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What I also regret not seeing in the Queen’s Speech is a proposal to take the administration of the tax credits scheme away from HM Revenue and Customs. The noble Baroness, Lady Hollis, will remember that I warned against this at the time because the Revenue is a great deal better at collecting money than it is at giving it away. The fact is that it has given away the wrong amount to tens of thousands of people and then demanded it back, which has caused the most appalling concern and worry to the poorest members of our society. The sooner the scheme is taken away from the Revenue and put back into the social security side of things, the better.
I turn thirdly to the Sale of Student Loans Bill, which was not mentioned in the Queen’s Speech at all. I well know from my own experience that there is always intense competition between departments to get a sentence in the Queen’s Speech. The one from this particular department states that:
Anything more platitudinous or wasteful of an opportunity, I cannot envisage. However, the speech does not mention the Sale of Student Loans Bill, so when the Minister mentioned it in his opening speech last week, I was rapidly prompted to intervene because it is extraordinary. If the Government are proposing to sell off to the private sector a collection of sub-prime loans at the present moment, their sense of timing is seriously defective. Nothing could be more unfortunate than to try to dispose of this particular asset at this particular moment, even if it is said to be only a provisional Bill. But what worries me even more is that after the debate a colleague said to me, “One of my children has a student loan. Did you realise that the Government have just put up the interest rate?”. It seems that the Government are raising the interest rate on student loans in order to boost the value of the asset so that they can sell it off to the private sector. I hope that the universities and various other institutions around the country have put this information on their notice boards. The scheme is said to be worth £18 billion at present, but I doubt very much whether the Government will get that sum for it because these are clearly not prime loans. If they were, there would be no reason for the Government not to hang on to them. The Government are going to sell them off not only at a discount—I wonder where the loss will appear in the Government’s accounts—but they are going to have to pay a risk premium as well.
I turn now more broadly to the state of the economy. The words are surely, “debt, debt, debt”—international debt, national debt and personal debt. The noble Lord, Lord Oakeshott, and my noble friend Lord MacGregor both referred to this matter. The fact is that the previous Chancellor of the Exchequer presided for 10 years over a situation where the Government’s debt has grown more and more and more. The idea of prudence, as my noble friend Lord MacGregor observed, is a busted myth. There has been nothing prudent about the way the Chancellor of the Exchequer has acted over the past 10 years. On supervision of the banking system, his
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I am out of time and I want to make only one final point in line with what was said a moment ago. The previous Chancellor of the Exchequer inherited the best economic situation that has been inherited by any Chancellor; I fear that his successor, Mr Darling, is in danger of inheriting one of the worst.
6.46 pm
Lord Cotter: My Lords, business needs stability, and it was good to hear the noble Lord, Lord Jones, refer to that very point in his opening remarks. We on these Benches were extremely pleased when the Government introduced the system whereby the central bank sets interest rates. It was a departure that has produced much-needed stability and is something that we had long advocated. But stability is driven not only by the financial backdrop, it is also about the Government’s overall and specific approach to business, the climate they create. Among other things, this means that business must be listened to. I shall say more on that later.
The Government have long stated a commitment that the impact of regulations and government measures will first be assessed for their effect on small businesses. I hope that that commitment will be renewed and carried forward. Our SMEs are the backbone of the country and frequently provide the innovation and new ideas that play a big part in our economy. I have spent a lifetime in the small business field, latterly as managing director of a manufacturing company producing plastic extrusions, so I declare an interest, albeit a past one.
