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Essential to our continued competitiveness will be, first, ensuring a regulatory framework that supports and does not stifle the conditions for business success—in these difficult times, it is more important than ever that we only ask businesses to adapt to new regulations where the case is compelling—and,

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secondly, ensuring the maintenance of a highly skilled, highly productive workforce prepared for the future.

The Government have relaxed the funding rules for Train to Gain to give SMEs the training they need. We are also bringing forward measures to help business develop the potential of their employees. The children, skills and learning Bill will establish a new skills funding agency to ensure a simpler, more business-focused training and skills system. To help boost our skills base and business competitiveness, the Bill will give all employees in Great Britain the legal right to request time to train, providing around 25 million people with the chance to work with their employer on their development needs, with the requirement that their training helps to improve business performance and productivity.

In addition, the Bill will give all suitably qualified young people the legal right to an apprenticeship from 2013. We are establishing the national apprenticeship service, the first ever such service dedicated to apprenticeships. We have expanded the apprenticeship programme threefold over the past 10 years and we are determined that it should continue to grow

Unlike in previous recessions, the Government have acted to protect and advance essential investment in the public sector, but as we recover from the recession we will give top priority to rebalancing the public finances. The overwhelming means of achieving this will be through tighter public spending restraint, not tax increases, though at a time of acute economic difficulty the broadest backs will bear the bigger burden, as I am sure noble Lords will agree is right and fair. But the restoration of sound finance will require the Government to redouble their efforts to ensure belt-tightening and value for money across the board. The Government expect to be able to set against borrowing more than £30 billion in greater efficiencies in the next spending round. Discipline on public spending growth will keep it to little more than 1 per cent. This will be tough, but is in contrast to the Opposition’s declared intention not just to limit growth but to cut into the core of public spending and our nation’s investment programmes. I am sure noble Lords will look forward to hearing from the opposition Front Bench the costed detail and impact of the cuts they have in mind.

We are bringing forward measures that will not only help businesses and families, but also enable us to rebalance our public finances in the medium term. I am determined that the Government will continue to work with British businesses to ensure that they have all possible help in weathering the downturn and emerging ready to face a new generation of challenges. For example, to support those working in the construction sector, we are helping apprentices facing redundancy find other employers to help finish their training. Through the energy efficiency employment initiative, we will match those workers who lose their jobs in housebuilding with employment opportunities such as insulating homes and businesses, and improving energy efficiency across the country. The Government are open to further ideas to provide much needed alternatives to unemployment.

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For UK car manufacturers, we are lobbying for €8 billion of European funding for investment in automotive energy efficiency projects. For this industry and dozens of others, including those associated with nuclear power and other renewables, there are huge opportunities in the global shift to a low-carbon economy. Next year we will set out a low-carbon industrial strategy to help UK industries develop low-carbon operations and succeed in these lucrative new markets as they emerge.

I realise that the Opposition will need to make out that Britain is unprepared for this economic turn of events—and, of course, will blame it all on the Government—but the foundations that we and business have built in Britain over the past decade will serve us well in moving from this downturn to recovery and beyond. We have built an enterprise culture in this country that rivals any in Europe and is ready to take on any in the world. The challenges we face are both immediate and more long term: resolving the banking crisis and putting our financial sector on a sound footing once again as we unravel the complex credit derivatives, credit default swaps and other obscure financial products that have contributed to the banks’ problems; ensuring that the Government help people and businesses through the downturn as best we can; investing in vital infrastructure, vital research and development and new technologies and skills so that Britain is ready to meet the upturn with confidence and competitive strength; acting to ensure that the European Union’s competition and state aid laws remain intact under the inevitable pressure they will come under; and ensuring that the EU’s doughty trade commissioner sets her face against any attempts to roll back Europe’s stand against protectionism while bringing the WTO’s Doha round to a successful conclusion.

The Government have a clear sense of the scale of these tasks and a commitment to meeting them head on. I hope the Opposition will feel able to wish us well for the country’s sake rather than wish failure upon us for their own sake. We will now hear from the Opposition, but I commend these measures to your Lordships and to the House.

3.32 pm

Baroness Noakes: My Lords, I thank the Secretary of State for opening today’s debate. I agree with one of his statements—that is, we wish the Doha round well in the interests of this country and the global economy.

The gracious Speech stated:

“My Government is committed to helping families and businesses through difficult times”,

but there were no policies in it to relieve the pressures on struggling businesses. Instead, the Business Rate Supplements Bill is designed to tax them further.

Only three weeks ago, the Chancellor claimed in his PBR speech that the Government were delivering,

and that the PBR would,

That is not how business saw the PBR: it saw a web of hidden tax costs and tax rises for business.

