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For too long, our wealth has depended upon property and financial services. We need to develop a range of measures to create a more balanced and resilient economy. It is fundamental that we increase our economic base and expand more science and high-tech services. We have an opportunity to become world leaders in the
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The strength of the financial services sector as a key player in the United Kingdom economy has been a good thing. My own business is financial services, but we need to ask ourselves whether we could have done more to ensure that the manufacturing sectors could have been more competitive; but let us look to the future and establish and build on what has been lacking in the past.
Finally, we have to confront the need to change our broken economy, but the present Government have shown that they lack the credentials to make the necessary changes. I say that with a deep sense of regret. We need to make changes swiftly but, given that the Prime Minister and the Chancellor of the Exchequer are caught in a collective denial, it is unlikely that they will be able to identify what needs to be done, let alone make the judgments necessary to repair the damage.
8.30 pm
Baroness Valentine: My Lords, this is a timely debate and I am grateful to the noble Lord, Lord Myners, for its scheduling.
Rather than repeat the many wise points made earlier, I base my remarks on my experience of London business over recent months as chief executive of London First. Indeed, the Minister, in one of his first official engagements, shared a breakfast with London First business leaders, where he displayed his strong grasp of the then acute challenges facing the financial services sector and the Government’s strategy in addressing them.
Fundamentally, we must prepare and strengthen ourselves for the upturn, while seeking to reduce both the impact and duration of the dip. First, we need to step up investment in infrastructure. We could learn not just from Keynes and from Louis XIV’s Colbert but from Maharaja Umaid Singh, who, in the face of famine and drought overwhelming the Marwari people, commissioned in 1928 a great palace—the Umaid Bhawan Palace. It employed many hundreds of Marwaris for some 15 years, transforming the short and long-term fortunes of Jodhpur, its capital. Closer to home, I trust that our downturn will not bring famine, nor last 15 years.
We have existing commitments to economic infrastructure, such as Crossrail and Thames Tideway, but London also has both unfunded transport projects and those which could be accelerated—for example, the modernisation of the Tube and phase 2 of the East London line. Work can start now if the funding is provided, providing activity and jobs now while building our capacity for future growth. They are London’s equivalent of the Maharaja’s palace.
We should also invest in social infrastructure, increasing the new Homes and Communities Agency’s budget so that it can be an active investor in housing development
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We also need to invest to support London’s future growth. Of course we must deliver the Olympic Games cost-effectively, but we must not mix up investing in the long-overdue regeneration of the East End with this cost. The Olympics provide a once in a lifetime catalyst: we must invest the public money necessary to provide the foundation for the private investment which will turn the East End into a powerful part of London’s future. For example, why are we scaling back the Olympic village on the one hand while stressing the need for thousands of houses in the same area?
It is a myth to think that low borrowing makes you a saint and higher borrowing a sinner. What matters is where the money goes, and London, the engine room of our economy, will deliver a decent return on investment for our hard-pressed Treasury.
My second area for action is to look afresh at regulation. There are areas—most obviously, financial services—where action is needed. Boardrooms and regulators need to understand fully the risk profile of the products and services which they trade and oversee. We need proper risk management without undermining competitiveness. That is not necessarily heavy touch or light touch; it should be right-touch regulation.
So we need no knee-jerk response; instead, we need thought-through global co-ordination, and no one should pretend that that is easy. The British Government’s recent impressive international leadership must continue—to avoid regulatory arbitrage and ensure that international regulators, whether in Brussels or Basel, do not take short-term, short-sighted actions. For instance, in the longer term, it makes no sense for the failure of a bank such as Lehman’s to be treated so differently by authorities in the US and the UK that the market may be skewed to the disadvantage of its creditors, customers, workforce or competitors.
Equally, we must guard against overzealous UK regulation, which will simply drive business offshore. The competitiveness reviews of financial services commissioned by the Chancellor and London’s mayor before the recent crisis should provide real-time input to policy-making.
We also need to look more widely at the impact of regulation; now is not the time to load extra burdens on business. The Planning Bill before this House places a new infrastructure levy on developers. We need to ensure that it is a practicable measure which will support, rather than deter, investment. Similarly, the Government should not be starting to levy full business rates on empty properties, hitting businesses when they are down.
