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Banking: Money Supply
Question
3 pm
The Financial Services Secretary to the Treasury (Lord Myners): My Lords, the asset purchase facility provides a framework for the Monetary Policy Committee to use for monetary policy purposes. The Chancellor’s letter to the governor on 3 March authorised that the MPC should have the option to finance purchases of up to £150 billion, under the facility by the issuance of central bank reserves.
Monetary policy decisions continue to be set by the MPC. It has full operational independence from the Government in deciding how to meet the Government’s inflation target.
Lord Higgins: My Lords, I am grateful to the noble Lord for providing details of the unprecedented authorisation which the Chancellor of the Exchequer has given. However, so far the House and Parliament generally have had no opportunity to comment on or debate this issue. What steps are the Government taking to enable Parliament to exercise control on this matter, which is of great importance to many people, not least pensioners and those on fixed incomes? In what way can we hold the Government to account?
Are we not now on a merry-go-round, with the Government lending to particular banks, which are lending the money back to them? If it is the Government’s objective to increase the money supply, would it not be better to do so by underfunding the borrowing requirement rather than buying back government debt?
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Lord Myners: My Lords, parliamentary engagement with the issue of quantitative easing is a matter for determination through the usual channels. I believe that the flaw in the noble Lord’s suggestion at the end of his question is that it conflates monetary policy with fiscal policy. Monetary policy has to date, under the very effective management of the MPC, targeted and achieved the inflation goal through the price of money. As the price of money has reduced to a level which we have not seen for more than 300 years, it is necessary to address the issue of the quantity of money. Given his monetary background, the noble Lord will understand the equation MV=PY. We are targeting the quantity of money times velocity to equal price equals monetary GDP. To confuse that with fiscal policy, as I suspect the noble Lord knows, would be a dangerous and foolish thing to do.
Lord Newby: My Lords, given the concerns about the delays in some of the Government’s financial rescue package coming into force, when does the Minister envisage that the first purchases will be made under the facility he has just described and how long does he expect it will take before the full facility is used?
Lord Myners: My Lords, the answer to the first question is tomorrow. The answer to the second is that it is in the hands of the MPC, which is independent.
Lord Desai: My Lords, does my noble friend not agree that, in the way he stated, the velocity has dropped to a very low level and is about to hit zero and that there is therefore no danger that the creation of extra money will create inflation, which is the fear expressed by the noble Lord, Lord Higgins?
Lord Myners: My Lords, I am most grateful to my noble friend for that observation. The targeted amount of money for use in the asset purchase facility is £75 billion, which is the amount requested by the Governor of the Bank of England. It approximately equals two current central bank monetary reserves, which are one-19th of nominal GDP. Therefore, the effect on GDP in nominal terms is likely to be of the order of 5 per cent with stable velocity. However, in these circumstances, one would imagine that, with the low cost of interest rates and the attractive lending opportunities, velocity will increase.
Lord Blackwell: My Lords, in embarking on this policy, which I accept is necessary, will the Minister say whether the Bank of England is still operating solely to a target of future inflation levels or now adopting a target related to the expansion of credit or nominal GDP?
Lord Myners: My Lords, the Bank of England’s policy target remains as set by my right honourable friend the Chancellor of the Exchequer on 11 March last year, which is to target inflation on a symmetrical basis at 2 per cent and to subserviate beneath that the goals of employment and growth. However, the inflation target remains overriding in its importance behind all decisions taken by the Monetary Policy Committee.
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Baroness Symons of Vernham Dean: My Lords, would my noble friend be kind enough to tell us in simple terms what he hopes will be the outcome of the G20 meeting in London in April?
Lord Myners: My Lords, the answer is in simple terms the same as that which I would have given if I had been asked what the purpose of quantitative easing was, which is improved economic activity, more jobs, fewer people threatened with losing their homes, more investment and a confident economy.
Lord Ryder of Wensum: My Lords—
The Minister of State, Department of Energy and Climate Change & Department for Environment, Food and Rural Affairs (Lord Hunt of Kings Heath): My Lords, I think that the noble Baroness has the Floor.
Baroness Tonge: My Lords, last week, one of my young grandchildren asked me whether the Government would now have to go to prison because they were printing money. The Minister has given us some wonderful answers this afternoon. Could he please give me a convincing answer for a seven year-old as to why nobody is to be punished for creating this unholy mess?
Lord Myners: My Lords, I think, as my right honourable friend the Chancellor of the Exchequer has said, there are many things to be learnt as a result of these experiences globally. We need to recognise that the challenges that we are facing are global. It is not an issue of punishment, but of taking the right decisions for Britain to create real outcomes which are positive for jobs, families and the future of this country.
