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4.23 p.m.
Lord Craig of Radley: My Lords, much has been made in recent years about improving our ability to spot wealth creating technologies which can be exploited to the benefit of our country. We have seen the successful launch of government-led initiatives such as Realising our Potential; the technology foresight panels; and, more recently, the Information Society Initiative for small businesses.
I had hoped that there might have been some reference to the way ahead for the Information Society in the gracious Speech. Information technology is going to have a major impact on the future and on how government is organised and managed. A chance to give those issues greater visibility may have been missed because other topics demanded too much space in the gracious Speech. I hope that it will not be missed out next time.
Sixty-seven years ago, a world-beating technology was hit upon by a young Englishman, scarcely into his twenties. His ideas were immediately, and widely, judged by his elders and betters to be impracticable, and no more than a foolish young man's dream, even though the theory of what he was proposing seemed sound enough. It was only that young man's persistence, his prolonged and utter determination to demonstrate the practical results of his ideas which won through. Against enormous indifference and an almost total lack of financial and other backing, he eventually succeeded. Many others would have given up and accepted defeat. He did not. In 1930 he patented his ideas, but for the next six years there was no industrial or government interest in the patent and no financial support for further research or development.
When the patent came up for review in 1935, that young man was unable to find even the £5 needed to renew it. By then others began to see sense in his ideas, and after further trials and tribulations the ideas were turned into reality. The reality was the jet engine; the young man was Frank Whittle. Sir Frank died last August, aged 89. It is fitting to pay tribute to his unique technical achievement, and to his determination.
That determination was not confined solely to his invention but almost more to becoming a member of the Royal Air Force, a service which he greatly admired and loved throughout his life. There will not be a Member of your Lordships' House who has not been propelled through the air by a jet engine. Some of us have been fortunate enough to be at the controls of aircraft powered by jets. What a unique technological achievement, one of the most far-reaching of this century, from which so much of mankind has benefited and will continue to benefit. But it was realised through the unique combination of inventive genius and determination. Today's inventors need the same degree of determination if they are to succeed and if the country is to benefit from their discoveries. Determination as much as technology foresight panels is required for success.
During one of the celebratory dinners marking Sir Frank's 80th birthday, I was sitting next to him. In the course of a fascinating and wide-ranging discussion
I asked him whether he thought that there was another invention in the offing which could match in the 21st century the worldwide impact of his own development of the jet engine. I asked him, "What should a young inventor, aspiring to succeed today as you, Sir Frank, did half a century ago, be working on?". With almost no hesitation he said that he thought that it would be in the field of telepathy. He described what he meant by talking about the movement of a flock of starlings or a shoal of fish which change direction without any apparent follow-my-leader or other signal. All turn as one and move off in a new direction. His idea was that there was something, he called it telepathy, which allowed the birds or the fish to communicate or react in this unique way. It was something which one day mankind would master for its own use.If Sir Frank was right to suggest that the next most remarkable breakthrough is going to be in the field of communication, I rather fear that the technology of telecommunication is in danger of outstripping our ability to master it and make it our servant. We need even more visible leads than we have at present and better explanations as to how the technology is going to help us all. Some proposals are contained in the latest report of the Science and Technology Select Committee on the information society. We await the Government's formal response to that report. However, I understand that the Government intend to produce a Green Paper next month which I hope will address some of the ideas contained in that report.
What is already clear is that there are technologies around that will have profound effects on the ways in which government and citizens interact. The concept of separate departmental responsibilities as the tidy and bureaucratic way of allocating and managing activities of direct interest to the citizen may well prove to be awkward and cumbersome for the individual as we move into the electronic age. I chaired a Select Committee on the decommissioning of oil and gas installations and I found it interesting that we were dealing with one government department, the DTI, as the lead department for government. The relevant Act was of course overseen by them, but they were co-ordinating the views of a raft of other departments, ranging from defence, the environment and the Foreign Office to transport, MAFF, the Scottish Office and of course the Treasury. Therefore the DTI was in effect providing a form of one stop shop to handle our inquiries. Contrast that with the way that we were provided with evidence for the Information Society Report. We were confronted by a whole range of government departments and agencies, each giving evidence covering its own particular and at times insular interests and involvement with IT. In all we took evidence from no fewer than 10 of them. John Citizen in front of his PC will soon be pressing government for more one stop shops to meet his particular needs.
Unlike the other place, the inquiries of some Select Committees in your Lordships' House do not track the activities and responsibilities of single government departments. I think that that is entirely right. However, I believe that there will be major changes in the way that government do their business with the citizen as the
latter becomes more and more plugged into the electronic age. Over 6,000 individuals used their PCs to access the Select Committee report on the Information Society in the first fortnight after its publication on the Internet. Incidentally that was the first report of either House to be made available to the public electronically.Government must be seen to be embracing this new technology openly and to be giving it visibility and impetus throughout the government service. I hope that the noble Viscount will be able to confirm that the Green Paper to be produced next month will be published on the Internet. No doubt there will be hurdles to cross because of ignorance, because familiar practices must be changed and adapted and because departmental responsibilities must be remodelled. Strong leadership and widespread dissemination of what is afoot will be called for. Even the organisation of government at the highest level of Cabinet and Cabinet Committees may be swept up in the changes.
