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In the PBR, we were told that there would be a quick dip into recession this year and that we would start to come out of it in the middle of the year. However, the Commission thinks that this year we will go backwards by almost 2.7 per cent, which is nearly three times the Governments central forecast. In 2010, according to the Commission, we would just about emerge into positive territory, compared to the Governments wishful thinking of nearly 2 per cent growth.
If the Government were a company, they would by now have had to issue a profit warning. However, the Government are, in effect, reissuing the figures from the PBR in the convergence programme document as if they were still valid, when they have clearly been overtaken by the increasing pace of the recession. Typically, the Government say that they will revise their forecasts in the Budget, whenever that is, but that is simply not good enough. It does not take a genius to work out that, as the recession deepens, the horrendous borrowing figures will get even worse and the need for action will become even more evident.
That brings me to the alleged centrepiece of the PBR: the fiscal stimulus, for which the Prime Minister likes to claim world leadership. It is clear that the temporary VAT reduction has bombed. Retailers thought it a costly waste of time and I have yet to meet a shopper tempted by an extra 2 per cent discount. We now hear reports of delays in the accelerated capital spending part of the stimulus package. There is a big question mark over the effectiveness of the Governments fiscal stimulus programme in the PBR.
We question the policy itself. In a weak economy, already burdened by high debt and budget deficits, the scope for increased borrowing, beyond that caused by the automatic stabilisers, is very limited. We are not, as the Government like to claim, on our own in this. Both the IMF and the OECD have emphasised that fiscal stimuli need to be affordable in the context of sustainable public finances. The European Commission said in its recovery plan document, to which the Minister referred in his opening remarks:
We have argued for months that the main problem in the economy is a lack of credit and we proposed a national loans guarantee scheme. Bank rescue version 1 failed to restore credit. In the last two weeks we have seen bank rescue version 2 and a package of lending measures aimed at smaller businesses. We wish them well but are far from convinced that they will solve the problems faced by the business community. Beyond that, we believe that fiscal stimuli, in the context of a bust economy, must come from expenditure savings, not debt. We believe that we should create an era of responsible spending and, if returned to power, we plan to set up new arrangements to root out and deal with wasteful spending. We would also put together serious plans to start to reduce debt and not let it carry on rising. Germanys fiscal stimulus was by no means a mirror of the UK version, as the German one was accompanied by a constitutional amendment that requires Germanys debt to be reduced each year.
The foreign exchanges have passed their own verdict on the viability of the Governments plans, with the pound losing around 30 per cent of its value last year, the largest depreciation since the collapse of the Bretton Woods system of fixed exchange rates, according to the Monetary Policy Committee. Investors are clearly wary about the value of the pound. We have yet to see whether this will affect the financing of the Governments debt mountain. Other, more balanced economies are
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I have just three questions for the Minister. First, the convergence programme notes that unemployment has risen to 5.75 per cent, but that has already been overtaken by the official November figure of 6.1 per cent. Commentators now expect that to rise to over 10 per cent. What assumptions about unemployment were made in the PBR and what impact will each 1 per cent above that forecast add to the borrowing requirement?
Secondly, the PBR estimated that next year the Government would have to borrow an eye-watering £118 billion, the highest figure as a proportion of GDP on record. All the indications are that the sum will turn out to be even higher. Are the Government confident that they can raise this debt at a reasonable price?
Thirdly, the Government have announced tax rises for those on higher incomes with a new 45 per cent tax rate, thus breaking new Labours promise when it came into power. The IFS has already warned that the impact of this could be negative. Will the Minister give an assurance today that the Government will not raise top rates further?
The submission to the EU is a sorry document. It shows the depths to which nearly 11 years of Labour misrule have taken us. The Government used to blame everything bad on what happened before 1997; now they blame the rest of the world. The truth is that they inherited an economy that was growing strongly, with a stable currency and low inflation, and they have completely blown it.
