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We already know that we do not want to go back to the same settlement as before in the financial world. There will need to be some form of greater regulation of financial institutions and rules about credit, to cite but two examples. There have been suggestions about focusing on social and environmental investment in the future. We already know from experience, but also instinctively, that many things will have to be different.
How we handle this moment as a nation and people, and as individuals, will determine the kind of country we will be in the future. By way of example, I want to mention two areas: first, some of the work that the church is doing and, secondly, some highly relevant research which was published earlier this year. The church has always responded to those in the greatest need, especially in times of great hardship. In the diocese of Portsmouth, we have taken steps to target some extra support on parishes in areas of disadvantage in order that they can become not just more sustainable in their own right, but more particularly achieve greater social benefits for those who live in their catchment areas. This is by no means unique: it is replicated in many other places around the country where local churches of every denomination and faith groups of every tradition set up small-scale, very local projects that are hardly noticed at any other level.
The second example is from two eminent epidemiologists from the secular world, Richard Wilkinson and Kate Pickett, whose recent book The Spirit Level is subtitled, Why More Equal Societies Almost Always Do Better. They wrote:
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“Initiatives aimed at tackling health or social problems are nearly always attempts to break the links between socio-economic disadvantage and the problems it produces. The unstated hope is that people—particularly the poor—can carry on in the same circumstances but will somehow no longer succumb to mental illness, teenage pregnancy, educational failure, obesity or drugs”.
This debate is about morality as well as economics. I hope that the future will be based on fact and not fiction.
12.55 pm
Lord Lamont of Lerwick: My Lords, I congratulate my noble friend Lord Forsyth on introducing this debate and on his excellent speech. I do not think that anyone could have envied the Chancellor of the Exchequer in introducing this Budget. His situation was not one of his own making, but I thought that he delivered his speech with commendable stoicism considering the position in which he found himself. Before the Budget, I said that I hoped it would be a Darling and not a Brown Budget. Unfortunately, I think that it was a Brown one, and highly cynical at that. Nowhere is that cynicism more demonstrated than in the decision to reintroduce the 50 per cent rate of income tax—not just the measure, but also its timing.
The Government’s whole argument has been, “You can’t have tax increases now. You can’t have spending cuts now. In the middle of a recession it’s wrong to do that”. But, somehow, it is different when it comes to the 50 per cent rate of income tax. No doubt, populist measures and attempts to attack the better-off are a useful distraction, but they will hardly help Britain to attract inward investment, headquarters and entrepreneurs into this country.
My main criticism of the Budget would be that it did not show a clear path to restoring the national finances. The public finance figures revealed in the Budget were a horror story with the gargantuan deficit. I would suggest that the most alarming figure was not the 12.4 per cent of GDP deficit, but, as my noble friend Lord Lawson pointed out, the figure for the structural deficit—the 9.8 per cent of GDP. That huge figure shows that a large part of the deficit was not related to the downturn and not going to come back just with the recovery of the economy. By itself, that figure was a condemnation of the fiscal rules the Government have practised in the past and of their own overspending.
The Government now make attempts to minimise the importance of the total stock of debt. The noble Lord, Lord Eatwell, joined in that argument. But if debt does not matter, it is rather surprising that the Government for so long tried to adhere to a rule limiting debt to 40 per cent of GDP. I disagree with the noble Lord, Lord Eatwell. The deterioration in the level of debt is alarming and matters for two reasons. First, the burden of debt means that more resources are devoted to interest payments, some of the money going to foreigners, crowding out private investment. Less is available for spending on programmes. Secondly, if rates rise, interest becomes more expensive. If the Government do not move to deal with that situation, rates may rise further and the Government may soon find themselves in a debt trap.
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The risks are there. As I know from the previous recession, the peak of the deficit came one year after it had ended, so it is perfectly possible that the figures that the Chancellor revealed, shocking as they were, still may not be the worst figures. Worse figures may appear later this year or in the Budget next year. The figures disclosed by the Chancellor are really an admission that the growth in recent years, about which there has been so much boasting, has been illusory. One commentator at the FT wrote that in the years since 2000 everything was oversized and GDP became inflated by the ability of debt to expropriate tomorrow’s expenditure. He said that it was as if we had made Bernie Madoff responsible for the national accounts.
