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The Government have presided over an extraordinary expansion of personal debt. Individuals followed the Government’s lead and spent on the back of debt. The Government were only too happy to have the apparent miracle of continuous growth buoyed by consumer spending. They showed a complete lack of interest in the evident housing bubble, saying complacently that debt-to-income ratios were healthy. Personal debt now totals nearly £1.5 trillion, which is roughly the same size as our GDP.

In 2004, my noble friend Lord Northesk, on the eve of personal debt breaking through the £1 trillion mark, secured a debate on debt in your Lordships’ House. The savings ratio had then fallen from around 9 per cent to around 6 per cent. The noble Lord, Lord Davies of Oldham, who I am pleased to see is in his place, in a display of complacency said:

“The fact that the people today are prepared to reduce their savings ratios is a reflection of the fact that they have faith in the Government's handling of the economy”.—[Official Report, 9/6/04; col. 339.]

Since then, the savings ratio has slumped to virtually zero and, if pension contributions are eliminated, it is now negative. Do the Government still think that this is a statement of confidence in their handling of the economy or will they admit to a tiny bit of concern? Increased saving is a rational response by individuals to tough economic times. What does the Minister think will happen to GDP growth when the savings ratio rises again?

It has been well documented that private sector pension schemes have been irreparably damaged by this Government, starting with the abolition of ACT. The TaxPayers’ Alliance has today costed this as £225 billion taken from pension scheme values. At the same time, the Government have done virtually nothing to deal with the burden on taxpayers of unfunded public sector pensions, with the cost of that overhanging the economy estimated at more than £1 trillion. No Government could be proud of such a legacy.

I am sorry that the noble Lord, Lord Myners, will not wind up the debate this evening. I had hoped that he would bring the refreshing honesty that he showed when speaking to “Sky News” on 23 October about the financial crisis. He said:

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“Nobody should say: ‘Don't blame me guv, it's not my fault!’ Everybody should say: ‘Looking back on it there are things we would not do again in future’.”

Perhaps the noble Baroness, Lady Vadera, will be able to tell the House this evening what the Government will not do again in future.

I am delighted that so many of my noble friends have chosen to speak today, and I am sure that they will add to the items on my charge sheet. The Government have not only failed to fix the roof while the sun was shining but undermined the very foundations as well.

We do not relish the prospect of a weak UK economy and so will support the Government in any reasonable policies to restore it, just as we have pledged to do in respect of the Banking Bill. However, we stand ready with a plan based on fiscal and financial responsibility to bring much needed economic change in future. We have had to pick up the pieces after Labour Governments before and, for the sake of our country, we are prepared to do it again.

3.59 pm

Lord Newby: My Lords, no doubt like many other noble Lords, I accumulated in the run-up to the Summer Recess a great pile of unread submissions, reports and analyses on the economic situation, which stood as an accusatory heap at the side of my desk. I put off reading them as long as I could, because most of them were worthy but extremely dull. Economic events, however, during September and early October rendered virtually all these tomes redundant. The economic map had irrevocably changed and I could safely ignore my pile; it belonged to history.

Economic events over the past two months have been the most dramatic and alarming of our lifetimes. The global banking system came within days, if not hours, of total collapse. Whole sectors of the economy, led by but not limited to construction, have collapsed. There is consensus that, if we are really lucky in the UK, unemployment will rise by only 1 million over the next 12 to 18 months. In these circumstances, we must ask not only why our much vaunted system of Anglo-Saxon capitalism has been found wanting but what action is now required to minimise the costs of the recession and build a more robust system for the future.

As to why all this has happened, there is, of course, no shortage of villains. Depending on where you stand, they include venal bankers, dodgy credit-rating agencies, supine regulators and hubristic Governments. Between them, they encouraged an almighty bubble of debt that would inevitably burst and which, indeed, now has burst, with devastating consequences.

How did this happen? Why did so many sophisticated economic actors so dramatically fluff their lines? As in so many cases, the newly rediscovered guru of such things, John Maynard Keynes, got it right in a phrase. He described as “animal spirits” the phenomenon in which a herd mentality develops, which assumes that current trends will continue indefinitely and which sneers at any questioning voice.

Such irrational bursts of exuberance and subsequent collapse are of course not new. Some world-weary cynics argue that this is just the way of the world, that

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booms and busts come and go and that the upward graph of human progress quickly resumes. There is obviously something in this argument, but it would surely be irresponsible to simply shrug our shoulders and treat this as a blip. Apart from anything else, the human misery that a recession, let alone a depression, brings compels us to act wherever we can.