There is a good book on the subject with an appropriate title: Unpredictable Certainty. The information revolution is that certainty. It is going to impact on all that we do and make and invent; on how we educate and on how we provide medical care; how we pay for goods and services; how government collect taxes, and much more. It is already proving to be transdepartmental. I hope that when the noble Viscount replies to the debate he will have a moment to say how he sees government responding--as I believe that they must--to this 21st century parallel with the impact of a Whittle jet engine.
I find it difficult in the debates on the gracious Speech to identify the appropriate day on which to raise some of these issues. None of the groupings set aside for each day of the debate quite fits. However, I hope that the overarching value to wealth creation which the information age is leading us towards falls as naturally into the topic of industry and economic affairs as any other--if not, I crave your Lordships' indulgence. I was in any case tempted to raise these issues today when the noble Viscount the Lord Privy Seal, who is chairman of the Ministerial Committee on Information Technology, is responding for the Government.
4.35 p.m.
Lord Howe of Aberavon: My Lords, one of the attractive features of your Lordships' House to which one gradually becomes accustomed is the way in which in a debate such as this a speaker of the distinction of the noble and gallant Lord, Lord Craig of Radley, is able to judge sensitively how to manage the rules of order of the House, if any, and to raise a topic as fascinating as he has done from which we have all learnt a great deal. I join him--as everyone would--in paying tribute to the memory of Sir Frank Whittle. However, I was interested in the noble and gallant Lord's confident description of his own ability to handle the controls of a jet engine. I am sure I speak for many others in the House when I say that such a prospect would absolutely terrify me.
However, one must acknowledge that the task of handling the controls of a jet engine is a great deal easier than was the task of at least half a dozen Members of
the House--three of whom are present at the moment--of controlling the economy when they were Chancellors of the Exchequer. I see that the noble Lord, Lord Healey, nods his head enthusiastically. The noble Lord had a trying time during his tenure of that Office. I recollect that his last three budgets were introduced under an increasingly bizarre degree of surveillance. I believe that in 1977 it was that of Mr. Witteveen from the International Monetary Fund; in 1978 it was that of Mr. Pardoe, the Member for North Cornwall in the Lib/Lab Pact; and in 1979 the noble Lord was compelled to introduce a budget in consultation with myself when a general election had just been declared.However, I must try to avoid invidious comparisons of that kind and return to the path that lies ahead; namely, the last major political set piece before the election, the Budget which the Chancellor of the Exchequer will introduce in a few weeks from now. I agree entirely, and not surprisingly, with the view expressed by my noble and learned friend Lord Fraser of the present state of the economy. However, rather than cite his judgment I wish to refer to that of the Governor of the Bank of England who said quite simply,
- "Average annual retail price inflation has fallen from around 12¾ per cent. in the 1970s to 7 per cent. in the 1980s to 4½ per cent. in the 1990s and to 2¾ per cent. over the last four years".
- "our fifth successive year of relatively steady growth--at a rate above that of most of our G7 partners...Unemployment has fallen consistently over the past three years to the lowest...in any of the larger European economies...Accompanied...by more stable as well as lower nominal interest rates, and by much more stable effective exchange rates".
I listened with interest to the speech of the noble Lord, Lord Ezra. It had a dismal tone about it. I was surprised by his reluctance to acknowledge that the real success of the economy--of course there are many things yet to be done--is due to three factors achieved by this Administration and its predecessors over the past couple of decades. The first factor is the liberalisation of the labour market and the almost complete disappearance of strikes in the private sector. Secondly, we have shaped an enterprise-friendly tax system. In that regard just one figure gives an interesting insight. In 1978-79, the share of taxation paid by the top 1 per cent. of income earners in this country was
11 per cent. Last year, it had risen to 17 per cent. The share paid by the top 5 per cent. was 24 per cent.; last year it had risen to 34 per cent. It is that fruitful generation of tax revenue which the Labour Party still threatens, at least in the mind of Mr. Gordon Brown, to reverse. Thirdly, those features, together have created a hugely hospitable environment for inward investment, as my noble friend says. We can rightly see that Britain is perceived by the world outside as the enterprise centre of Europe.The question now is: what should the Chancellor best do to preserve that? It requires above all that he should take no risks either with inflation or with the macro-economic balance. I am glad that the noble Lord, Lord Peston, has spent some of his time reading the memoirs of myself and my colleagues. I have to say that what he seems to have learnt from them shows that he still has some way to go on the learning curve. It is very sad to hear a professor of such economic distinction lapsing into the habit of dismissing monetarism as though it were a factor that had come and gone. No economic minister in the world fails to give it a position of prime importance in his economic management. Look at China, India, or even Russia, where the noble Lord will find one of his professorial colleagues from the London School of Economics advising Russian economic managers on the importance of monetary policy.
