---

I have two or three questions on the structure through which the Government will provide assistance to businesses and companies. First, are the Government satisfied that the regional development agency structure is working as it ought, if that is the structure through which a lot of government money will be injected into business? Globally, the UK has many organisations that promote their particular brand of business and international trade—the UKTI, RDAs, chambers of commerce, English Partnerships, individual cities, the IOD, the CBI and trade associations. All have different stories and interests and, more importantly, seem to lack a common theme. I submit that RDAs are classic government quangos, duplicating councils, industry groups and the UKTI’s efforts across vast regions of the UK. I would welcome the Government’s comments on that.

Secondly, I welcome the Minister’s comments on help for SMEs. My party campaigned for an improvement to the small firms loan guarantee scheme which, for those of us who have experienced it, until this banking crisis seemed to produce significant bureaucratic delays among the banks in enabling individual SMEs to obtain the help that they needed. The jury is undoubtedly out as to the effectiveness of the Minister’s proposals to which he has referred today.

8 Dec 2008 : Column 167

Thirdly, noble Lords would expect me, from these Benches, to touch upon the point of the noble Baroness, Lady Noakes, which was also the last Question before this debate: where do we stand on the euro? We can have a lot of political sport about this, but the Tories have of course always taken the view that we should not go into the euro because of a one-size-fits-all monetary policy. At the moment, however, we also have a one-size-fits-all monetary crisis. The real question for the Government is not whether it would have been better had we joined the euro one, two, three or five years ago—because we did not and therefore it is a futile question—but whether they feel that we are closer than we were a year ago to adopting the UK’s policy with regard to going into it, as articulated by the noble Lord, Lord Myners. Do the Government have any timetable in mind with regard to seriously considering that question?

We have already seen the impact on this House and, indeed, on the Government, of the actions of the Secretary of State. We have also seen the impact of the actions of the noble Lord, Lord Myners, with whom I first worked in another context more than 20 years ago. I dare to express two wishes before sitting down. First, is there not an argument for having Dr Cable as Chancellor of the Exchequer? Secondly, in looking forward to hearing the remarks of the noble Lord, Lord Bilimoria, who will follow me, can we have a pint of Cobra beer when he finishes?

4.01 pm

Lord Bilimoria: My Lords, in the past decade Britain has experienced a period of remarkable uninterrupted economic growth. We have heard the successes trumpeted many times: low unemployment, low inflation and historically low interest rates. Mortgages were being offered at 125 per cent of a property’s value, at six times an applicant’s salary. Not surprisingly, house prices escalated, and many householders who had never considered buying a second home decided to take the plunge. Some invested in bricks and mortar because they could not rely on their private pensions; we all know why. Others bought and improved properties with the promise of easy profit. If Harold Macmillan had been alive to witness the past decade he might well have repeated those famous words, “You’ve never had it so good”. Equally, however, being a wise man, he would definitely have asked: “Was this all too good to be true?”. We now know the answer to that question. Like the most indulgent guest the morning after a lavish party, we as a nation have woken up with a horrifying hangover, hoping that we will get back to those happy days and the happy state we were in the night before.

All of us, even the Prime Minister, now accept that economic cycles are an unfortunate reality and that, to use my previous analogy, all parties must come to an end. We saw that in the 1970s, we saw it in the 1980s, we saw it in the 1990s, and we are seeing it again today. However, despite this reality, I agree completely with the Secretary of State that it is the duty of Governments to ensure that these economic cycles are tempered as much as possible. As we have just seen, uncontrolled booms can be just as dangerous and damaging as

8 Dec 2008 : Column 168

busts, especially if those booms are fuelled—as they were in our case—by record levels of debt. I for one think that it is absolutely hypocritical to blame the Americans for the crisis we are in today. Britain’s attitude towards debt in the past decade makes us guilty for the situation in which we find ourselves.

I was pleased to hear in the gracious Speech that the overriding priority of Her Majesty’s Government is to ensure stability in the British economy during this global economic downturn. Having started a business from scratch, I know from experience that what businesses desire more than anything else is stability. But business, which had a wonderful relationship with this Government before the current crisis, is now baffled. For example, the Government reduced capital gains tax from 40 per cent to 18 per cent. That should have been applauded as a wonderful move, but we were all surprised by the removal of the 10 per cent taper relief, almost doubling it to 18 per cent. Why did it happen? Because the hedge funds, for example, were misusing the taper relief provision. As a result, the small firms and entrepreneurs who benefited from taper relief were unfairly penalised. That is wrong.

More recently, the Chancellor acknowledged in his Pre-Budget Report that raising corporation tax on small companies was not appropriate. But instead of abolishing this proposed increase, he has merely postponed it. Why? Because some individuals were using the small companies corporation tax to lower their own personal tax. It is the innocent SMEs that will pay the price, and that is wrong.