Unlike the noble Baroness, I do not intend to dwell too long on the contribution of the Government to the current crisis, but I want to mention three points. The first point is hubris. The Prime Minister boasted of the end to boom and bust. He has also repeatedly said that we were better placed than other countries to withstand a downturn. Although he has acted decisively in recent weeks, this arrogant cast of mind has found Britain particularly ill prepared in many respects to deal with the current situation.

The Government’s second mistake was to persist with a large budget deficit during the boom, so that now the cupboard is relatively bare when government expenditure is bound to rise and tax incomes to fall even without a further fiscal boost.

The third shortcoming was dilatoriness in dealing with the unfolding crisis. The first manifestation of this was the six months that it took to deal with Northern Rock—ironically, in the light of later events—largely because the Prime Minister was afraid to be seen to be nationalising a bank. During the first half of the year, we saw a series of half-hearted, or worse, attempts to deal with the growing problems. For example, attempts to revive the construction sector have been pathetic. The Government equally did nothing to rein in the ever more irresponsible levels of lending and borrowing. For example, it is now clear that, despite knowing that the Icelandic banking system was on the verge of collapse for months before it happened, the Government said and did nothing—and this was when many local authorities thought that they were being encouraged by the Treasury to put money in Iceland.

That is, however, all in the past and our focus must now be on the future. If we are to make sound judgments in economic policy-making, we need to accept a number of fundamental realities. The first is that, on a global level, the balance of economic power has irrevocably shifted. As we see Barclays being rescued by funding from the Gulf or the Prime Minister begging the Chinese and the oil-rich Arab nations to support a new global financial bail-out fund, it is clear that something has fundamentally changed. The world’s financial institutions need to reflect this change.

As we discussed in your Lordships’ House last week, it is no longer possible to deny China, India and the other resource-rich nations a full role in the world’s financial institutions, or, for that matter, at the UN. It is not clear to me that the Prime Minister, President Sarkozy or the US fully realises that it will be impossible to get these countries to make the contribution that we are now asking of them without giving up the dominance of our power in the Bretton Woods and UN bodies that the West has enjoyed since their inceptions. However, we will have to do so.

Secondly, banking is not like any other sector of the economy. With such a small number of banks in the UK, it is abundantly clear that the Government cannot

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allow any of them to fail. This has major implications for banking regulation. It argues strongly for treating banks as utilities and regulating them in a way that makes it impossible for them to act in the reckless manner of recent years. One way of doing so would be to segregate retail banking and any day-to-day business banking from investment banking and the more esoteric financial products that have caused so much recent grief. I realise that there is nothing new in this; the Glass-Steagall Act in the US sought to do roughly the same in response to the Wall Street crash. I am not necessarily arguing for something identical to Glass-Steagall, but there is now an extremely strong prima facie case for ring-fencing those aspects of banking that constitute the utility and isolating them from more risky banking activities.

My reasons for thinking that we need a fundamental look at banking regulation are reinforced by the response of the upper echelons of the banking sector to recent events. I have no doubt that the vast majority of those involved in providing banking services are perfectly honourable and responsible citizens doing a good job. However, this attitude does not extend to the highest echelons of the profession. The top bankers still seem to think that they can carry on as they were, despite the fact that without the government action—let us remind ourselves that it amounts to support of various kinds totalling half a trillion pounds—they would in many cases be bust.

The attitudes of the banks to the statement of the Government a couple of weeks ago that those getting a capital injection would not pay bonuses and would continue lending to small business at previous rates seem to be verging on contempt. Bonuses are still being paid and small businesses are still going to the wall because the banks are withdrawing support. At the same time, Barclays is prepared to pay almost anything to avoid having any controls on the way in which top management behaves. Northern Rock, wholly nationalised, is the most aggressive of all banks in repossessing homes from people whom only months ago it encouraged to take out 125 per cent mortgages. I ask the Minister why, when the Prime Minister said that he expected banks to pass on the recent half per cent interest rate cut, Northern Rock failed to do so.

The Government are now negotiating a revised banking code. Can the Government give us any assurance that it will go beyond platitudes and include firm, specific provisions? How do the Government plan to police such a voluntary agreement, given the previous track history of the banking sector?

One consequence of the banking crisis is that there will be fewer independent high street banks and competition will be reduced. We need to look, in the light of this, at how we can help to diversify the sector, particularly for people at low income levels who will always be relatively unattractive customers for the big banks. We need an urgent look at how we can strengthen the credit union movement and the possibility of developing a new tier of community banks.

It is clear that the banking crisis is but the precursor to a crisis in the real economy, which is now starting to unfold. The collapse of the housing market and the

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construction sector is becoming more widespread as the contagion spreads to other sectors, such as retail and vehicle manufacturing.

