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We are also working to tackle the causes of the problems in the banking system and in global financial markets.
Lord Forsyth of Drumlean: My Lords, on the specific package that the Minister mentioned—the so-called bail-out package for banks—how did the information on those discussions come into the public domain before it was announced, which saw a fall in, for example, the royal bank’s share price by almost two-thirds and did great damage to the financial system? Why have the Government not got an inquiry into how that information was leaked, along with several other instances where market-sensitive information has come out of his department?
Lord Myners: My Lords, that is not an issue on which I can comment. It is a matter for the Financial Services Authority.
Lord Higgins: My Lords, why not?
Lord Myners: My Lords, the correct agency to investigate any suggestion that there was impropriety in markets is the Financial Services Authority. The FSA is engaged in that matter.
Lord Trimble: My Lords, would it not be appropriate for the Government to consider whether their own officials have behaved properly in this matter? Hiding behind the Financial Services Agency gives the distinct impression of a guilty conscience.
Lord Myners: My Lords, nothing could be further from the truth. The Financial Services Authority is the appropriate body in this regard. It has the resources and is carrying out an appropriate investigation which will be full and comprehensive. It will allow the authority to ask questions of whoever it wishes. Perhaps I may continue.
Lord Lea of Crondall: My Lords, if the Opposition are so keen on inquiries, it would be sensible if they recognised that a few apologies are needed from the people in the banks who increased leverage by two or three times in the past three years. If we are going to hold inquiries, do we not need a wider public inquiry? Why are the Opposition not looking at the banks?
Lord Myners: My Lords, I agree with my noble friend.
As recent events have shown, we need more effective global regulatory co-operation. The UK was among the first to call for increased transparency of financial institutions’ exposures, for improvements in the effectiveness of credit rating agencies, and for agreements for enhanced capital adequacy requirements. There have been improvements in risk disclosures by banks and the steps being taken to establish the college of 30 cross-border supervisors by the end of this year will be a material step forward in that respect.
In this new age of global markets we also need more effective global institutions. The challenges we face are significant, and it is right that we give attention to strengthening global institutions to ensure that they are well placed to meet those challenges. The Prime
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Financial stability and strong banks are an essential precondition to restimulating lending and an eventual recovery in the wider economy. Just as we led the way on the global recapitalisation of banks, we will lead the way when it comes to the wider global economy. At home, the Government are now implementing a comprehensive set of measures, reaching commercial agreements with UK banks and building societies to stabilise their capital position and ensure that they are able to perform well for the economy in the future. The Chancellor is providing an update on how the Government’s investments in these banks will be managed to the Treasury Select Committee this afternoon. The comprehensive programme we have introduced includes taking Northern Rock and part of Bradford & Bingley into public ownership, protecting depositors and making sure their problems can not spread. On FSA and Bank advice on financial stability grounds, we introduced extraordinary measures to amend the competition regime so that the merger of Lloyds TSB and HBOS could proceed swiftly. The problems of liquidity in the banking system are being tackled directly through the Bank of England’s Special Liquidity Scheme.
Alongside our action to promote financial stability, the Government are determined to help families and businesses with targeted support for those who need it most. That is why we are supporting families facing higher food and fuel bills through raising the income tax personal allowance by £600 for 2008-09, worth £120 for every basic-rate taxpayer. Moreover, making this announcement ahead of the PBR means that most basic-rate taxpayers will have seen this in their take-home pay from September. We have postponed the fuel duty increase for all of 2008, saving businesses and families nearly £100 million a month. We are making additional payments to households containing over-60s and over-80s, of £50 and £100 respectively, alongside the winter fuel payment, to the benefit of around 9 million households. We have also announced a £1 billion package of energy efficiency measures, including at least 50 per cent off a range of practical energy-saving devices for all households, with 11 million of the most vulnerable households qualifying for these free of charge.