In all the time I have been in Parliament, in both Houses, the much-repeated concern from all quarters has been about red tape and excessive bureaucracy. The touch must be light. But business also needs certainty and awareness. The world does not stand still and there are always fresh challenges. People’s circumstances and expectations change, so the Government and business must adapt, but certainty is important. Too often, new regulations are brought forward without proper consultation and with no prior knowledge. A few years ago while on a visit to Brussels, I was dismayed to confirm what I had believed already: there was no one-source tracking system for new regulations. From inception through their development to the final regulations, no central computer system or system of any sort tracked
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While business needs stability, it also needs the freedom to operate sensibly and fairly, and it needs trained people in the workplace. Before saying a few words on training, perhaps I may say on the issue of red tape that there have been a very great many initiatives over the past 10 years, and we now have one more. I hope that the planned Regulatory Enforcement and Sanctions Bill does not become just another initiative among the many. It talks about the establishment of a statutory corporation known as the Local Regulation Office. Will that mean one more set of officials? I appreciate that much to do with regulation happens locally, and thereby the desire for local offices. This will be welcomed by many, but I am still concerned that this should not become, in its own way, a further piece of bureaucracy. The new Bill must contribute to a reduction in bureaucracy and be monitored accordingly. We will naturally be very keen to ensure that the Government do that over a period of time.
I hope that the Government are living up to their promises on the “one in-one out” principle in regard to the introduction of new regulation. I hope that principle is being followed because the Government made a strong commitment to it. I hope also that, in practice, a statement of effect to ensure that all other measures have been exhausted and examined is produced before new regulation takes effect. We still need slimmer regulations, more consultation and a higher standard of impact assessments.
We have always maintained the need for rigorous independent regulatory impact assessments. During my time in the other House I dealt with something in the order of 10 Bills. The concern about regulatory impact assessments was raised fairly consistently and frequently, certainly in the early days. The Bills were not very adequate in that respect. The impact assessments should be independent, accurate and rigorous. Many will again watch with interest for a genuine reduction in bureaucracy and, above all, more common sense being brought to regulations. This often happens, in my experience.
Perhaps I may now touch on the issue of the workforce and training. Business and industry need the highest quality of educated people but also those who are vocationally trained. It is to be welcomed that the Government will address through legislation the issue of apprenticeships. This is exciting. An emphasis on an entitlement to an apprenticeship for 16 to 18 year-olds will be welcomed. I, along with others, look forward to the review of the apprenticeships programme promised for January next year.
It is good to note that under this Government’s tenure there has been an increase in the number of apprenticeships, but completion is important and in the past the rate of completion has been as low as 40 per cent. It has now risen to 60 per cent. It is important that the Government address the problem
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What will the Government do to encourage employers to take on apprentices? In the past employers have been reluctant to take on apprentices aged 16 to 18. Perhaps they feel they were not equipped to go into business or have not had a sufficient lead-in to it. It is a very serious issue in view of the commitment the Government are making in carrying forward the education of 16 to 18 year-olds. It is particularly important in regard to apprenticeships that employers are encouraged to take on young people—indeed, to take on all people. In that connection, employers at the moment do not necessarily feel that encouragement as there are gaps in the funding arrangements. This means there is not the incentive that there should be for the employers to make their contribution of some 50 per cent or so towards courses, and many are reluctant to do so. Therefore, while welcoming the Government’s initiative, we will be looking very closely at the detail. We hope there will be a good period of consultation before the Bill is introduced later next year.
As I say, small businesses, in particular, must not be forgotten in regard to both red tape and training, because that is a very difficult area for them to address with their limited funds. So stability, setting business free and training are the key watchwords. We look forward with interest to seeing the Government deliver on these.
6.55 pm
Baroness Turner of Camden: My Lords, we are to have another Pensions Bill this Session. This was of course foreshadowed in the discussions we had on the Pensions Bill in the previous Session, which we knew was the beginning of the Government’s attempt to redesign pensions provision. Of course, most of us agreed that this was necessary. Until quite recently we had a very good system of private pension provision in this country, although of course there were criticisms of the basic state scheme. Those of us who benefited from a final salary scheme are the lucky ones. The decision of many companies to close such schemes to new entrants and to provide very much less favourable money purchase schemes was a great shock. This was followed by the collapse of certain final salary schemes, which many employees had believed to be entirely safe and had been encouraged to join on that basis.
