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To conclude, the story is of a sector that is growing in value and significance to the economy and society. There are significant challenges ahead, but I believe Parliament, particularly your Lordships’ House, can allow itself some satisfaction that the regulatory approach it set in train with the Communications Act—an effective balance of powers and obligations, with a healthy presumption against doing things but with a capability to act when necessary—is bearing fruit, and will continue to do so.
7.17 pm
Lord Peston: My Lords, I start by welcoming my noble friend Lord Truscott to the government Front Bench. He opened the debate, which is the easier of the two jobs. I think he will find, when he has to reply to debates in future and has to deal with his supposed “friends”, such as my noble friend Lord Barnett and me, that life will not be quite as easy.
I start with climate change. The Prime Minister said that the Stern report was the most important to appear in his period of office. It is surprising, therefore, that the usual channels have so far not set aside a full day to debate that report. We must certainly have a full day’s debate before we should even remotely consider looking at the proposed legislation.
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I have two points of substance to make. I say with deep regret that, I think for the first time ever in our period in this House, I disagree strongly with the noble Lord, Lord Newby; I take exactly the opposite view. I apologise to him, of course. My view is that the overarching criterion to be applied in this case must be for the Government to act in the interests of our country. Goodwill gestures will get us nowhere. Being thought highly of by the rest of the world will not buy you a cup of coffee, let alone anything else. The countries that are the main sources of carbon emissions have every intention of carrying on regardless. They will free-ride on any minuscule gains that emerge from our own independent policies, a point that was made by my noble friends Lord Sheldon and Lord Barnett. Those other countries’ industries will flourish, while ours are damaged by so-called “green taxes” and all the other measures that are being proposed.
Secondly, even if you believe—which I do not for one moment—that a major collaborative international effort will occur, any effects will take decades to appear. That is in the Stern report. Thus, the Government’s duty now is to initiate an optimum response to what is going to happen. That optimum response must be to adapt to the climate change that is going to occur. A strategy of not adapting is simply not one of the available options.
I welcome the statistics Bill. Again I have three comments, which largely just underline what the noble Lords, Lord Jenkin of Roding and Lord Moser—my old teacher—have said. Our concern must be with all the relevant statistics and not a narrower set of statistics. As it happens, our economic statistics are as good as any in the world, and probably better than those of nearly any other country, but the same cannot be said for those on health, crime, transport, the environment and so on. Thus it would be a serious error to concentrate on economic statistics as the main point of the Bill.
It follows—again, as the noble Lords, Lord Jenkin and Lord Moser, said—that the home for the non-ministerial department should be the Cabinet Office; but, wherever it is, it absolutely should not be the Treasury. Further, parliamentary scrutiny—and I emphasise parliamentary, meaning your Lordships' House—should not be undertaken by the Treasury Select Committee in the other place, although that is up to it, and certainly not by our Economic Affairs Committee. The noble Lord, Lord Jenkin, thinks that we might get a collaborative committee. I do not believe that either—you see that I am in a very negative mood this evening. I think that we must have our own statistics committee in this House that would do the job of scrutiny.
I now turn to the economy itself. I speak as someone who bears the scars of advising Governments during the 1960s and 1970s. I can only tell noble Lords that, for the past 10 years, this economy has been almost like utopia. In my notes I used the words “reasonably good”, but that is very much an understatement. Inflation is at a low and stable level. The GDP growth rate is at its long-term level and the annual GDP rate has been stable, at
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I am in difficulty about my next point, and noble Lords will see why in a moment. This morning, again following the GDP point, I wrote that, “Whole-economy productivity growth is also positive and pretty stable and has been very much at the level of its long-term trend”, which I then added is “pretty good”. I said it was pretty good because the economy is moving ever more to emphasise the services sector, where we do not measure productivity gains correctly, or perhaps they do not occur—but I agree with my noble friend Lord Haskel that we certainly do not measure them correctly. I thought that that was pretty good. But I then added, and this is my difficulty, “There has been no productivity revolution”. I thought that my noble friend Lord Truscott, unless I misheard him, said that there had been. I do not like to criticise him or make a problem, but perhaps someone could check whether I misheard what my noble friend said. I looked at the data this morning and there was no sign of a productivity revolution. However, I still think that what has been achieved is very good indeed.
