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12.18 p.m.
Lord Boardman: My Lords, I share a number of the reservations expressed by the noble Lord, Lord Desai, although I do not agree with all his conclusions. The most popular argument in favour of the Bill is the way in which other banks--the Bundesbank and the United States Federal Reserve Bank--have apparently, so it is said, been successful. That success needs some qualification. The noble Lord, Lord Desai, referred to a more recent example but history will recall that the Bundesbank was in existence in the 1920s during the time of the massive economic problems and inflation at fantastic rates after the First World War. It was also subject to pressure from its government on the merger of the Deutschmark and the East German mark. In neither case can it be said that it provided the independent safeguard for the economy and for inflation that was claimed. The Fed was in operation in the 1930s when there were massive problems in the United States. I mention those points as a reminder to those who quote a central bank as being an economic solution. It is not quite as clearcut as some would suggest.
As has been said several times today, economic policy is a mixture of fiscal policy and monetary policy. Until May of this year the Chancellor had control of the two levers of economic policy; namely, the fiscal lever and the monetary lever. He could work those as he believed best for the economy as a whole. If he wanted to, the Chancellor could reduce certain taxes in order to encourage growth. He recognised that if that should lead to pressure towards inflation he would be able, at a suitable stage, to control it on the interest rates. No longer will he be able to do so under this Bill. His responsibilities cover the areas of growth, unemployment and living standards for which he is accountable to Parliament. He has lost one of the powerful instruments which he could apply. The present position is that since May there have been five interest rate rises--a sixth is predicted--in order to control consumption. That has raised the value of the pound and severely cut our exports and attracted imports. These are matters which the Chancellor cannot control through interest rates. It has been said that the instruments left to him are fiscal ones, which may not be attractive or right to use at the present time.
In contrast to what I believe would be the right strategy, he has taxed savings. He has introduced pension taxes and proposes them on PEPs and TESSAs to reduce investment. It seems absolutely illogical. It has been said that no previous Chancellor has attempted to make that move apart from my noble friend Lord Lawson who suggested very clearly when he was in office that it should be done. The proposal was rejected.
The Chancellor is responsible for a massive passing of the buck. He puts up interest rates, with the effect of that on mortgage borrowers and so on, and can then say, "It is nothing to do with us. It is entirely due to the Bank of England". It is as if he were turning to Marks & Spencer and saying, "The Bank of England is not mine. It has the Act which gives it authority to do these things."
However, when one analyses, as my noble friend did, who or what is controlling interest rates, it is something of a charade to say that the Bank is purely independent. I believe he called it a massive quango of nine appointments to the monetary policy committee. Only two of the appointments are in the hands of the Governor of the Bank of England and those are subject to consultation with the Chancellor. So all nine appointments are controlled by the Chancellor. One wants to hear why it could not be just a Treasury committee. It is in fact a Treasury committee, but if it were called that then the Government would take the blame for raising or lowering interest rates. Either move brings enemies. When interest rates are increased it hurts mortgage borrowers and so on. When they are reduced it penalises all those who rely on income from their savings in building society deposits and the like. To say to those who complain, "It is nothing to do with me; go along and see Mr. Eddie George" is just passing the buck.
Having said that, I am sure that the present membership of the monetary policy committee is highly competent. I do not doubt that it will act independently so far as it is able to do so. But it leaves the chairman with one lever only which he can apply and that is the fiscal lever. It is like riding a horse which has lost one side of its mouth. One has a very uncomfortable ride with very little control over where one is going to go. That is the kind of position that this Bill will leave for the Chancellor of the Exchequer.
There will be two bosses in charge of the economy, one elected and the other not. Yet both have a powerful influence on the economy. The old system provided the governor very much with the right levers. He could give very powerful advice to the Chancellor. The Governor's ultimate weapon was always to say, "If you don't like what I say and you are not prepared to take my advice, I shall resign". The prospect of the Governor of the Bank of England resigning put most Chancellors into a very worried state of mind indeed.
That is only the first part. What we have to visualise is the precedent being set for the establishment of the central bank of the EMU. The monetary policy committee will be replaced by six remote foreigners--five, if we promote one member ourselves--who will
soon control our monetary policy and serve the interests of 14 other nations as well as ours. That is not a subject for discussion today. We shall no doubt have some interesting opportunities to do so in the future.I turn to a few other points. The supervisory function of the Bank of England is now to be transferred to the Financial Services Authority. I am reminded of remarks made by the present Chief Secretary to the Treasury, Mr. Alistair Darling, to the City and Financial Conference in November 1996. He said,
- "A blanket approach, the creation of a 'super regulator' won't do. I know that it makes for convenient shorthand but the idea that if all the regulators are rounded up and put into one building then we will have a system that will solve all our problems simply won't wash. We believe that in the long run the primary distinction between financial stability and consumer protection should be looked after by different bodies".