What measures are now needed to mitigate these effects? The first must be a rapid reduction in interest rates. There seems every prospect that the MPC will indeed reduce rates again this week but, with rapidly falling inflation and rapidly rising unemployment, there seems little reason why it cannot do so dramatically, arguably even within the remit of the existing legal framework. There is a strong argument at this point for a change, if it is necessary, in the terms of reference of the MPC under the Bank of England Act. I shall be interested to hear the Minister’s response to the proposal of the noble Lord, Lord Saatchi, in that regard.

Secondly, we need to cut taxes for those on low and middle incomes. We can do this without increasing government borrowing by ending upper rate relief on pensions, clamping down on avoidance, harmonising income and capital gains tax rates, increasing green taxation and trimming overall government spending. These measures would help those who are struggling the most to pay for essentials and to keep spending money in the high street.

We must ensure that mortgage repossessions are a last resort. The Government have made some positive steps on this front, but we do not think that they have done enough. For a start, they could stop Northern Rock behaving in such a belligerent manner. There are already nearly 2 million families on housing waiting lists. We can help them by allowing councils and housing associations to buy unsold properties and land from construction companies. That would replenish the social housing stock, stimulate the housebuilding industry and provide homes for people who desperately need them.

On the Government’s general fiscal stance, they may be able to bring forward somewhat some building projects in the public sector. If possible, they should do so. However, turning the tap on quickly is in reality impossible and should not be attempted unless the quality is maintained and cost levels kept in check.

One of the constraints on the Government’s bringing forward capital projects is a shortage in some sectors of adequate engineers and other skilled staff. More generally, it is clear that, if we are to compete more successfully in the new economic circumstances, we need many more skilled maths, science and engineering graduates. If necessary, financial incentives should be given to those wishing to study these subjects.

Of course, one area of economic activity offers the prospect of many new jobs and investment—namely, reducing our carbon emissions by the 80 per cent to which the Government are now committed. This should start with an expanded programme of home insulation, with a view to bringing all homes up to high standards within the next decade. This can be funded through arrangements with the energy companies, which received a £9 billion windfall from the European Emissions Trading Scheme and could employ many of the property surveyors and construction workers currently on the labour market. There is also a great opportunity for

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employment in the construction of wind turbines. That offers particularly valuable prospects for dock communities such as Hull and Newcastle.

Finally, we need a fundamental reappraisal of how we ensure the future prosperity of our economy. I am not at all gloomy about our potential as a country to thrive in a global marketplace. We have many strengths derived from a combination of reputation, creativity, innovation and the English language, and I am sure that the City will play a big part in this future success. However, we need a more balanced approach, in which we are no longer in thrall to the world of finance but give equal priority to those other services and high-tech manufacturing sectors in which Britain has been, and can remain, a successful global player.

4.13 pm

Lord Bilimoria: My Lords, last week during a debate I tabled on reforming global financial institutions, it was made clear that the situation is so critical, and the threat to our economy so severe, that we have no time to go on apportioning blame. I believe that all our focus and all our energy must be piled into finding the solutions that will free us from the grip of this financial crisis.

I want to start with the fundamentals and examine the Government’s attitude towards business. We welcomed the noble Lord, Lord Mandelson, to this Chamber three weeks ago. However, his appointment made him the fifth Secretary of State for business in five years. If I had changed the chief executive of my company five times in the past five years, my company would have gone bust a long time ago. Perceptions can be deceiving, but the Secretary of State’s office at the Department for Business, Enterprise and Regulatory Reform has been fitted with a revolving door and we are justified in questioning the Government’s commitment towards business.

As chair of the UK India Business Council, I often attend meetings between our Secretary of State for business and his Indian counterpart, for whom I have the greatest sympathy. Having served his Government in the same post for four years, every year the Indian Minister for Commerce and Industry is having to read the biographies of the latest UK incumbent.

This is not just about the Secretary of State for business, it is also his Ministers. After the resignation of my noble friend Lord Jones of Birmingham as Minister for trade, his replacement now holds responsibilities at the Department for Business, Enterprise and Regulatory Reform and the Department for International Development. My noble friend Lord Jones of Birmingham spent his time focused entirely on banging the drum for British business around the world, as he always said, so is this really the time to dilute our efforts in promoting trade and investment?