The Government cannot and should not try to prop up house prices, but we are supporting the home owners of today and of the future by removing stamp duty from all house purchases under £175,000 for the next year. In addition, we have provided first-time buyers with access to expanded home-buy direct shared-equity programmes, alongside earlier support for mortgage interest to home owners in difficulty and reducing the number of repossessions through new mortgage rescue schemes. We are also working to improve the mortgage
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We are supporting businesses. An announcement last week from the Chancellor means that Britain’s small and medium-sized businesses stand to benefit by up to £4 billion from the EIB. As the Chancellor said, small firms are vital to the strengths of our economy. We need to make sure that, despite the global credit crunch, they have access to the loans and capital they need to help their business grow and develop. Together with a range of other measures being taken by the Government, these commitments will contribute to ensuring that strong small businesses in the UK have continuing access to the best support available.
We are confident that our economy will get through the difficult period. We are better placed to weather this global economic storm than we were in the 1970s, 1980s or early 1990s because of the decisions we have taken over the past 10 years.
Lord Lang of Monkton: My Lords, the noble Lord has just repeated what the Prime Minister and the Chancellor have repeatedly said about how remarkably well placed the United Kingdom’s economy is to withstand the current problems. If that is so, how does he account for the plunge of the pound against both the dollar and the euro?
Lord Myners: My Lords, the currency markets are febrile and volatile and we have seen the phenomenal strength of the yen and the US dollar. Sterling has been a weaker currency, alongside several other currencies, but that is as much a feature of the strength of the dollar and the yen as the weakness of sterling. Indeed, as the IMF said recently when referring to the UK:
“For over a decade, the United Kingdom has sustained low inflation and rapid economic growth—an exceptional achievement ... the fruit of strong policies and policy frameworks, which provide a strong foundation to weather global shocks”.
There are a number of reasons why we are better placed than in previous downturns. First, the Bank of England’s independence has continued to give us low interest rates and inflation well below the double-digit levels we saw in earlier decades. On 8 October the Bank, along with major central banks around the world, decided to cut interest rates by 0.5 per cent to 4.5 per cent. It made clear that while inflation had risen because of food and energy prices it is now set to fall back, and could fall back very significantly. Secondly, our labour market is the most flexible in Europe. Employment remains close to record highs; there are more than half a million vacancies in the economy; and wage pressures are subdued, led by our own responsible decisions on public sector pay. Thirdly, Britain remains one of the best places in the world to do business, a magnet for overseas investment. Fourthly, thanks to the decisions we have taken since 1997, public debt remains low. This means we can provide targeted support for those who need it most in these difficult times and protect vital investment in our infrastructure—investment that was sacrificed in previous downturns; investment that will underpin our future growth.
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One point of encouragement in recent weeks amidst extremely challenging developments has been the fallback in the price of oil from summer’s recent high. Oil prices are presently around $60 a barrel compared with $150 a barrel during the summer of this year.
Baroness Oppenheim-Barnes: My Lords, while the Minister is boasting about the fall in oil prices, will he also acknowledge that because we have to pay for oil with petrodollars, and because the pound is so weak against the dollar, we will lose most of that benefit?
Lord Myners: My Lords, I was not boasting; I was sharing the facts with the House. The price of oil has fallen substantially in terms of any currency, including sterling.
It is important to consider also the role of fiscal policy. Rules provide discipline for the Government; they are the means to an end. Our core objective right now is to get the economy through these difficult times. As the Chancellor set out in his Mais Lecture last week, the average current budget between 1997 and 2006 was in balance—the only time that has been achieved over a cycle since the early 1970s. As the Chancellor has also made clear, that is how the Government managed something that many thought would be impossible: to triple public investment while cutting government debt. In other words, we fixed the many roofs that needed fixing—the roofs of schools, hospitals and homes throughout the country. No one at that time was arguing for less spending on education, health or transport.
We also had enough flexibility to accommodate negative shocks, such as the bursting of the technology bubble in 2000, as well as positive shocks, such as the receipts from the spectrum auctions, which were used in full to repay debt. What matters is that the public finances start from a position of strength, with public debt low as a share of national income and low compared to other countries. People should be in no doubt that the Government will take the decisions necessary to ensure sustainability of the management of public finances in the future.