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The Secretary of State recently delivered a lecture at Chatham House. Many were surprised that the noble Lord started his speech with an anecdote about his relationship with the Prime Minister along the following lines: Prime Minister to Lord Mandelson, “Are you happy, Peter?”; Lord Mandelson to Prime Minister, “If you are happy, then I am happy”. I know this is rather difficult to believe. I am not going to dwell on what this exchange tells us about the relationships at the heart of government, tempting though that is, but I am going to turn the question around. Secretary of State to business: “Are you happy, business?”. Business to Secretary of State—our Standing Order on asperity of speech precludes me from giving the exact response but the paraphrase is—“You must be kidding”.

The noble Lord might have thought that he could come in from Europe on his white charger, wave a magic wand over the business world and all would be well, but he may not have realised what his Government have done to business. There has been a decade of irresponsibility on the economic front which has left our economy ill prepared for the recession that we now face; a decade in which the real needs of business have been neglected.

Since his return to government, the Secretary of State has been rarely absent from the media. He has been engaged on a busy round of meetings, forums, dinners and speeches—sometimes, although not always, about business issues. The question is whether, to echo the noble Lord’s own words in his maiden appearance at the Dispatch Box, he has been toiling or spinning. Business has seen little so far about which to rejoice.

My noble friend Lord De Mauley will wind up for these Benches and focus on the issues for business. Before I turn to the economy, I shall sketch out the past decade from a business perspective. In the years running up to 1997, manufacturing employment was growing again. Since then, 1 million manufacturing jobs have been lost and more are now threatened. Our labour flexibility has been eroded and is threatened still further by the European Parliament which, with the backing of Labour MEPs, plans to end our working time directive opt-out. We are now 12th in the World Economic Forum’s competitiveness index; we were fourth in 1997. More than 34,000 new regulations have been introduced which the British Chambers of Commerce estimates have added £65 billion to business costs. Our tax code is the longest in the world and probably the most complex. We have lost our tax competitiveness.

The Government have neither supported nor valued the businesses on which our national prosperity ultimately depends. We now hear that the Secretary of State regards the Government’s industrial policy as insufficiently joined up. He has suggested that we need a “more capable strategic state” and a “smart state”, and he has even promised a more active industrial policy. If there is one thing that business wants, it is less government and not more.

However, there is one thing that businesses need now: finance. The Government have pumped billions of pounds of taxpayers’ money into saving the banking system, but, so far, it has done nothing for British business. The Queen’s Speech referred to the Banking

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Bill, which has already largely completed its passage in another place—I shall save my detailed comments on that until our Second Reading next week—but that Bill is largely about the next banking crisis and not about today’s issue of getting the banks lending again.

On that, the Government have sent mixed messages. They have talked about overleveraging, repricing risk and the regulation of liquidity, all of which suggest less, and more expensive, bank lending. But at the same time they have indulged in publicly hectoring the banks to increase lending. They have failed to get to the core of the issue, which is loss of confidence at the heart of the banking system. The Secretary of State told us today about a new statement of principles and various other actions. We shall see whether they have any impact in practice or it is just more words.

My party does not advocate taking no action, and no matter how many noble Lords opposite say that will not make it true. We have proposed a national loans guarantee scheme for banks which will allow confidence to return to business lending. We have also proposed that government consider guaranteeing credit insurance so that non-bank credit can be restored to normality. We hope that the Government will start to try solutions that work with the grain of the commercial world.

This is our first opportunity to debate the Pre-Budget Report. We had a hugely important debate on the economy at the beginning of November. Even the most pessimistic of us in that debate did not foretell the full horror of the prospects for our economy unveiled in the PBR. The Chancellor had already trailed his coat on the abandonment of his predecessor’s fiscal rules, but it still came as a shock to find that they were to be replaced with a “temporary operating rule” of the “I'll do what I like” variety.

Even more shocking is that debt will reach a 40-year high in 2014 at 57 per cent of GDP, and that annual borrowing as a percentage of national income will reach a 63-year high next year. I hope that the Benches opposite recognise that all of those figures are worse than any during our last spell in government.

The Government’s figures conveniently ignore huge chunks of debt. It used to be the PFI and Network Rail, but these are now dwarfed by the exclusion of the cost of the various interventions in financial markets. The PBR quantifies this as a whopping eight percentage points in this year. A true figure of the liabilities overhanging our economy would also include unfunded public sector pension liabilities, which would add another 60 or 70 percentage points, but then we might really start to frighten ourselves.