Employment has been increased, which is a good thing, but unemployment is too high and appears to be rising. I notice that the noble Baroness, Lady Noakes—I assume as part of the remodelled Conservative Party—laid particular emphasis on unemployment as something we need to look at. I therefore came to the conclusion that it is not so much that Polly Toynbee is now the main source of inspiration for noble Lords opposite as that Karl Marx has replaced Edmund Burke as their most important philosopher.
Unemployment is, however, certainly too high. It was generally agreed by economists from about the late 1970s onwards that we had previously given too much emphasis to unemployment and too little to inflation targets, and so we moved over. But if you go over to inflation targeting, it is not surprising in the least that you must accept higher unemployment levels. It is an inevitable consequence of the way that economies work. You cannot wriggle out of that by saying, “We will go for some microeconomic measures that will make the labour market work better”. I certainly agree that we should go for such measures, but it is a total failure to understand economics if you think that those measures to improve the workings of the labour market can deal significantly with aggregate unemployment.
I should like to make a point that no one else seems to have made, which surprises me given that almost everything else has been covered. One surprising feature of what has happened to the economy is that inequality has increased, and the rich in particular seem to be getting very much richer. I understand the case for targeting measures to help the poor, but all targeted measures have very distinctive disincentive effects. As for talk about tax measures, I say to the noble Lord, Lord Marlesford, that I know the story about the 98 per cent tax rate, but no one has ever been able to find anyone who paid it. The reason why
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Another plus point is the balance of payments—at least I think it is a plus point. The current account has been in deficit to varying degrees for the past 20 years. The amazing thing—which shows that, when I taught economics, I really misled the students very much—is that we have been able to finance this deficit year in, year out. That has to be a plus, because we have financed that deficit by people feeling that it is worth while investing in our country. Our interest rates are a bit on the high side, but if the world lost confidence in us, interest rate policy would never offset that. So it has to be world confidence that matters.
We want that confidence to continue. I know as a matter of arithmetic that if some countries in the world have massive current account surpluses, others such as our own must have deficits. Equally, if they have those surpluses, they also accumulate finance capital. They have to put it somewhere and we are a place where they are likely to put it. So you could argue that, as long as they have confidence in us, there is no problem. But, deep down, something nags at me, “Can I be right?”. In other words, I go back to the reason why I became an economist: my innate pessimism tells me that economics is the subject to be in.
I have two additional worries. I start with the MPC. I have read the latest inflation report, which as usual offers an excellent account of the recent history and the current state of the economy. I have also read—they have just arrived—the latest minutes of the MPC, which are most revealing. But I do have a serious difficulty. I cannot find any connection either logically or economic-theoretically between what is in those two documents and the policy decision. To quote the MPC’s conclusion: “Given that outlook”, which is what the whole of the rest of the inflation report was about,
- “and bearing in mind the balance of risks, the Committee judge that an increase of 0.25 percentage points in Bank Rate to 5 per cent was necessary to bring CPI inflation back to the target in the medium term”.
I can only respond, again following my noble friend Lord Barnett, by saying that I am amazed. Apart from the fact that I cannot see that the MPC’s decision follows in any rational way, I am concerned very much at the risks that it is willing to take with the real economy.
My second and final comment—nearly final; there is always an extra one—is on the fiscal position. It is not right to anticipate the Pre-Budget Report, but I am concerned that public expenditure and aggregate taxation are getting close to an upper limit. What worries me even more is that pressures for more expenditure are growing. It is the age-old problem
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The Chancellor’s economic policy depends on a sound fiscal position, with borrowing to be strictly for productive investment. He is entirely right on that. However, it follows that in a few weeks’ time he must give us a tough fiscal package. Wearing my old academic hat, I would tighten the fiscal side to persuade the MPC to see sense, forget about raising the bank rate from now on and start to bring it down again.