The Prime Minister has developed some sophisticated rationale for saying that this is not a return to boom and bust, although it appears like that to everyone else. It is true that this is an international crisis, but it is a crisis that was co-authored by America and Britain. No other major country has had banking crises as big as those in the United States and Britain. That is clearly shown by the IMF figures for the projected cost of bank rescues: 13 per cent of GDP in the United States, 9 per cent of GDP in the United Kingdom, and both far bigger than in other countries. The Government like to point out that in Canada, Italy, Japan and China, exports and manufacturing are falling faster than here, but those countries contributed nothing to the banking crisis; they did not have banking crises. They are the victims of our retrenchment, our deleveraging and our debt deflation.
My major concern remains the banking system and the fear that it will be a drag on the economy. The Government have rescued the banks and I pay tribute to the noble Lord, Lord Myners, whose skills and knowledge of this sector have been great assets, but so far we have been dealing with the problems of the boom. The problems of the recession are only just beginning; the deleveraging is only just beginning. The IMF points out that debts to be written off in Europe and the United Kingdom have not been written off as quickly as they have in the United States and casts doubt on the ability of the banks to raise new capital in the private markets. The OECD points out that recessions from financial crises are usually very prolonged and severe, and so too are globally synchronised recessions. We have both, and for that reason we face a long recession and, when it ends, a weak recovery. We must never get into this situation again. We need to pay more attention to borrowing, both public and private. Above all, we need a complete change of culture to one that encourages much more saving. That change in culture is going to depend on a change in government.
1.02 pm
Baroness O'Cathain: My Lords, it is a great honour to take part in this debate, which has been so ably introduced by my noble friend Lord Forsyth. I feel like a pygmy among the giants. Some of the interesting points that have already been raised throw light on to the current situation but not, thank goodness, necessarily on why it happened because there has been so much analysis that we are becoming almost paralysed by it.
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There is huge confusion in the country as a whole. The Government are spending time and energy on informing people, quite rightly, about swine flu and what we should be doing, thus alleviating concern, but perhaps they should do likewise in order to alleviate the concern among the population about the economic prospects of this country. That concern arises from a complete breakdown of trust in the Government and a complete lack of confidence that they will take action to help those who so badly need it. Changing forecasts of growth, public expenditure and employment levels have resulted in trust and confidence vaporising. It is all right for some, of course—they will not be quite as concerned as others. Those who have no help fall into different categories. Other than bankers, building societies and people in fairly secure employment, what of those other huge employment sectors in this country that do not know whether they will survive? They are not likely to be bailed out, so can the brains in the Government come up with some swift action for them? The noble Lord, Lord Bhattacharyya, who is no longer in his place, said that the Government are capable of doing so and, indeed, did it right at the beginning of this crisis.
The areas of concern go wider than only those who are worried about losing their jobs. It has already been alluded to twice that pensioners face a real problem. Not only has there been a raid on pensions that has now gone on at the rate of £5 billion-plus a year for 12 years, but personal pension plans, which the Government encouraged people to take out in order to supplement their state pensions, have gone down in value by around 30 per cent in 12 months. If that continues, there will no personal pension plans to kick in when people need to augment what are very poor state pensions in this country by comparison with other developed nations. Further, those who have been frugal and prudent—to use a word that was in common use at the beginning of this Government—and saved for their retirement in addition to their personal pension plans or AVCs are finding that the money they invested is now earning a maximum interest rate of 0.5 per cent. That is not going to help. Older people “looking forward” to a longer life but one in which there is probably more illness and a greater need for care, which is extremely expensive to fund, have huge concerns as a direct result of the problems that have arisen due to the economic meltdown. Where is the swift action to deal with the issues of pensioners? They need some form of support from the Government, but the issue is never mentioned. The Government talk constantly about employment, but pensioners hardly ever get a look in. They are a growing sector of the population and something has got to be done about it.
I am sure that the Minister is an action man, but is he prepared to take action along these lines and not leave it for 12 months? The situation is changing
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We have to take action that is understandable to the country. There is no point in bandying about terms such as “quantitative easing”, because they mean nothing to the man living down in Surbiton or wherever, or even in the East End. We use these economic terms too frequently, blinding people with science and not properly explaining what they mean. As a result, there is real concern out there. I beg the Minister to do something about it and come up with an action plan to show that the Government actually do think of the people outside Westminster, Whitehall and academe.