The reports starting point is the overall economic outlook, which it sets out. Its prediction was that this year we would see a fall in GDP of between 0.75 and 1.25 per cent but that this would be more than offset in 2010 by an increase of between 1.5 and 2 per cent. This is clearly far too optimistic, both in the size of the fall in GDP and the speed of the turn round. It is worth reminding ourselves of the speed of the collapse of the economy last year. The first two quarters saw an average growth of 0.1 per cent; the third quarter saw a reduction in GDP of 0.6 per cent; and the fourth a reduction of 1.5 per cent. So in 2008 in total, GDP fell by 1.9 per cent. The Government believe that this year we will see a fall of 1.25 per cent, which would make in total a fall of about 3 per cent, peak to trough. Does anyone believe that we will see such a small fall peak to trough? Virtually all commentators are now talking about a fall, peak to trough, of at least 5 per cent. I suspect that 5 per cent is now a rather optimistic forecast.
The Minister was at great pains to set out, as the Government have done at every point, how important the international component of this crisis is. He has suggested, as the Prime Minister has many times, that we were almost passive victims of a crisis, of a whirlwind that somehow started internationally. Clearly the collapse
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It has also been exacerbated by the complete inadequacy of the regulatory authorities, particularly the FSA, which have lacked rigour, decisiveness and determination to take action to prick the bubble at its earliest stages. I do not intend to deal with many of the detailed issues on regulation today as I feel we have done them slightly to death in our debates on the Banking Bill in recent weeks.
The fall in GDP is mirrored by the fall in the robustness of the public finances. Just as the GDP forecast is now looking wildly optimistic, so too are the forecasts the Government have produced in the Pre-Budget Report. The PBR itself shows how quickly things can go south. It reports that between the Budget and the Pre-Budget Report the projected deficit in the year increased from £42.5 billion to £77.6 billion, so over that period the Governments own view of the deficit has nearly doubled. As the noble Baroness said, they now predict £118 billion in 2009-10. That is clearly a significant underestimate.
What are the consequences of that, and how worried should we be? The Conservatives are very concerned about the views and the role of the IMF; the noble Lord, Lord Ryder, has already introduced the IMF into the debate. I ask the noble Lord, Lord Howard of Rising, who will be winding up for the Conservatives, to tell us about their view of the future role of the IMF in the UK economy. According to the leader of the Conservatives, Mr Cameron, Britain is running the risk of being forced to go to the IMF cap in hand. According to the Shadow Secretary of State for the Department of Business, Enterprise and Regulatory Reform, such a suggestion is not realistic. If the Conservatives aspire to be the next Government, we ought to be told about their views and policy on the IMFs likely future role.
Having set out the financial and economic outlook, the Government then took steps in the Pre-Budget Report to deal with it. We support in principle the concept of a fiscal stimulus. We do not agree with the noble Baronesss assertion that credit is the only problem facing the UK economy. Is she really suggesting that the levels of borrowing that were being undertaken last year were sustainable? Is she saying that there was no bubble to burst? Is she saying that the banks should be lending on commercial property, on housing and on a whole raft of matters at the level that they were last year? I hardly think so, because that would hardly be responsible. I am also amazed at the assertion that the way out of the problem, other than extending credit, is expenditure savings. I thought that all the lessons of history were that during a downturn, when
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That does not mean that we agree with the detailed stimulus that the Government have introduced. In our view, the VAT reduction, costing £12.5 billion, is an ineffective way of stimulating the economy, not least because nearly all of that, and nearly all the other measures that the Government took, relate to current, rather than capital, spending. We believe that a fiscal stimulus should be concentrated on the capital side. The Governments own admission is that of the 1.1 per cent of GDP that the measures in the Pre-Budget Report inject into the economy, only 0.2 per cent of GDP relates to capital spending. That is inadequate.
The size of the VAT cut is almost irrelevant now, because it pales into insignificance next to the other measures with regard to the banking sector that the Government either had already taken at the time of the Pre-Budget Report or have taken since. Paragraph 2.67 on page 32 of the report sets out how the Government had already made commitments of £66 billion to the banks between the Budget and the Pre-Budget Report over that period. There is a £37 billion recapitalisation, which is the headline figure, but then there is £21 billion for refinancing the Financial Services Compensation Scheme, £5.7 billion working capital to Bradford & Bingley and a payment of over £5 billion for retail depositors in Bradford & Bingley and the Icelandic banks. That is a huge amount. It dwarfs the VAT figure by a factor of well over five to one. Therefore, the VAT cut, whatever its merits, is only one small part of the picture.
