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There are some worrying parallels between Iceland and Ireland. Of course, Ireland is not a financial basket-case like Iceland, but its banks are in dire straits and the fact that on 30 September the Irish Government, like the Government of Greece, felt forced to guarantee all deposits is a sign of weakness, not strength. Ireland is a small country with a very large financial sector. It promotes itself as a low-tax zone off north-west Europe, a kind of Cayman Islands in a cold climate, and aggressively chases footloose financiers and less scrupulous British companies to move to Dublin to dodge tax. British taxpayers suffer twice from that because it also makes it much more difficult for our Revenue and Customs to make British-based multinationals pay their fair share. Dublin does not need to be Liechtenstein on the Liffey. If you set out to attract mobile money from around the world, you run much bigger risks when things go wrong.
British banks have been lending far too much on property. Many of their loans will be underwater already. Noble Lords may have seen the Royal Institution of Chartered Surveyorss wholly realistic forecast that British commercial property prices are likely to fall by a half from their peak to their trough. Any property professional will tell you that while British banks have been foolish, Irish banks have been mad. They have been betting on property here like a party of punters on Gold Cup day at Cheltenham. British taxpayers must not pay or underwrite their bookies bills. We need every penny to get banks lending again to British businesses and British families.
Let me give the House a couple of recent examples. A surveyor I have done business with for 20 years was last week asked to value a flat development in a northern city. One of the big three Irish banks had lent £16 million against a valuation of £20 million last year. There is no income from the site and no demand for flats. I asked, Whats it worth today? Five million perhaps?. Three million, said the surveyor. Another trusted contact of mine has just been instructed by a receiver to take on the management of a portfolio of multilet offices all over Britain that was bought by an overseas private investor for £600 million with a £500 million loan from another of the big three Irish banks. The owner has now done a runner, the rents have not been collected for many months and the properties are worth £300 million at best. It is no surprise that the markets are pricing in an 18 per cent chance of the Bank of Ireland defaulting on its obligations over the next five years and a 28 per cent chance for Anglo Irish Bank. Those are not Icelandic levels, but they are still far too high for comfort.
In times of unprecedented economic turbulence, as the noble Lord, Lord Mandelson, so aptly put it, would it not be safest for the British Post Office, whose the main savings account is operated by the Bank of Ireland, instead to team up with the strongest possible partner to protect British savers money and develop its business? That can mean only National Savings & Investments, the nationalised Bradford & Bingley and Northern Rock, or Britains big high-street banks and building societies.
I keep my own cash on deposit in sterling in HSBC and the Bank of Scotlandmore than £50,000 in each, actuallyand I have not had a moments worry. To put it at its simplest, the Bank of Scotland is as safe as the Bank of England; the Bank of Ireland is not.
The Lord Bishop of Durham: My Lords, I was pleased to see in the gracious Speech the promise that the Government,
I am slightly surprised that I am the first to pick up this theme of the economic statements in the gracious Speech.
We urgently need to rethink the structures of our global economy. The unintended consequences of the 1944 Bretton Woods agreement include the tilting of the global economy to benefit rich nations, and several of the poorest countries in particular still face massive spiralling debt. Since a country cannot declare itself bankrupt and start over, it is compelled to prioritise debt-serving ahead of healthcare, clean water, education and so on.
At the recent Lambeth Conference, I was privileged to meet bishops from Tanzania who spoke of the dramatic effect of the debt remission that was granted to that country a few years ago. Other countries have also benefited enormously, but a huge task remains. More than $400 billion of debt still needs to be cancelled, most of which will be taken up by 100 per cent relief for the very poorest countries. Debt in Bangladesh stands at $19 billion, and repayments are higher than the annual health budget. Yet Bangladesh is one of the countries most at risk from climate change, and about 40 per cent of the population lives on less than $1 a day.
Or take the Philippines. Most of its $28 billion of debt was incurred under the Marcos dictatorship. The country has already paid five times that amount. Even so, the compound interest has ballooned the debt to more than £60 billion. The result is that one child in 10 suffers from malnutrition and one person in five has no access to clean water. Those two figures stand for many more around the world. All this is miles away from the noble vision articulated by Gordon Brown, speaking in St Pauls Cathedral in March 1999. He said:
Poor country debt is the great moral issue of our day, the greatest single cause of poverty and injustice across the earth ... We must drop the debt and drop it now.