Of course one has to have an effective monetary policy; and alongside that there has to be effective management of the public sector fiscal deficit, borrowing requirement or whatever you call it. Even if Maastricht had never been invented or discovered, those would have been essential requirements for sensible economic management. That is why I welcome the decision announced today to raise interest rates by the figure identified. There has been developing in recent weeks and in almost every quarter of the market-place, near unanimity on the need for that. It is best expressed by someone whom noble Lords may be surprised to hear I admire, Timothy Congdon, of Lombard Street. We do not agree with each other about the role of monetary mechanisms in the international sense, but he has always been a very shrewd assessor of the state of monetary policy in the national economy. That is why I welcome the interest rate increase announced today.
However, that is not an alternative to fiscal prudence. The noble Lord, Lord Ezra, was entirely right to mention the need for that, as was the noble Lord, Lord Peston. It is not the case that the public debt in total for general government financial liabilities has throughout the past 17 years been going in the wrong direction. In 1979, as a percentage of nominal GDP, it was some 38 per cent.; 11 years later it had come down to 19 per cent. It is, however, right to observe, and with some anxiety, the fact that it has since been going in the wrong direction. The fact is that the forecasts of the likely out-turn in the current year range between some £25 billion and £30 billion. That is about twice as high as the expectations of two years ago. It certainly means
that the Chancellor should take very serious account of that. The figure last month, £3.4 billion, was at least £1 billion more than expectations. Whatever one may say, and however much one may like to present a glossy view, in the fifth year of sustained growth those figures are too high. The Chancellor must take account of that fact, as I am sure he will.He will be under pressure, as Chancellors so often are, from those with greater interest in opinion polls than in economic performance. But to them, too, I say: do not forget the extent to which the economy is now delivering the feel-good factor, which the pollsters regard as so important. I ask them: do they not have confidence in their own case? We have only to look at what has happened to unemployment: down, as I said, by 900,000 from its peak; and last month's fall was the largest for two years. That is good news. It is news to feel good about. They have only to look at their own posters. Rising living standards for the average family are up by £700 per annum since 1992. That is good news. It should be used as a foundation for economic wisdom. Taxation is not as low as in the United States, where the figure as a percentage of GDP is only 31 per cent. But our figure here of 38.4 per cent. is much lower than the 45 per cent. that is characteristic of European economies. So let the party managers as well as the Treasury Ministers count their blessings. Let them feel good, as they are entitled to do. Let them feel good, as they are also entitled to do, by feeling right, too. That makes you feel really good.
The strategic judgment is clear. The present combination of monetary and fiscal conditions is as politically benign as can reasonably be expected. Better than that, it is helping to rebuild the reputation of this Government for competent management of the economy, once one of the strongest cards of our party. If that is to be maintained, restraint on the fiscal front is equally necessary. The Chancellor has to accept that insight, and he will do so, no doubt, with the full support of the First Lord of the Treasury.
In a notable speech to the party conference, the Chancellor said:
- "We have to follow one Tory golden rule. We only cut taxes when we can afford to, and when it is good for the economy".
But that is more than enough "small print". Let me, rather impertinently, revert to my own shadowy past. My central message to the Chancellor, and even more to his colleagues, is that if he wants to go on feeling good and, above all, feeling good tomorrow, he must go on feeling right today.
I recall with some immodesty the press comment on my pre-election budget in 1983. That charitable organ of public opinion, the Daily Express, said:
- "The empty budget box".
- "Like a stripper in the bible-belt, Sir Geoffrey has gone as far as he could go".
And in the Daily Mail--and this is the real wisdom--Patrick Sargent said that it was,
- "An electioneering Budget of the modern sort ... meant not to tickle us in our pocket but in our sense of virtue".
I hope the Chancellor might feel encouraged, as well as fortified, by the severity of my advice.
4.47 p.m.
Lord Currie of Marylebone: My Lords, I had not expected to address the House so soon after the gracious welcome given to me yesterday. However, my noble friend Lord Peston advised me that to speak in this part of the debate on the gracious Speech dealing with economics was too good an opportunity to miss. My noble friend did not tell me that the speakers in the debate would be so distinguished. Had he done so, I might have had second thoughts. I feel extra trepidation given the fact that I believe I should be both brief and non-controversial--which is rather difficult for a business school academic such as myself. I shall have to bite my lip about one or two matters on which I should like to comment arising from what has been said and what may come later. In addition, I cannot pace up and down, as I normally do; and I lack the security blanket to which I am accustomed, namely that of the overhead transparency.