Since the Budget, we have had the Mandelson announcement of several weeks ago, the Chancellors announcement of last week and the second Mandelson announcement this afternoon. We share the concern which the Treasurys Select Committee has expressed that a raft of measures with huge public expenditure commitments is being dribbled out daily and that we, if not the Government, will lose track of quite where we are. The Treasury Select Committee suggested that the Government should follow business practice and produce a quarterly statement of their expenditure, particularly in these areas. That seems to be an extremely sensible proposal. I hope that the Minister will say something about the Governments response to the Treasury Select Committee report today. The table in the Pre-Budget Report to which I referred is a good a model of how that kind of reporting to Parliament could be undertaken in future.
I do not intend to trawl in detail through the announcements of recent days and since the Pre-Budget Report, but perhaps I might press the Minister in respect of the bank lending agreements, which were reported last week. I asked him then whether all the banks had agreed to participate in the bank lending agreements. Perhaps I might ask him also about the scale of the Governments intervention in seeking to influence the scope of bank lending. We are faced with a potential collapse of the social housing market. A number of housing associations whose loans come up for renegotiation are in danger of being faced with a fivefold increase in the interest rate spread that they are expected to bear. There is a suggestion that some
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We support the concept of a fiscal stimulus but are critical of the nature of the stimulus that the Government have adopted. We looked at what one could do with £12.5 billion, which in our view could have been better spent on investment and contributing to meeting the carbon reduction targets which the Government have set. For £12.5 billion, you could, for example, fund a five-year programme to insulate every school; you could fund insulation and energy efficiency for 1 million homes, with a £1,000 subsidy for 1 million more; you could build 40,000 extra zero-carbon social houses; you could buy 700 new train carriages; you could reopen old railway lines and stations; you could electrify the Great Western and Midland main lines and begin the Liverpool light rail network; and you could install energy and money-saving smart meters in every home. That seems to be the kind of fiscal stimulus which really makes sense and has a long-term benefit for the country.
I think that we can all agree that we are in the middle of a financial and economic blizzard not seen in our lifetimes. This Pre-Budget Report already has the feel of a historic document. We now await the Budget to see how much further the Governments finances have deteriorated since the autumn and what further steps they plan to take to recognise the scale of the current economic crisis.
Lord Barnett: My Lords, we have an exceptional economic situation, but, however serious it is, the media are seeking to make it worseof that there is little doubt. You would believe from listening to and reading the media that it was the end of the world. However, as Kenneth Clarke said, it is not a financial calamity that we face but a serious situation.
When one hedge fund manager ... tells you the country is bankrupt and another, the American Jim Rogers, says Britain is finished, you can be sure of one thingthey probably both have a massive short position in sterling and will profit mightily if they can engineer its fall.
When I spoke at Question Time in the House the other day, my noble friend Lord Myners spoke of the benefits of stopping the ban on shorting. I asked him to list the benefits of shorting. He overlooked the requestI know that he is very busybut will he come back to it and tell us the benefits of shorting? I have not been able to see many.
The Opposition have the right, and indeed the duty, to criticise the Government, and I do not blame them for that. However, often they appear to be attacking
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I turn briefly to the Pre-Budget Report, because that is what we are debating. It had to make forecasts, because the Treasury is obliged to do so. However, it is basically guessing, as everybody else is guessing, what is going to happen in the next year or so. As the noble Lord, Lord Newby, pointed out, the Chancellor said that towards the end of the year, there will be an end to the recession and a slight beginning of the upturn. I have always said that I hope that the Chancellor and the Pre-Budget Report will turn out to be correct, but I have my doubts still.
The central question today is what we do about the serious economic crisis. A fiscal stimulus is right, although, like the noble Lord, Lord Newby, I would not have chosen the VAT cut. However, I understand why it was chosenit could be done quickly, by regulation, and, in terms of whether it is successful, it can be easily reversed, as was intended. Whether I agree with the family benefit figure of £200, I am not sure, but at least the money is going into the economy as a stimulus, and this cannot be reversed. However, it seems to me that a great part of the stimulus must be capital investment on a major scale.
