal waste of potential and it is holding the UK back.

It is not just educational inequalities; regional inequalities are important too. The IMF says that regional disparities are harmful for economic efficiency, as limited opportunities for those stuck in the wrong place lead to the underutilisation of potential and constrain overall growth. More broadly, regional disparities, including urban and rural differences, can fuel social tensions, promote political polarisation, and threaten the social fabric and national cohesion. Free markets cannot fix these things. It takes leadership from both national and, probably more importantly, regional government.

My noble friend Lord Whitty mentioned international productivity comparisons, and well he might. Twenty years ago, the average Briton was wealthier than their European neighbour but today the average French family is 10% richer than their British peers, and in Germany that figure rises to 19%.

Austerity trashed our public services—everything from Sure Start to social care, community policing to cancer. Life expectancy gaps are growing and regional inequalities are more entrenched than ever. We have hammered public services, and now we can see it: austerity has hammered our growth as well. Ed Balls was right. He said that George Osborne was going too far, too fast. He said that austerity would fundamentally undermine the ability of our population to thrive and would threaten productivity.

Brexit without a plan, followed by a bad deal, increased the administrative burden on business, left us out of Horizon, does not allow for mutual recognition of professional qualifications, left the institutions of Northern Ireland paralysed and sucked every ounce of political energy away from where it needs to be—focused relentlessly on delivering a stable and secure economy. We are paying the price for all those things today. The Covid inquiry is just beginning to reveal how ill-equipped the UK was for the pandemic in terms of our planning but also our health service and our supply chain resilience.

Where we make things and who owns them matters. We need to develop new partnerships between an active state and a free market with countries across the world which share our values. We believe that leadership of the economy does not start and end with management of interest rates.

The noble Lord, Lord Effingham, rightly focused on public health: this is about good jobs, decent pay and fair working conditions so that working people can contribute to our national success and their financial security will underpin our economic strength. Rachel Reeves talks about “securonomics”—I can sometimes barely say that without really focusing, but that is the word we are using to describe it. What she means is that she wants to build the kind of economic security that provides hope: that our best days are ahead and knowing that we can get on, not just get by.

I again thank my noble friend Lord Eatwell for providing the opportunity for this timely debate. As we all know, he brings enormous experience. The name Andy Haldane has come up a few times today and, coincidentally, I was talking to Andy last night and I mentioned that this debate was going to be led by my noble friend, and he said, “Ah, yes, John Eatwell. He wears his learning lightly”. I think I know what he means. His introductory speech was as coherent and comprehensive an explanation of our current predicament as I have heard. I look forward to reading it back later, but for now, I look forward to hearing the Minister’s response.

Photo of Baroness Penn Baroness Penn The Parliamentary Secretary, HM Treasury 5:23, 29 June 2023

My Lords, I thank all noble Lords for their contributions to this timely debate, in particular the noble Lord, Lord Eatwell, who has brought us here today. In the face of rising inflation, we continue to take the action necessary to shelter the most vulnerable, get inflation under control and set our country up for long-term, sustainable economic growth.

Before I turn to some of those matters, I shall address some of the gaps in the review of the noble Lord, Lord Eatwell, of this Government’s record. He noted that the previous Labour Government left government debt too high as a result of intervention in the banking sector and their response to the accompanying recession. He neglected to say that Labour inherited a surplus of £66 million in its first full financial year in government and that, when it left office, the deficit was almost £160 billion, the largest since the war.

The noble Lord, Lord Eatwell, also neglected to mention employment. I do not know whether that is because all Labour Governments have left office with unemployment higher than when they entered it or because this Government’s record on employment and jobs does not accord with his narrative on our economic decision-making.

Two of the biggest gaps in the noble Lord’s assessment of this Government’s record were our responses to the crises of Covid and Russia’s war on Ukraine. The response to Covid was, in fact, a massive public effort to protect lives and livelihoods. The noble Lord did not mention the provision of more than £400 billion of support during the pandemic, including paying 11 million people’s wages, and that we had one of the fastest and most successful vaccine rollouts in the world.

Our response to Ukraine has not just been to be their most steadfast ally, providing equipment, training and financial support; we have also taken action to protect people at home from the price shocks that we have experienced in the invasion’s aftermath. We have put in place the energy price guarantee to protect people from the worst of the energy cost increases, we have increased benefits by over 10% this year and we have put in place extensive cost of living support payments for those least able to cope. In total, this year and last, our support has been worth £94 billion. This support will help the most vulnerable weather the current storm, but the real answer to the current economic challenge must be to bring down inflation.

The UK is not alone in facing high inflation. UK inflation was lower than in nine EU countries in May, and over half of the EU had higher core inflation in the same month. The primary drivers of high inflation are international: the supply chain shocks in the wake of Covid, followed by food and energy price shocks as a result of Russia’s invasion of Ukraine.