I am reminded of another debut that I made not very far from here, in the Purcell Room. It was not, I hasten to add, the sort of debut that one normally associates with that place. I was faced with a full house of executives from the construction industry. That was a number of years ago, when I headed the forecasting team at the London Business School and was still headstrong enough to think that one could predict the twists and turns of the British economy. That day my computerised crystal ball was especially gloomy, so I did not expect to be invited back. I was sorely tempted to take out my rather neglected clarinet and play a few tunes. I thought it was the only opportunity I should have to play in that wonderful recital room. I regret now that I did not, as my forecasts were almost certainly as error-prone as the music might have been. It is worth adding that most of the authoritative forecasters, the OECD, the IMF and others quoted in the debate today, rarely achieve a more than passable melody in their forecasting record.
Noble Lords will be relieved to hear that I have no such temptation today, since I should hate to lose the valued friends that I already have and those I hope to make. I hope in time to contribute regularly to the debates in this House in my three main areas of interest; namely, the economy and economic policy, education (especially higher education and management education) and constitutional reform. Today I should like to focus on the first of these.
I was born immediately after the war. My generation has seen the UK economy slip from a position of pre-eminence to 18th in the prosperity league, largely because we have had a growth rate of around 2 per cent. over the long term in the British economy over those decades. One has to be very careful in looking at the economy to ignore the froth of the ups and downs of the cycle. The underlying trend has not changed greatly. As
a result, we have slipped down the prosperity league and are now behind most of the countries in Europe that we would wish to compare ourselves with, and in addition a couple of Asian Pacific economies. Although the slippage may have slowed a little, we are nonetheless in per capita income levels well below those countries we should like to compare ourselves with.Things do not necessarily feel so bad. Many of us enjoy comfortable, and rising, living standards. However, that is unfortunately not the case for all. One of the reasons for that is that in the league table for per capita consumption, as opposed to that for per capita income, we are rather higher, around ninth or tenth. That is because we as a nation save rather little, and that bodes ill for the future.
This decline does matter. Without a strong economic performance it is hard to provide the services that we all value and need--healthcare, education, social care, the arts, a good built and natural environment and so on, as well as to address the problems of poverty and social justice that concern us, to provide a society of real opportunity for all, not just the few. This position can feed on itself. I notice that most of the aspiring business executives whom I have the fortune to teach at London Business School come from the more dynamic parts of the world and that many of the British look elsewhere to further their careers. It is important that we reverse that trend, and of course we can do so.
When I started my career as an economist, I thought that the primary responsibility for creating a dynamic and vibrant economy lay with government policy. I now put a slightly different emphasis on that as a result of the close contact I have had with business. Economic performance depends on both business and government, a partnership in which high quality companies work within an effective framework of rules laid down by government. Unfortunately, we have got neither element of that partnership right.
It is true that the UK has some first-rate companies that match the performance of any in the world, but we also have a long tail of bad performers. The extraordinary thing is that, the further down that tail you go, the more complacent those companies become. When asked how they are doing against their competitors, it is the best who pay heed and the worst who are the most complacent. If we could reduce that tail, we would transform the British economy. To do that requires effective management and management education--management not just to ensure short-term efficiency but also to manage the innovation and development of new products for customers and open up new markets.
In emphasising the role of management, I do not suggest that government policy does not matter; it does. Government need to create the right framework within which business can operate. That is not the same thing as simply letting market forces rip. Market forces can easily operate against the public good if not framed within the right policy context. What is needed is the right framework of rules. I would identify six elements that we need to get right.
First, we need a stable macro-economic context for business. I shall not say more about that lest I stray into the controversial issues we were debating earlier.
Secondly, we need to enhance the education and skills of our whole population. Sustained investment in general education is one of the few things that explains differences in growth performance around the world. That is corroborated by East Asian experience. The World Bank found that investment in education for all, not just the elite, was the key explanation for the East Asian miracle of combining rapid growth with equity.
Thirdly, we need to enhance the quality of our management, not just at the top but throughout business.
Fourthly, we need a proper framework for competition and mergers policy to prevent anti-competitive behaviour and the abuse of dominant power. Without such a framework, competition can have adverse effects. This is an area where the current policy framework is deficient.
Fifthly, we need a framework for regulating those parts of the utility sectors where market forces cannot operate effectively but which are so important for other parts of the economy. We need a system that combines efficiency with openness, fairness and accountability.
Finally, we need policies that give effective help to the more disadvantaged sections of our society.
If this set of remarks came from one of my students, I think I would scribble the word "Superficial" at the bottom. I borrow their standard defence: lack of time. Despite the lack of detail and qualification, I hope your Lordships will agree with my basic argument that future prosperity depends on a well-educated labour force and effective management, operating within a sound framework of rules laid down by government. We have not got that right but I am sure that we can do so over the next five years. For that reason, I am optimistic about this country's economic future into the next century.
4.56 p.m.
Lord Boyd-Carpenter: My Lords, I feel that I am fortunate in following immediately on the speech of the noble Lord, Lord Currie of Marylebone, which we have all listened to with very great interest indeed, not least because it was a remarkable speech, particularly so for a maiden speech in this House. It will have been obvious to all your Lordships that this House acquired yesterday a Member of great knowledge and experience in economic matters who will be able to contribute frequently to our discussions. Indeed, he indicated his intention to do so.