It was clear that something had to be done and the Government rightly sought to provide some assistance. We discussed the schemes concerned in the context of the previous Bill. There was of course the Pension Protection Fund, and the Financial Assistance Scheme to assist those not covered by the PPF. It seems likely that we shall have to return to discussion of these schemes as there have been concerns about whether the resources made available will be adequate. There was also a suggestion last time round that there should
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However, the Government plainly want to restore confidence in private occupational schemes, and we have a new regulator. The Government were quite correct to adhere to their arrangements with the unions in the public sector, thus ensuring that such employees benefit from good occupational schemes, and they have rightly maintained that stance despite some criticism from opposition parties.
Problems remain, however. How do you persuade people, at a time in their lives when they already have heavy calls on their disposable incomes, that it is necessary for them to save for retirement? They may already have debt problems, some of which have been referred to—heavy mortgage repayments, children to support, perhaps even ageing parents to care for. The cost of living in London is acknowledged to be very high. The last thing they want to think about is retirement and the cost of saving for a pension. Moreover, when they look at the figures involved in providing good private pension provision for themselves, they may be absolutely horrified; it costs an enormous amount.
The Government came to the conclusion that an element of compulsion was required. This of course is included in the scheme that we discussed in outline during the last Session with the previous Bill. But there is a problem involved there too. The scheme would involve automatic enrolment, with the employer, employee and Government each making a contribution, but there would be an opportunity for the employee to opt out. The problem we identified the last time it was discussed was the interaction with the benefits system. If an individual decides to opt out and then, at the appropriate time, does just as well under the benefits system as someone who has paid his 4 per cent salary deduction, there will be an incentive for more people to opt out. There needs to be a discussion about how to deal with that problem and how the new scheme will be managed and regulated. No doubt there will be an opportunity to discuss this in the context of the new Bill.
Then there is the state system. We have often been told that it is the cornerstone of pension provision in this country. Certainly for many lower paid people it is likely to be their only income in retirement. I welcome the decision to provide increases in the basic state pension in line with the wages index in future, but regret that it was not thought possible to introduce this with immediate effect.
I know that pension credits have been of great assistance to many people, despite some of the problems that have been identified by other speakers, such as the noble Lord, Lord Higgins, but I would still prefer a substantial increase as of right—not means-tested—for all pensioners, enough to provide a basic state pension on which it is possible to live. That has long been the aim of the TUC, and the noble Lord, Lord Oakeshott, referred to it earlier. In that respect I agree with a lot of what he had to say. If it were said once again that such a measure would simply benefit the better-off, I would say that the
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The Government have attempted to meet criticism of the poor provision for women in the state system by reducing the number of contributions necessary for them to qualify for a full pension. We welcomed that last time, but I doubt whether it will deal with the problem fully. Many of us believe that a residency-based pension rather than a contributions-based one would inevitably benefit women more than the current proposals. That option has been rejected and there may be many problems associated with it, but we may have to consider it in future. My noble friend Lady Hollis, who is an expert on this subject and has done a lot of work on it, may make a contribution about this in her speech. Nevertheless, the Government seem aware of the many problems that exist, and I welcome the chance to discuss the new Bill.
On the issue of employment, I was interested to hear what the Minister had to say in introducing the debate. The employment legislation looks very far-reaching and I welcome the opportunity to discuss it when we have more details available.
7.01 pm
Lord Marlesford: My Lords, at the start of this year many people thought the world economy was set to continue its steady progress. Based on low world inflation, low or falling unemployment and globalisation with rapidly developing economies generating huge liquidity from massive trade surpluses from oil, primarily in the Middle East, and from manufactures, primarily in China, it seemed as though prospects, if not exciting, were as solid as the rock on which Manhattan is built.
Although the sub-prime problem in the American housing market had emerged in March—HSBC, with its $10.6 billion write-off, was the first to own up—the imminent scale and effect of the credit crunch was as widely unpredicted as it was predictable. The credit bandwagon rolled on. The bubbles in real estate, consumer spending and stock prices continued to swell so that when the storm burst in August and September and the banks stopped lending to each other, most did not realise the gravity of what was to happen.
