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First, the accent in the Pre-Budget Report was on stimulation of the consumer. However, regardless of a VAT reduction, people will not go shopping for big-ticket items when they are out of work. I hope that the Secretary of State’s department will maintain a sustained emphasis on keeping people in work and on training immediately those who have to be trained in alternative employment because of inevitable redundancies

Secondly, at the start of today’s debate the Secretary of State said that, when we come out of recession,

The nation is in peril of experiencing long-term detriment to necessary private sector growth, because a shrunken private sector will be working valiantly to pay the extravagant and unfunded public sector pensions to

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which the Government committed only a few years ago, including continued commitment to a retirement age of 60 for current public sector employees. That is entirely inconsistent with the private sector having to work longer these days for no better pay and certainly less job security. It means that people will have to work longer, in part to pay for those public sector pensions in the long term. I cannot think of anything more economically or socially divisive than employees in our eventually recovering economy having to face that division.

Lastly, I say to the three parties in this House and in the other place that there is a need in the year ahead—one of the most perilous years economically for this nation since the Second World War—for all politicians to strike a better balance. Sadly, at the moment, that is more noticeable by its absence. The taxpayer is a shareholder who wants strong, profitable, dividend-distributing banks. The taxpayer is a borrower who wants interest rate cuts passed on as extra distributable income for the private individual and as cheaper money to help with the rising cost of business. The taxpayer is also a saver who wants greater reward for previous—dare I use the word?—prudence. Is that difficult? You bet it is. But balancing different interests and taking very difficult decisions is what people elect Governments to do. When those different interests come together all in one person—the taxpayer—there must be a displayed use of balance. That has been conspicuous by its absence across the political divide. I hope the country gets better in the year ahead.

9.01 pm

Lord Newby: My Lords, the debate today has concentrated on two questions: the nature and scale of the economic problems we face, and the nature and scale of the response. The majority of the time has been spent on the second of the two questions. I intend to follow that pattern.

As for the nature and scale of the problem, slightly different views have been expressed about how we got here. To summarise, however, I think that there is agreement that we now have a major economic crisis, caused in large measure by a financial crisis. The differences expressed have been largely to do with who is to blame and how much the Americans, as opposed to the British, should bear the burden of opprobrium. Frankly, that is a second-order question. The real question is: how bad is it going to get and what are we going to do about it?

As for the scale of the problem, the Government set out in the Pre-Budget Report their estimate of how deep they expect the downturn to be. I think it fair to say that most people believe that that is an underestimate. We heard the suggestion today, for example, that GDP next year might fall by as much as 2.3 per cent, and there have been many suggestions that it will take us longer than the Government predict to see growth re-established.

To make some sense of the scale of the problem, I returned to the old adage, “Why look in the crystal ball when you can read the book?”. Noble Lords have mentioned this evening a string of stark and unwelcome

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statistics. The 0.5 million increase in US unemployment in one month was one. Another—which I am not sure was mentioned but is equally stark in the UK—is that car sales have fallen by 37 per cent in a year. One which I found almost incredible is that energy consumption in Italy was apparently down 30 per cent last month. Those are immensely worrying figures.

Equally, we have already seen from the Pre-Budget Report how these two crises are having seriously deleterious effects on the government finances. Page 32 of the Pre-Budget Report shows that, since the Budget, the Government’s cash requirements have already increased by £108 billion beyond what was envisaged at the time. A significant proportion of that has to do with recapitalising the banks and putting money into the Bradford & Bingley, but a requirement of £26 billion has been caused over that short period by what is described in the Pre-Budget Report as a weakening of the fiscal position; that is, taxes are not coming in at the rate predicted and expenditure is increasing as the automatic stabilisers come into effect. So we are undoubtedly faced with the greatest economic crisis since the Great Depression.

That requires from us a proportionate response, and noble Lords have given many reasons for doing so. In addition to the obvious moral argument for mitigating the human costs of long-term unemployment, there are the more narrow economic arguments. If companies go bust, you cannot necessarily reinvent or reinvigorate them when the upturn comes. We know very well that the longer people are out of work, the less likely it is that they will ever get work again.

I turn now to the nature and scale of the response. The elements of the response clearly include getting the banks to lend again; fiscal and monetary policy; and a raft of other issues, including the skills agenda, which have been discussed this evening. As for getting the banks lending again, we broadly welcome the Government’s actions in this area. However, there are one or two further things that they could do. First, they could make better use of their leverage as part or full owners of a number of major banks. This should include appointing explicitly government directors. The noble Lord, Lord Paul, spoke about the need to have manufacturers represented at higher levels of decision-making in bank lending. Perhaps we could have one or two manufacturers among them.

