| Previous Section | Back to Table of Contents | Lords Hansard Home Page |
Lord McIntosh of Haringey: My Lords, I meant to say Lloyd's. That would have been a useful change, would it not?
Finally, in Part IV, there are two additional measures. First, the Bill makes provision to improve the efficiency of the gilts market through the transfer of the gilts registration and brokerage functions of the National Savings Stock Register with the Bank of England's registrars department. Secondly, the Bill also provides for the modernisation of the central money markets office which will allow the market to work with computer records alone. This will not only reduce costs but strengthen London's position as an international financial centre.
This Government have made and continue to make significant reforms to the institutions and the practice of economic policy in Britain. This Bill is an important part of those reforms. It gives operational independence for setting interest rates to the Bank of England. It does so through one of the most open and accountable set of procedures of any central bank. It reforms the governance of the Bank to reflect its new role and reflects current best practice. It secures the funding of the Bank through the statutory cash ratio deposits scheme, reforming the national financial reporting requirements of the Bank with more open financial disclosure and an up-to-date dividend policy, and with the transfer of banking supervision it represents the first step towards a new structure for financial regulation. I commend the Bill to the House.
Moved, That the Bill be now read a second time.--(Lord McIntosh of Haringey.)
11.24 a.m.
Lord Mackay of Ardbrecknish: My Lords, I am grateful to the noble Lord for introducing the Bill. I have to say that he left me rather breathless with his gallop through the various provisions. I am not sure whether he gave us some new information concerning the Government's plans for the regulatory authority they intend to set up. Obviously we shall have to read the latter part of his speech with some care to see whether there is anything new there.
I have learnt since coming to this side of the House that, as always in these matters, one has to take a look at the Labour Party's manifesto before one decides how to tackle any particular issue. If it is in the manifesto, I have learnt that there is no point in trying to have a discussion with the Government as their answer to everything is, "It is in the manifesto". The manifesto states,
- "We will match the current target for low and stable inflation of 2.5 per cent. or less. We will reform the Bank of England to ensure that decision-making on monetary policy is more effective, open, accountable and free from short-term political manipulation".
I am not entirely sure whether that accords with the Bill in front of us. I looked further to the business manifesto which states,
- "For the Bank of England we propose a new monetary policy committee to decide on the advice which the Bank of England should give to the Chancellor".
This Bill goes a great deal further than that. Indeed, I do not believe that it fulfils the manifesto commitment; it goes much further. I suppose that it is perhaps the first Bill on which the Government cannot claim the
safety--if I can call it that--of the Salisbury doctrine. However, the Minister should not get too worried about that remark.On 7th February the Chancellor spoke of the policy which eventually appeared in the manifesto. He said,
- "I believe that any consideration of whether to give the Bank operational responsibility for setting interest rates must be preceded by two steps. The Bank must demonstrate a successful record in its advice and build greater credibility".
That was one of the steps. Within four days of 1st May the Chancellor decided that the Bank had demonstrated a successful record and in those four days had built that greater credibility. They are clearly quick builders at the Bank! Perhaps they should be recruited to build the millennium dome or even the new Scottish parliament building because both of those seem to need speedier builders than is the case at present. On the fourth day, with a metaphorical roll of drums and fanfare of trumpets, the Chancellor announced that he was going for an independent central Bank. When I heard that announcement I felt sure that we were on our way to obeying the Maastricht criteria, and on our way into the single currency.
However, as with so much else in this tinsel town of sound bites, the drums and the trumpets were not quite what they seemed. The Bank is not to get proper independence, only operational independence. Who will be the principal beneficiary? It will be the Chancellor and the Government who hope by this move that they can shuffle off responsibility for interest rates. I doubt whether that will be nearly as easy as the spin doctors hope. There are two reasons for that. First, the Chancellor sets the inflation target and, secondly, he appoints, or has a finger in the appointment, of all the members of the monetary policy committee.
On the first point, as we have heard, the Chancellor has told the Bank that it must aim for an inflation target of 2.5 per cent. I notice that the Minister did not add, "plus or minus 1 per cent.". That makes a slight difference because those of your Lordships who do not need a calculator can quickly calculate that 3.5 per cent. is the upper limit of that target, which is a considerable weakening of the target set by Kenneth Clarke.
I have no doubts that the monetary policy committee will meet its target. It will, in the words of an old Scots expression, "Mak siccer"; that is, make sure. It will always err on the side of caution and it will always put interest rates up faster and higher, and reduce them slower than may be merited by a regard for the whole economy. Anyone who doubts that should look at Clause 11 of the Bill which states,
- "In relation to monetary policy, the objectives of the Bank of England shall be--
- (a) to maintain price stability".
In another place the Chief Secretary got into some difficulty reading his own Bill. He did not seem to understand that maintaining price stability took precedence over all other considerations. The clause further states,
- "and subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment".