The scale of toxic credit revealed by the sub-prime scandal is almost unimaginable. As a measure, take the UK GDP, which is $2.6 trillion. Including the $1.3 trillion in sub-prime bonds, there is $2.8 trillion in distressed mortgage bonds. Already the international banks have revealed losses totalling $50 billion. The experts now expect that the eventual total could be $150 billion to $450 billion. The very width of that forecast underlines the uncertainties.
Let us remember that in the great crash of 1929 the Dow peaked in September of that year but did not bottom out until July 1932, by which time American shares had lost 90 per cent of their value. Few people thought that the failure in May 1931 of the Credit-Anstalt bank in Austria, which triggered the financial collapse of central Europe, with the German Danabank collapsing in July and closing down all
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Let us go back for a moment to December 2001 when the American energy trading company Enron collapsed owing $16.8 billion. Enron used off-balance sheet structures to keep liabilities off their books and booked “mark to market” profits, often based on derivative prices they created. The banks today have huge exposures to off-balance-sheet structured investment vehicles—SIVs—which have been borrowing in the capital markets and investing in securitised credit derivatives, which are now blowing up. They have earned huge profits out of the creation and management of such off-balance-sheet vehicles, and are now being forced by market realities to take them back on to their balance sheets just as the investments they hold become worth less or, in many cases, worthless.
I am reminded of the scandal of Lloyd’s of London that did so much damage in the 1980s to the reputation of the City. I should at once declare an interest as a former victim of Lloyd’s. What happened then was that a number of underwriters, who combined a fatal mixture of stupidity, greed and dishonesty, motivated by the commissions they would earn, took on to their books a series of unquantifiable long-term risks that no sane person would have looked at. To protect themselves they invented the notorious baby syndicates into which they sought to place the best business for the benefit of themselves and their friends, while the mass of rubbish was shunted on to the punters who were outside names.
Last month I was among some of the most sophisticated members of the American financial community. They expressed much concern that it would take many months for the extent of the credit crunch disaster to unfold. I was struck by an analogy used by Dr Sidney Jones, a former professor of finance at Michigan University and previously assistant secretary for economic policy in the US Treasury. It was, he explained, like the childhood card game of Old Maid. In this case the old maid was the card labelled “risk”. It was cut into small pieces and each piece was bundled into a package of other financial confetti and shuffled out to those with an appetite for such sophisticated instruments—which, of course, they did not understand. The originators reckoned that the mathematical logarithms would prevent any chance of the pieces of the risk card being reassembled. Well, they have been.
A Cambridge mathematician friend of mine, who sees the financial model in engineering terms, believes there is a real risk that the whole credit risk cycle could be reversed. That may well have started. Thus, instead of freely available credit leading to more leverage and more buyers and thus to increasing asset values and decreasing lender defaults, less credit at higher prices would result in fewer buyers, falling asset values and thus more defaults and less chance of recovery for lenders.
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What is quite certain is that we have not yet begun to see the impact of all this on the ultimate consumer. The bankers having failed in their prime task of assessing risk rather than going for short-term profit maximisation, the public on both sides of the Atlantic have been gorged with credit, whether in bank loans, excessive mortgages or multiple credit card expenditures. Some of your Lordships may remember one of the most amoral of financial marketing slogans, “Borrow from us and take the waiting out of wanting”.
Alan Greenspan, in his recent book The Age of Turbulence, puts it neatly:
America has had an economic engine fuelled by optimism. Now I find that many there feel that there is perhaps a 30 per cent chance that there will be a recession.
What are the conclusions from all this? First, central banks should not be in a hurry to cut interest rates. If capital is to be properly used it should have a real cost of about 3 per cent or the long-term GDP growth, which is probably about the same thing. Monetary policy can become an empty weapon, as the Japanese found to their cost. The Nikkei bubble peaked at 39,000 in December 1989. Today, 18 years later, it is still only at 40 per cent of that level.
Secondly, we must expect currencies to revert to something closer to their purchasing power parities, perhaps by the end of 2008. That is what exchange rates are for. You cannot buck the market but a two-dollar pound is clearly unsustainable, as is a euro that will buy $1.47.
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