Secondly, the Government need to set their strategy. Ministers have sometimes seemed to think that there is no difference between setting a strategy and deciding which individual account holder is to be given a loan or have a loan withdrawn. That is a relatively straightforward distinction and the Government should follow it. Thirdly, taking up the point made by my noble friend Lord Oakeshott, the Government should use the nationalised or part-nationalised banks to work with the Post Office as its savings products partner, rather than the Bank of Ireland. We fear that the Bank of Ireland route is likely to lead to significant difficulties down the track. Fourthly, making the Banking Code statutory, as the Government are planning, is a good idea. I share the views of the noble Lord, Lord Broers, on that. Will it be done in the current Banking Bill in your Lordships’ House before it goes back to

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the Commons, or will a second Bill be introduced later this Session? If so, what exactly is the Government’s planned timing?

The final issue is whether the Government believe that further statutory regulation is needed in corporate governance, as the noble Lord, Lord Smith, mentioned, and whether we in the UK might look again, as the noble Lord, Lord Low, implied, at least at the principles of the Glass-Steagall Act. Are the Government giving any thought to either possibility?

As for monetary policy, we on these Benches welcome the MPC’s dramatic reduction in interest rates. However, there is a possibility that if prices continue to fall, we could fall into the liquidity trap of zero interest rates. In those circumstances, noble Lords on all sides of the House might surprise themselves by looking to Milton Friedman. He argued that in such circumstances a quantitative easing is needed. To put it in layman’s language, he argued in favour of providing “helicopter money”, whereby the Government print money and effectively drop it from the sky in order to get expenditure going. I am sorry that, in his evocation of Milton Friedman, the noble Lord, Lord Higgins, did not extend his remarks to that aspect of Friedman’s thinking. If he had, he might have found himself in an unlikely alliance with the noble Lord, Lord Smith, on the appropriateness of Friedman’s thought. In dealing with the kind of severe deflation we now face, we find a most surprising conjunction: we might need to bring together Friedman and Keynes in producing a comprehensive policy response.

On fiscal policy, there seems to be a near-unanimous view across the globe that a substantial and co-ordinated fiscal stimulus is needed. As noble Lords have pointed out, such a stimulus is being adopted across much of Europe and advocated on a very serious scale by President-elect Obama. There is, however, a notable exception to this consensus. The Conservative Party is not part of it. On 26 November, George Osborne in another place said that the Chancellor’s plans have taken the country,

That is childish nonsense. He should take a leaf out of the book of an illustrious predecessor, in the shape of Harold Macmillan. In 1956, when he was Chancellor and the debt-to-GDP ratio was 146 per cent, as against the maximum of 57 per cent which the Government envisage over the next few years, Macmillan said:

“Whatever the temporary difficulties from trying to run too fast, if we stand still, we are lost”.

Well, I fear that the Conservative Party in the Commons has decided to stand still, and, certainly, it looks lost.

As for the specific route that the Government have adopted to push the fiscal stimulus, in the form of the VAT reduction, I share the qualms of a number of noble Lords about its effectiveness and whether it is the best conceivable route that could have been taken. In his Statement, the Chancellor said:

“This temporary reduction is equivalent to the Government giving back some £12.5 billion to consumers to boost the economy”.—[Official Report, Commons, 24/11/08; col. 495.]

However, the Pre-Budget Report makes it clear that half the increase, in real purchasing power, translates into an increased volume of spending, with the remainder

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used by households to bolster their finances. So even on the Government’s own assumptions, only half of it will serve the purpose for which it has been introduced.

Our views are that there should be a rebalancing of the tax system, with higher rates of tax, particularly corporation tax, funding a cut in income tax for those at the bottom end of the scale. The reason for this, apart from any arguments of fairness at this moment, is that those on lower incomes have a higher propensity to consume than those on higher incomes, so a rebalancing of the tax system in itself, without an overall cost, leads to a fiscal stimulus. There is an argument for going further, but we have argued that any additional stimulus should take the form of programmes that boost investment.

The area that is crying out for investment more than any other at the moment is housing. The Government’s plans to increase housing expenditure simply fail to meet the scale of the problems, particularly at a time when many housing associations are on the verge of collapse because they have entered into rather speculative deals with private sector developers who now cannot deliver. Frankly, unless the Government do significantly more than they currently intend to do on social housing, not only will they miss a major opportunity to have a real impact on a problem that has got worse and worse during the lifetime of this Government, they will also miss a major opportunity to put into employment many of those unemployed construction workers who are currently a drain rather a contributor to the economy.

Looking to the future, the Pre-Budget Report sets out how the Government envisage that they will recoup the money. Given the uncertainties, that seems an almost completely spurious exercise, looking so far into the future. Certainly, the 45 per cent tax rate looks highly unlikely to yield the funds that the Government predict for it.