I repeat the words "subject to that". Quite clearly the maintenance of price stability is the principal function of the Bank. I have no doubt that later today some of your Lordships--there is certainly a distinguished roll call of speakers in this debate--will talk about the separation of monetary and fiscal power. Alternatively, as one of the Government's own Back-Benchers in another place, Diane Abbott--she is a critic of the policy--said, the Government are handing over,
- "one of the most important levers of economic power to an unelected quango".
Last week I read of the concerns of the Labour-dominated Scottish Affairs Select Committee in another place. It was not complimentary, or perhaps I should say hopeful, about welfare to work. Discussing unemployed young people it said,
- "The committee did not feel that the implications of a possible slowdown in economic growth for the new deal"--
- "and other unemployed clients had been fully thought through".
Indeed, it was a little before its time because Scottish unemployment figures this week started to increase again. That does not seem a good symbol of how successful welfare to work will be.
One of the members of the committee, Mr. John McAllion, pointed out that the Bank of England had raised interest rates five times since the Government gave it control over monetary policy. He is quoted in the Scotsman as saying,
- "There is a macro economic policy being pursued by Government and the Bank of England which seeks to slow down the economy. That is the problem".
And certainly the Scottish economy has now seen that; and the North of England too. I suspect that it will move south as the months progress.
My concern is that the Bank will be so determined to succeed in meeting the targets set for it by the Chancellor that it will indulge in monetary overkill; and that concern is clearly shared by some of the Government's own supporters. A read of the Bank minutes of 7th and 8th January lends weight to my concern. Three members voted for an increase in interest rates. At the most recent meeting, we know that three members also voted for an increase in interest rates--probably the same three although we do not know that yet. As Robert Chote said in a Social Market Foundation pamphlet,
- "One danger is that the economy will suffer if the Bank uses its interest rate policy to pursue low inflation while the Government uses budgetary policy to pursue employment, growth and votes. This is a recipe for high interest rates, excessive Government borrowing and an over-valued pound".
My second reason for concern surrounds the composition of the monetary policy committee. Your Lordships can see the composition set out in Clause 13. First, the governor and two deputy governors will be appointed by Her Majesty. That, as we know, is by the Government, or more specifically by the Chancellor. Those appointments are to be for five years. Two members have to be appointed by the governor after consultation with the Chancellor. They have to be appointed for three years. And four members are appointed directly by the Chancellor, also for three
years. I do not think that there is a lot of independence there. This is really a quango bank--and this from the party which railed against quangos in the former government and made all sorts of blood curdling threats to quangos and quango members. And what do they do? They create a new quango and hand over to it control of monetary policy. And there is little in the Bill to tell us who might be appointed and how widely the members may be drawn.I listened to the Minister talking about the court, but I am more concerned about the monetary policy committee. When I consider the current membership of the monetary policy committee it does not persuade me that the membership will be widely drawn. Unless one considers Oxford and Cambridge to be representative of the kingdom beyond London, the membership is certainly drawn from a narrow geographical base; and academia seems to be extremely well represented. It might not be a bad idea to have someone from industry, although perhaps not the members from academia who some of your Lordships may think would be wiser and better on the monetary policy committee. But, so far as I can see, there is no one from manufacturing industry, and no one from any further north than whichever is the furthest north of Oxford or Cambridge.
As your Lordships will find out shortly, we shall be considering a Bill which will set up separate governments with considerable powers, in Scotland and Wales. Why should there not be someone on the monetary policy committee from almost anywhere else in the kingdom north of Oxford or Cambridge, but in particular from Scotland? That person would have knowledge of the Scottish economy. I believe that it will begin to operate slightly differently because the aims and objectives of the government in Edinburgh may well be different from the aims and objectives of the Government here. While I am on the subject, will any parts of the Bill fall within the areas to be devolved to Scotland or Wales?
It is not just the control of the appointments which worries me. It is the short term of office for the appointees: five years for the governor and two deputies, and three for all the rest. I would not go quite as far as the Fed in the United States which has 14-year terms. But perhaps we should look at other central banks. Perhaps they are better described as independent central banks. The Bundesbank, for example, has an eight-year term. Indeed, Gordon Brown, in a speech in May 1995 when speaking only of an advisory monetary policy committee, not one with operational independence, suggested a seven-year term.
Who is appointed, for how long, and how independent they will be are issues which the Government must address. Is there a danger that the Chancellor will pack the committee with like-minded people? Sir Samuel Brittan in his evidence to the Treasury Select Committee in another place put it better than I can when he said,
- "Monetary economics is not a hard science. An attempt to confine the monetary policy committee to so called experts will simply enthrone the conventional wisdom of the moment".
No doubt we shall hear more about that from some of the economists who will take part in the debate today.