In seeking to increase national insurance, the Government will increase not only personal taxation but the cost of employing people. Surely the Government should be doing everything they can to incentivise employers to take on more staff, not tax them more for doing so. That is wrong. And the proposed increase in the top rate of tax to 45 per cent has sent alarm bells ringing not just in the UK but around the world.

On the other hand, the Government have magnanimously reduced VAT by 2.5 per cent, at an estimated cost of £12 billion. Surely that sum could have been better and much more effectively targeted by, for example, reducing income tax by a massive 4 per cent. Just as the Government want to prevent the systemic collapse of the banking system, they have a responsibility to prevent the systemic collapse of the SME sector. Only today, the Federation of Small Businesses revealed that 40 per cent of its member businesses said in a survey that they had already considered the possibility of closing down. I am talking about the Government supporting the 5 million SMEs and the 13 million people they employ and their families. The vast majority of SMEs have good business models but, sadly, because of a lack of finance in these awful times, far too many of these companies are being allowed to go to the wall.

The Secretary of State mentioned the establishment of a small business finance scheme, to the tune of £1 billion. I have called many times in this House for the Government to increase multifold the small firm loan guarantee scheme, and yet the Government have come up with a £1 billion fund. Surely that is a drop in the ocean compared with the £700 billion package

8 Dec 2008 : Column 169

that is bailing out the banks and the financial sector. Moreover, it is my understanding that, as we heard, the Government have decided to deliver this £1 billion through the banks. But the reality is that the banks still are not lending.

At a time when London is in danger of losing its position as the world’s leading global financial centre and Britain’s economy is being leapfrogged by that of France, it is more important than ever for the Government to create confidence in the business community. We have all read about the Prime Minister’s moral compass, which directs the way in which he executes his public office, but where is the Government’s financial compass? What guides them in their relationship with business?

As we are descending into a spiral of almost self-fulfilling doom and gloom, should we be aspiring to revert back to where we were in the decade that I spoke about earlier? No, I do not think that we should be. We need a Government who support not just banks but businesses—which, after all, create the employment that pays the taxes that pay for the public services that we all benefit from. We need an economy that is less dependent on the housing market than on the strength of its skilled workers and the fruits of their productivity and on the strength of its businesses, especially its SMEs.

We need an economy that is supported by sensible saving, sensible lending and sensible borrowing, where our banks and financial systems are supervised and regulated effectively—not with a heavy touch, not with a light touch, but with the right touch. Most importantly, we need an economy that is built on confidence—confidence in the consumer to spend, confidence in the banks to lend, and confidence in the Government, a Government who will always put business first.

4.08 pm

Lord Rooker: My Lords, I declare my interest as a fellow of the Institution of Engineering and Technology and my role as a lay governor of Aston University. I want to say a few words about our role in using science and technology in the economy. I believe that there remains an anti-science and technology culture in the media and public life, which permeates our education system and into the schools. I acknowledge the efforts of many people to try to change that situation.

Our nation is small relative to the emerging economies. Quantity will never be our unique selling point; quality will. So it makes sense to sell science and technology to our best brains and to get the discovery under way early in young minds. The Science Council’s recent survey showed that of the 1,000 16 to 18 year-olds questioned, only 28 per cent saw science as relevant to their lives. Not only is this at variance with reality, but it means that many youngsters are cutting themselves off from exciting and lucrative careers in a range of industries—industries which they may not immediately be concerned with or connect to science and technology. Finance, fashion and sport all use science and technology.

I should like to give three examples of how science and technology affects business and our economy. The first is fashion, which is of much interest to youngsters. A recent edition of the journal of the Institution of

8 Dec 2008 : Column 170

Engineering and Technology was devoted to “power dressing” or “haute-tech couture”. Engineering companies and fashion houses are collaborating on wearable electronic garments that are as revolutionary as the first fob watch was 400 years ago. There are applications for such clothing in fashion, sports, medical and work wear. I shall highlight just two of the examples the journal gave.

Rachel Bagley, a fashion design graduate from South East Essex College, created a collection to show how wearable electronics can contribute to reducing a wearer’s carbon footprint by use of solar panels in dresses to power iPods and other devices. John Batchelor, at the University of Kent, has developed a circular antenna that looks like a button on a pair of jeans but which is designed to communicate in two modes—around the body and away to other devices. With touch panels integrated into sleeves in fully washable garments, the potential is very significant. Science and technology, fashion, clothing and fabric design is a hell of a mixture and incentive to offer our younger generations to get involved in business.