I move on to one or two other points that have been raised in the debate. There has been some discussion of the global economic framework. I should like to ask the Minister in particular whether the Government are now confident that the declaration made at the end of the Washington talks that the Doha round would be concluded before Christmas is now likely to come to pass.

A number of noble Lords, including the noble Lord, Lord Bhattacharyya, the noble Baronesses, Lady Sharp and Lady Garden, and the noble Lords, Lord Rooker and Lord Layard, talked about the combination of education, innovation and science in apprenticeships, which is clearly another area of crucial importance in getting the economy moving again. I have great sympathy with the comments of the noble Lord, Lord Rooker, about the importance of science for cool professions such as fashion and motorsport. He might have added “computer games”. It seems to be a major problem that the way these subjects are taught squeezes all the interest out of them. Instead of young people aged 10 or 12 being motivated to think that learning science will mean that they can do a really interesting and sexy job, they are faced with a series of bureaucratic, exam-based hurdles to get over, so any interest in science is squeezed out of them rather than enlivened.

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A number of noble Lords, including the noble Lord, Lord Thomas, the right reverend Prelate the Bishop of Durham and the noble Lord, Lord Sawyer, spoke about mutuals and credit unions. I agree entirely with the comments of the noble Lord, Lord Thomas, and I hope that when we have the reform legislation on co-operatives and credit unions, we can go beyond mere technical tinkering to see what we can do in terms of regulations and, more generally, to breathe new life into the credit union network.

The coming months will see further major shocks to the economy, and some of them will be largely unexpected. From our different points in the House, we will no doubt have different policy responses. However, we welcome the fact that we now have senior Ministers in both DBERR and the Treasury in your Lordships’ House, and we will welcome all opportunities to influence them as they exercise their judgment in taking us through the difficult economic times ahead.

9.16 pm

Lord De Mauley: My Lords, this has been a very interesting and deeply sobering debate, and I am most grateful to all noble Lords who have taken part. My noble friends Lady Noakes and Lord Higgins, among several others, have given a thorough and informed analysis of the economic situation. The liquidity crisis, to which my noble friend Lord Patten among others referred, over which the Government have presided and of which the Banking Bill will, we all hope, play its part in preventing a recurrence, is but one half of the wider economic disaster facing our country, our businesses and our people.

My noble friend Lady Noakes, who will undoubtedly ensure that the Banking Bill receives rigorous scrutiny as it passes through this House, spoke primarily on the broader economy, as did several noble Lords, including my noble friends Lord Marlesford and Lord Caithness. Other noble Lords focused on specific areas. My noble friend Lord Bates focused on home owners. In the time I have available, I will concentrate on the effect that the recession into which we find ourselves plunging will have on the business sector, and raise some questions for the Minister about how the Government’s programme, set out in the gracious Speech, is intended to address the problems of business in the difficult times that we are entering.

The Secretary of State, who opened this debate, is reported to have undertaken a last-minute campaign to rid the Government’s programme of anti-business measures—for which, at least, we should all be grateful. We look forward to seeing whether he has had any success in inserting anything that is pro-business. The equality Bill, for example, represents an opportunity to simplify the sort of regulation that has cost businesses dear over the past 10 years. We will study the details, now that it has finally been published, to see whether it achieves that. Unfortunately, I am not optimistic, given this Government’s history on regulation. My noble friend Lady Noakes also touched on this. I remind your Lordships of the Regulatory Reform Act 2001 and the Legislative and Regulatory Reform Act 2006, the second introduced because the first

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simply did not work. Both were potentially powerful Acts that promised great things but so far have achieved so little. Let us hope that, by now, the Government have realised that, despite their continuing love of box-ticking and form-filling, businesses have better things to do.

However, I must give credit where credit is due. In one department, the Government have learned to listen to Conservative suggestions. For several years now, the Department for Work and Pensions appears to have been reading Conservative policy papers with flattering attention. Both the welfare reform Bill and the previous Welfare Reform Act 2007 contain provisions ensuring the use of incentives to seek employment, the use of private and voluntary sector delivery on a payment-by-results basis and the reassessment of incapacity benefit claimants to ensure that the system is not consigning 2.5 million people unnecessarily to lifelong unemployment. They are all Conservative recommendations. One can only imagine how much the taxpayer could have saved during the golden opportunity presented by the past 10 years if these Conservative policies had been accepted earlier.

As it is, the reform of incapacity benefit will not be completed until 2013, according to the DWP. In many areas it is almost too late. The Government appear to have waited until an OECD prediction that we will suffer the worst rise in unemployment of any G7 country before coming to the conclusion that giving people access to information about new jobs might be helpful. However, a recent moratorium on closing jobcentres is not much use when 492 centres have been closed since 2002, and only three will apparently be saved by this policy.