I very much agree with that. The Bank of England has a knowledge and expertise to judge systemic risks in the banking system. Many of the people who were trained and who practise in that field will be going across to the FSA. I doubt whether one can get any better supervision than that by the Bank of England or indeed anything equal to it. I know that it has its problems and that not everything has gone smoothly and well. But we should retain that facility.
As regards the credit ratio deposit scheme, I welcome very much the inclusion of the building societies. I hope that in due course the scheme can be extended to any similar credit institution. The rate at which credit ratio deposits are subscribed by the banks has been done in order to cover the whole of the banking operation including supervision. It is obviously important that there must be a substantial reduction in that now that the supervisory role has gone to the FSA, which will no doubt be making further charges.
There are a number of occasions when the Bank requires individual banks to provide privileged information which is needed for bank supervision and the like. There should be in the Bill a provision to safeguard the banks, if and when that arises, from any legal action for complying with any such requirement or an acceptance that if that safeguard cannot be obtained they need not comply with the request. When the Minister replies I hope that he will be able to give that assurance. There are a number of other points that will no doubt arise in Committee. We shall have an opportunity to raise them at that time.
12.29 p.m.
Lord Peston: My Lords, I warmly welcome the Bill. My noble friend Lord McIntosh of Haringey reminded us that its introduction was an election commitment, but it is a sensible thing to do anyway. Apart from anything else, it legalises--that is probably the right word--the situation that has existed de facto since May 1997. The noble Lord, Lord Roll, reminded us that it is 10 years since the then Chancellor, now the noble Lord, Lord Lawson, first raised the matter when the then Prime Minister rejected it. That has always mystified me. I should have thought that what we are doing today is exactly the sort of thing that we could have expected a Conservative Government to do.
Of course, 10 years is nothing in terms of making economic policy. The other day at Questions, when my noble friend referred to the aim of achieving global free trade by 2020, I was reminded that that would be almost exactly 200 years since David Ricardo laid the foundations for the theory of free trade. With regard to rational economic policy-making, it is probably sensible to think in terms of centuries rather than decades.
I should like to pay tribute to my right honourable friend the Chancellor of the Exchequer on his enormous courage, which this Bill emphasises. He actually did something which has been long overdue. Someone was required simply to say, "Do it". I hope that it will now be done. It looks as though the Bill is the first step on the road to meeting the Maastricht criteria as far as the independence of the central bank is concerned. Perhaps my noble friend will tell us later whether it is. We shall certainly explore that point in Committee.
Referring to the courage of my right honourable friend the Chancellor, I do not think that this is a matter of passing the buck. Not at all. My view is that if it all goes wrong, I do not see how a Chancellor will be able to blame the Bank of England. It will the government of the day and the Chancellor who will be crucified if it all leads to a disaster in macro-economic policy-making. I do not think that this lets him off the hook at all. Indeed, I am sure that noble Lords opposite and their colleagues in another place would not dream of letting the Chancellor off the hook. This is a sensible move in terms of economic policy-making.
Macro-economic policy can function efficiently with an independent bank, provided certain conditions are met. One condition is that the overall objectives of economic policy must be spelt out clearly. As noble Lords are aware, I regard low inflation as one valuable end, but it is only one of the many valuable ends which we ought to be seeking.
The other aspect of policy working is, as the noble Lord, Lord Taverne, put it, that the Treasury must adopt an active fiscal role. The Bill enhances the Treasury's role rather than weakens it. It places much greater obligations on the Treasury. At this point, I say that I welcome the new form in which the inflation target is to be put. Technically, it is much more sensible to specify a mean and then a range rather than an upper limit. Again, my right honourable friend the Chancellor has moved in the right direction.
Having been welcoming so far, my loyalty is tested by the current antics of the monetary policy committee. It appears to be split between leaving the interest rate unchanged or putting it up. However, what this country needs immediately, and as part of preparation for entry into EMU, is a significant lowering of the interest rate, which would then allow the rate of exchange to find a lower level in the market. That would restore the competitive position of United Kingdom industry, especially manufacturing industry. I do not believe that economic policy-making--not merely in the past year, but earlier--has given anything like enough weight to the real economy and to industry. I have listened to the remarks made by my noble friend Lord McIntosh--and
I know why he makes them--but he is still much more worried about keeping the City and the financial markets happy than about those who are actually producing things. We do not have to go back to David Ricardo to remind ourselves that the financial system exists for one purpose and for one purpose only; namely, to make the real economy work better. It has no value whatever in its own right. Therefore, with regard to the monetary policy committee, I hope that what we observe is merely temporary insanity.The noble Lord, Lord Mackay of Ardbrecknish, made a point about membership of the monetary policy committee with which I agree entirely. It is a completely non-party point because during the past 10 years or more that I have been a Member of your Lordships' House, many of my colleagues have asked how one can ever get to serve on any committee if one lives further north than Cambridge. It has nothing to do with parties; it seems to have everything to do with the London-Oxford-Cambridge triangle. We should do something about that. One or two of those serving on such committees should have not merely Scottish accents, but perhaps even Yorkshire or Lancashire accents. I agree with the noble Lord, Lord Mackay. I do not know the solution and whenever I am asked why an economist in other than London, Oxford or Cambridge is not asked to serve on such committees, I say, "I don't know, but I am in the right place".