I should like to say to the noble Lord how much we appreciated his speech, how much we welcome him to this House and how glad we are that this House has received so effective a reinforcement. The debates in your Lordships' House on economic matters have always been of significance. I make no comparisons with another place, where I was for a good many years; but this House has particular authority in dealing with complex, important public matters. In particular, it has a capacity for discussing economic problems with authority, balance and moderation.
On behalf of all your Lordships I should like to welcome enormously the presence of the noble Lord. We particularly welcome one very unusual aspect. As I recall, the noble Lord took his seat yesterday and has therefore made his maiden speech within 24 hours of becoming a Member of this House. That is perhaps unique. I am sure it has been enormously to the benefit of this House. Perhaps I may say once again how glad I am to have the opportunity of expressing our gratitude and appreciation for a remarkable performance by a very distinguished man.
I shall not go through the career of the noble Lord. Everybody knows that he holds a Chair in economics and that enables him to have contacts with economic thinking and ideas and to address us not only based on his personal background but also as a contact with economic thinking generally.
The debate has now got under way and I should like to comment on only one or two matters on which I happen to have particular views. It seems to me very important that we should seek to maintain the level of taxation at no higher level than it is at the moment. I appreciate that that is a difficulty which faces all Chancellors of the Exchequer as they deal with the Budget. It is essential that, on the one hand, expenditure should not be authorised which will not be met from the Budget and by proper budgetary principles; and, equally, that expenditure must be restrained within reasonable limits. There is always a temptation. Ministers--as a former departmental minister myself, I know it--always have ideas and ambitions for good developments which will nonetheless involve further expenditure. The great problem for the Chancellor of the Exchequer, as my noble friend who sits behind me knows only too well, is how to restrain his colleagues from pushing good expenditure projects to an extent that results in a bad high level of expenditure and therefore inevitably in an excessive level of taxation.
I hope that your Lordships' House takes the view that we cannot possibly meet all the perfectly good causes which seek support from government finance. I suggest that we must exercise sufficient restraint to enable the level of taxation to be kept moderate. If we do not, and if taxation is allowed to rise and go on rising, it is the biggest discouragement to initiative and also, as we have seen in years past, a considerable factor in making people of ability and productive capacity go abroad to exercise those qualities in countries where taxation may seem to them to be a little less oppressive. Therefore, I shall say a few words about one or two areas of expenditure on which there is undoubtedly controversy and for which, if there were no such limiting factor as I tried to describe, there would undoubtedly be a strong case.
First, let me mention the very considerable expenditure that we now undertake on legal aid. Millions are sometimes provided in individual cases. Legal aid has become enormously expensive. It involves retaining members of the Bar of the highest distinction and the legal aid organisation--I say this with regret in the absence of the noble and learned Lord the Lord Chancellor--has become lavish in retaining counsel of the highest ability and most expensive character.
Consequently, expenditure on legal aid, as successive questions to the Lord Chancellor have brought out, has risen steadily over the years and is still rising.I suggest that, although it may be good to provide people who are accused of offences with able advocates to support them, nonetheless there must be a limit to it. On the whole, it is probably better to pay only moderately for the provision of legal aid, which in most cases is quite sufficient. I have been a member of the Bar long enough to recall the days when a guinea could be obtained simply for the asking. The aid could be obtained by anybody who was charged with an offence and could produce one guinea--I am speaking of before the war. It could enable an accused man to pick out in the court in front of him any individual barrister and retain his services. It was quite amusing to watch when someone asked for legal aid in that sense to observe how the more experienced and valuable counsel made a rapid rush for the exits. But it was quite a good provision and on the whole accused people received a very good guinea's worth.
I do not suggest that we should revert to that system. But I do suggest that legal aid is an expenditure which is perfectly good and helpful up to a point but is not entitled to the high priority which would justify it being extended upwards. In my submission, it is absolutely essential that taxation and therefore expenditure should be restrained to only a moderate level.
The same applies to a number of other questions. We are now undertaking big expenditure on the building of prisons and I wonder whether that is necessary. I wonder whether, as a result of the activities of our courts and, of course, the criminal classes, it is necessary to build extremely expensive additional prisons. Why is it not possible to take over abandoned army camps, install moderate security arrangements and put convicted people into them? They may not be very comfortable and they may not meet the progressive ideas of some people with regard to dealing with crime. But I try again to make the point to your Lordships that there is a limit to the amount by which we can increase expenditure and the amount to which it is therefore right to increase taxation. Therefore, although there are certain areas--I have referred to two of them and there are others--where there is always a case for additional expenditure, that case should be allowed to wait at any rate until times are easier.