In conclusion, going back to an earlier point—I know that it is terribly irresponsible to say this in your Lordships' House—I sometimes wish that we had a crisis. We, especially the economics profession, need extreme events both to test our macroeconomic theories and, more properly, to evaluate our policy mechanisms, but perhaps noble Lords should ignore those last few sentences.
7.31 pm
Baroness Valentine: My Lords, I shall concentrate on one vital element of the national economy—London. I should therefore begin by declaring my interest as chief executive of London First, an organisation which seeks to make London the best city in the world in which to do business.
My sights are not solely on London. The shape of the UK, and indeed the world economy, has changed. In this increasingly global environment, London has the potential to be the world city, and the UK needs it to succeed. London's contribution is clear. With 12.5 per cent of the population, London contributes 18 per cent of the UK's GDP and in recent years accounted for 40 per cent of the UK's export growth. Up to £20 billion of taxes raised in London every year contribute to public spending in the rest of the country.
The underlying issue for London is its success. Its population has increased by 700,000 in the past 15 years and is set to grow by the same amount in the next decade. Around 375,000 people came to live and work in London last year, 345,000 left and 100,000 were born—a phenomenal rate of social change, representing 10 per cent of London's population. Legislation needs to keep pace, specifically addressing the following challenges: first, the UK's tax and regulation regime needs to remain competitive, a point ably made by the noble Lord, Lord Rowe-Beddoe, in his maiden speech. Secondly, the capital needs devolved decision-making to enable the public sector to respond quickly and efficiently. Thirdly, Londoners' skills need to match the jobs on offer. Fourthly, immigration needs to be competently managed. Finally, the capital needs investment in its overstretched transport system.
I turn to these in order. London is one of the most important financial centres in the world. I look forward to measures in the exchanges and clearing house Bill to limit the chances of importing over-restrictive US regulation. The sector is already
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I look forward to further measures to devolve power in the Greater London Authority Bill. Your Lordships may be interested that in a recent survey of businesses asked whether they felt that the GLA, no London government, or the GLC were more effective, around 60 per cent endorsed the current GLA, 17 per cent preferred no government and 12 per cent preferred the GLC. I leave others to speculate on what this says about the current Mayor of London and previous leader of the GLC, Ken Livingstone.
Two important measures are proposed: new powers for the mayor to direct planning development decisions and devolution of responsibility for adult skills training. It is unfortunate that, on the eve of the First Reading of the Greater London Authority Bill, the Secretary of State has called in an application for offices in Fenchurch Street in the City. The Government are planning further reform of the planning system to address productivity and competitiveness. It is just this sort of intervention that causes the uncertainty and delay which undermine competitiveness.
The decision to enable the mayor to take over strategic planning decisions from the boroughs in exceptional circumstances should enable broader economic and social issues to be addressed, but goes against local concerns. It is crucial that these new powers do not result in developers getting caught in the crossfire between local and London government, each jealous of their own position. As London First, we will argue for the greatest possible certainty and clarity in the process, which is not the case with the current proposals. We look forward to more workable provisions in the Bill.
Among the employed, London has the highest skills levels in the country, but 1.5 million adult Londoners have low or intermediate skills and London also has the highest unemployment rate at 8.2 per cent. It is not surprising therefore that London attracts international migrants at the rate of around 200,000 a year to fill the vacuum in the middle. The Further Education and Training Bill will provide for the five learning and skills councils in London to merge and a new employment and skills board will be established to set adult skills strategy, chaired by the mayor, with a majority of business members. This should create the opportunity for business to introduce a sense of market reality to skills provision and for the mayor to provide leadership across the government institutions working in London. We have to make training deliver jobs for London’s unemployed, not just qualifications.
