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Our public finances are now even worse with the cost of the Bradford & Bingley recapitalisation and commercial loan guarantees. Net debt is heading for 50 per cent of national income, excluding off-balance sheet items. To complicate matters, I read that the Government are putting their faith in Lord Keynes. I do not want to digress down this alley, but I cannot help remark that, although an admirer of Keynes, I fear that some Ministers proclaiming his name have never read or even understood his works. His propositions are often taken out of context, as was the case in Japan in the 1990s when recovery was bungled by overborrowing. Sometimes Keynes’s fiercest disciples are not true Keynesians, as the great man recognised towards the end of his life.
The real scale of our debt could be two, even three times greater after accounting for PFIs and public sector pensions, to which many of my noble friends have referred. Public sector pensions are the costliest dimension of our hidden millstones.
The independent Pensions Policy Institute published a report last month. It stated:
“It is often assumed that better pensions in the public sector make up for lower pay. Although a job-for-job type comparison of pay is difficult to make between the private and public sectors”,
the evidence suggests that pay in the public sector is not lower than pay in the private sector across the board. In other words, the rule of thumb that decent pensions compensate for lower public sector pay no longer holds true. In addition, public sector staff tend to work shorter hours with stronger job security, take longer holidays and more sick leave.
Gold-plated pensions are becoming indefensible, the more so now that Mr Brown has increased the size of the public sector by nearly 1 million employees. Whereas the latest unemployment figures showed an extra 300,000 private sector workers are jobless, they revealed an increase of 4,000 employed in the public sector.
Expressed in stark terms, it is held that UK private sector workers are paying more in taxes to fund the pensions of the 20 per cent of the labour force in the public sector than they save for their own retirement. Payments into personal and company pensions totalled £15.6 billion in 2005, while in the same year £18 billion was used to pay the pensions of public sector workers—and that was a good year.
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Of course, the inequities have multiplied since the collapse in the markets, leading to hundreds of billions of pounds being wiped off the value of private sector pensions. The Government’s response over 10 years has been scant: savings from reforms amount to no more than £13 billion over 50 years. Further reforms were of course vetoed by the public sector unions, Labour’s paymasters.
Treasury officials should start preparing a White Paper on public expenditure for 18 months’ time, setting out three objectives; first, the reduction of money supply by controlling government borrowing; secondly, the restoration of incentives by holding down and, only if possible, lowering taxes; and thirdly, a plan for spending, including public sector pensions, that could be compatible with the objectives of borrowing and taxation, with a realistic assessment of the prospects for economic growth. These were the aims of the 1979 White Paper. They worked then, and they must work again.
8.01 pm
Lord Taylor of Warwick: My Lords, someone once said, “Greed is good”. That was the dreadfully misguided mantra of Gordon Gekko. He was the mercenary financial trader, a character played by Michael Douglas in the Oscar-winning Hollywood film “Wall Street” in 1988. The film ended with Gekko in ruins when his greed backfired, but Oliver Stone, the film's director, was dismayed to see that Gekko became a hero to many wannabe financiers, rather than a warning. Considering the credit and casino-type banking culture which then dominated the next 20 years, the moral of the film was ignored.
Our whole finance and economic system is based on confidence, which is sometimes not objective or rational. There was a time when the City and Wall Street were seen as the masters of the universe. No longer. The scale of the financial and economic downturn has surprised many. Loss of confidence has fathered the fear factor. Economic forecasters now seem less like Mystic Meg and more like “Mystic Mug”. Even in this noble and learned House, no one can confidently predict whether the Dow or FTSE will rise or fall tomorrow.
I agree with the charge sheet highlighted by my noble friend Lady Noakes at the beginning of this debate. No one doubts that there is a global recession, but the Government did not save for a rainy day. That is a fact, and it is not only raining now—it is pouring. However, we are where we are. The Government had a dilemma when the failing banks approached them: to buy out, bail out or burn out. We have a rather uncomfortable “Strictly Come Dancing” situation, where the so-called professional bankers are now expected to waltz in tune with the amateur, ordinary taxpayers who have bailed them out. The problem is that we do not know whether the Government's plan will work.
The banks do not need more regulation—they need effective regulation. In this, I agree with the noble Lord, Lord Powell of Bayswater, and my noble friend Lord Forsyth. We know that the market should not be allowed to operate in a moral vacuum, or we will continue to have executives being rewarded for failure.