That agenda was then endorsed by the then Leader of the Opposition, the right honourable William Hague.
Whenever I and others have spoken about these things in the past 10 years or so, we have faced a chorus of excuses and been told that we do not understand how the world works, that people who borrow money must learn that they have to pay it back, or that the borrowers were wicked, irresponsible or incompetent, and that any debt relief will only be siphoned off to fund yet more extravagance on the part of the few. Recent events have blown that excuse right out of the water. Governments, including our own, are, as we know, bailing out banks. At least one bank is being refloated in such a way as to continue unchecked, with large bonuses and shareholder payouts. The American Government are bailing out car manufacturers with loans taken from funds that have been allocated for ecologically significant design improvements. The very rich are doing for the very rich what they have refused to do for the very poor. If the promises in the gracious Speech are to be fulfilled, these global issues must be addressed as a matter of first priority.
We should not be aiming to return to business as usual, as some phrases in the Front-Bench speeches might have implied. It is business as usual that has got us into this mess. We need a paradigm shift. We cannot simply return to the old mixed economy, balancing the rampant follies of the so-called free market with appropriate government ownership and intervention; we have to address the underlying issues. Behind the sudden new squeals for help from the very rich, we must listen to the long-term cries from the very poor. My colleagues and I intend to continue our work with bankers and economists to shape and develop a future global economic order in which all may genuinely benefit. When I say all, I think of the people I work with day-by-day in the north-east of England. In the strong opening paragraphs of the gracious Speech, the Government promised to address local issues facing families and businesses.
Ten days ago, I hosted a meeting of business leaders from across the north-east. The message came through loud and clear from speaker after speaker that the banking model we have worked with recently is flawed and needs to change. Bailing out the banks will not do any good unless the system is radically reformed. The massive over-regulation, which tries to diminish risk-taking in some areas and which is a standing joke among struggling small businesses, now appears as a displacement activity for the massive deregulation which has encouraged astonishing irresponsibility and inappropriate risk-taking in the financial sector.
That said, I am hearing two different messages around the north-east right now. On the one hand, the recent steady economic improvement has been good and diverse. Some, previously redundant, have found new work. We have a traditional low-spending population, so when money is tight, we do not see a drastic change in spending patterns. The manufacturing members of the North East Chamber of Commerce, particularly in the Tees Valley, are markedly more positive than other parts of the business community. However, unemployment has gone up to 8 per cent, the highest in the country. There have been significant job losses,
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Meanwhile, we in the churches remain committed to working on the aims highlighted in the gracious Speech through local partnerships at every level. Churches are distributing food and running small credit unions. Churches can often give a lead in helping to identify to social services those most at risk. In addition, though voluntary agencies are themselves at risk when money is tight, we can still help provide voluntary work for the unemployed, particularly young people, so that they can develop skills and retain a sense of self-worth. We are actively involved in helping local communities to think creatively about our medium and long-term aims and how to prepare for them. The churches can take a small but significant lead in helping maintain and restore morale and thus assist in the objectives outlined in the gracious Speech. I hope in years to come that we look back to this moment, not as a disaster followed by a muddle, but as a time of fresh vision and bold action which made a real, lasting difference both globally and locally.
Lord Bhattacharyya: My Lords, the gracious Speech made it clear that the economy is the overriding priority for the Government. I declare an interest as a professor of manufacturing, a vital area of the economy. Hence, I shall concentrate entirely on manufacturing and in our ability to compete both during and after the crisis. In the early 1970s, manufacturing represented 32 per cent of the British economy. Today, it is around 13 per cent. We are all familiar with the life support culture, inefficiency, lack of investment, industrial strife, poor management and product starvation that plagued British manufacturing in the 1970s and 1980s. After those scarring experiences in the 1980s and 1990s, policy was to allow the market to run its course; that is, do nothing. As a result, we now have a smaller but leaner and more productive manufacturing sector. Obviously, this has been helped by a spectacular growth in inward investment. Today, the manufacturing sector employs 3 million people across the UK and a quarter of British exports are in the high-technology sector, a higher proportion than France, Germany and the USA. A company like Land Rover, not so far away from my university, invests nearly £400 million a year in research and development in Britain, totally different from what it was in the 1970s, 80s and 90s, and until
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Today, manufacturing faces severe challenges as a result of the financial crisis. We must act swiftly so that the cost of failed speculation is not a loss of vital innovation. My noble friend Lord Mandelson has recognised that many sectors need short-term help because of the global downturn. I agree that that will need some industrial activism. We need the best brains to carry out research so that we can ease the process of attracting qualified people to the UK from all over the world. Crucially, we need to invest in engineering and technology research and skills. A co-ordinated approach to research has worked extremely well in the life sciences and the biotechnology sectors. Public investment and charitable funding of more than £2 billion a year has worked wonders for our pharmaceutical industry, which now employs 70,000 people and has a turnover of more than £50 billion. That should be applauded.