However, it is right to say that domestic inflationary pressures have also risen in recent months. To address one of the questions from the noble Baroness, Lady O’Grady, the UK is in a position of having a very tight labour market—as they face in the US, but with less pressure on the energy bills—with pressure on energy bills that is more akin to that which we see in our European partners. That means that we need to be even more determined than ever to get inflation down.

Let me reassure my noble friend Lord Griffiths of Fforestfach that, to do this, first and foremost, the Government remain steadfast in our support for the independent Monetary Policy Committee at the Bank of England and its target to return inflation to 2%. I agree with the noble Lord, Lord Whitty, that it is vital that monetary and fiscal policy work together in this respect. That is why we are making difficult but responsible decisions on tax and spending, to manage our borrowing and get debt falling. Increasing borrowing at this time would simply be adding fuel to the fire. Thirdly, we are taking long-term action to address some of the underlying drivers of inflation, investing in our long-term energy security and energy efficiency, and working to boost labour supply, with interventions to support people back into the workforce and remove barriers to returning to work, such as through the extension of free childcare to parents with children from nine months and upwards.

We know that, as the Bank of England increases interest rates to bear down on inflation, this puts upwards pressure on mortgages. While mortgage arrears and defaults remain at historically low levels, with just under 1% of residential mortgages in arrears in 2023, and at a lower level just before the pandemic, we want to support those who find themselves in a challenging position—but, again, as my right honourable friend the Chancellor has made clear, without adding further fuel to the inflation fire. That is why my noble friend Lord Lamont is right that we cannot take action such as providing tax relief on mortgage interest payments, or other support of that nature. We can work with lenders, as we have, to provide more support for people through flexibility in how they manage these costs. That is what the mortgage charter, negotiated last week, will do: it will help give people peace of mind about extending an existing mortgage or moving to an interest-only mortgage for six months.

Let me reassure the noble Baroness, Lady Thornhill, that there will now be a minimum 12-month period from the first missed payment before there is repossession without consent. The noble Baroness also touched on renters, and we recognise the need for more support there. The recently introduced Renters (Reform) Bill includes a ban on Section 21 no-fault evictions. There is an extensive package of measures there to improve security and quality in the private rented sector.

I agree entirely with my noble friend Lord Lamont that tackling inflation must be the immediate priority. It is also the essential precondition for sustainable economic growth. High growth needs businesses, investors and consumers to all have confidence, which is not possible with high levels of inflation. In January, the IMF said that the UK was taking “the right approach” and, in its recent visit to the UK, said that the UK authorities had taken “decisive and responsible steps” which have had a “favourable impact” on the economy. The measures announced in the Spring Budget deliver the largest permanent increase in potential GDP that the OBR has ever scored in a medium-term forecast.

I must disagree with some noble Lords on this Government’s record on growth. The UK had the fastest growing economy in the G7 last year, growing by 4.1%, following a 7.6% increase in 2021. Since 2010, we have grown more than major countries such as France, Italy and Japan, and about the same as Germany. Where we find more common ground—as we have in past debates on similar subjects—is that, in our economy, we have a need for greater productivity and investment. My right honourable friend the Chancellor at the start of the year set out his approach to the four pillars that we need to support to increase productivity in our economy.

The first focuses on enterprise, which means supporting innovation and investment. That is why direct funding for R&D will reach £20 billion a year. Indeed, OECD data shows that, as a percentage of GDP, the UK provides more support for business research and development through tax and spend than any other OECD country. Part of the challenge now is to match that investment from the public sector with investment from the private sector. To support that, we are refocusing R&D tax credits and have introduced full expensing. To the noble Lord, Lord Woods, and the noble Baroness, Lady Bowles, I say that we are looking at how we can further unlock pension fund capital to invest in our future businesses, while of course ensuring that pension funds continue to act in the best interests of their members.

On education, the Government are implementing a significant skills programme, including an expansion of apprenticeships and T-levels and crucially delivering a commitment to lifelong loan entitlements that will allow people to access support for their continued education throughout their lives and careers, not just as a young person leaving school and going on to university. This builds on the sustained success that we have had in improving educational outcomes in our schools since 2010.

On employment, as I have already said, the Spring Budget included a comprehensive plan to address labour shortages, including cutting the cost of childcare by up to 60% and abolishing the lifetime allowance on pensions. The OBR expects that these measures will result by 2027-28 in the labour market directly increasing employment by 0.3% and GDP by 0.2%.

Finally, as the noble Lord, Lord Monks, noted, this growth needs to be felt everywhere across the UK, not concentrated in London and the south-east. I assure the noble Lord, Lord Leong, that we will continue to devolve powers to local areas and to invest in places through our levelling up fund. My right honourable friend the Chancellor has also announced 12 investment zones which will catalyse high-potential, knowledge-intensive growth clusters across the UK, including four across Scotland, Wales and Northern Ireland, bringing investment into areas that have traditionally underperformed economically.