Finally, in these difficult times, I reiterate that the UK’s capital remains open for business. We need investment, we need to improve Londoners' employability, and we have to avoid more own goals on tax and regulation. But London remains, according to most studies, the best place in the world to do business. Our competitive advantage extends beyond the City, from world-class research and development, to visitor attractions and creative industries; from, as it were, the
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8.35 pm
Viscount Eccles: My Lords, I will concentrate on the short term. I suggest that the answer to the question, “How did we get into this crisis?”, is only interesting as a guide to how and when we get out of it. Essentially, the crisis is Anglo-Saxon. It started in New York and London. Before we go any further, we should agree, I hope, that the Anglo-Saxon system has made a great contribution, since the mid-19th century, to the development of the world. Indeed, there has been no other system which has made anything like the same contribution. It has found its way through many excesses and it will find its way through this excess. Excess comes when testing the boundaries of innovation in the style of Ross and Brand.
It is far too soon to condemn the Anglo-Saxon system. Indeed the United States of America may find its way forward quite quickly. It has a large and flexible economy and has shown that it can recover rapidly in past times of trouble. The United Kingdom is not likely to be able to recover so quickly, but why? First, it is a matter of public confidence. The point has been made many times in this debate that the public need to be confident; if they are not confident they will not spend, but save. At the moment, the public are bemused, almost shocked, because they did not expect to be here and nor do they think that anyone else expected to be here. From 1997 the economy had only one way to go: better and better. That was good news and people like good news in the same way as they do not like bad news. House prices had only one way to go. What was wrong with a 125 per cent mortgage? Why not take the waiting out of wanting? Renegotiate the mortgage, switch credit-card providers, hence the high levels of household debt. It was a disastrous example of mistaken political leadership, arousing expectations that never would be fulfilled. It is no wonder that the public now have no confidence in what they are told.
Secondly, expenditure has consistently been called investment. This afternoon the Minister used the description “investment” at some point, but it is more prudent—a fashionable word at one time—to call it and treat it as current expenditure. True investment requires a financial return which is not available from NHS hospitals, nor from state schools. But worse, many of those projects—£60 billion of them—have been financed off balance sheet via PFIs, requiring taxpayers of the future to find some three times as much. What is the Government’s calculation of the liability to be met year by year by the taxpayer over the next 30 years? There is no other way of repaying a hospital PFI project—UCLH cost £404 million—but by taxes. Hospitals in the NHS do not have a cash flow that provides them with an operating profit. Contrast that with the banks, which are now being told, probably quite rightly, that they should be transparent and should not finance things off their balance sheets without telling us the exact cost.
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It is no wonder that public confidence is so low, yet it is a vital ingredient of recovery. It is time we tell things as they are and stop underrating the common sense of the people. The sum total of the position—public debt past, present, future; household debt; falling house prices; and fast falling activity in the economy—means that the United Kingdom is in the worst position in the G7, and disagreeing with that proposition is to be in denial. Where is our Keynesian room to manoeuvre? Are we not caught between introducing levels of spend and debt that will cause further falls in the pound or a long wait as our position unwinds? It is a pretence to say that we lead. Ideas we may have; room to manoeuvre is denied to us. As has been said several times in this debate, lowering interest rates is not a remedy that will act quickly. Are we left with only one way out—inflation? We were completely unprepared for this crisis. We cannot lead; we will have to follow, which will become clearer and clearer to the public, who have been misled for long enough.
8.42 pm
Lord James of Blackheath: My Lords, I came to this debate with a pick-and-mix text on the grounds that the debate would last a long time, there would be many theories and a great many points would be made. I find to my surprise that two of my points are left untouched. I am rather pleased about that. I was nervous that my noble friend Lord Higgins was about to demolish one of them earlier, but he nicely opened the lid on it for me when he talked about my main concern, which is the level of debt. In recent weeks, he has twice asked a question, which was not answered on either occasion, although we now understand the answer. The question was: how will the Government finance the money that they have put in to rescue the banks? The answer that we seemed to be hearing was that they would do it as they had previously done it, by borrowing the money back from the banks. That is rather self-defeating, as it would take the money that was going into the rescue back out of circulation.