The central problem remains the banks. Eventually there will have to be stronger regulation; that will have to happen; but for now we need a proper functioning of the banks, which is what the Government seek to achieve by stabilising the banking system. So far, they do not seem to be having too great an effect. The Government are right to seek to put large sums of money into the banks.
My noble friend did not refer to one major area to which the Governor of the Bank of England referred recently, when he said that very substantial sums would be put into the banks by way of buying bonds. I shall quote what he is supposed to have said, which was reported in the Financial Times. He said:
I declare an interest, as I have a fewgood quality ones, I hasten to add. Another report said that there would be £50 billion of such bonds to increase liquidity. I am delighted to see, and would like to see, increased liquidity in the banks, but I should be glad if my noble friend would tell us whether this is true. Does he agree with the Governor of the Bank of England, or was he talking off the top of his head about something that he would like to do at some time or other? How would he do it? Is he talking about buying new or existing bonds? What exactly did he have in mind? He also talked about unconventional unconventional measures. Maybe the Financial Times got it wrong, as the media can occasionally, but that is apparently what he said.
The real problem we face is how much it is all going to cost. My noble friend gave us some figures for borrowing for this year and next year and they were very large. I fear that it could be even larger, but I do not fear it as much as doing nothing to stimulate the banking system and the economy. If it has to be slightly higher and takes slightly longer to repay and to get the borrowing down again, we could live with that better than we could with not doing anything, resulting in an even longer and deeper recession. I support the Government on that. It would be a disaster if we did nothing and an even greater disaster if we did not spend this money.
We are asked what the true cost would bewhat the banks would cost us. We do not know; nobody can answer the question, because nobody knows what the banks balance sheets are like or should be like. I read in the Financial Times, which is one of my favourite newspapers, as noble Lords will realise, that the auditors are very worried about the certificates that they have to give. I am not surprised; they should be worried, because in the past they have given clear certificates and the following day the banks have written off billions. The Financial Times tells us again:
It is perfectly true that any qualification of an audit certificate on any company would virtually ensure its bankruptcy. What has been the result of those talks? It is not clear to me what auditors can say. The only way in which they can solve this terrible difficulty for the banks and for auditors is fully to state the extent of the toxic assets, whether they have been written off or not and to what extent they have been written off. If we do not know that, we will never know the true cost of what we have to put into the banks and the extent of their deficits. I hope that that can be done, but again I have my doubts.
The other main question is: who will manage the banks if we are left with a majority in a lot of them or full nationalisation? My noble friend is quotedrightly in my viewas saying that he would prefer that the banks were not nationalised. I am not sure that Ministers and civil servants are the best kind of people to run the banking system. However, from what we have seen of those who have been running our banks does not inspire much confidence.
In my noble friends article in the Financial Times last week, he said that we need an effective commercial banking sector. That would be better than nationalisation. I agree with him, but the central word is effective. If it is not effective, inevitably there will have to be nationalisation, whether we like it or not. One can hardly be confident that the people running the banks will be effective commercially in running them. I would like to think that the new people will be. Perhaps it would be better if my noble friend Lord Myners retired and went to run a bank. He may prefer it: I see him smiling and I believe that he should do so.
It is essential that the media and the Official Opposition stop talking the country downthey can talk the Government down if they must. But it is essential that
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Lord Freeman: My Lords, I congratulate the noble Baroness, Lady Noakes, on once again making a comprehensive and telling speech, which this side of the House fully supports. I am not going to follow necessarily the noble Lord, Lord Barnett, who always speaks a lot of common sense and commands the Houses attention. I want to concentrate in a few brief remarks on the impact of the crisis and indeed the Pre-Budget report on industry.
Earlier today, your Lordships House heard from the noble Lord, Lord Mandelson, the Secretary of State for Business, about support for the automobile industry. That is certainly welcome. He said that support was to prevent a loss of skills and technology in that industry. The noble Lord assured noble Lords that Her Majestys Government would take further action within the limits of the announced fiscal stimulus in the Pre-Budget report for other industries that are necessary for our industrial well-being and that need help. I hope that I have summarised what the noble Lord, Lord Mandelson, said.
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