Business of the House
Timing of Debates
3.07 pm
Moved By The Lord President of the Council (Baroness Royall of Blaisdon)
That Standing Order 47 (No two stages of a Bill to be taken on one day) be dispensed with on Wednesday 11 March to allow the Northern Ireland Bill to be taken through its remaining stages that day.
Postal Services Bill [HL]
Copy of the Bill
Explanaory Notes
Second Reading
3.08 pm
The Secretary of State for Business, Enterprise and Regulatory Reform (Lord Mandelson): My Lords, I would like to begin by paying tribute to the late Lord Dearing. He was widely respected in this House and,
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We live in a digital age. As we send more texts and emails, we send fewer letters. The Mobile Data Association estimates that we sent around 216 million text messages per day in 2008. That same year, we sent five million fewer letters per day than just two years previously.
The fall in mail volumes is happening across many modern economies, but I do not accept that postal services are locked into an inevitable decline. I believe that mail is still a critical part of our social fabric, our communication infrastructure and our economy. For those reasons, I want to see Royal Mail modernised and made fit for the future. The Government are fully committed to maintaining the universal service. Royal Mail is at the heart of that service. Only Royal Mail has the ability to collect and deliver letters anywhere in the country, six days a week, for a single, affordable price. That is why the Royal Mail’s service requires sustaining, not abandoning—and sustaining with a vision that will ensure its commercial success.
It was for this reason, with the strong support of the Communication Workers Union, that, in 2007, my predecessor, John Hutton, asked Richard Hooper to lead a review of the Royal Mail. When Hooper’s report was published late last year, I informed the House that the Government agreed with his analysis and had accepted his recommendations. We are committed to a publicly owned Royal Mail, fully restored to good health. That is what we said in our last manifesto, and that is what our policy, if implemented in full through this Bill, will achieve.
The Postal Services Bill establishes a fair and modern regulatory framework that ensures that Royal Mail remains in public ownership, while supporting modernisation through a strategic partnership. It enables the Government to tackle Royal Mail’s pension deficit, which is already larger than that of any FTSE 100 company.
Before I talk in more detail about the substance of this Bill, I must address some of the points raised during the debate that has followed publication of Richard Hooper’s report. First, some have suggested that we should allow more time for reflection. When it comes to making changes, there is always an argument not to act but, in this case, there has been extensive debate about the future of the postal sector, and Royal Mail in particular. Many will remember that the noble Lord, Lord Heseltine, published a Green Paper over 15 years ago. Our plans are very different from his but, since then, in addition to the Government’s own 1999 White Paper and subsequent legislative reform, my noble friend Lord Sawyer spent a number of years considering industrial relations at Royal Mail and Sir George Bain advised us on relationships within the sector—and now Richard Hooper has done so, too.
Sir Richard conducted a thorough review of postal services, lasting 12 months. He and his panel had extensive discussions with the stakeholders and received
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Some may ask why we have not acted sooner. That is a fair question. Successive Governments and past Secretaries of State have wrestled with the challenge of change in Royal Mail. I am only the newest. When this Government first came into office, we established Royal Mail as a commercial organisation with increased freedom to modernise and to respond to market opportunities. We have provided over £3.5 billion in funding to support the business, but the fact is that, while the marketplace in which the company operates has changed significantly, modernisation has not happened on the scale required, despite the money available.
The second point that I want to address is that many are confused about the distinction between Royal Mail and the Post Office. They see these services as seamless—and so, in a sense, they should. But these are different organisations, playing different roles and facing different challenges. It is important that our policy should reflect those differences. Royal Mail collects, sorts, transports and delivers post. Our post offices provide access to Royal Mail’s services—letters, parcels and stamps—but they also deliver a much wider range of government and financial services, playing a vital social and economic role in the communities that they serve. Around two-thirds of post offices depend on a government subsidy to survive. The Post Office network is not, therefore, purely a commercial concern.
The Communication Workers Union’s publicity campaign calls on us to “Keep the Post Public”. I could not agree more. The Bill makes it clear that Post Office Limited will remain entirely owned by the Government. Indeed, the Bill repeals powers in the current Postal Services Act that would let the Government sell part of the Post Office business. The Bill specifies that Royal Mail, too, will remain in public ownership. There is no question that either the Post Office or Royal Mail will be under the control of “foreigners” or anyone else other than the Government, as the CWU’s propaganda claims.
I now turn to the substance of the Bill. In the political debate on these issues to date we have heard a lot about union policy and party policy, much of it misleading, but almost nothing about customers—what they want from their postal service and where their interests lie in this debate. Above all else, I believe that customers want a universal service, which is reliable, offers good value for money, is innovative and responds to their needs.
Our proposals seek to deliver that. Part 3 of the Bill sets the standard for the universal service. It requires Ofcom to ensure that the universal service is maintained. If Ofcom finds that there is tension between its functions in relation to post, the Bill is explicit in requiring the regulator to give precedence to the universal service. Competition can bring benefits for customers, but it must not be promoted in ways that threaten the universal service.