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However, the Government have an ongoing problem. In a national and global recession, they still need to provide the right economic conditions to create jobs and supply public services. The answer, in my view, is not the Government’s solution, simply to borrow and spend more. This is the time to harness the innovation and expertise of the private and voluntary providers. I am pleased to hear that this is something that a Conservative Government intend to do.
By that I mean social enterprise, which has been described as the Cinderella sector of the British economy. It needs a higher profile, when you consider that it comprises at least 55,000 enterprises, with an annual turnover of more than £27 billion. A social enterprise is a business with the primary objective of ploughing profits back into the company or the community. Yes, it wants to make a profit, but not profit alone. It is not driven simply by the desires of the shareholders and owners. This economic model enables Governments to tackle difficult social problems without an increasing drain on the public purse and the taxpayer.
Despite its growing importance, social enterprise is still under-researched compared to more traditional firms. A good example is the Co-op bank. I have no financial or other link with the Co-op, but it has over 6.5 million customers, and is the largest consumer co-operative in the United Kingdom. It is interesting that the Co-op bank, along with the other members of the UK’s ethical banking sector, is not only surviving the meltdown but experiencing new levels of consumer confidence and investment. Started in 1872, the Co-op bank puts its success down to the fact that it is a prudent lender, and transparent, with a code of ethics.
Profits at the Bristol-based Triodos Bank are up 50 per cent. My point is that many banks in the mainstream sector are suffering and asking for help while banks in the ethical sector, doing it the right way, are actually thriving. Maybe there is a lesson to be learnt there. Outside the banking sector, the Nuffield Hospitals are another example of a social enterprise that is actually working. Social enterprise is based on the recognition that innovative solutions to the world's economic and financial problems are unlikely to come from markets left to their own devices.
In the present economic climate, some companies may be tempted to cut back on training and education. That would be a false saving, a disaster. The Government must continue to encourage business to develop the skills of its workforce. In this I agree with the excellent points of the noble Lord, Lord Bilimoria, echoed by the noble Lord, Lord Haskel. This country needs small business. It needs business to create wealth; no Government can do so. To overtax and overregulate small business is a step backwards. The noble Lord, Lord Bilimoria, made some excellent points on behalf of that sector, which we must take into account.
The noble Lord, Lord Powell, also stressed the vital importance of trade. I was recently in Geneva at the parliamentary conference of the World Trade
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In conclusion, you do not have to be a prophet to make a profit. However, this recession is a time for fresh, creative thinking out of the box. We cannot have a financial system which allows a hedge fund boss to pay less income tax than his office cleaner. It is time for fresh thinking. Seek, and ye shall fund.
8.09 pm
Lord Sheldon: My Lords, in examining the economic situation, the share price volatility has been commented upon as being staggering. We have seen prices substantially increasing one day and then falling sharply the next. These daily changes have continued in a way that we have never seen. As well as those fluctuations, oil prices rose to nearly $150, and then fell to $60. We are seeing a world financial decline that is partly a consequence of this very long-term expansion of the economy which prompted the enormous increase in house prices. They rose spectacularly and played a part in the first global crisis that we have seen.
The planet is integrating economically in a number of ways, in particular through the production of goods for export and the limitation of imports. These factors and the demand for oil all affect a large proportion of the world’s economy. In regard to the price of oil, Gordon Brown told business leaders in Edinburgh last week that it was a tragedy that the world is a prey to one volatile commodity that can disrupt businesses and people’s lives through a trebling of prices over a very short time. What is needed is a more stable energy price, not a volatile one. Petrol prices should be coming down much more than they are at present. In connection with the up and down oil price, the Prime Minister’s four-day visit to Gulf states is a measure of its importance. The Prime Minister, referring to the oil producers, said that their interest is in a stable energy price, not in the massive volatility we have seen where oil prices have shot up and then come down again. What is required is for the economies in different countries to move closer together. China and the oil states are more and more dependent on the world economy, as are, indeed, all the major countries. There is to be a most important international meeting on 15 November, when this new world economic change will be debated. Some co-ordination is to be hoped for. It will be difficult, but if it succeeds there will be a most valuable consequence. So far the oil situation has indeed led to global financial turmoil. Interest rates are still high. They are reducing, but not by as much or as soon as is needed.