We have also heard from noble Lords about the importance of backing strategic sectors where the UK has a competitive or comparative advantage, and the Government absolutely agree on that. Over the past 13 years, we have become the world’s third trillion-dollar tech economy after the US and China. We have built the largest life sciences sector in Europe, producing a Covid vaccine that saved 6 million lives and a treatment that saved 1 million more.

Our film and tv industry has become Europe’s largest, and our creative industries have grown at twice the rate of our economy. Our advanced manufacturing industries produce half the world’s large aircraft wings. Our green industries mean not only that we are a world-leader in offshore wind but that we have managed to decarbonise our economy further and faster than other major economies.

We are committed to backing these sectors, creating forward-facing policy and regulatory initiatives and providing strategic public investment to ensure that they continue to build on the strengths I have just outlined. To take one example cited by the noble Lord, Lord Eatwell, when it comes to clinical trials, to maximise opportunities in this area, we have commissioned a review by my noble friend Lord O’Shaughnessy into the current clinical trials environment. As a first step after that review, we have made five headline commitments, backed by £121 million, to, among other things, substantially reduce the time taken for approvals of commercial clinical trials, deliver a national approach to contracting commercial clinical trials and deliver real-time data on commercial clinical trials activity in the UK. Our commitment in these areas continues.

The noble Lord, Lord Eatwell, and the noble Baroness, Lady Chapman, touched on the importance of our supply chains and our broader economic security in a changing global environment. That is a picture that the Government absolutely recognise. As announced in the integrated review refresh, the Government will publish a new supply chains and import strategy to support specific government and business action to strengthen our resilience in critical sectors.

That takes me nicely on to the question from my noble friend Lord Howell. I know that economic security and supply chains were a subject of great interest at the G7 recently hosted by Japan. He is absolutely right that Japan is a like-minded partner, and we value our relationship deeply. That is why the Prime Minister Rishi Sunak and Japan’s Prime Minister Fumio Kishida recently signed the Hiroshima accord on 18 May, which includes new agreements on defence, trade and investment and science and technology collaboration. We continue to want to work with our close partners.

My noble friend Lord Effingham is absolutely right that well-being is essential to supporting economic growth and productivity, and we are committed to supporting individuals to live healthier lives. At the heart of this is improving access to and levelling up healthcare across the country. In January, we announced that we will be publishing a major conditions strategy, and an interim report will be published this summer. Interventions set out in that strategy will aim to alleviate pressure on the health system as well as support the Government’s objective to increase healthy life expectancy and reduce ill health-related labour market activity.

To the noble Baroness, Lady Bowles, we had this debate on the Financial Services and Markets Bill, as she noted today. Can I suggest to her that perhaps the best way forward is that we sit down together in the Treasury and go through in detail the points that she has made in this debate?

Today’s debate has been wide-ranging, and it has been impossible to address all the points noble Lords have so thoughtfully made. The noble Lord, Lord Desai, recalled that we have had similar debates before, and I very much hope that we will have more in the future so that I am able to explore further areas that were beyond my reach today.

I think it is right, in closing, to return to the greatest economic challenge before us—inflation—and the Government’s steadfast commitment to bringing inflation down. Without inflation under control, we will not see the growth and productivity improvements that I think all noble Lords in this debate have agreed are needed.

Photo of Lord Eatwell Lord Eatwell Labour 5:39, 29 June 2023

My Lords, I am grateful to all noble Lords who have taken part in this interesting debate and for the many interesting ideas and views expressed. I will make a closing remark on the topic of inflation.

I am very nervous that the Bank of England’s policy will not work. The increase in interest rates has a much smaller base to operate on than it used to, given that fewer mortgage holders in this country have variable-rate or fixed-rate mortgages that will mature very shortly. Moreover, it is extraordinary that we are relying in our attack on inflation on worsening the economic circumstances of a small group of mortgage holders in this country.

Moreover, the other way in which the Bank of England’s policy can work is by raising the exchange rate and thereby reducing costs. We have seen some increase in the exchange rate as interest rates have risen, but that policy is very frail and insecure. Capital movements around the world, especially short-term ones, can move interest rates in various directions in quite different ways from those that might be expected by policymakers.

I am very concerned, and my concern is shared by the Bank for International Settlements, which argued last week that monetary policy will not be enough. Therefore, we must look to other ways of taking the pressure off the labour market by supporting basic well-being in the labour force in particular, so that there is not the same pressure to bid for higher money wages.

I will not go on. There is much more for all of us to debate on this. I very much thank all noble Lords who have taken part and the noble Baroness, Lady Penn, for her summing up. I beg to move.

Motion agreed.