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Before somebody says that it is all very well to say that with hindsight, I came across a quote from my former colleague, the right honourable Peter Lilley, speaking in the debate on the Bank of England Act:

“With the removal of banking control to the Financial Services Authority ... it is difficult to see how ... the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse”.

He went on to say:

“The coverage of the FSA will be huge; its objectives will be many, and potentially in conflict with one another. The range of its activities will be so diverse that no one person in it will understand them all”.

Further, he said,

There they were. They were warned by the Opposition what the consequences would be. No one listened and the result is that we must now all pay a price. The Prime Minister took away the safety barriers without consultation. He may vilify and blame the bankers

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now but he was all over them once. He gave James Crosby, the deputy chairman of the FSA, a knighthood. This is the chief executive of HBOS, who presided over a loan book which was 40 per cent housing and took equity stakes in the companies to which he lent money. He asked the same man to report on the housing crisis. Mr Fred Goodwin was invited to advise on task forces on credit unions and the New Deal. He was in and out of No. 10 and knighted for his services to banking. Mr Greenspan, who was responsible for cutting rates and for the monetary expansion at the heart of the global problem, was showered with honours and made a senior adviser to the Prime Minister.

If the Government are unable to pay their debts, they seem incapable of collecting them either. HMRC alone is owed a staggering £17.3 billion in outstanding tax, interest and penalties as of March last year and the number of debtors has increased from 13 million to 15.8 million. That is an increase of 22 per cent. The Government have also made £4.2 billion—yes, billion—worth of overpayments in benefits and tax credits. Just think of the loss of revenue but, more importantly, the misery that is causing as people are asked to pay it back. Last year, they wrote off £5.6 billion—more than the proceeds from raising the top rate of tax—in unpaid tax in 2007-08 alone.

We need an election now to deal with these problems instead of this Government who are playing for time and hoping, like Mr Micawber, that something will turn up. Today is 7 May. I know that the noble Lord, Lord West—I am sorry that he is not present—likes a flutter. I am willing to bet that exactly a year from now it will fall to David Cameron to sort out this mess left by a Labour Government. The country needs to understand the scale of the challenges he faces. Given the chance, I have no doubt that he will meet them. It is what Conservative Governments are for. I beg to move for Papers.

11.57 am

Lord Bhattacharyya: My Lords, I thank the noble Lord, Lord Forsyth, for securing this important debate though I do not agree with any of his conclusions.

As we consider the prospects for the future, the Government should be applauded for their swift action to secure the financial sector at a moment of global crisis. The decisions taken then were vital to prevent economic meltdown. Now we must act just as decisively to ensure that industry can drive growth in our economy.

I am an optimist about this country; that is the reason I live here. We live in a great, resilient and innovative nation. Yet far too often we are seized by negativity when we have the chance to grow. We must be confident and Britain will grow and prosper. To seize that opportunity, it is vital to have a Government who understand the needs of industry. For three decades the role of the DTI, and now BERR, shrank as government retreated from industrial policy. The current recession shows the importance of a powerful interface with business at the heart of government. My noble friend Lord Mandelson is right to focus on laying the foundations for future growth. His energy has been

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greatly appreciated by business. In preparing for recovery, we must not waste the talents of our young people. John Denham's recent announcements on skills, internships and apprenticeships, such as the Graduate Talent Pool, are particularly welcome.

I should declare an interest as director of Warwick Manufacturing Group at Warwick University. There I see talented students looking for the opportunity to pursue a career in industry so that they can be a productive part of our economy, since there are no jobs in the banks to give them bonuses. I hope that the Government will ensure that graduate internships and apprenticeships are a permanent theme in our industrial landscape.

In industry there has been broad support for the concept of new industrial activism and real anticipation of the investment that the Government have announced in Building Britain’s Future in areas such as climate change. In the current economic crisis speed is of the essence. Good ideas can take can take some time to reach those on the ground. I hope that my noble friend’s department at BERR will be able to deliver its agenda with some freedom.

In the past decade, Britain’s economic growth ran at almost 20 per cent of our long-term economic performance. Yet that growth disguised a decline in manufacturing. We relied on consumer spending and expansion of financial services to grow the economy over the past two and a half decades. That was entirely understandable. The virtues of revising the judgment of the market are limited, as many on the Benches opposite have pointed out in past debates. As a result, British industry became a smaller part of our economy, falling from 27 per cent of gross value added in 1990 to 17 per cent in 2007—a sharper fall than in any other OECD economy, bar Luxembourg.