Of course, information about available jobs will not be enough to help the thousands of people facing unemployment. Improving the skills base of the UK workforce is critical but, as the 2006 Leitch review made clear, a recession was not necessary for Labour failure in this area to be obvious to most. With the children, skills and learning Bill, Labour are once again planning to rely on quangos to deliver what needs to be genuinely rooted in the business environment. After two major reorganisations of the Learning and Skills Council, the Government have decided that multiplying it by three is the best use of taxpayer funds. They have also decided that a statutory entitlement to apprenticeships is enough to counteract the regulatory hassle and inappropriately targeted funding and dumbing-down of standards that have already resulted in their missing every apprenticeship target they have set themselves.

Of course, excessive bureaucracy and endless reorganisations are not confined to skills and training. One need only look at the 3,000 business support schemes run by over 2,000 public bodies and their contractors to see how public finances have been run into the red with so little return. Even the Government appear to have realised that the £10 billion to £12 billion they have sunk into these schemes might not have been entirely well spent. Two years ago, they thought that a reduction by 2010 to 100 schemes might result in a little more efficiency. I think that they have so far managed to scrap 10—the Minister will correct me if I am wrong—so there are 2,890 to go.

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Regional development agencies, of which my noble friend Lady O’Cathain spoke with some force and which are to be given more powers in the Local Democracy, Economic Development and Construction Bill, might have been thought by a Government less devoted to quangos a good place to start. After all, they spend more than a third of their funding on administration costs and are widely considered to be completely disconnected from the very businesses that they are meant to be supporting. Apparently not, however. Can the Minister give us an indication of how many of the remaining 2,890 superfluous schemes are likely to have been abolished by the target date?

The Government have a lot of convincing to do on each of the Bills I have mentioned so far. One Bill has unequivocally been drafted with business in mind: the Business Rates Supplements Bill, to which my noble friend Lady Noakes and the noble Lord, Lord Cotter, referred. It gives councils the power to raise business rates for local economic development. I would be most interested to hear the Minister’s view on this Bill, and specifically whether he considered the introduction of a mechanism that would allow the raising of business rates to replace central funding, an innovation carefully calculated to enhance the confidence and survival prospects of businesses at what is clearly such a difficult time for them. Local councils are certainly better placed to promote economic development than regional development agencies, but I very much doubt that they are better placed than the businesses that make up the economy and which will be expected to bear that cost. We will be looking at this Bill very carefully indeed when it arrives in your Lordships’ House.

We on these Benches, by contrast, would step much more carefully when raising taxes on business. It is clear that we are not in agreement with the Government on this, as in so many other areas. Rather than fiddling in the margins and implementing expensive schemes with no guarantee of success, we would concentrate on maintaining the smooth running of the engine of our economy—the small businesses to which my noble friend Lord Courtown referred, which provide the majority of private sector jobs and more than 50 per cent of private sector turnover.

My noble friend Lady Noakes explained that, despite the Government’s banking package, they have failed to remove the blockage on lending to businesses. My noble friend Lord Wakeham underlined how vital the availability of finance is to businesses. My noble friends Lord MacGregor of Pulham Market and Lord Trenchard also underlined that point. My noble friend Lady Noakes explained Conservative policy which would address this blockage on lending, to which my noble friend Lord Tugendhat also referred. Rather than increasing national insurance contributions at a time when many companies are already realising—as the noble Lord, Lord Bilimoria, said—that they cannot afford to maintain their headcounts, a Conservative Government would seek to make employment cheaper, not more expensive. We would cut national insurance contributions by 1p for very small companies and introduce financial incentives for private sector employers taking on the unemployed. We would cut small business taxes too by reducing the small companies’ rate of corporation tax from 22p to 20p. Rather than imposing

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a costly, inflation-busting reduction in VAT—to which my noble friend Lord Marlesford, among others, referred—at a time when the Bank of England, which is responsible for responding to inflationary pressures, has cut interest rates to a historic low, we would give small businesses help with their cash flow by allowing VAT bills to be deferred for up to six months.

My noble friends Lord Patten, Lord Sanderson and Lord Eccles, among others, spoke about the importance of pensions and savers and raised some important points. My noble friend Lord Patten suggested abolishing the requirement to buy an annuity at 75, which is, indeed, Conservative policy.

In conclusion, the Government are insistent that the problems the UK economy is facing are all due to the global economy. They see no inconsistency between claiming the credit for 10 golden years, when every other comparable country also had low inflation and high growth, and denying responsibility when the OECD predicts that our country will suffer a deeper recession than those exact same countries.

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