Finally, I find the amendment rather curious. Obviously, there has been a search on the Benches opposite for grounds for attacking the economic policy of the Government. But it is not true that the standing of this country or its relations internally are subject to justifiable criticism. On the contrary, the prestige of this country today is probably higher than it has been for a long time. The prestige of this country is evidenced not only by the number of would-be immigrants who desire to come in, but still more--as has already been observed--by the considerable investment made in this country by foreign businesses which has considerably helped our economic position.
It is therefore an indication of the barrenness of Opposition policies that, in drafting an amendment to the Motion on the Queen's Speech, it has not been
possible to include any practical suggestion. The amendment contains no practical suggestion and no sensible comment; it is just a vague moan, and I hope your Lordships will throw it out.5.11 p.m.
Lord Healey: My Lords, I must start by paying a tribute to my noble friend Lord Currie for his speech of exceptional charm and humour. It demonstrated a quality which was rare among economists when I was young; that is, a certain degree of humility--it is much more common these days.
I thank my noble friend for drawing to our attention what governments, and particularly Chancellors, of all parties have always found to be our biggest single economic obstacle--the poor quality of the majority of British management. I hope that he will continue to draw our attention to that in future debates and make it one of the focuses of his comments.
I stand before your Lordships as the second Chancellor to speak in this debate; I believe a third is to address us later and a fourth most distinguished one is sitting by me as I speak. But I do not propose this afternoon to talk about the economy in general or about my own record compared with that of others, though I shall be delighted to do so on some other occasion as I have so often in the past.
I would rather talk about a subject which, like that chosen by the noble and gallant Lord, Lord Craig, is extremely important for our economy but is rarely discussed in this kind of debate with the care that it deserves; that is, the proposal for European economic and monetary union. We had some discussion on that in the debate on Monday, but it was discussed almost entirely--with one exception on the Benches Opposite--in the context of whether or not it was a good thing in terms of Britain's political relations with her continental neighbours for us to join the EMU. The question as to whether the economic case was made and what was the nature of it was ignored. I want to say a few words about that this afternoon.
The case for EMU and for Britain's membership of it stands and falls on the economic arguments and not the political ones. I must face the fact that Chancellor Kohl, who is by far the one outstanding statesman in Europe today and whom I am glad to see tomorrow will celebrate the longest period in office of any Federal Chancellor, takes the other view. He has made it clear again and again that the political case for a single currency must take precedence.
There are perhaps two reasons for Chancellor Kohl taking that line. First, he hopes to crown his political career by presiding over the introduction of European economic and monetary union before he may have to face the electorate in 1998. The other reason, I fear--even his best friends will agree with this--is that he does not claim a deep understanding of economics and has never demonstrated it. I believe that he was over-influenced by his own experience in having a single currency adopted for a united Germany six years ago. But the situation there was totally different from the problem which Europe faces in creating a single currency for up to 25 states in a few years' time.
When Chancellor Kohl introduced a single currency in the united Germany, he did so against the public and strong opposition of his economic advisers, particularly the Bundesbank--in fact, the chairman of the Bundesbank resigned over the issue. They felt that it was not sensible to have a single currency to unite two groups which had such enormous disparity of economic performance.
To make the single currency work there has had to be a colossal flow of money over the past six years from West Germany to East Germany--between 3 and 4 per cent. of West Germany's GDP and at the moment £400 billion has passed from West to East to try to make the single currency work. Yet we discovered a week or so ago that 85 per cent. of East Germans still think that they are worse off today than they were when the single currency was introduced in 1990. And 15 per cent. of East Germans are out of work; that is why, in addition to the tremendous flow of money from West to East Germany, there has been a tremendous flow of unemployed workers from East Germany to West Germany. Those two flows are continuing at an exceptionally high rate.
The introduction of the single currency was and still is possible in a united Germany because a single currency was introduced to cover a single people and a single state under a single leader. There is therefore the readiness to make sacrifices in the West and labour mobility is possible because people speak the same language. Those conditions do not apply among the potential members of a European economic and monetary union. Nobody has yet shown how it will be possible to deal with the disparities which already exist and will continue to exist among its potential members. Germany will certainly not be prepared to make sacrifices for EMU such as it made for the German single currency. Indeed, Chancellor Kohl made it crystal clear over recent months that Germany is not prepared to go on paying to the European Community at the present rate, never mind the increased rate that would be needed if we had EMU.
My opinion--I believe it to be a growing opinion--is that the Maastricht criteria for EMU were inadequate. The convergence demanded is purely financial. It concerns the level of inflation, the level of debt, the level of interest rates and the level of exchange rates. There is no concern whatever for growth or employment. And in so far as the biggest countries concerned--France and Germany--have converged, they converged on what the Financial Times the other day described as,
- "a dismal level of economic performance".
Low growth and high unemployment have been the price and condition of convergence according to the Maastricht criteria.