This decline was not the result of unproductive manufacturers facing superior overseas competition, as it was in the 1970s and 1980s. Between 1996 and 2006, manufacturing output per hour worked increased at twice the rate of the whole economy. UK manufacturing is outstanding, but on a narrow front. It is not a matter of quality but a matter of breadth. While productivity has increased, manufacturing employment has declined by a quarter since 1998 and manufacturing investment has fallen even further, declining by a third. As a result, our manufacturing base has continued to decline as a share of exports from 64 per cent to 50 per cent in a decade.

We all lived for a long time on the fresh air of a post-industrial economy. For more than 20 years, economic growth was powered by financial services. All parties chased that mirage. Now it is over. A sharp contraction in the financial services sector, followed by declining house prices, has reduced consumer and business spending sharply. At the same time, the vital action that the Government took to stabilise the economy by rescuing banks, ensuring lending and increasing the money supply and velocity means that future public spending will be far more restrained.

Our trade in goods increased by 3 per cent only in February. The challenge is to use the window of competitive pricing to attract inward investment in our future product base. Britain is an excellent place to

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do business. We have a good infrastructure, a strong research base and a flexible workforce with good industrial relations. On the topic of Britain being a good place to do business, the idea that the British businessman or businesswoman is so concerned about marginal tax rates that they will not innovate if the top rate of tax is 5 per cent or 10 per cent higher is foolish. For the vast majority, it will not make any difference to their plans.

That is why we have had outstanding levels of foreign investment over the past decade. Those investments will be the key to future growth. We must act to ensure that this continues. Today we see companies that have all the ingredients for success: good products, strong R&D and healthy margins. They only require credit to achieve future growth. These companies need access to credit fast and should not be faced with a bureaucratic nightmare as they try to grow.

Industrial innovation and inward investment must be pursued with the same willingness to do whatever is needed that the Government showed at the height of the banking crisis. We are a very innovative nation. Britain will prosper. To innovate we must increase the proportion of research funding to support economic growth. It is not unreasonable to ask scientists to direct part of the massive funding increases they have received to secure the future economic vitality of the UK.

To attract investment, we need to focus on manufacturing industries that offer major export opportunities in high-value industries. The work of the regional development agencies is vital to achieving this. They should be freed to take decisions and to act quickly to invest in emerging products and processes.

Innovation entails risk. We should distribute that risk to secure outstanding growth from success, not pursue a bureaucratic, risk-averse approach. If we take these steps, the industry, technical excellence and flexibility of Britain’s manufacturers and exporters will lead us to growth sooner than many think. If we are bold, Britain will grow.

12.05 pm

Lord Oakeshott of Seagrove Bay: My Lords, it is a pleasure to follow the noble Lord, Lord Bhattacharyya. I am afraid that I found his speech a little corporatist. I blinked particularly at the new look of the noble Lord, Lord Mandelson, as the high priest of old Labour corporatism.

I declare my interest as a pension fund manager for the past 33 years. I congratulate the noble Lord, Lord Forsyth, on introducing the debate. The length and quality of our speakers list speak volumes, but I cannot because I have only seven minutes.

I pay tribute to the noble Lord, Lord Forsyth, for the professionalism and logic of his Tax Reform Commission report. We on these Benches share much of his approach to simplifying our tax structures. The image in my mind is that we must drag the tax ship into dry dock and scrape down its barnacle-infested bottom. Raising the tax-free personal allowance, slashing fringe benefits and cutting business and personal tax rates by closing loopholes are all our priorities, too.

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One thing though—when the noble Baroness, Lady Noakes, winds up, will she confirm whether one of the key recommendations of the noble Lord, Lord Forsyth, and George Osborne’s first specific tax-cut pledge when he became Shadow Chancellor, still stands? It is the abolition, then costed at £3 billion a year—I expect it will be a little less now—of stamp duty on the purchase of all UK shares. Is that hand-out to their City friends still a firm Conservative pledge and priority?

I want to focus particularly on the banks and regulatory failure. Other noble Lords will also have heard this morning the noble Lord, Lord Myners, interviewed on the “Today” programme. I am sorry that it wandered off into a wild goose chase about his personal tax affairs, because I thought that that was quite inappropriate. But on regulation of the banks, I am afraid to say that he struck a complacent and pro-City establishment note. The Governor of the Bank of England, the Liberal Democrats, many economists and investors see a strong case for removing the taxpayer guarantee from banks’ non-core casino investment banking operations, particularly in Britain because we have three of the world’s big five banks based in London. That is a gigantic pillar of risk resting on a tiny economic base. We must cut our megabanks down to size, degear and derisk the British financial system, and rebalance our whole economy.