My noble friend Lord Barnett pointed out that the increased borrowing must lead to quick spending, but it is uncertain whether we are going to get that speedy spending. The Government’s spending normally takes a long time to come into effect. If it takes that long, we shall not see the sort of consequences that have been envisaged. What we are seeing, of course, is that
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A major change is that government borrowing is inevitable. The Conservative shadow Chancellor, George Osborne, has said that a spending splurge is a mistake. He has said that we cannot spend our way out of a recession. Borrowing to stave off recession leads to economic ruin. In commenting on this, the Liberal Democrat MP Vince Cable rightly said that Osborne had shown poor judgment, which is a view that I also hold.
In a most important statement, the Prime Minister has said that oil-rich Gulf states must play their part in stabilising world oil prices. The fact is that if oil prices rise and fall at the rate and frequency with which they have been changing over the past year, the use of oil will not be anywhere near as steady as the producers must wish. The oil producers are not likely to advance their position by limiting themselves to general agreements on each country’s output of oil. There is a need for producers to have a closer dialogue with national consumers. There is a real need for a wider international understanding of the world’s requirements and the producers’ output.
The major problem we have now is the financial squeeze. Turnover is down. Companies are not so profitable. Bankers are uncertain of their clients. They are not lending as the economy requires. We have to press for the price of oil to continue to decline and for interest rates to be substantially lower. These are not necessarily the solutions to our problems but they are an essential part of the tasks confronting us.
8.14 pm
Lord Bates: My Lords, it has been a privilege to listen to this debate for the past five hours, which has increased my understanding. I am sure that the wisdom uttered here will benefit the Government’s deliberations, which prompts the question about why this debate was not held earlier, and certainly the question about why it has not been held in another place.
I hope that I can be helpful to the Government in thinking through this and adding to the context of the debate. I think that the best way I can do that is to take this from the macro and global level to the regional level. I am from the north-east of England; I am for the north-east of England. My passion is education and enterprise. I am proud to declare an interest as someone who is involved in three small to medium-sized enterprises in the north-east. If the House will bear with me, I wish to spend a few minutes talking about the experiences of business in that region. The survey of business confidence and business insolvencies, which came out this morning, indicated that, sadly, so far this year, 365 businesses in the north-east have gone out of business. That is a 43 per cent increase over the same period last year. Earlier, it was speculated that the effect of this recession has been felt most in London. However, the rate of business failure in the north-east is twice the national average. That is being matched by rises in unemployment. Last month the
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The failure of businesses is not only a personal tragedy for those involved in them—I know some of those people, who are outstanding business people and I shall come on to some of the reasons why their businesses have failed—but constitutes a reduction in the number of businesses in the north-east that the region can ill afford. We have by a long chalk the lowest stock of VAT-registered businesses in the United Kingdom. Scotland is second. The north-east is a long way behind. Our economy is too heavily dependent on the public sector, which accounts for some 68 per cent of our regional GDP; only 32 per cent is in the private sector. We know about differential rates of growth between the public and private sectors. Therefore, one can see a gap emerging in terms of wealth, prospects and social mobility between the north and the south. That is to be deeply regretted, and it is something that I am concerned about.
I will move on to sharing a few ideas about how one might begin to tackle this problem. I appreciate that it is a confidence problem. We have talked about the failures of the banks, and I accept that, and we have talked about the failures of the Government, and I am sure that there are lessons to be learnt there, but one must also remember that the good old British consumers have been another party to the problem. They have availed themselves of the credit that has been available at incredible rates. Although one can understand that it was difficult for them to resist blank cheques appearing through the post asking them to fill in the amount, send it back and receive the income, the reality is that we have all been caught up in the irrational exuberance of the consumer economy. In that, the House will reflect well on the remarks made by the right reverend Prelate the Bishop of Chelmsford, and perhaps we will learn lessons from them.
I shall give a few examples. One NorthEast is the regional development agency, and it is always open to criticism, but it does a pretty good job in many areas. On learning of the scale of the financial crisis, it announced that it would make £10 million available to help small businesses in the north-east, which is totally laudable. To do that, it is going to set up a new fund, which will take six to nine months to distribute the money. One of the things that we talk about in this House is energy efficiency, and that idea should be adopted by Governments as well. For example, there are 30 agencies in the private and public sectors which could easily distribute that fund and get it quickly into the hands of the small businesses that desperately need it because of the drying up of credit lines with the banks. Why do we have to invent something new? That is taking our eye off the ball. We should use what is there to its best effect, and the plea is to distribute the money as quickly as possible.