Even so, at the present time, as the IMF pointed out last week, only Ireland and Luxembourg already meet the criteria for EMU. France, Italy, Spain and the Netherlands hope to meet the criteria, but only by fiddling the figures. The French Government are now up in front of the statistical court--I did not know there
was such a thing--in Brussels for including one-off privatisation proceeds next year in order to justify their claim of a 3 per cent. deficit. Mr. Prodi, the Italian Prime Minister, made it clear that two can play at that game--indeed, three, four, five or six can play at it. Even the Dutch are fiddling the figures, as Mr. Duisenberg, the Dutch central banker, pointed out the other day.The most worrying problem is that at the moment it seems very unlikely that Germany itself will meet the criteria. We have seen the report of the six leading German economic institutes. I share my noble friend's view of economic institutes and economists, but, in my experience, they are more trustworthy if they are independent institutes than if they are government economists. I am glad to see that the noble Lord, Lord Harris, at least agrees on that. What is quite clear is that Germany cannot meet the criteria. None of the other countries can meet them without fiddling, except little countries like Ireland and Luxembourg. But that does not worry Chancellor Kohl. Indeed, he invited the Prime Ministers of Italy and Spain to meet him in Bonn the other day to tell them that whatever the French said it would be okay.
The fact which very few commentators seem to have noticed is that Chancellor Kohl wants a soft euro. He does not want the new single currency to be as strong as the deutschmark. He told us so in a speech at Easter when he said that if EMU fails, the deutschmark will go soaring up into the stratosphere and German industry will be totally uncompetitive. The fact that the markets believe it will be a soft euro is demonstrated by the fact that everyone has been moving money out of deutschmarks and into Swiss francs. The Swiss economy at the moment is crippled. It has stopped growing because its exchange rate has become, as a consequence, far too high. Even yesterday, when the report by the six economic institutes was published, making EMU less likely, the deutschmark went up on the foreign exchange markets.
Against that background it is not surprising that a large number of people who are the most enthusiastic supporters of EMU are now asking for delay. Outside Germany, M. Delors, Mr. Kinnock, the noble Lord, Lord Tugendhat, and Mr. Duisenberg, who is the leader-designate of the European Central Bank and whose job it will be if they make a muck of it to knock their heads together and put them on short rations--gruel and water--for a long period of time, want delay. Even the economists are now beginning to ask for delay. In Britain there is Mr. MacDougall and the National Institute for Industrial and Economic Research.
Others fear worse than delay. They fear disaster. The noble Lord, Lord Dahrendorf, who I fear may not be here this afternoon, has said that he has now turned against EMU because he thinks it will divide Europe rather than unite it. The one thing we can all agree is that if EMU comes about the East European countries, whose membership of the Union and the single currency are to be desired, can be ruled out. If the thing goes ahead, as Chancellor Kohl certainly wants, it will be a disaster economically and politically because the social strains created by the fight between the central bank and
the national governments to try to return to the type of convergence which was originally intended will produce riots in the streets, as we have already seen in France, and certainly demonstrations, as we are seeing in Germany.We must not ignore the fact that in most of northern Europe--Holland is the only exception--a majority of the people are now against EMU. Sixty-five per cent. of Germans are strongly against it. To set up an organisation of this importance against the will of so many people would be a disaster and a terrible error. Of course it is true that in southern Europe the people seem at the moment to be rather in favour of it, but that is not much comfort because none of those countries is likely to qualify without cooking its books.
"What is going to happen?", I hear your Lordships asking. It is too soon to be certain. My own view is that they will opt for delay over Chancellor Kohl's dead body. That would be wise. If they do not delay, it would be very much better for Britain to stay out than to join a system which is bound to be disastrous in its economic and political consequences. There is no reason why we should suffer from that because, as the Ernst & Young Item Club, which I think uses the Treasury model for its predictions, told us yesterday, by the end of the century, if EMU goes ahead as presently conceived, unemployment will be double among its members what it would be in Britain if Britain stays out.
What I think is the real risk facing Britain if it stays out is that we shall find the pound soaring like the Swiss franc which could have damaging consequences of a completely unexpected nature for our country. I believe that we should argue for delay. We should not fudge the criteria. I was delighted to see Her Majesty's Government's representative in Brussels yesterday join other countries in criticising the French fiddle on the 3 per cent. fiscal debt limit. If we delay, we must then add economic criteria to the purely financial criteria--criteria relating to growth and employment--and we must attack far more carefully the problem of relations between those members of the Union who join and those who do not. If all this proves to be too difficult, we must apply Healey's First Law of Holes--when you are in one, stop digging.
5.28 p.m.
Lord Taverne: My Lords, I feel sorely tempted to follow the noble Lord, Lord Healey, in his discussion of monetary union. However, he raised so many different issues which ought to be discussed separately on other occasions that I shall return to the debate on the economy. I wish to associate myself very strongly with the remarks that have been made about the excellent maiden speech of the noble Lord, Lord Currie of Marylebone. He achieved the unusual feat of remaining both non-controversial and saying a lot of things which are extremely important to the subject matter under discussion.