But the Government and the FSA simply refuse to take this vital debate seriously—talking about Freddie Mac in America really is utterly irrelevant. Patch things up, tighten up regulations, make banks hold more capital, but don’t rock the boat chaps. If you had to sum up the Government’s policies in a film title, it would be “Carry on in the City”. It should not be: the Government should be Eliot Ness and the Untouchables, cleaning the Al Capones out of Chicago.

The FSA has endured a saga of disaster, from Northern Rock and Bradford & Bingley, through RBS and HBOS, and it is far from over, as the Dunfermline Building Society debacle shows. There are more building societies which got totally out of their depth in commercial property where the spivs and sharks saw them coming a mile off. After so many failures costing taxpayers so many billions, Parliament has a right to know, and it must be in the FSA’s interest to be transparent and tell us how its banking stress tests work now.

Today in America, we will see the results of the stress tests on the 19 largest banks—full transparency on which banks have fallen short and need more capital. Everybody there knows where they stand. But here we have few hard facts—even on what the stress tests are and how the FSA is applying them. The FSA told the Liberal Democrat Treasury team a fortnight ago:

“Let me reiterate that we are planning to release further details of our stress testing publicly, but that we also consider this information potentially market sensitive (as it may affect analysts’ views of valuations in the banking sector), which is why we will not release this information to you until the financial markets have been informed via the regulatory news service of the stock exchange”.

That is fine. Was it not, however, far more market sensitive on 27 March, three days before the asset protection scheme deadline, when Barclays told the

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Financial Timesthat it had passed an extreme stress test by the FSA? Its share price went up by 24 per cent that day.

My honourable friend Vince Cable is writing to the FSA today to ask for full disclosure now of the FSA’s banking stress tests and how they are being applied. He will be asking for a full explanation of why Barclays gave that stress test result to one newspaper, whether the FSA confirmed it to the FT, and if so, why the FSA did not ensure that a full and proper announcement was made immediately to the Stock Exchange.

There must be no suspicion that some banks are too big to fail the FSA’s secret stress tests. If little Johnny brings home a story about how well he has done that term in the school magazine, most parents would say, “That’s nice, but I want to see your school report and your exam results”. That is what we are still waiting for from the headmaster at the FSA. Other banks’ directors tell us—indeed yesterday a bank director was telling us—that they want to know that they are having to jump the same hurdle as Barclays.

Our regulatory system has failed and our banks have failed our country. Our debt-fuelled fall in national income this year may well be even worse than in 1931. It is time to come clean and make a fresh start.

12.12 pm

Lord Butler of Brockwell: My Lords, I too thank the noble Lord, Lord Forsyth, for giving the House the opportunity to have this important debate. As we have already seen in the debate, much current political dialogue is about which Government can take the most credit for the prosperity of the past 15 years and which will be most competent to deal with the difficult situation that the world now faces. If the House will forgive me, I will not go very far down that road.

Indeed, my view, at the risk of offending both Front Benches, is that the prosperity of the past 15 years owes less to the brilliant management of Governments or the financial authorities than to an extraordinary combination of circumstances; we have had a supply of cheap manufactured goods from the Far East, a flow of cheap labour from eastern European countries and an abundance of cheap credit. In those circumstances, it really is not surprising that the western world has been prosperous over this recent period. The trouble is that the prosperity has been built on major imbalances in the world economy. It has been built on consuming countries, including the United States and the United Kingdom, consuming more than we were earning and living on the credit of the exporting countries—particularly China, Japan and Germany.

One of the aspects that worries me most about the situation as we look forward is that the steps that are being taken rightly by world leaders to deal with the situation that the world faces do very little to tackle those imbalances. It is the case that such imbalances can continue, indeed have continued, for a long time, for as long as the creditor countries are prepared to take the IOUs of the consuming countries. However, when something happens to make creditors’ confidence wane, the consequences are dire—and as for countries, so for banks.

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The high rate of default on the so-called prime mortgages in the United States was the trigger that caused the recent collapse in the confidence in many of the world banking institutions. The banks ran for cover. The discount banking market dried up, the banks called in their loans, sound businesses became illiquid and the effects spread to the real economy.

In my view, it was both appropriate and right for the British and other Governments to do all that they could to stem that collapse. It was Britain’s misfortune that we were already in substantial structural deficit when that happened. In those circumstances, and since we were dealing with the collapse of confidence, it would have been wiser for the Government to have concentrated on using their credit to provide guarantees that, if successful, might not have been called, rather than to have dug the fiscal hole deeper, particularly through measures of doubtful effectiveness such as the VAT cut.