We now know, because we have seen the first of the successful auctions of the bonds, that the Prime Minister is sponsoring a major series of bond placements around the world, which will have to be repaid. I am not a bond expert but, when I tried to read the small print on them, I was surprised to find that they seem to be of relatively short maturity.
My noble friend Lord Higgins said that there are only two ways out of the debt problem, but he is wrong. There are three, none of which is good. The first is taxation going up, which would just about finish us all off completely. The second is that we take cost out of our expenditure. The third, which he did not mention, is that we do what everybody does with a maxed-out credit card, which is to get another credit card to provide the money to pay off the first one. It looks as though we are likely to have to do that in the last year of the next Government, which is when, I think, the maturity date falls. I am sure that it is a coincidence that it will be the last year of the next Government, but we shall have to wait and see who is going to have to deal with it.
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However, we cannot wait until then for a solution; we need a solution now. I suggest that solutions could be harnessed now that would not be destructive of anything further in the economy and that the Government should now implement them. They should take a leaf out of Sir Robert Walpole’s remedy at the time of the South Sea Bubble, when he possibly had even worse problems than we have now. He created a dedicated set of assets in a sinking fund that he could realise under his own control over a period and all those funds would go directly to redemption of those debts.
The first place that we could look for that would be the Government’s analysis of cost reduction from the Gershon report. According to the National Audit Office, the Government have implemented only half of that; the other half is available to do. That does not take out any services for the public benefit. Secondly, they could dust down the James report and take, say, half the value that we assigned at the time. That would not take out one hospital bed; it would not take out a single soldier; it would not take out one policeman or one schoolroom. If you put the two together—the rest of Gershon plus half of the James report—you would have enough to pay back the entire value of the bond already raised by the Government. If you do that for five years, you have effectively wiped out the entire debt to fund the whole of this exercise.
The second thing that should go into the Walpole-style sinking fund is the recognition by the Government that the shareholdings that they have taken in the banks that they have rescued should be regarded as cashable cheques in future. The Government need the banks to recover financially and for their share prices to rise; at that time, the Government need to sell their shares. The best people to buy them will be the banks themselves and their existing shareholders, who were not able to do that this time round. Get the money back from the banks by selling the shares back to them within the five-year period, when the recovery comes. You should be able to do that without fiscal calamity or reduction in public services.
I had an extraordinary meeting this morning with a personal finance adviser for one of the big clearers—not because I have any finance to invest, I hasten to add. He has been put in charge of his bank’s portfolio of very rich clients, who have so much money to invest at the moment that they do not know what to do with it. I suggest that there may be some benefit in thinking on the lines of a war bond, whereby you might be able to harness the resources available on an attractive coupon that would recycle money back into the British economy from British resources. You should look to this as a possible extra dimension and as an alternative to fiscal imposition. If you swept the national balance sheet, you could get the money out in time to pay it back before you had to tax to do it.
My last point is about our old friends Northern Rock, who started this problem. I have an unanswered question on this, which I put to the Government. We have been told recently by the noble Lord, Lord Davies of Oldham, that we should be proud that more than 50 per cent of the amount put into the rescue of Northern Rock has now been repaid. If it has been repaid, could we please have a restatement of the asset
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8.50 pm
The Earl of Courtown: My Lords, as many noble Lords will be aware, this is not a subject on which I speak often. However, as a result of the plight of small and medium-sized enterprises in this current financial crisis, I am motivated to do so. I agree entirely with my noble friends Lord Bates and Lord Naseby and the noble Lord, Lord Bilimoria. I should declare an interest as part of the management of a landscape construction team in the south-west. The company is a typical SME, although it is slightly larger than the norm in the sector. The financial crisis has affected us, but our order book is still full and we hope that our success will continue.
Quite rightly over the past few months, the media have reported extensively on the banking crisis in the financial news. However, the downturn in consumer confidence has been apparent over a considerably longer time and its effects have significantly reduced SME margins. From the early summer of this year, suppliers have increased prices. Until now, we have been reluctant to pass on these prices to customers and consumers, but our experience of trying to pass on those increases has resulted in a blunt refusal from the client. Due to the competitive nature of the industry, it is a question of accepting reduced margins or not getting the work at all.