Abolishing Postcomm and appointing Ofcom as the new regulator reflects the reality that Royal Mail faces tough competition from digital media. Ofcom is
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The Bill enables Ofcom, if at any point in the future it finds the universal service places an unfair burden on Royal Mail, to ask other postal companies to contribute towards the costs. Together, these elements create a stronger, more objective evidence base and set clearer regulatory criteria to enable Ofcom to make sure that prices are fair for postal companies and affordable for consumers.
Important though it is, clear and fair regulation alone will not be sufficient to secure Royal Mail’s future. For that, the company will need to transform its business so it can deliver the universal service, and do so quickly in a highly competitive communications market. As Hooper made clear, the company faces many constraints. It has relatively little room for manoeuvre on pricing since any sharp increase in prices will simply drive customers away to digital communications and media, accelerating the decline of letters.
Royal Mail has a large and volatile pension deficit. Further, the company’s industrial relations are characterised by a lack of trust and engagement. In 2007, the embarrassing truth is that it accounted for 60 per cent of all the days lost to industrial action across our whole economy. It is not uncommon for agreements reached at national level to be obstructed at local level, an issue identified by my noble friend Lord Sawyer in his work in Royal Mail.
Looking at the performance of the company as a whole, the Royal Mail lags behind the best performing postal companies in Europe. For example, these companies use machines to put 85 per cent of mail—and I mean 85 per cent—in the right sequence for delivery. This process is done entirely by hand in the UK and takes each postal worker between two to three hours every morning.
Royal Mail does not make the profits required to modernise its business and, crucially, to diversify. Having posted a loss last year, the letters business has a profit margin so far this year of just 1 per cent. Its already massive pension deficit is projected to increase significantly at the next triennial valuation. The company will not be able to afford any extra deficit recovery payments required. The size of payment would more than swallow any projected profits. The company is already balance-sheet insolvent. If we do not act to improve its financial position, it will continue to face severe and mounting financial difficulties in the future. To the extent that there will be any surplus cash in the business, this would continue to be required to cover pension contributions. There would be no money for modernisation.
The Hooper review’s judgment is that the introduction of a strategic partner will bring the capital, experience and confidence to help to tackle these challenges,
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A partnership will provide the springboard on which Royal Mail can generate new revenue streams—by developing its parcels business, for example—drawing on the resources and size of both partners. Contrary to what many recent commentators would have you believe, the introduction of a partner cannot and will not threaten the level of the universal service. This will be set by Parliament and the regulator. It will be for Royal Mail and its strategic partner, then, to decide how best to deliver the prescribed level of service.
To make this possible, Part 1 of the Bill deals with restructuring Royal Mail Group. It ensures that Post Office Ltd must be owned in its entirety by the Crown, and that Royal Mail, the company providing the universal postal service, must be publicly owned. “Publicly owned” means that the Crown must own more than half of the company at all times. This restriction could only be changed by primary legislation. The Bill makes it clear that public ownership carries with it the voting rights and economic benefits appropriate to a majority shareholder in such a company.
One further protection could be to vest the Crown’s shareholding in a public interest trust. Our view, however, is that this could raise significant issues of accountability and control. The Government of the day may be unable to ensure entirely and directly that the universal service was being maintained as its customers expect, but I will listen to others’ views on this.
The Bill does not specify the size of a minority shareholding in Royal Mail before any commercial negotiation has taken place. Assuming that a partner was to make a direct equity investment in Royal Mail, however, we expect that the partner would need to take around a 30 per cent interest. Some may also consider it desirable for Royal Mail employees to own part of the shareholding. This is something to be discussed.
We should be under no illusion that attracting the right partner, or any partner, will be easy. Richard Hooper has painted a stark picture of the challenges facing Royal Mail. While we believe that the company has a profitable long-term future if the correct decisions are taken, the shrill nature of some of the current debate is making it harder to make this case to potential partners. The tone and content of the opposition levelled at our policy is a clear indication, if one were needed, of the depth and severity of the industrial relations challenge at Royal Mail, and the risks it generates. All this will make negotiating an investment on the right terms difficult.
There are points, of course, on which we will not compromise. The taxpayer must receive fair value for any stake we sell. Any partner must be genuinely committed to transforming Royal Mail. We need to strike the right balance between giving a partner enough influence in running the company successfully and
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Part 2 enables government to tackle head-on the Royal Mail’s ballooning pension deficit. The pension scheme represents a major burden for Royal Mail in spite of recent changes made to address it. In my view, it is inconceivable that the public will accept such a “bail-out” without the Government taking steps to ensure that the company has a transformed future. The fact is that it has not modernised sufficiently under present policies. There needs to be a step change, and the public need to see this. The new arrangements will also require the approval of the European Commission.
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