I will turn my attention to SMEs and entrepreneurship, which have been overshadowed by the banks in this financial crisis but which are equally threatened by it, if not more. The Chancellor, Alistair Darling, announced last week that £4 billion would be available for small and medium-sized enterprises to support businesses through the downturn; and the Minister reaffirmed that today. My understanding is that this funding will

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come from the European Investment Bank via British high street banks and will amount to £1 billion of loans each year for the next four years. According to the British Bankers’ Association, net lending to SMEs totalled £5.7 billion in the first six months of this year alone. We have of late become accustomed to a new financial vocabulary, where figures reaching into the many billions no longer generate the awe that they once did. But let us be in no doubt that £4 billion over four years is nowhere near enough, considering the current situation.

I call on the Government to vastly increase the Small Firms Loan Guarantee scheme, which my business benefited from in its fledgling years. I have used before in this House the example of the United States. Last year, its Small Business Administration backed more than $12.3 billion-worth of loans to small businesses. In the same period, our Government’s Small Firms Loan Guarantee scheme made available £360 million. That is £360 million versus $12.3 billion.

The Government could also learn from a tiny country such as Israel. Its Yozma initiative was a government-backed venture capital scheme that has been a catalyst for thousands of successful high-tech and knowledge-based companies with government-backed venture capital investment. The companies have been crucial in giving Israel a cutting-edge advantage globally, in spite of all the problems that exist in that region. As a result, Israel has been attracting huge amounts of foreign direct investment. Now is the time for the Government here in Britain to create a multibillion-pound government-backed, venture capital fund, so that we, like Israel, can punch above our weight as a country.

There has been much talk of, and we have already heard in this debate, about trickle-down economics, with a Keynesian-inspired increase in public spending, being mooted at the highest levels of government as a solution to this crisis. Increases in public spending will, I fear, hardly help small businesses. All too often, much of it does not filter through and what does often takes too long and is too late. It would be far more effective for the Government to support SMEs directly. Entrepreneurs and SMEs are not asking for a hand-out, but a help-up, be it through loans or investing in training.

It costs approximately £10,000 to attend the business growth and development programme at Cranfield University which, I know from first-hand experience, transformed my business and helped to secure its growth path. How many companies get a chance to attend that programme? Some 150 a year. If the Government were to support SMEs through courses such as the BGP at Cranfield, the effect would be enormous, and the biggest beneficiary would be the Treasury.

Now is also an opportune moment for the Government to reverse those measures which over the past 18 months have served to diminish their once excellent relationship with business. I am talking about the non-dom levy; the removal of taper relief on capital gains tax; the increase of corporation tax on small businesses and the taxation of foreign companies’ earnings. Thanks

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to those measures, the Government entered the financial crisis having already alienated the business community. Now is the Government’s chance to make amends.

Now is also the time for the Monetary Policy Committee of the Bank of England to cut interest rates. The US rates, as we all know, are down to 1 per cent, but here we are at 4.5 per cent. We are out of the euro; let us make the most of it and urgently cut our interest rates. Groucho Marx once said:

“Politics is the art of looking for trouble, finding it, misdiagnosing it and then misapplying the wrong remedies”.

Sticking to a rigid target for inflation at a time of crisis like this is an example of that saying being brought to bear.

Parliament has been sitting for a month since the Summer Recess; yet today is the first opportunity for this House to debate the financial crisis at any length. Where are the Government’s priorities? This does not look right to me, this does not feel right and this is not right. For all their good intentions, this Government have yet to grasp how much this financial crisis will hit British business, SMEs in particular and the 13 million people whom they employ—and their families.

Through building business from scratch, I have discovered that one of the keys to that has been continually to turn threats, frustrations and obstacles into opportunities. I call on the Government to seize the opportunity offered by these unprecedented times for the Government to be bold. They have shown boldness in leading the world in the financial bail-out of British banks. Today, I ask the Government to apply the same boldness and resolve to securing our British business, especially our SMEs which are the heartbeat of our country and the engine of our economy.

4.21 pm

Lord Lawson of Blaby: My Lords, at the heart of this debate lie two questions: how did we get into this mess and, now that we are in it, what should we do about it? I will deal briefly with both.

Part of the answer to the first question is the inescapable working of the economic cycle, which, as Keynes pointed out in the 1930s, is in large measure a creature of the credit cycle. What has greatly magnified the credit cycle since his day is the massive growth of consumer credit of all kinds. The present Prime Minister’s constant boast—even as late as his Budget Statement last year, when the extent of the housing bubble should have been evident even to him—that he had abolished the cycle and put a permanent end to boom and bust, showed not merely astonishing economic ignorance, but it made things worse; for, to the extent that people believed him, and I suspect that many did, it reinforced the unwarranted over-optimism of borrowers and lenders alike. It was an invitation to be imprudent.

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