Previous Section Back to Table of Contents Lords Hansard Home Page

However, these irresponsibilities are not my theme. We are where we are, giving rise to the question: is there something so different about this crisis that past policies will not do what is required? Also, how are people reacting to the crisis and how will they behave? I hope we are close to an agreement that this crisis is quite unlike post-war recessions. The Pre-Budget Report recognises that action to stem inflation has usually triggered recession in the past 30 years or so. Inflation turns out to be irrelevant to this crisis. Nor did government action start it. Indeed, inaction bears the greater responsibility.

The report also spells out the difficulties of forecasting. Such phrases about future credit conditions as “will return to a new norm”, qualified further with uncertain timing, show that the draftsmen knew that the past is an unreliable guide to the immediate future. This must be right. Then there is the Treasury trend line for growth, which has been in recent years 2.7 per cent. The way in which this has been achieved has proved unsustainable. It has depended to a significant degree on financial services and they in turn depended on the global economy. Yet the Pre-Budget Report claims that this recession will be shorter than the past two

8 Dec 2008 : Column 228

and that we will promptly return to our trend line and, indeed, better it in 2011. This judgment is redolent with uncertainty, depending on events about which in the short term we know little and on the success of actions taken by many other influential players in the global market on whom we rely since we will not get out of this crisis on our own.

It is too early to assess the degree of optimism built into the Pre-Budget Report but I do not doubt that it is overconfident in its predictions. It is, of course, the mention of confidence which leads naturally to the reactions and behaviour of people. What do people think? Few people are at all sure how this debt crisis came about. Not many people confidently understand derivatives, the securitisation of mortgages or the imbalances between Asia and America. They have been told that this is a global crisis started by the Americans, so presumably they will have to get us out of it again. With their healthy scepticism, people know that it is not sensible to expect their Government to be in control of global events. They were not able to handle the risks we were running and cannot now be expected to know either when or whether things will return more or less to the old norms or will move on in some quite different direction. It seems uncertain that the changes, which people are told will be good for everybody everywhere, are also the best for each and every United Kingdom household. Many people need to make decisions that cannot wait upon the renegotiation of global co-operation.

There are other differences; it is not only the global dimension. The population is much older than it was in previous recessions. The elderly have to be careful with their money. The savings ratio, which was 3.5 per cent in 2006, is now 0.5 per cent and shrinking. As the Treasury says, we can expect that additional spending power, as from the VAT reduction, will go half into spending and half into saving. What are people to make of the 20 pages in the Pre-Budget Report entitled “Delivering on Environmental Goals”? Surely this means that they should consume less.

Finally, nagging at many people will be the thought that it cannot have been 100 per cent the fault of the banks. If nobody looks to be sure to get us out of this crisis, we had better do as much as we can for ourselves. People are sure to wait to see what happens next. Will the banks strengthen their balance sheets? Indeed, how long will it be before they know the full extent of their losses? Will the moves to encourage spending make a significant difference, or will people and small businesses concentrate on saving? No one knows. We need more time to find out, at a time when we have been left with so little room to manoeuvre in our efforts to determine an outcome.

Come the 2009 Budget, the forecasts in front of us now will demand revision. We will not be going back to where we were, but on to somewhere quite different, which will encompass social as well as economic policy; and we are not at the moment in control of the journey.

8.02 pm

Lord Barnett: My Lords, I strongly support the case for a fiscal stimulus; that goes without saying. I am bound to say that I would not have used £12.5 billion

8 Dec 2008 : Column 229

of the £20 billion-odd pounds on a 2.5 per cent VAT cut. I have a long list of other things that I would have liked to have done, but I will not spell them out at this hour. Having spent so long, sadly, in my position as Chief Secretary having to cut public expenditure, I would have loved to have had the opportunity to decide how to spend £12.5 billion differently from the way that the Government chose, on VAT.

However, the real question is whether the current fiscal stimulus will work. On that, I shall quote my favourite economist. With respect to my noble friend Lord Peston, I am not referring to him or to his son. I refer to Anatole Kaletsky, one of the few writers in the Times who I can agree with fairly regularly. He is worth quoting. He said:

“JK Galbraith, the author of ... a book that Mervyn King ... has been recommending to all his visitors ... said that there are two kinds of economists: those who don’t know what will happen and those who don’t know they don’t know”.