None of this has fooled the markets. Concern about the scale of borrowing that we will have to undertake led to credit default swap prices going through 100 basis points last week for UK government debt. This is higher than for some UK corporates and the leading economies in Europe. More graphically, the foreign exchange markets have taken fright. Sterling has lost more than 25 per cent of its value in the last year, and the collapse has accelerated since the PBR, with the largest single-day fall since we exited the exchange rate mechanism on Black Wednesday.

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The Government’s narrative—which we have heard again today—is that the recession is a product of events outside the UK and outwith our control. This is plainly untrue. The Government at home have overspent and over-borrowed. That is what gives our economy less scope for fiscal measures now. Our structural budget deficit, created by the current Prime Minister, is one of the worst in the world and we even compare badly with the leading economies in Europe. The Prime Minister believed his own hubristic statements about abolishing boom and bust, and failed to use the good times to prepare for the bad times that now beset us.

The Chancellor wanted the story of his PBR to be one of fiscal stimulus, where the Prime Minister pretends that he is leading the world. The real story is one of small tax cuts today followed by an indefinite period of tax rises and expenditure cuts. The centrepiece was a reduction in VAT, but it is far from clear what effect that will have. A reduction of slightly over 2 per cent in selling prices, in an already heavily discounted marketplace, will have little immediate impact on consumers, even assuming that they want to spend, but it has certainly cost businesses a huge amount to implement. The next big tax measure was the continuation of the higher personal allowances with which the Government attempted to bribe the electors of Crewe and Nantwich. This is a giveaway on paper only, because no one expected that the Government could take those allowances back next year.

The Government take voters for fools. As the Institute for Fiscal Studies has shown, the class-envy increase in the top rate of tax is likely to yield nothing. The rest of the package will hit people earning more than £19,000 a year. Do the Government really think that the PBR is going to stimulate anything but outrage once taxpayers see the reality of higher national insurance contributions, permanent excise duty hikes and the other tax rises that have not yet been revealed? The small print of the PBR contains spending cuts allegedly achieved by £5 billion a year of additional value-for-money savings. The last round of efficiency savings was demonstrated by the National Audit Office to be largely without substance. We do not believe that fairy stories should be allowed to underpin the public finances, and this would not be allowed under our proposals for an office of budget responsibility. At the heart of the PBR are the Government’s forecasts for growth in the economy. We fear that they are too bullish about the depth and length of the recession. That is the view of the OECD, the IMF and the Bank of England. Do the Government have a plan B if that view proves correct, and their view proves incorrect?

In Question Time earlier, we had an exchange on whether we should join the euro. I asked the noble Lord, Lord Myners, what the Government’s position was on Mr Barroso’s view that we would have been better in the current market conditions if we had joined the euro. The noble Lord did not answer the question then, but I hope that when he winds up this evening we will get a straight answer. Our view is very clear—that we would certainly have been damaged had we joined the euro earlier—but I would be interested in the Government’s view. If the noble Lord is in any

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doubt, perhaps he would like to consult the important person sitting next to him, who I am told takes part in these conversations.

There is nothing in the Queen’s Speech providing any remedy or relief for businesses struggling to keep afloat in difficult markets that have been deserted by consumer confidence. There is certainly no vision for the future. Similarly, there was little in the PBR that gave comfort to taxpayers. That made it absolutely clear that the cost of 10 years of misrule by the party opposite will haunt taxpayers for a very long time to come.

3.45 pm

Lord Razzall: My Lords, it is always absolutely fascinating to hear the views of the noble Lord the Secretary of State. Indeed, one has only to open any Sunday paper to see that he is now the most powerful Cabinet Minister outside the Prime Minister. If he describes the Prime Minister as Moses, perhaps he is John the Baptist. From looking at the number of noble Lords who put their names down to speak in this debate, it is clear that many people wish to share in the stardust that he sprinkles among us.

As the old Chinese cliché would say—and I am sure the noble Lord would accept it—we live in interesting times. The great imponderable question is whether we are facing a short, sharp recession in which after a while the normal rules of fiscal correction will apply, or a deep depression involving serious deflation in which the normal rulebook must be torn up and new remedies tried. It is not entirely clear to me which of those two views the Government take. There certainly seems to be some divergence on that issue between monetary and fiscal policy. Clearly, the action of the Bank of England to lower interest rates to their lowest since 1951 indicates that the Bank takes the view that the depression risk is now much more serious than the inflation risks that it was concerned about previously. In rescuing the banking system, that view seemed to be shared by Her Majesty's Government, with their unparalleled taking of shareholder positions in certain banks and control of others.