However, we know that engineering and technology research funding is only one quarter of that sum. Engineering and technology, which is a much larger sector of the economy, needs the same approach in funding and skills as life sciences. This will require co-ordination between bodies such as the EPSRC, the Technology Strategy Board and the RDAs. These agencies must have a symbiotic relationship with industry to ensure a critical mass of innovation. Advantage West Midlands is actively pursuing this. Only businesses which fund innovation will have new products to offer when consumer confidence returns, and good products and good margins decide the fate of companies.
Britain is a relatively small country. In a globally competitive environment, we must export and we must ensure that we always have a world-class product base. The Government have set out the areas in which we as a nation need to innovate. These priorities are where we should work with businesses to achieve practical applications of engineering and technology. We must enact an integrated innovation strategy. By 2011, we will spend almost £4 billion a year on scientific research. We must focus some of those resources on what President-elect Obama called building the ecology of innovation. The President-elect is concerned about the future of the product base in America. We should be just as concerned in the UK.
The Technology Strategy Board supports applied research, but its total budget is less than one-tenth of that of the research councils. Today, funding still has an overwhelming bias to pure science, a phrase that suggests a false divide between research and application. We must develop applied research plans for sectors such as energy, environment, computer security and so forth. We should reach out to businesses and not always expect them to take the lead in applied research in difficult economic times. We must try to reduce the bureaucracy in government departments, which stifles innovation with too long a response time. The tradition of scientific research in the UK is brilliant. It is also
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In the past 20 years, we have built efficient, flexible and innovative manufacturing businesses in sectors as varied as aerospace, pharmaceuticals and automotives. These companies have fixed their roofs, so to speak. Now it is not the roof but the foundation of future growth that has been shaken by the recent crisis. Today, the problems of the financial sector mean that a short-term rebalancing of the economy is inevitable. I am sure that the Government will take action to fix that. But we need to pay attention to the drivers of long-term growth, as well as short-term life support. Successful businesses need our help to make Britain fit for the future. It is vital that we support them in that endeavour.
Lord MacGregor of Pulham Market: My Lords, in the short time available to speak I want to confine myself to three issues, and I take as my text for the first two Mervyn Kings comment to the Treasury Select Committee on 25 November that,
In other words, and here I follow the comments of my noble friend Lord Wakeham, the shortage of bank lending is now one of the most important problems we face. Indeed, the governor seems to think that it is the most important problem facing the economy. Three days later the CBI reported that some 40 per cent of firms have had their credit facilities reduced or withdrawn. Everything I hear in business and financial circles confirms this, and here I confirm my interest as recorded in the Register as a member of the supervisory board of DAF Trucks and chairman of the pension funds. Let me say also in passing that the reduction in VAT at a cost over two years of £12.5 billion, when prices are coming down by often more than that, seems a very poorly directed public financial decision.
My first point concerns small and medium-sized enterprises. The Government have announced a new small business finance scheme to support up to £1 billion-worth of bank lending. The Secretary of Statethe noble Lord, Lord Mandelsonand the noble Lord, Lord Bilimoria, cited the recent survey undertaken by the Federation of Small Businesses, which I have with me. Two points that were not mentioned are that when small businesses were asked how they felt about the financial prospects of their businesses following the Pre-Budget Report, 58 per cent were significantly or somewhat less optimistic compared with only 6 per cent that were optimistic. Further, in response to being asked whether they had seen an increase in the cost of existing finances in the past two months, 30 per cent said yes, and I am told that the percentage increases with every new survey. In response to being asked whether they have seen an increase in the overall cost of new credit in the past two months, again 30 per cent said yes.