I don’t know, and I know that I don’t know. What everyone is doing these days is guessing—apart from the media, which is simply exaggerating any guesses. The plain fact is that the Chancellor had to make a forecast in his Pre-Budget Report. In his case, it is also a guess, but it is a Treasury guess. I cannot help thinking that his guess was just a little optimistic. On his forecast of figures, for this year—2008—it is not a guess, because we know pretty well what it is going to be. We will have two quarters of downturn, and even then the forecast is that we will have had growth this year of 0.75 per cent. The Treasury’s guess for 2009 is that there will be a downturn of 0.75 per cent to 1.25 per cent. In 2010, the guess is that there will be growth of 1.5 per cent to 2 per cent. I hope that the guesses are right, but I suspect that that guesswork could well be wrong.

Even if it is wrong—even if it is 1 per cent or 2 per cent worse—my friends are surprised when I tell them that in practice we have had steady growth every single year of the past 16 years. If we have a downturn of even more than the Treasury has guessed, it would not be the catastrophe or disaster that the media would have us believe. Most people do not hear that; they only read the media headlines, which is 90 per cent the pops—even the Times, which is even worse at times on its guesswork and its exaggerated headlines.

Of course, whichever way we take the guesses, the situation is serious. It is particularly serious for those who are going to be unemployed, or for those businesses that are going to go bust in the next year. It will be very serious indeed. Apart from the fiscal stimulus, with which I strongly agree, bank lending is, if anything, even more important in current circumstances. I declare an interest as chairman of a small business and a major investor in it. My company does not need their money, as it happens. We are in the recycling industry, which is rather more growth-conscious than most. That is beside the point. Industry, and certainly small businesses, needs bank lending, and it is not clear to me how policies such as a statutory code will define where the lending should go. I had thought at one time, like the Opposition apparently are now proposing, that a guarantee to banks would be helpful, but you

8 Dec 2008 : Column 230

still have to say where you lend, and I do not see how a government guarantee of selective investing is going to be possible.

My main point is how on earth are the government directors who will be appointed to banks going to tell the bank boards what they are going to do? Presumably, they will be non-executive directors. The current non-executive directors, on something like £200,000 a year, have hardly been doing the job that a non-executive director should be doing with the banks. I doubt if they even knew or asked questions about derivatives or off-balance-sheet figures. What are we going to tell the banks’ new government directors to do as a strategy to help more lending? When they finish that, we are going to have very high borrowing, whether the fiscal stimulus is used or not. The idea that no fiscal stimulus would result in lower borrowing is a nonsense. We all know that, because the recession would go on longer and deeper, more businesses would fail and more personal suffering would take place. There must be a repayment of the borrowing, and the Chancellor had to set it out. In fairness, he spread it over a number of years.

I make one other suggestion to him from my experience as Chief Secretary to the Treasury of five years where, as I said, I sadly had to spend most of my time cutting public expenditure, which was not what I came into politics to do. The Government tell us that they have found another £5 billion of efficiency saving. I say to the Government that if departments have accepted £5 billion, there is room for a lot more. I hope that they will not just settle at £5 billion. I can tell them some ways of doing that, but perhaps not now.

In conclusion, if there is a better alternative than what the Government are doing, I would like to hear it. I agree with what the noble Lord, Lord Skidelsky, said earlier—that the 20-odd billion pounds of fiscal stimulus may well not be enough. I hope that the Government can give me an assurance that in due course, they will, if necessary, find sources of increased capital expenditure in the public sector to boost borrowing even more, because if that is the only way of reducing suffering in the business sector and the personal sector, it would be well worth doing.

8.10 pm

The Earl of Courtown: My Lords, I do not pretend to be any expert on the economy, like the noble Lord, Lord Barnett, whose wise words we have just heard, nor can I claim to understand in any great depth the best course for macroeconomic policy. What I can tell noble Lords is that I understand the problems facing SMEs, such as that of ensuring that there is enough money in the bank account to pay suppliers and to put wages in the packets of the workers at the end of the week.

The noble Lord the Secretary of State ably described the situation facing the economy; it is not worth repeating or getting even more depressed about than we already are. So where are we at the moment? In a recent debate, I highlighted the plight of small and medium-sized enterprises. A steep decrease in consumer confidence and tough economic conditions have continued to push margins. SMEs are facing a drop in business,

8 Dec 2008 : Column 231

difficulties obtaining credit and the consequent insufficient liquidity to meet their financial obligations. That puts many in danger of following the vicious cycle through to bankruptcy. This is of serious concern for the economic health of this country. As noble Lords have said, SMEs are vital. They employ 60 per cent of our private sector, a total of 13 million people. They could be described as the engine of the British economy.

I accept that the Government have taken measures to deal with the plight of SMEs and I am refreshed by the importance that the noble Lord, Lord Mandelson, attached to the survival of SMEs in his opening speech. In the Pre-Budget Report, the Chancellor presented a series of measures totalling £7 billion to assist SMEs, including funding from the European Investment Bank, a further £1 billion credit offered to worthy businesses through a temporary small business finance scheme, the ability to spread tax repayments and a delay in the increase in corporation tax. I commend the Government for this action, as it will provide some assistance in maintaining liquidity.