I am not a great fan of the present Government. But if there were to be a fair judgment of the overall general economic management of the past few years, it would
be on the whole favourable. There are claims that we have now the strongest economy in Europe. This I believe is a rash and overblown statement and another example of the frequent occurrence of unjustified self-congratulation, which is just as common in Britain as unjustified self-denigration. If one looks at the fact that productivity is still lower in this country and that our savings and investment are lower, as the noble Lord, Lord Ezra, pointed out, and if one also looks at our poor educational standards comparatively, we cannot claim to be the strongest economy in Europe. Nevertheless, in the past few years we have been catching up and on the whole affairs have been managed reasonably well.What has been the key to that success? I remember reading the IFS and Goldman Sachs green budget just after the 1992 devaluation. As far as I am concerned that is the source of wisdom on budgetary matters. It pointed out that the problem facing us was to make sure that consumption grew much more slowly than the growth of GDP so that there would be room for investment and exports. That required a very tough fiscal policy and major tax increases. I never thought that we would get them but we did. Taxes were put up despite the election promises, consumption was kept down and the deficit was somewhat reduced, although much more slowly and less extensively than one had hoped.
What is the need we face today? We need a much lower budget deficit, as the noble Lords, Lord Peston and Lord Ezra, have pointed out. Our budget deficit is far too high for the present state of the business cycle. Our deficit ought to be down to perhaps 1 per cent. or 2 per cent. at most at a time of healthy growth and falling unemployment. It must be much lower before we reach the top of the current cycle. That is true irrespective of the Maastricht criteria. Measures which people in the Conservative Party would normally have supported are now denounced because they happen to coincide with some perfectly sensible criteria laid down at Maastricht.
At the same time there are very pressing demands on public spending. If one looks at the main constituents of public spending, the social security budget, health and education, there are no prospects for any cuts being effectively made. Indeed, there is an overwhelming case for a certain measure of increase. If one looks first at the social security budget, all attempts at major surgery in this field have failed. The Secretary of State for Social Security, Mr. Lilley, has, rather to my surprise, proved to be a rather effective and thoughtful Secretary of State. But no one can accuse him of being excessively concerned with the reduction of inequality in our society. Mr. Lilley was determined to cut the social services budget, but he failed to do so. It is still growing even at a time when unemployment is falling. The pressure on the present system from increased life expectancy alone is considerable. So one cannot look for any cuts in the social security budget unless one really goes for a major reform of the whole welfare system, which has so far proved to be a very elusive aim.
When one looks at the National Health Service, one sees that it clearly needs a lot more money. When one looks at our schools, our education system clearly needs a lot more money. The other day a list was published of 1,000 best schools. Where were the comprehensive schools in that list? It is a total denial of equality of opportunity which we all preach and which we all claim we wish to see, if in fact there is this huge gap between schools where one pays and schools in our inner cities.
The current fashion is to concentrate on discipline and morality. They are the obsessions of Ministers, politicians and the media. No doubt that mood will pass. But what education needs above all, important as those other matters are, is more money. There is also a new demand, as the noble Lord, Lord Boyd-Carpenter, pointed out. A recent extra demand on public expenditure has come from the Home Secretary's policy of sending as many people as he possibly can to gaol and of trying to bring our penal system more into line with the American penal system, presumably ending with their rates of crime.
If the Chancellor is the best Minister in the Government then there can be very little doubt as to who is the worst. I for one will gladly volunteer for what I understand is going to be a new society, the Penal League for Howard Reform. Figures were quoted the other day by my noble friend Lord Rodgers of Quarry Bank that the cost per average prisoner is something like £25,000 a year. With prison numbers rising from 40,000 in 1990 to what will shortly be about 60,000, the cost, if one adds on the number of prisons that will have to be built, is enormous. It amounts to something in the nature of £200-worth of personal allowances. So despite the evidence that this will only increase crime, we have the most disgraceful and wasteful public expenditure increase that one can possibly imagine. It is a surrender to the crudest form of populism, despite all the evidence which is available to the Home Secretary.
So what is the position in which we find ourselves? We need a lower deficit. We almost certainly need, and will almost certainly get, a higher degree of public expenditure. We also find that consumption is rising at 3.5 per cent. a year. We also find that there is rather a disturbing increase in the money supply. When the Chancellor has to put up interest rates at a time when the exchange rate has been rising, things are fairly serious.
Therefore, the last thing we need in these circumstances is any kind of tax cuts. The lunatic right of the Conservative Party, in asking for tax cuts at this time, has no more sense on this, as on other matters, than its mirror image, the loony left of the Labour Party, had in the 1970s and 1980s. There is every likelihood that, even with healthy economic growth, the next government are more likely to have to raise taxes than to cut them. I wish that the two main parties would be realistic enough to say so. I do not understand what Mr. Brown--who is a very sensible man, and for whom I have a great regard--is doing in promising further tax cuts. I am not generally much of a party man, but I am very glad that on the economy the Liberal Democrats are both realistic and honest.
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