Although many of the right things have been done and there are signs that bank lending is beginning to free up, the effects on the real economy will continue to be felt for some time. For my part, I think that the Treasury’s forecast of a bounce-back in growth this autumn, while optimistic, is not impossible, but I am more doubtful whether we will return to the trend rate of growth as quickly as the Treasury expects.

What the Government must do in the period ahead is to encourage those areas of the economy from which growth will come. Our export markets are already being helped by more competitive exchange rates. The Government have been right over the past 10 years to support scientific innovation in the economy. In the straitened environment of the next few years, difficult choices will have to be made and we may have to cut back on areas of public investment that bring less immediate economic returns.

Whatever the public distaste at present for parts of the financial services industry, we must also recognise that it will remain a very important sector of our economy, as the noble Lord, Lord Myners, said in his interview on the “Today” programme this morning. We must not drive it away or strangle it by overregulation. From that perspective, I share the view that the 50 per cent tax rate was a serious mistake.

Seeing the noble Baroness, Lady Thatcher, in her place today, I should like to say one further thing to the House. In some comment on the origins of the banking failures, it has been suggested that banking irresponsibility is a legacy of Thatcherism. Many things have been attributed to Thatcherism that the noble Baroness would have difficulty in recognising, but this is one of the most absurd. It is true that, when markets were freed up and greater scope was given to enterprise, greater scope was inevitably given to people to behave irresponsibly. However, the noble Baroness was in the van of propounding sound finance, both publicly and privately, and she would have been the last person to support or encourage borrowing, particularly for the purpose of irresponsible speculation. I am sure that she would say to the House today that, if the principles of sound housekeeping had been followed in recent years by some financial institutions that failed to do so, we would not have had the banking difficulties that we have today.

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12.19 pm

The Lord Bishop of Bradford: My Lords, I congratulate the noble Lord, Lord Forsyth, on securing this debate to call attention to the economic prospects for the United Kingdom. I begin by thanking noble Lords and the support staff of the House of Lords for making this new boy on the block so welcome.

It is my privilege to make my maiden speech in your Lordships’ House and to contribute to the debate from the perspective of the diocese of Bradford, which I am proud to serve. I do so aware that I lack the gravitas, wisdom or wit of a number of my predecessors. One managed to spark the abdication crisis; another became Archbishop of York and then moved on to Canterbury, which in Yorkshire was regarded as a downward move; and a third, with Irish charm, became personal chaplain to Sir Terry Wogan. I have none of those aspirations.

Bishops move diagonally. When I moved to Bradford, even though it was only a few squares from being Bishop of Pontefract—moving, in effect, from Halifax to Bradford & Bingley—I was surprised by the beauty of the diocese. I knew the southern dales and the Three Peaks but I did not know the Howgill Fells or the Forest of Bowland; nor did I know Bradford itself, with its 5,800 listed buildings. On the rare occasions that I go to watch Bradford City, and on the all-too-frequent occasions when there is a lull in the action, I look out from my seat over the city and, if the sun is shining in the late afternoon, the York stone buildings glow gold. Could Bradford be Jerusalem in England’s green and pleasant land?

When I went to Bradford, I was surprised by the poverty that I encountered among the hill farmers but especially in the city. I saw the same poor-looking people in Bradford in 2002 as I had seen when I grew up in the inner city of Nottingham 50 years earlier.

I recently visited one of our two church secondary schools for a prize-giving. I get rolled in when no one is available from Bradford Bulls. The head teacher said to me, “You have to be proud of these children. They’ve done brilliantly in what they have achieved in spite of their backgrounds”. Studies show that children who experience poverty are more likely than others to be young for their age: young physically, mentally, socially, emotionally and intellectually; and they are disadvantaged throughout the whole of their lives. It is on behalf of these children and their prospects that I speak today.

I welcome the reduction in child poverty that has been achieved in recent years and the heavy investment in school buildings—at least, in Bradford—which has, for example, enabled the school of which I spoke to become an academy. However, I worry about any cuts in these initiatives as we seek to make amends for the financial debacle that we are debating. The Joseph Rowntree Foundation report, Ending Child Poverty in a Changing Economy, says:

“The recession will not greatly affect child poverty numbers, but it will worsen the profile of child poverty. Proportionately fewer of the children in poverty will have parents in work, and more will be in severe poverty”.

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If these levels of poverty become embedded in the fabric of our society, this will be extremely costly for the country in the future because it will affect these children for the whole of their lives.

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