That brings me to the Asylum and Immigration Bill. While it is vital that we improve Londoners'
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As London continues to grow, major new housing and commercial development is needed. Planning procedures are still taking too long. While it is convenient to argue about legislation, the main scope for improvement lies in doing things better. Borough planning departments need to be better resourced and the appeals process speeded up. Targets for increasing housing supply will also not be achieved without investing in infrastructure. In particular, in the Thames Gateway actual housing development is running at 5,000 per year against a target of 16,000. A planning gain supplement would not raise significant funding since the majority of the development is on brownfield sites. Instead, national, London and local government need to make house building less of an endless obstacle course.
The Thames Gateway, London and the UK are becoming severely constrained by the need to invest in transport. If London were permitted to invest the money it collected in taxes, it could not only solve its own transport problems but increase the national tax take. I look forward to the Eddington report, which is due to set out the economic benefits of investment in transport and recommend ways of speeding up planning for major projects.
I touch briefly on capacity constraints on London's roads. With potentially 400,000 more vehicles by 2025, congestion will grow by 25 per cent. Road construction on this scale is impractical. The only option is to ration resource through pricing. I welcome the inclusion of a Road Transport Bill in the legislative programme. However, if road user charging is to gain public acceptance, it must be seen as a net economic and social contributor. This means hypothecating the charge to invest back into better management of local roads, public space and more public transport.
Where will all the displaced drivers go? Crossrail is the only mass transit system which is deliverable in the foreseeable future, and that is only by 2016, by which time London will have grown by the size of the city of Leeds. The hybrid Bill for Crossrail should reach your Lordships' House in the spring. The one outcome that business in London looks for above all else is to complete the legislative process and resolve its funding so that construction can begin without delay.
7.40 pm
Lord Rosser: My Lords, we have a strong economy, with the longest period of sustained low inflation since the 1960s; growth of over 25 per cent since the Government came to office compared with 15 per cent in the nine years prior; interest rates low by historic standards; mortgage rates at their lowest sustained level for 50 years and record numbers in
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We have also seen the Government take steps to lift significant numbers of children and pensioners out of poverty, as well as to improve the position of the lowest paid at work through, first, the introduction of the minimum wage and, subsequently, by increasing the level of the minimum wage. Through such measures, as well as those addressing social exclusion, the Government have sought, allied to a stable and thriving economy, to provide the foundations for a fairer and more cohesive society.
However, not all developments and trends appear to be working in this direction. Many of your Lordships have rightly referred to the important contribution made to our economy by the financial markets, and I would not want my agreement with that point to be forgotten. Changes in the way that the financial markets work, though, are creating an environment that is geared more than would seem desirable to a short-term approach to investment. The changes in the financial markets are many. More extensive use of stock options, particularly when applied to senior directors, creates considerable incentives for top managers to give priority to raising stock prices, which only encourages short-term thinking.
A more market-driven pension system is leading to pension fund managers investing in riskier assets, changing their portfolios more frequently, reducing firms’ certainty with regard to future funding, and intensifying pressure for higher returns from their investments in productive companies, thus depriving the latter of much-needed resources. The expansion of private equity funds does not promote economic stability. Investment by such funds is frequently highly leveraged, with the buy-out debt financed, and the firm purchased left saddled with responsibility for servicing the debt. The strategy for investment by such funds is too often asset stripping or restructuring, leading to jobs being lost and established companies being destroyed, while the ones who benefit most appear to be the fund managers.
Gate Gourmet, of Heathrow airport fame, is one example of what can happen when an organisation is bought by a private equity firm which, in this instance, hired hundreds of contract workers before carrying out the next stage of the strategy, which was to attack the existing workforce, many of whom were Asian, and their working conditions.
Takeovers where the driving force is a high and quick return do not promote stability. The threat of takeovers also influences thinking. The desire to minimise the threat of a hostile takeover results in the existing management taking action to raise the company’s share price in the short run, through measures such as deferring investment and creating redundancies, which have a negative effect on the longer-term performance of the company.
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