Many SMEs are worthy, well run and viable. These actions will help. Furthermore, I accept that many in the business lobby have reacted positively to government action. Although I commend the Government for recent action, I ask whether more could have been done, as other noble Lords have said. The Minister, the noble Lord, Lord Bilimoria, and my noble friend Lord MacGregor cited the results of the recent survey by the Federation of Small Businesses. Perhaps I can add some other statistics from the same survey: 60 per cent of the 5,000 companies surveyed reported a deterioration in trading, 40 per cent have cash-flow headaches and have to wait longer to be paid, and 33 per cent are considering making redundancies.

This leads me to the effect of recent government actions on, for want of a better description, the horticultural economy, an area in which I have experience. The effects of the PBR on the horticultural industry have simply not been as was intended. The change to VAT, as other noble Lords have said, could have been described as a £12 billion government own goal. Implementing the change now and the further change in 12 months is high in cost and highly disruptive. Furthermore, substantial ordinary and extraordinary price cutting on the high street is overshadowing any decrease in VAT. This is preventing SMEs in the horticultural sector from gaining any advantage from the VAT cut. The weakness of sterling is increasing the cost of anything imported, further outweighing this costly and disruptive cut.

The VAT decrease is having little effect on the export market. The collapse against the euro and dollar does not immediately allow businesses to switch to being exporters. The capacity, skills and relationships required for effective exporting to an entirely new customer base take a significant amount of time to develop. Furthermore, the weak pound is counterbalancing key operating costs such as the decrease in energy prices. These effects have led to negative consequences for the environment and employment. There is already an accelerated level of job losses in the manufacturing industry as demand has slowed. Furthermore, this is expected to decrease employment

8 Dec 2008 : Column 232

in retailing, marketing and research and development after the Christmas period. These “soft” business divisions are essential for the growth, competitiveness and development of any business in a global economy. Consequently, they would be essential to any change from import to export.

Despite the Chancellor’s insistence that climate change will not be overshadowed by the economic difficulties, pressures on the business front line are causing the reverse. Growing business and personal finance problems are preventing the long-term environment mindset from prevailing in business decisions. Sadly, this is simply because it can no longer be afforded.

The noble Lord, Lord Borrie, raised the subject of penalties for non-payment of outstanding accounts. Legislation is already in place, and I agree with what he said, particularly when he referred to repeat business.

We are in a situation where well run small businesses throughout the country are threatened by the consequences of bad business practice on the part of the country’s banks. As one journalist said, only SMEs contributed more in deposits than they withdrew in credit in recent times. Yet it is they who are most vulnerable to the rapidly changing economy; they are in the terrible position of being at the sharp end of a crisis that they contributed very little to. SMEs are in the front line of this economic battle. Despite this, the assessment of the Horticultural Trades Association suggests that SMEs in this sector and possibly many others have been left with little with which to tackle liquidity issues. Even excluding the problems associated with the VAT cut, the decreasing strength of sterling and employment issues, a £7 billion stimulus package is insufficient for a sector employing 13 million people. Currently, SMEs leading the economic fight-back have few resources to tackle the enemies of decreasing liquidity, demand and credit.

8.18 pm

Lord Lipsey: My Lords, had this debate been held just a week ago, I should have had to declare an interest as chairman of the Financial Services Consumer Panel. I resigned that position following a civilised row with the Financial Services Authority about the role of the panel and the resources devoted to supporting it. My personal fate is of no interest to the House but I think that there are underlying issues here of profound importance to the future of financial services in this country, to which I wish to devote my remarks this evening.

What, in today’s situation, should the Financial Services Authority’s priorities be? One answer came from some senior Members of your Lordships’ House at the excellent seminar on the crash arranged last month by the Lord Speaker. The FSA, so these senior speakers argued, needed to get away from one of its jobs, regulating the way in which consumers are served by financial services companies, and concentrate on the other—supervisory and prudential regulation. Helping consumers was a luxury that the financial services industry could no longer afford.

I profoundly disagree with that analysis. In the short run, it is true that the FSA has to beef up and improve its performance on supervision. However, in

8 Dec 2008 : Column 233

the long run, there is something even more fundamental than the soundness of institutions, which is the confidence of consumers and savers. The restoration of that confidence cannot be brought about just by restoring the balance sheet of financial services companies; it can be brought about only if consumers resume a feeling that their investment will pay off. However, at the moment very few consumers watching their nest eggs go down the drain feel that. Therefore, we have too little investment in pensions, too few savings put aside and too little put into protection policies, because confidence has gone.