My second example is from the world of motorsport. Unlike my noble friend Lord Drayson, I am just an interested anorak who, as an engineering apprentice in the 1950s and 1960s, had the odd fleeting dream as I read about Stirling Moss, Mike Hawthorn and the Marquis de Portago, but it went no further. Motorsport employs some 30,000 professional engineers in this country. In the past year I have visited McLaren and Honda. This very day last week I was at the Honda plant. Obviously the news from Honda is not good, and we hope that a new buyer will come forward to continue not only with the team but with its world-leading materials technology, which is vital to our business. The MoD might not tap into it, but I can assure noble Lords that US defence equipment manufacturers queue up to learn what UK motorsport is doing in materials technology.

The land speed record for diesel cars is held by the UK’s JCB Dieselmax, designed and engineered in Coventry by Visioneering. The engine was modified by Ricardo in Leamington and the gearbox and transmission by Xtrac of Thatcham. The Motorsport Industry Association tells me that the sector is a hotbed of SMEs which average a couple of dozen employees and a turnover of some £4 million. They have an export level of 65 per cent and high R&D investment levels at 30 per cent, double that of pharmaceuticals.

One of the SMEs I mentioned, Xtrac, is now the world’s leading manufacturer of motor racing transmission solutions, supplying all levels of motorsport and, because of transfer technology, the aerospace and marine industries. Xtrac started from a shed in 1984 and now has sales of some £40 million. The majority of its engineering staff are bachelor or master-level graduates. The company has taken on three student engineers every year since 1998 and still commits 30 per cent of sales revenues to R&D.

I should also like to highlight the world-acknowledged record in ultra-fast optical transmission technology and research achieved by the Photonics Research Group at Aston University. It is one of the largest such

8 Dec 2008 : Column 171

groups in the UK and is working to exploit new fibre-optic technology for business which I saw on a recent tour of the labs. My noble friend Lord Drayson, who is also an Aston graduate, was there. We saw, for example, tiny single-fibre sensors the size of a hair that are embedded for a lifetime in structures such as aircraft and bridges, replacing the old, worn-out and unreliable technology of the conventional electrical strain gauges. The value of pinpoint and accurate pressure readings for economic and safety purposes is self-evident. A large patent portfolio has already led to the formation of several start-up companies. Partners among the big players are National Grid, BP, the US Air Force, the MoD and Tarmac.

We are undertaking a technical adjustment of our economy on a fairly grand scale. I am not saying that this readjustment is only on the margins but we can, I hope, manage it so that to a large extent we are in control. This is the very time to push on with investing in research in these areas. As I said, quantity will never be our USP but quality will and, if we can get a grip on exploiting these new technologies and in due course take a world lead in that regard, in the current economic situation that has to be a good investment from the point of view of both the public and private sectors.

Having lectured the House over the past seven years, I am very conscious that with the Clock showing six minutes, I am into the seventh minute and therefore my time is up. However, as I make what is in effect my maiden Back-Bench speech in your Lordships’ House after seven and a half years of membership, it would be remiss of me if I did not say thank you for all the support, and indeed scrutiny, that I have experienced in four different ministries. I also appreciate the support that I received when I was regulating the House as deputy to my noble friend Lady Amos after 2005. That regulation was not easy—indeed, sometimes it was hard—but I hope that it was fair. Nevertheless, it could not have been done without the support of the House, and for that I am extremely grateful.

4.16 pm

Lord Wakeham: My Lords, the noble Lord, Lord Rooker, and I entered the House of Commons on exactly the same day and I have heard him speak on many subjects over many years. I have never yet heard him make a boring speech, and that one certainly was not either.

It is very nearly 50 years since I started my own business. Looking back to my experiences in those early years, I can see that some of the problems that I had then are being repeated now. When I started 50 years ago, I did not go around telling everyone that I was a small business. In fact, I did everything that I could to disguise the fact and to try to build the business up so that I did not have to call it small. However, back then we did not have a Government who wanted, as the noble Lord said, to put up corporation tax for small businesses to a level above what they would have paid if they had already been successful.

The rate of interest that I paid was extremely important—and the lower the better—but it was not nearly as important as the ability to get finance. When

8 Dec 2008 : Column 172

I ran a business, the question of whether I invested in a project did not depend on 1 or 2 per cent of interest on the margins, because it was not possible to judge matters that closely. If things were that close, I was certainly wise not to get into a project, and I did not. The important thing was getting finance to establish my business. That was far more important to me than the rate of interest, although of course I should have liked it to be as low as possible. I had other costs that were infinitely more important than the interest that I paid to the banks. For example, wages featured as a much higher figure in my accounts than the amount of interest that I paid, and those wages depended substantially on the rate of inflation in this country.