I totally support the Bill with regard to moving the regulatory function away from the Bank of England. To put it as mildly as I can, the Bank's record in terms of regulation has been less than good. Here, I disagree with the noble Lord, Lord Mackay. I cannot believe that the new body will not do better. Indeed, on past experience I do not see how it could do worse.
I hope that the new legislation will not be as complicated as all other pieces of legislation on financial control have been. I should like at last to see a piece of financial control legislation that I understand and that other noble Lords--and the Minister!--understand. In that sense, I do not envy my noble friend Lord McIntosh: one day he will have to introduce that Bill to this House. I shall help him as much as I can with it! For now, I ask him a straight question: does my noble friend have any idea when we might get such a Bill?
The Government are rightly committed to openness and accountability in economic policy in general and therefore in monetary policy. I welcome everything that the Bill does to move us towards that end. Obviously, we shall examine such points in a great deal more detail when your Lordships sit as a Committee, but I should like now to ask one or two questions. It is probably not appropriate for my noble friend to answer them now, but I wanted to give notice that we shall want to raise such points later.
We are told that the new court will be responsible for the Bank's "objectives and strategy". One of my difficulties is that I have no idea what that could possibly mean. What are those "objectives" and what is the "strategy" separate from monetary policy? I hope that we can consider that in Committee. Does my noble
friend Lord McIntosh agree that the transparency criterion ought then to be applied to the operation of the new court since its significance has been enhanced?My own view is that as part of transparency, the Bank should publish its own economic forecasts. It publishes its inflation document now in which we get a snippet or two of its forecasts, which I never trust because I always wonder why certain bits have been included, knowing that a vast amount of other stuff is not there. The Bank should be asked to publish its forecasts in total.
On the question of transparency and accountability, I wonder whether your Lordships might want to consider whether one day we should set up a Select Committee on Economic Policy to take evidence, to hear witnesses and to publish reports on the conduct of the Bank of England and the pursuit of economic policy. I do not think that this is a matter that needs to be left only to the other place.
The question of the reserve powers has arisen. I know that my right honourable friend the Chancellor at some point said that they would be used only rarely. I think that we should table some amendments in Committee so that we can understand what "rarely" means and clarify what is meant by the expressions "the public interest" and "extreme economic circumstances". I can, however, well understand a Minister not wanting to spell out in detail what he would regard as "extreme economic circumstances".
The question has been asked--I have asked it myself previously: on a scale of independence, how independent will the new Bank of England be? It looks to me as though it will probably be as independent as the New Zealand Central Bank--although I am not sure. Partly because of the length of time for which members are appointed, it looks as though it will be rather less independent than the Fed and a good deal less independent than the Bundesbank. One way of dealing with the matter is to have some detailed discussion in your Lordships' Committee.
I should like to make two points about the reserve powers. If we enter EMU, as I believe we should, will those reserve powers be remotely compatible with the Maastricht requirements? I do not believe that they would. The question arises whether somewhere in the European Union the equivalent of those reserve powers should be given a proper statutory basis.
Clauses 11 and 12 are important, but what happens if the Bank of England fails to pursue the right objectives or claims that it has pursued them but has not succeeded? My noble friend has referred to the famous letter. We do not ever want to see such a letter because we do not want the Bank to fail. However, if there were such a letter, what would happen? In particular, are there any provisions for the sacking of the relevant people? The noble Lord, Lord Boardman, referred to the governor threatening to resign. I believe I am right in saying that on the whole governors of the Bank of England do not resign. Nowadays, no one appears to worry about firing anyone. Surely, a failed Bank of England monetary committee and governor should be told, "Goodbye--and there is no severance pay". I accept that that would be a radical departure.
Clause 12(3)(b) makes reference to a notice to be laid before the other place. Why is there no provision for the same notice to be placed before your Lordships? When dealing with matters of this kind my noble friend the Minister used the word "Parliament". Given that he is not a person to make such a mistake, one wonders whether he is assuming that Parliament and the House of Commons are one and the same. Without wishing to be too prickly about your Lordships' rights and interests, I believe that when matters of that kind are laid before the other place they should also be laid before your Lordships so that they can at least say something about them.
Further, in Clause 12(1) the word "may" appears. Does my noble friend agree that in that context the word really means "must"? We have spent hours and hours in your Lordships' House discussing legislation in which the word "may" appears. The lawyers tell us that the word "may" means "must". If it does not mean "must", the whole clause makes no sense. Perhaps my noble friend can deal with that matter.
I believe my noble friend Lord Desai said that there was no point in amending this Bill and that noble Lords were simply here to talk about it and then allow it to pass into law. I hope that my noble friend the Minister does not take that view because there are all kinds of useful ideas that can improve the Bill enormously. I hope that he will provide us with an opportunity when we sit as a Committee to press upon him suggested amendments not of a very controversial kind which will improve the Bill in due course.
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