I hear some criticism of my right honourable friend the shadow Chancellor, but he has made some very interesting suggestions that are practical solutions. I offer two of them in addition to those that were eloquently put forward by my noble friend Lady Noakes
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My next point relates to Northern Rock, which was, and still is, one of the bastions of the economy of the north-east. It employs 4,000 people, although sadly 1,300 have lost their jobs. We have a responsibility to examine Northern Rock. Its practices in terms of repossession have been overly harsh. The repossession rate is three times the national average. It is not a criticism to say that because the Government now have a stake in Northern Rock they ought to be telling it how to run a bank. I would be saying that whether Northern Rock was in the private or public sector. That multiple is too high, and it bears too much inconsideration for the difficulties that many people are in because of the rise in unemployment and the fall in base rates.
My time is up, but I have a final point. Crises such as this one, in the classic sense, provide opportunities to do something for the long term. There are two things that I encourage the Minister to think about doing in the north-east that would make a great difference for the long term. First, the Minister should consider locating one of the Government’s enterprise academies in the north-east of England. We need to embrace entrepreneurship and enterprise combined with education in the north-east. Leaving a legacy up there that comes out of the crisis would be very good.
Secondly, there should be infrastructure investments. The dualling of the A1 north of Newcastle to Berwick and the upgrading of the western bypass would amount to just £650 million. You could have all that done, and when you are throwing around £500 billion, that seems like small change. If the Government could slip that in along with the other invoices, I am sure that the north-east would be very grateful.
8.24 pm
Lord Sheikh: My Lords, I accept that the present economic situation has been affected by global economic factors, but it must be stressed that it has been greatly aggravated by the Labour Government’s complacency in constructing an economic boom on a mountain of debts. The Labour Government abandoned the principle of prudence and they have failed to follow a monetary policy to deal with demands. I declare that I am chairman of an insurance brokering and financial services organisation and have always believed in building sound reserves and controlling the company’s expenses.
The Government’s borrowing probably now exceeds £60 billion and it may reach £110 billion by 2011. In addition, it must be pointed out that the economic crisis will result in a reduction in tax revenues and there will be a need to spend more on benefits. The country has borrowed heavily and the population has
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I remind your Lordships’ House that, in 1997, Mr Gordon Brown stated that,
What is the Prime Minister doing now? He is reneging on that statement. Higher borrowing will result in higher taxes and we need, therefore, to follow a monetary policy and keep control of public finance and borrowings. The Government’s approach to fiscal management has not earned them much credit. Their failure to control public and private spending over the past decade has created a debt level that is irresponsible and unsustainable. The value of the pound has plummeted, and we are entering a boom-and-bust scenario. The Government failed to make hay when the sun was shining.
In my business, I have dealt with mortgages and have practical knowledge of the subject. One reason for the problems was because building societies converted into banks, threw away the principles of mutuality and ignored the practice of prudence. I lay the blame at the financial institutions which have been irresponsible in their lending practices. The FSA and the Bank of England should have exercised better control and supervision of these institutions. The supervisory regime needs to be strengthened and be much more thorough.
Small businesses account for 99 per cent of the firms in our economy, and contribute 59.2 per cent of private sector employment and 51.5 per cent of private sector turnover. I am a great supporter of small businesses and, therefore, welcome the proposal that an incoming Conservative Government would cut the rate of tax for small businesses and, furthermore, set up a procurement budget for small businesses. Our approach does not stop there, as my party has announced deferment of VAT bills for small and medium-size enterprises, initially for six months, and the cutting of national insurance contributions for smaller businesses. My party proposes to apply a freeze on council taxes. It is also important that we revitalise the regions, and building high-speed rail links between various parts of the country will help us to achieve this.
I am a great believer in following a monetary policy with fiscal responsibility, and it is important that we consider putting that into practice to enable us adequately to deal with the financial crisis. We need also to consider the relative weakness of our economy and how best we can prepare to ensure that we are better able to minimise the pain caused by future downturns. It must be appreciated that we do not fully possess the necessary skills. It is important that we build those skills by better education and suitable training, and back these with resources and investment.
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