In general, there is no tension whatever between actions designed to restore consumer confidence and prudential action. As, on the one hand, the FSA enhances its supervisory activities, as it must, so too must it enhance its efforts to restore consumer confidence through appropriate regulation. Is it doing so? At best, and being as charitable as I can be in the circumstances, I think that the jury is out. On the one hand, I applaud the fact that the FSA is pressing ahead vigorously with its money guidance work—financial education and so on. The retail distribution review has been progressed and has important gains for consumers—for example, the end to commission-driven independent advice. On the other hand, the RDR has been watered down somewhat. In its latest manifestation, huge concessions have been made to the banks to enable them to sell their in-house brands under the rubric “sales advice”. That is the kind of sales advice you get from a timeshare dealer at a free weekend at its resort—that, at any rate, is what many consumer representatives fear.

Another retreat concerns the FSA’s flagship Treating Customers Fairly programme. Themed visits to firms have been dropped. Then there is my poor old consumer panel, where I sought a wider role to deal with the myriad issues raised by the crash—repossessions, proper compensation for depositors and so on. The FSA plans to appoint a further 318 supervisory staff. When I left the panel, it had two non-administrative staff in post and I was denied the half dozen or so who would have enabled me to do the job.

What is to be done? There are three things. First, the FSA wants to confine the consumer panel to its old core role of advising as an in-house critic of the FSA. That is going to happen, but at least under its new acting chairman, Adam Phillips, who is an excellent man, it should be given enough staff to fulfil that minimal role, not the tiny number of staff that I was allowed.

Secondly, the FSA’s insistence on this narrow role for the consumer panel has created a vacuum in representing consumers in the wider world. That vacuum must be filled and the best body to do so would be Consumer Focus—the old NCC, now revived under the splendid leadership of the noble Lord, Lord Whitty, and its chief executive, Ed Mayo. It has to acquire the expertise and the locus to play the wider role that I wanted the consumer panel to play, but the FSA does not want that.

Thirdly and finally, I want to strike a slightly more speculative note. When the immediate crisis has passed, we will have to have a major debate on the future of

8 Dec 2008 : Column 234

financial regulation. That is inevitable and there will be lots of contributions. My fundamental question was raised earlier by the noble Lord, Lord Sawyer. Is it sensible for prudential regulation on the one hand and retail regulation on the other to be combined in a single institution? There will be one body that somehow has to deal with all the ways in which products are mis-sold or mishandled or when consumers are ill informed, and at the same time will have responsibility for upholding the integrity of the financial system.

I was not in this House for most of the proceedings on the Financial Services and Markets Bill in 1999. Indeed, as a member of the board of the old Personal Investment Authority, I arrived just in time to sign my own death warrant by voting for the Bill’s enactment. Before that time, I remember going to see Alistair Darling in opposition and arguing, unsuccessfully as it turned out, for the then fashionable alternative to a single regulator, which was called the “twin peaks” solution. There would be one body for retail regulation and another for prudential regulation. They would be separate institutions each with its own last to stick to. Time does not allow me tonight to develop the arguments in full. There are arguments on both sides, but in our current situation and given what I fear to be the move away via the FSA from the due attention that should be paid to consumers, I think that that approach deserves another look.

8.26 pm

Baroness Garden of Frognal: My Lords, in this wide-ranging debate, like my noble friends Lady Sharp and Lord Cotter I shall refer to training, apprenticeships and the role of employers. In the current economic situation it has become increasingly challenging for employers to fulfil their part in training and education.

As a nation we have centuries of experience of education, training and apprenticeships. All three disciplines have evolved sometimes for the better, sometimes for the worse. Where the forthcoming Bill promises reform, we hope that our debates will be influenced by a great deal of good practice which has been gathered over the years and that we shall not be reinventing wheels or proposing change for change’s sake.

On these Benches we believe that the best results come from winning hearts and minds. Those mastering manual and practical skills take particular pride in responsibility for their achievements. Enthusiasm is sucked out when doing a job well is deemed less important than proving to unseen external bodies that boxes have been ticked. The most effective apprenticeships are when the learner has a genuine interest in their trade or craft and the employer, trainer or master has skills and knowledge that they are enthusiastic in passing on to a succeeding generation.

The Government should seek to encourage, not stifle, motivation. One of the quickest ways to discourage is to introduce overbearing regulation from the centre. Central government currently has a grip on education and training which risks excluding employers and channelling learners into the assumption that success lies principally in meeting external targets.

8 Dec 2008 : Column 235

Next Section Back to Table of Contents Lords Hansard Home Page