Only two months ago, we were worried about the serious impact of inflation and now we are talking about deflation. With all the things that are going on, we could easily, and quickly, go back to having problems with inflation. The Government need to be very careful that that does not suddenly happen, as it would be disastrous. As a matter of fact, for small businesses deflation is just as serious a problem as inflation because of the way that it slows down demand. Both inflation and deflation are dangerous for small businesses, and we need a Government who can maintain an acceptable level.

As I said, the availability of bank finance was then and is now very important. The banks have now invested in a whole range of assets which have been disastrous to say the least. It should be said clearly that no one instructed them to invest in those assets. They invested in them because they thought they wanted to, and they have a very big measure of responsibility for that. So, too, does the regulatory system. It is a government responsibility and they have a measure of responsibility for the difficulty of the banks to find the finance they need.

The problems are large and the Secretary of State touched on some of them. The auditors have difficulty in valuing some of the assets as the conventions that are now used, such as mark to market, mark to model and all sorts of other things, are complicated. Most of the non-executive directors of the banks would find it very difficult to understand exactly what was going on. I am not saying that these methods are intrinsically wrong but they are so complicated and sophisticated that it is hard to see how they could be the right way forward. If the directors and those who control the institutions cannot fully understand them, the regulators have a responsibility to try to discourage this sort of investment.

I do not think that that necessarily requires a great deal more regulation, but it requires much more supervision and understanding by the regulators of exactly what has been going on to make sure that we avoid it in the future. The Government would be wise to look again at the tripartite system of control of the banks as I am not satisfied that that is the best system to deliver what it should. I would prefer it to be under the Bank of England but I recognise that the noble Lord, Lord Turner, who was a member of the Economic Affairs Select Committee, which I had the honour to chair for a number of years, is an outstanding man. I would not want to say anything that indicated that I did not have a great deal of confidence in his ability.

8 Dec 2008 : Column 173

Some of the Government’s measures have been helpful but some less so. We have to get the banking system working again. The present situation is not helped by press briefings blaming the banks for all the difficulties. They have their share of responsibilities but so do others. I hope that the private meetings that the Minister is having with the banks are on a more mature level than some of the comments I have seen in the papers.

The banks’ cost of capital is miles higher than the bank rate. They have to repair their balance sheets by paying the Government—or the taxpayer—12 per cent on the £37 billion of our money that has been put in. Rightly they should, but the idea that the bank rate reductions can be immediately passed on does not seem realistic. The FSA wants them to hold more government bonds to put themselves on a more secure footing. That cannot be a disappointment to the Government because they will have the dickens of a lot of bonds to sell in the next few years. They are required to run sensible businesses in a commercially difficult time. I want a return to confidence because that is the only way forward, but it would be foolish to think that that can happen as quickly as some would like.

4.24 pm

Lord Oakeshott of Seagrove Bay: My Lords, I am afraid that I cannot compete with the noble Lord, Lord Wakeham. I started my own business only 23 years ago, but he is absolutely right that for a viable business the availability of finance matters much more than a percentage or two on the price.

Today the laws of the principles of economics are lost in a fog of fear. Unless we can rebuild credit and confidence, economies are almost unmanageable. I shall focus on banks—Irish and Icelandic—and the British Post Office.

However, I start by paying tribute to the noble Lord, Lord Mandelson, for grasping much more quickly than the amateurs in the Treasury how shocking it is that the banks have virtually gone on strike in recent weeks. He has been speaking about small and medium-sized enterprises, as have we, but will he and the Treasury now get to grips with the real dagger pointing at the heart of the British economy, which is the banks’ failure to lend to big businesses as well? That is where the greatest risk is. Private equity-backed companies with millions of jobs are in great danger of going down next year, and we need to focus on lending to big business too.

I got really worried about Iceland six months ago when I looked hard at what the markets were telling me. Credit agencies were slow to pick up the problem, but the credit default swap prices were shouting from the rooftops that Icelandic banks were in trouble. They were signalling a 40 per cent chance that they would go bust. I raised my concerns in Parliament in the summer with Questions about the Icelandic compensation scheme and British, not Icelandic, regulation of these banks, which were taking billions of pounds of British money. I am sorry to the see that the noble Lord, Lord Myners, is not in his place, but perhaps his officials will pass this on to him. As we now know, despite the disgracefully evasive and misleading

8 Dec 2008 : Column 174

Answers I got from the Treasury on 14 and 15 July, those banks were well past saving. We know that from the leaks that have come out from the Treasury, our financial authorities and the IMF. They already knew that in the spring. However, if the Treasury had given me straight Answers to my Questions, at least savers in Icesave—individuals, charities and public bodies—would have had on the parliamentary record the facts about the risks they were running and the parlous state of the Icelandic scheme, and they might well not have gone on pouring hundreds of millions of pounds more into Icelandic banks right up to the moment in October when they hit the wall.

---