I am sorry that the noble Lord, Lord Eatwell, is not taking part. I nearly referred to him as my noble friend because in Treasury debates over the past three or four years we have been sparring partners across the Dispatch Box. I understand that the noble Lord teaches on a Friday and finds it difficult to be here. However, I should not like him to be left out of the debate. I could not help note what the noble Lord said to the Treasury Select Committee:
- "Moreover, there is a tendency in monetary policy matters to regard certain propositions as 'obvious' and anyone who questions such propositions to be at best a nit picking academic and at worst a crank. Yet the notion that the theory of monetary policy is 'obvious' and 'pragmatic' is belied by the fact that the theory and practice of monetary policy has undergone quite radical revisions over the past 20 years".
- "If views held 10 years or 15 years ago were so obviously right then, why are they so obviously wrong now?".
I shall tempt some of the professors of economics who will speak later to debate that proposition for two or three minutes. Those interests are central to who is to be appointed to the committee, by whom, and for how long.
Another issue that I suspect Back-Benchers may raise is this. Is this semi-independent quango bank the forerunner of a proper independent central bank a la Maastricht? If the Prime Minister ever plucks up the courage of the Chancellor's convictions and decides that we should enter EMU, will we have another Bank of England Bill?
I turn briefly to other parts of the Bill. I wish to say a few words about Clause 37 and Schedule 7. It is an important clause dealing with disclosure of information by the Bank. In paragraph 3 of the schedule a table sets out those authorities to whom the Bank can disclose information and the functions for which such disclosure can be made. Sub-paragraph (2) then gives the Treasury the power by order to amend the table. The 11th report of the Select Committee on Delegated Powers and Deregulation said at paragraph 19,
- "The power to amend the Table is potentially wide, and the appropriate degree of parliamentary control depends on the uses to which it will be put. The House may wish to consider whether it is not of such significance as to justify amending the Bill to provide for the affirmative resolution procedure, rather than the negative procedure currently proposed in the Bill".
I think that the Delegated Powers and Deregulation Committee has been rather kind to the Bill. That is all the more reason for the Government to take on board its recommendation for change. I hope that in his summing up the Minister can assure the House that the Government will change the paragraph from the negative procedure to an affirmative resolution along the lines suggested by the Delegated Powers and Deregulation Committee.
I turn to that part of the Bill which removes from the Bank its supervisory role. It seems odd that the Bank cannot be trusted with banking supervision, yet it can be trusted with monetary policy and interest rates. I know that the failures of BCCI and Barings are used as examples of the failure of the current regulatory system. I certainly recall debates when I answered for the Treasury about Barings, and I am in no doubt that the Bank did not cover itself in glory in that case. But
no regulatory system is infallible. No one can tell me, or your Lordships, that the super SIB would have done any better with regard to Barings. If the Minister thinks it would, perhaps he can tell us why, but without using the 20/20 vision of hindsight.What does the removal of its prudential supervision do for the status of the Bank? What does the removal of its role in the bond market and public debt do for the status of the Bank? Can the Government be confident that they are is not diminishing the standing of the Bank?
The Government seem determined to create a super regulatory body with a huge range of regulatory responsibilities. I understand the possible attractions of greater simplicity--although I remain to be convinced that that will happen. I understand the attractions of a kind of one-stop shop for regulation. But is there not a danger that the range of its responsibilities may lead to its taking a broad overview of those responsibilities, and not looking in great detail at the individual parts of those responsibilities?
The creation of one body does not in itself mean better regulation. The creation of one body does not make the complexities of financial products any less. In the creation of the super body it will be essential that those involved do not become so absorbed in the creation and administration of the large bureaucracy that they cease to pay detailed attention to the financial markets they are to police.
Getting this matter right is essential for the health and reputation of the City. Getting it right is essential for the security of the individuals who entrust their money to the financial sector. And getting the position of the Bank right is essential for all of us, since we are all affected by interest rates--those with mortgages, those with savings, those in business, those in employment, and those seeking employment.
The ability of Chancellors, controlling both monetary and fiscal policy, to control inflation has been clearly proved by my right honourable friend Kenneth Clarke. His success was helped in part by the open structure he put in place to deal with the relationship between the Chancellor and the Treasury on the one hand and the governor and the Bank on the other. The Bank's advice was clear for everyone to see; the Chancellor's view and decisions were also there for all to see, and the wisdom of his judgment was there for all to see and to judge, and for the other place to call him into account. That fundamental answerability to Parliament, to the people, was there for all to see. That transparency, that responsibility and answerability is being removed by this Bill.
As so often, I am grateful to the noble Lord, Lord Healey, for explaining in his usual helpful and succinct way the attraction of this policy for the Government. It is a gimmick to be used as an apologia by failed Chancellors to shuffle off their failures on the Bank of England. I hope that the noble Lord is being less than charitable--but I fear.
Next Section
Back to Table of Contents
Lords Hansard Home Page