1.08 pm
Lord Haskel: My Lords, I, too, congratulate the noble Lord, Lord Forsyth, on initiating this debate. Judging by what he had to say, he and I have something in common. We both suffer from a form of short-term amnesia. Let me say quickly that mine is caused by my advanced years. In his opening speech the noble Lord remembered what happened 30 years ago, but seems to have forgotten that the recent enormous change in the public finances has been caused not by expenditure of choice but by expenditure of necessity.
When you have a near collapse of the banking and financial system followed by a recession, the economy has got to be fixed. We cannot afford not to rescue the financial system, and to put these costs down to reckless spending proves my diagnosis of amnesia. Paul Krugman, an economics prize-winner no less, described these actions as “saving capitalism”. I would have thought that the Conservatives, more than any others, would have welcomed the rescue, but we have yet to hear a word of gratitude from them. Perhaps it is because they are confused. They are confused about whether to welcome or reject the financial stimulus, as my noble friend Lord Eatwell explained. But surely this is not a matter—
Lord Forsyth of Drumlean: My Lords, I do not want to take too much of the noble Lord’s time, but does he think that the all-party Treasury Select Committee, which has expressed concern about the control of public expenditure, is confused as well?
Lord Haskel: My Lords, that is a party political matter, but this is not. It does not matter which party you support or which kind of economist you are; it is a matter of survival. In this matter, I am a cryptoeconomist, a cryptoeconomist with a hidden allegiance to balance—of the kind mentioned by the noble Lord, Lord Butler. I am for a balanced taxation system which, on the one hand, asks those with broader shoulders to bear more of the burden by paying a higher rate of income tax, but which, on the other, is balanced by encouraging enterprise and growth, by maintaining capital gains tax at 18 per cent—with
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We cryptoeconomists also treat GDP data in a balanced way. Although the data are, yes, disappointing, we know that they are preliminary data which are routinely revised more often up than down. One quarter’s data, however surprising they may be, tell us little about growth in two or three years. After all, we are discovering that an amount of intangible activity is happening in the economy which is increasing and which we do not seem to measure in our GDP, as the Treasury paper mentioned.
I must admit that, as a cryptoeconomist, I also find it difficult to forecast, because, as the right reverend Prelate the Bishop of Portsmouth said, things are not going to go back to what they were, so we have carefully to manage our way out of these difficulties. I have every confidence in our management team. Unusually, most of this team is in your Lordships' House, which gives me confidence and, yes, a little pride, because they know that, after this period of excess, the financial sector has to be less overbearing and better regulated. Managing the economy also means driving other parts of the economy forward, as my noble friend Lord Bhattacharyya explained.
This debate is about prospects. Recent experience has taught us that we are all part of the same system; we are all interconnected. Those who have lost their jobs and their homes are paying a much heavier price than those whose wealth has shrunk or who have to pay more tax. Our form of capitalism has to have a more human face.
So it is not anti-business to understand that, as the right reverend Prelate the Bishop of Bradford reminded us, a market economy leaves behind poverty and deprivation. It is not anti-business to understand that business has both rights and obligations. It is not anti-business to point out that this perceived unfairness supports extremism. And it is not anti-business to say that, unless we build trust and confidence between business and society, we will never have a strong economy—the noble Baroness, Lady O’Cathain, touched on that. I therefore have every confidence that our management team will persuade us all of the importance of maintaining Labour’s values of equality and fairness.
It may well be that the medicine is working—perhaps the Government have put a floor under the downward spiral. It may well be that the banking sector has been stabilised and that quantitative easing is working. It may well be that the good news is that there is just less bad news.
In direct contrast with some noble Lords opposite, perhaps the right attitude of not talking us down was shown at the Institute of Directors meeting on 29 April. They spoke of moving on; how times of crisis present new opportunities, such as launching new businesses because of lower interest rates and low inflation; how in these difficult times it is easier to find talented people; how large, established firms are having to concentrate on cutting costs, giving new businesses the
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I hope that noble Lords will forgive my amnesia but join me in my quest for more balanced economics.