In the past week, we have had a 15 per cent increase in the cost of waste disposal as well as the same increase in the cost of concrete and aggregates. Not only does that hit the landscape industry, but it will also impact on the construction and building sector, on which the state of the housing market, as we know, has already had a devastating effect. It is of paramount importance that the Government should come up with a proposal that will have an immediate effect. I am not looking for a long-term effect. I understand what the Minister said in his speech, but the problem is now, today, this week. To get VAT paid in this month, the money should have gone to Revenue and Customs today. That is where small and medium-sized enterprises are having problems with their cash flow.
A few weeks ago, the importance of SMEs increased with articles in the media and a Statement in the House. That is not strange when, as other noble Lords have mentioned, 13 million people are employed in this sector, which makes it important and influential. The Government announced that they would talk to banks about their lending activity, as well as arrange for an extra £4 billion from the EIB, which, as other noble Lords have said, is small beer compared to what is required. It is no good having that money available if the banks do not lend it on to small and medium-sized
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The Horticultural Trades Association tells me that the industry employs around 285,000 people in 20,000 businesses. In other words, it is a highly fragmented industry, which underlines the fact that a form of central support or source of help is required. A number of noble Lords have talked about growth and the lack of it. My thoughts are that this sector will fast go downhill. There have been delays in projects, many cancellations of work from the construction industry, a potential drop in work from local authorities, which have been affected by the banking crisis in Iceland, and a general reduction in economic activity. News reaches me that even large firms in my sector are going out of business due to a lack of confidence, as a number of noble Lords have said, which leads on to the lack of liquidity.
We have found that the factor most affecting us is that debtors are taking much longer to settle their invoices and that the payment period is greatly lengthened. The banks are refusing to increase overdraft facilities and in some cases enforcing reductions in overdraft levels. This has led to an increase in short-term cash-flow problems affecting small companies, in some cases putting them out of business. My noble friends Lord Bates and Lady Noakes mentioned a way to help on this: a VAT and income tax holiday. As long as HMRC does not set punitive rates or fines for late settlement, but keeps repayment terms in line with overdraft facilities, that would be perfectly acceptable to small businesses. Giving companies more time and some help would have an immediate effect.
I am sure that I will be proved wrong and this is an arguable statement, but generally speaking companies fail through lack of cash flow as opposed to a lack of profitability. The Government have bailed out the banks; they must now come up with measures to safeguard British SMEs, which have become such an important part of our economy.
8.55 pm
Lord Desai: My Lords, being No. 42 on the speakers list and the last to speak from the Labour Benches is either a sign of due punishment for what I have said in the past or it is a sign that my Front Bench trusts me to be, like Franz Beckenbauer, a sweeper. I therefore take it as a compliment. This has been a fascinating debate and I will take my departing line from the noble Lords, Lord Lawson and Lord Lamont. I am surprised at how fickle is the belief in free markets. Having read my Marx and Hayek, I am still a believer in free markets. They work exactly like this: there are booms and there are busts, in which people go bankrupt. That is how free markets should work. When companies collapse
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I am a strong believer that when banks or financial institutions fail, one should not rush to rescue them. The American experience has been good in the sense that it has been one of horses for courses. The Americans let Lehman Brothers go, Bear Stearns was bought out, along with Wachovia and Washington Mutual, while AIG was saved. The point is that one has to be very selective about what one is going to rescue. What my right honourable friends the Prime Minister and the Chancellor have done is right: they have declared a facility available for bank recapitalisation. Unlike what noble Lords opposite think, they have not yet actually signed a cheque for £37 billion. They are encouraging banks, quite rightly, to seek finance themselves. If the banks can get themselves recapitalised privately, that is always to be preferred and is why punitive conditions must be attached to public money. If the banks want public money, they bloody well have to—I am sorry—they have to pay the price. I do not think that one should be kind to bankrupt banks. One should be severe, because the only thing they understand is money, and it should cost them a lot of it.
So far, the way that the banks have been recapitalised has been very good. Equally, the way the bank guarantee has been provided is quite right. I like what the noble Lord, Lord Forsyth, said: we have not spent £500 billion. We have just said that the guarantee is available, which relieves the pressure in the market and allows confidence to return. That is a much more sensible approach to recapitalisation.
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