This afternoon, the Minister seemed to indicate that he takes the view that we have a danger of deep depression and deep deflation, rather than a simple short and sharp recession. However, in the Pre-Budget Report, the Government seem to take rather the opposite view. If we are heading for a deep depression, do we seriously think that a 2.5 per cent cut in VAT will be the remedy that will cure the problem, particularly in the context of high-street retailers offering 20, 30 or 40 per cent discounting, as we saw on our television screens in Oxford Street on Saturday? Are we seriously suggesting that a 2.5 per cent VAT cut will make the slightest difference to the problem, if the problem is the one that the Minister fears it is?

My party gave general support to the support that the Government implemented for the banking system over the past few months. We were the first party to call for significant cuts in interest rates, which have now been more or less achieved, but we have parted company from the Government on the Pre-Budget Report. We believe that significant income tax for

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what the Government always like to call “hard-working families” would be more likely to increase consumer spending in the short term.

I take issue with one of the Minister’s remarks. In this House, we do not have the Government and the Opposition, but the Government and two opposition parties, the Conservatives and the Liberal Democrats—and that does not include the opposition of many who sit behind him.

The Conservatives have said very little about what they would do to help business. They refuse to acknowledge the need for a fiscal stimulus. I listened very carefully to the noble Baroness, Lady Noakes. They are muddled over monetary policy and have rehashed old tax policies—giving tax breaks to employers to take on the long-term unemployed—that will not stimulate demand and will not work in the current economic climate. Dr Vince Cable said in another place that he was surprised at the Conservative Party, because he does not remember Winston Churchill saying, “We are not sure if we are going to fight on the beaches, because we are worried that the gilt market will complain about the cost of munitions”.

Listening to the Conservatives today, I say that they are in danger of making the error that was made in the United States in 1932 to 1940. This Conservative Party would not have supported Roosevelt’s New Deal in 1932, which, between 1932 and 1936, was primarily responsible for pulling the United States out of the deep depression that had ravaged the country. It would also have made the same mistake as Roosevelt did in 1937, when, faced with his own deficit worries, he sharply reduced government spending and raised taxes. The result was a serious recession in the US economy that only the Second World War solved.

If we are to avoid a depression, there is common ground between all of us that the banks must resume their lending, both to large firms and SMEs. I was interested in the remarks of the Minister about the research done by the banks, because there is a clear mismatch between what some of us hear on the ground about the experience of businesses and individuals with loans and overdrafts, and the statistics given at the top level by banks to the Government. I will read with interest the survey referred to by the Minister on exactly what is happening on the ground.

Looking at the banking sector, it seems that all the remarkable skills of the Minister will be required if he is to pull together three conflicting objectives of the banks. First, the banks and the Government wish to ensure that the taxpayer receives a proper return and profit from investing in the banks. Some of the preference dividend coupons being suggested could be very significant in protecting taxpayers’ money and giving a return.

Secondly, the banks and the Government wish to improve the capital ratios of the banks. When tackled on “Any Questions” two or three weeks ago, Angela Knight, who now speaks for the banks, said that the money put in by the Government was not available to increase lending because it was being put in to improve the capital ratios of the banks.

Thirdly, we have the desire of the banks, the Government and the FSA to improve liquidity to prevent future runs on the banks. Many noble Lords will have seen the FSA consultation document. If the

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proposals are implemented, they will require banks, by next October, to hold a significantly greater proportion of their assets in a liquid or relatively liquid form. If taxpayers need to make a profit and get their money back, if the banks have to improve their capital ratios, and if the banks are required by the FSA to improve their liquidity, how on earth can they also maintain their lending? Two plus two will not equal four in that instance.

I know that the Minister is not responding to this—it will be the noble Lord, Lord Myners—but does he, in that context, believe that the Bank of England and the Government should start following the suggestion of the Federal Reserve that more unorthodox methods from the armoury of monetary policy are needed? By that I mean further large-scale direct lending to banks, the buying up of credit products, and other forms of the so-called quantitative easing that arguably pulled Japan out of its recession of the 1990s. I would welcome a response on that from the Minister winding up the debate when he does so.

Apart from giving an interesting tour of the Government’s view this afternoon, the noble Lord, Lord Mandelson, also gave the Hugo Young lecture at Chatham House last week, which was quite widely trailed in the press. He gave an effective tour d’horizon of the issues facing the Government and the UK economy. As he touched on this afternoon, and as I am sure we are all interested to know, he has recognised that the crisis is not just affecting the banks. A significant crisis is now spreading down into British industry. We on these Benches welcome the Minister’s statement that he does not believe that the Government should go back to the bad old days of 20 years ago in these circumstances, propping up failing companies with taxpayers’ money. He has articulately set out the framework that the Government should follow in supporting British industry where it needs it.

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