Our fiscal framework leaves room for the rules to adapt to today’s global challenges by providing support for the economy, maintaining investment now and reducing borrowing and debt later. In the short term the twin shocks have meant, among other things, lower than expected growth, higher than expected inflation, falling house and equity prices and fewer jobs and reduced earnings growth in the financial sector. It is clear that those economic disappointments will impact negatively on the public finances.
Discipline imposed on public finances through the fiscal framework has meant that net debt is now low by both international and historical standards. We are in a good position to manage this downturn.
Lord Ryder of Wensum: My Lords, does the Minister agree with his noble friend Lord Desai, who wrote in the Evening Standard in September, before the collapse of the market, that Mr Darling “inherited an empty kitty” from the Prime Minister when he took over as Chancellor? Who is right, the noble Lord or the Minister?
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Lord Davies of Oldham: My Lords, before my noble friend replies, and I am sure he will, it will have been noticed by the House that all six interjections have been made by former Members of the other place. If we want to translate the procedures of this place into exactly the same as at the other end, we can carry on as we are going. I merely draw to the attention of the House that on the Wales Bill last year, in this House the opening speech took 25 minutes while in the other place it took two hours and 10 minutes. This House is self-regulating; I hope some Members will practise some self-regulation.
Lord Strathclyde: My Lords, that is a good attempt by the noble Lord to protect the Minister, but I thought the Minister was perfectly able to defend himself. During this debate there have actually been very few interruptions, and the fact that those intervening have all been former Members of another place proves nothing. I, for one, am not.
Lord Shutt of Greetland: My Lords, I am here to respond to this debate in due course, but I have to say that I am at one with what has been said; these interruptions are not a good thing. The Members on these Benches have two and a half hours to make their contributions, and I hope that they will be listened to when their turn comes.
Lord Myners: My Lords, I am grateful to the noble Lord, Lord Shutt, for his comments. My noble friend Lord Desai is an economist of great repute, but on this occasion I believe his judgment was wrong.
We will not run risks with public finances. The Pre-Budget Report will set out how we are supporting the economy in the short term, while taking the necessary actions and decisions to ensure that public finances remain on a sustainable path in the medium term.
In conclusion, this is the first great financial crisis of the global age. Its effects are being felt throughout the world. Loans are harder to find and the cost of credit is higher, but we have taken actions to address these and other pressure points. There will be some lasting effects: rest assured, banking will be different in the future. The roles of government and regulators are being redefined, but new opportunities will emerge from this crisis, opportunities we should be confident the UK will seize and exploit with great success. I beg to move.
Moved, That this House takes note of the current economic situation.—(Lord Myners.)
3.46 pm
Baroness Noakes: My Lords, I thank the Minister for introducing this important debate, for which we have been pressing since the House came back last month. I welcome the Minister’s agreement with the noble Lord, Lord Lea, about having a public inquiry into the issues surrounding the banks. I hope that it will cover the way in which Ministers have behaved throughout. We look forward to hearing further details.
It sometimes seems as though the Government are occupying a parallel universe, in which they have exercised outstanding stewardship of our economy and have made no mistakes. They lay all the blame for
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We have lost count of the number of times that the Prime Minister, when he was Chancellor, claimed to have abolished boom and bust. He presided over an economy built on debt, both government and private. He believed in stories of economic miracles spun by Alan Greenspan, and even made him an adviser to the Government. He created an economy which is not well balanced and not well prepared for the downturn—a possibility which he denied. To quote the Institute for Fiscal Studies:
“We are entering the current recession with one of the largest structural budget deficits in the industrial world and a debt level ... which is larger than that of most industrial countries. We have done less to reduce our structural budget deficit and less to reduce our debt than most other industrial countries since Labour came to office”.