I was the Minister for small business in 1981 who introduced the loan guarantee scheme, and I was delighted to learn from many small businesses subsequently that it had helped them to get off the ground. We have garnered much experience over the years on how to build on and extend that type of scheme in the current crisis. The Federation of Small Businesses has put forward its proposals and discussed them with the Government and the major banks, but I understand that it is not likely that the new small business finance scheme will be implemented until the end of the January. My first point is this: is there any good reason why the scheme could not be introduced at the latest by 1 January 2009 because it is so urgent? Can the Minister tell us in his reply why the earlier date cannot be achieved, or better still, say that it will be?
My second point concerns large and medium-sized major corporatesthat is, those not classified as SMEs. I want to elaborate on the point made briefly by the noble Lord, Lord Oakeshott. So far everything has been concentrated on, and until recently most media comments have been on, homeowners and SMEs. Little mention has been made of the need to focus on the problems of large companies, on which smaller companies so frequently depend, and of the potentially huge unemployment consequences from that sector. Everything I hear confirms that where facilities even for the most highly rated and creditworthy companies are being renewed, it is often at much higher margins over LIBOR and with substantial fees up front. Where new facilities are sought, again even from highly creditworthy companies, the margins and fees are also much higher, if they can be offered at all. Many banks are simply saying that they will not provide them. However critical one may be of the previous mismanagement and errors of the banks, one has to recognise that they are taking commercial decisions as they see them to improve their margins and strengthen their balance sheets. I am told that most banks are looking at the end of the year and trying to get them into the best possible shape. Does that lead to the suggestion that the situation might be a lot better after the end of the year? I suspect not.
I am not sure that the call of the Prime Minister, the Chancellor and others for lending rates to follow down to base rate will have much effect. Indeed, when setting out the principles for the UKFI, the new company set up to manage the Governments investments in the banks, the Chancellor said that one of them would be to respect the commercial decisions of the financial institutions. Therefore, I follow the noble Lord, Lord Razzall, in saying that I would be interested to hear how the Minister will deal with this major challenge. So far, it aint working.
One suggestion put to me, and one I believe that the car manufacturers hinted at during their recent meeting with the Secretary of State, is something I raised in the last debate we had on these issues. I mentioned the possibility of introducing a commercial paper funding facility similar to that which the Federal Reserve Bank of New York introduced in the US at the end of October, purchasing highly rated US dollar three-month unsecured and asset-backed commercial paper via eligible
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My response to that is, first, that the Federal Reserve already had in place facilities similar to the Governments credit guarantee scheme but found it necessary to introduce the new one subsequently. Secondly, although by no means a bank replacement for the credit guarantee scheme, it would add to it by enabling companies, as distinct from bank lending, to take advantage of it. It would help to free up more bank lending and thus, for appropriate companies, make a contribution to what the governor has called the countrys most pressing problem.
My final point refers to savers and the pension funds. We have heard a great deal about the plight of borrowers but the other side of the coin, which is now being noticed, is the plight of savings and, not least, its effect on pensioners. When the savings ratio is at an all time low, it discourages savers even more. It is ironic to hear some critics saying, If only the banks and building societies would lend more of their money, when it is, of course, their savers moneys that they are lending, They need to keep attracting savings, and that is another reason why the banks will not simply come down to base rate. Many pensioners with modest lifetime savings are very worried about making ends meet. Ultimately, it is a question of balance. We should learn from Japan the lessons of a decade of nil or almost nil interest rates and that other side of the coin needs to be expressed.
We have spoken endlessly in this House about the decline of pension funds and the part-government responsibility for that. We are now coming into a new danger in that, with the drop in asset values, many pension funds will have a deficit much larger than at the 2007 valuation or even their valuation today. I hope the regulator, as I think he has already indicated, will be sensible and cautious about putting too many pressures on pension funds to deal with a short-term problem in regard to deficit recovery plans, which would make the long-term issues for pension funds even worse.
Lord Skidelsky: My Lords, the opening paragraph of the gracious Speech pledges the Government to give overwhelming priority to ensure the stability of the British economy during the global economic downturn. We would all endorse that.
The Minister outlined several useful measures that the Government have taken or are planning to take, which remind me of the useful measures taken by Ramsay MacDonalds Labour Government of 1929 to 1931, about which I wrote my first book, but which were far too small to stem the economic blizzard that was then sweeping the world.
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