1.15 pm
Lord Wakeham: My Lords, I always enjoy listening to the noble Lord, but the proposition that an all-party Select Committee is party-political in its decisions, whereas what he said was not party-political, is a doctrine that I shall have to study with some care before I am able to accept it.
I thank my noble friend Lord Forsyth for introducing this debate and for his comprehensive speech. At this stage, many of the important things that need to be said have been, so I shall keep my remarks fairly short.
The first Select Committee on which I ever served in the House of Commons was chaired by the late Ian Mikardo, a man on the left of his party who was a good friend to me and had a sort of irresistible charm. He once explained to me that he was the only person in the 1945 general election who did not put his photograph on his election address, on the basis that if he had had to show his face, he would have got even fewer votes than he subsequently received. He proposed a meeting of his committee during the afternoon of the Budget speech. I protested, and it did not take place. However, his argument was that listening to a Budget was a waste of time because you soon found out what was in it. Nevertheless, like many noble Lords, I have listened to a great many Budgets in my time. I have been brought up on the doctrine that a Budget which does not go down too well on the day is, surprisingly, often seen to have many features of importance and success within a week, whereas a Budget which is extremely well received on the day is often seen through a week later. I think that this last Budget was unique in the sense that it was seen to be pretty bad on the day and has got steadily worse ever since.
But Budget speeches do matter, and I am not surprised that this one received a pretty bad reception. First, one has only to look at the number of times in the first few paragraphs that the Chancellor referred to the global recession to appreciate that he was pretty sensitive about his difficulties. In good times, the Government have been keen to take credit, but in difficult times they want someone else to take the blame. Of course, the massive government borrowing requirement owes something to the world recession, but we would not be in these difficulties if public expenditure had not grown at a far greater rate than the growth of GDP, with our consequent need to borrow.
Secondly, Chancellors ought to have learnt by now to stick to real economic matters and not try to score political points, which is a luxury that should well be avoided. Thirdly, Chancellors should be careful to use forecasts that have credibility. I understand why the Chancellor wanted to produce a Budget and forecast that showed us coming out of recession, but the figures that he produced had very little credibility. Within
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If I were in government, or considering the prospect of government, the two things that would worry me most are how do we finance the government debt and how do get our public finances under control. Many of my noble friends have spoken of this. It is going to be a massive task. I am also concerned that we may have a very serious problem still in the stability of our banking system. The news today from the United States is certainly worrying. If the banks were over their difficulties in the United Kingdom, I do not think they would have any difficulty at all in raising additional funds that would enable them to lend to small and medium-sized businesses. The fact that they still have difficulties in this area makes me wonder whether the banks are primarily concerned to strengthen their own balance sheets, rather than to take on more business. It seems to me that we are moving from a system of simply guaranteeing depositors to one of insurance, which means that the good banks pay for the mistakes of the others. A bank that is, so-called, “too big to fail” ought to demonstrate that it does not enter into the more risky activities that have given us so much trouble.
My noble friend Lord Lawson is quite clear that he believes there is a need for some form of Glass-Steagall legislation. I am not absolutely sure whether that is necessary, or whether it can be dealt with by regulation, but the effect has to be the same. The failure of the present tripartite system of regulation has also got to be changed to a more coherent system—not more regulation, but better regulation. The House of Commons Select Committee rightly blames the banks for much of the mess, but the Government’s tripartite system of supervision needs to be answered. I just wonder whether, if the late Eddie George had been in charge during recent years, we would have got into this mess. When we do get a better system, the Government have got to look, or the regulation system has got to look, very closely at some very doubtful accounting practices that have been allowed to grow up. My feeling is that mark-to-market accounting was probably a mistake. It allowed profits and bonuses to rise too quickly in good times—the absolute opposite of what the noble Lord, Lord Turner, and the FSA are arguing, which is that in good times, reserves should be strengthened to help in lean times, which, I think, is a counter-cyclical policy. If we are to move from where we are to where we ought to be, it is bound to take time, but the objective of getting back to a more conservative accounting policy is what is needed to restore long-term confidence in our financial system.
1.23 pm
Lord Smith of Clifton: My Lords, I, too, thank the noble Lord, Lord Forsyth of Drumlean, for initiating this debate. The last time there was a general debate on the UK economy in this House was seven months ago. Since November, the collective failure of the three
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