Lord Soley: My Lords, the noble Baroness’s party has indicated that it wants to take interventions, and I am grateful to her for giving way. If our debt level really is greater than that of other countries, how does the noble Baroness explain our position in the G7 as having one of the lowest?
Baroness Noakes: My Lords, we may have low debt but we do not have relatively low debt compared with other industrial countries. That is why we are less well prepared, which is what I said, compared with other countries.
Lord Eatwell: My Lords, I am afraid that the noble Baroness is misinformed. The debt to GDP ratio of the UK is the lowest in the G7 except for Canada, a raw material-producing country.
Baroness Noakes: My Lords, I quoted the Institute for Fiscal Studies, a well known institute which has excellent material. I quoted it word for word. I can only suggest that the noble Lord, Lord Eatwell, takes that up with the IFS after this debate.
The foreign exchange markets have passed their own verdict on the Government’s handling of the economy. The value of sterling has fallen nearly 25 per cent in the past year. This has outdone even the fall under Harold Wilson of 20 per cent in 1976, which forced us into the hands of the IMF. It is certainly higher than the 18 per cent fall after Black Wednesday, so I hope that the Government will now desist from making comparisons with that period in our economic history; they have now outdone that, too.
I remind the House about the economy that the Government inherited in 1997. There had been strong economic growth since 1992, unemployment was falling rapidly and RPI inflation was 2.6 per cent. What do we have now? Inflation is more than 5 per cent, growth ground to a halt in the middle of this year, and the
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The Government have boasted about creating new jobs and raising employment levels, but more than 80 per cent of the new jobs were taken by migrant workers. On a claimant-count basis, unemployment has hardly moved since 1997, economic inactivity has remained at more than 20 per cent and youth unemployment has actually risen. As this characterised Labour’s boom, we were not surprised to see in the latest statistics that the bust is feeding directly into a jump in unemployment and jobseeker’s allowance applications, coupled with a fall in employment.
The Prime Minister, when he was Chancellor, used to boast of his prudent approach to public finances. He invented two fiscal rules to shore up his image as a man to be trusted with the economy. This must count as one of the greatest con tricks in political history. The golden rule—borrowing only to invest over the whole cycle—has been so manipulated and distorted since it was invented that no serious commentator pays it any heed. The second rule—keeping public borrowing within 40 per cent of GDP—has long been something of a joke because of the dodgy accounting, such as keeping PFI debt and Network Rail off the books, and it has become risible since the Government nationalised Northern Rock. Public borrowing is in truth well over 40 per cent and rising rapidly.
Last week, the Prime Minister and the Chancellor abandoned the rules and have been spinning that they have discovered a truly wonderful Keynesian idea of combating recession by letting borrowing rise to unspecified levels, but it is unclear whether the Government are talking simply about the automatic stabilisers—the natural effect of rising benefit payments in a downturn coupled with falling tax receipts, which pushes up borrowing—or whether they are planning to go further and embark on a real spending spree in the hope that public expenditure can buy the economy out of recession. I hope that the Minister can clear that up today because the ambiguity is damaging our country’s credibility, as we have seen in the foreign exchange markets.
Let me make our position clear: we think that a spending spree would be very dangerous. Our economy is weak precisely because the Government have overspent and over-borrowed in the good times. We should certainly support small businesses and hard-pressed families, but that must not be an excuse for taking the brakes off public expenditure. We hope that the Bank of England, whose independence we strongly support, will be able to reduce interest rates and provide some much-needed relief for businesses and individuals, but it will rightly be cautious if the Government embark on an inflationary course of unrestrained spending and borrowing.
We believe that the duty of a Government is to nurture the economy in the good times, so that it is well prepared and resilient for the bad times. It is downright dangerous to pretend, as the Government
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In 1989, the Prime Minister wrote:
“Our balance of payments matters. No Chancellor who claims to have a medium-term strategy for long-term prosperity should treat a balance of payments deficit with cavalier disregard”.
The truth is that our balance of payments record during the past 10 years is one of large and increasing deficits. If that is not cavalier disregard, what is?
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