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I agree. We need to be more, not less, welcoming. The tax changes in the Budget are in danger of presenting a no entry sign to would-be investors or a bumpy road sign to entrepreneurs. However, the level is a matter for legitimate debate; what is more concerning is the process. Businesses attach a premium to stability. Britain's tax certainty was undermined last year with the non-doms tax fiasco and now, with the Government breaking a manifesto commitment, more doubt has been sown. This is compounded by the deep uncertainty around how pension tax relief changes will be implemented. We simply cannot afford this instability. Britain needs to re-establish its credibility as a jurisdiction where investors, employers and employees can have confidence in our income, capital and corporate tax regimes.
As the Finance Bill goes through the Commons, I hope that Ministers will look at ways in which they can support competitiveness. I have three suggestions:
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We retain enormous strengths in adversity. London, the heart of our economy, is a cosmopolitan city, with great international links and an outstanding talent pool. The currently competitive pound is helping to attract tourists, who we welcome. We have an innovative business culture, a can do attitude and we speak English in the GMT time zone. We must take the right decisions now so that London and Britain flourish in the less-leveraged decade ahead.
Viscount Eccles: My Lords, in past Gordon Brown comments, it has been fashionable to rely on country comparisonson league tablesto claim that however difficult the circumstances, we were better placed to deal with them than others. Those claims are difficult to credit given outside analysis; for example, that of the IMF. But then one remembers the rubbishing of the IMF and the hints in recent years that perhaps it had become irrelevant given the then Chancellor's understanding of financial markets.
I think we are clear that we have dropped down the league table of nations and that we have no indication about how and when we will climb up again. As to the international action that has been taken, none can be sure how effective that will be. Two thoughts on that occur. First, although we were a sizeable player in the start of these problemshaving three out of the worlds five largest banks, as has been saidwe are a relatively small player in the outcome. Secondly, given demography, standards of living and public debt, Keynes general theory, if written today, would read very differently from his groundbreaking effort of 70 years ago. So whatever the effect of the action being taken, nothing indicates that we can just go back to where we were or that there is any reason to suppose that, in default of radical policy change, we will again climb up the league.
Before there are any mindless cries of you have no policies, we need to note that we are all right now mesmerised by the public debt and the Budget prediction that 2018 is the year when the poor rejected Prudence can return to polite society. If, in 1954, I had put forward the simplistic analysis of transfer payments put forward by the noble Lord, Lord Eatwell, I do not think that I would have got a very good mark. The only policy on offer is the reform of world financial systems. But that is for next time. Right now we need to decide on our national direction of travel. We need a hopeful list of things to do and a list of things to be avoided.
First, we are greatly aided by the onward march of science and its application. There is every reason to believe that what started with Arkwright and Abraham Darby will continue. Annoyingly for this Government this progress is not theirs to command, but it will continue and we need government as an enabler.
Secondly, there is nothing new in banking crises created by the careless, mindless overvaluation of assets. Look at the irreversible problem with French public finances created by John Law, a Scottish banker, in the early 18th century. But we need bankers also as enablers. The careless ones should shuffle off and be heard of no more. There are plenty of potentially sensible people to take their place provided that society encourages sensible behaviour and, by peer group pressure, achieves it.
Thirdly, we need the wealth creatorsthose who have the ideas or pick up the ideas of others, find the money, find the markets and create the businesses that make them wealthy: the Henry Wellcomes and Bill Gateses, and, earlier than them, the Ashmoles and Smithsons. The issue for society is not about their riches; rather it is about what they do with them.
The issue of the pay of those who manage or administer businesses or institutions which have been created by others is different. They are not to be confused with entrepreneurs. This is where there has been one of the most outstanding market failures of recent times. We are paying far too much to many ordinary senior managers and administrators who are competent and potentially self-disciplined. They are being paid far more money than it is sensible to pay them for what they do, and more money than it is ethical to pay in relation to average income. Here I agree most strongly with the right reverend Prelate the Bishop of Bradford. It is a most surprising outcome after 12 years of new Labour. Finally, we need to remember that any Governments ability to enable us to climb back up the league is strictly limited. It is much more a matter of avoiding mistakes than of any constant stream of initiatives.
As I said earlier that we need a radical change in policy, I need to say why new Labour policies will not deliver. When Tony Blair, the brilliant sales director, became Prime Minister, he relied on Gordon Brown, the operations director, to run the shop. As always, operations prefers to be left alone at home to get on with it, the necessary detail having usually escaped the salesman. Gordon Brown had two golden rules and thus, it is said, a moral compassthe 40 per cent rules. The public expenditure rule was designed to woo prudence and, given continued growth, to enable continuous progress towards a more centralised state, at least for the more than 50 million people of England.
As the legislation flowed and the number of people in the public sector rose by 800,000, two verbal deceptions were practised. One was to use the word investment and the other to claim that the increasing number of public bodies were independent. All room to manoeuvre with the national balance sheet was eroded away and we now face a doubling of the first golden rule to 80 per cent.
The second golden rule was the 40 per cent tax rate, now to be 50 per centarguably, 60 per cent. So much for the acceptance of wealth creation as the driver of social progress. This crude move must count as one of the silliest U-turns on record, with wholly negative effects. As I said, we need to concentrate on what we
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Lord Lang of Monkton: My Lords, I congratulate my noble friend Lord Forsyth on securing this well-timed and important debate, and also on his excellent speech in opening it. Much has already been said, and I should like simply to make the most fundamental point: that confidence is the key to recovery.
This is, in essence, a balance-sheet recession. It was triggered by the banks which, perhaps misled by the Governments changes to regulatory mechanisms, by their injunction to the regulators to regulate with a light touch, by the expansion of public borrowing and by low interest rates focused only on the inflation rate, the banks increased their loan-to-capital ratios by irresponsible amounts. Banking remains the major problem, and the imperative is not for distractive witch hunts, but the restoration of confidence to the banking sector. Only then will it be able to lend again.
It is nearly two years since Northern Rock set off the alarm, and there has been an astonishing delay and complacency on the Governments part in responding to that growing crisis. When the storm broke last year, they should have acted with speed and force to identify the extent of the toxicity problems and to separate them from the healthy parts of the banks.
Nearly 20 years ago, Lloyds of London, the insurance market, had a toxicity problem which nearly brought it to its knees. The Council of Lloyds addressed it by setting up Equitas to take over the toxic assets. Here I declare an interest, which is happily now almost extinct, as a participant in Equitas. Brokers, underwriters, underwriting agents, the Council of Lloyds and all other interested parties came together to co-operate in solving the problem, and Lloyds continued as a healthy financial institution. Of course, the comparison is not exact, but that kind of example could have been followed if there were sufficient drive and purpose. Even today in the banking sector, treatment by the Government of toxic assets has been slowly and hesitantly designed and slowly implemented.
The Governments broad approach to the crisis has been, first, to flood the economy with moneymoney borrowed, money promised, money printedhoping, no doubt, in the process to wash away the trail of their past record of mismanagement. Now they are relying on the Bank of England to print money to buy gilts from the banks. Prices go up, yields go down and thereby companies pension-scheme deficits go heavily into deeper deficit. That, in turn, reduces companies capital for new investment and slows recovery.
The banks first priority is, sensibly and understandably, to restore their balance sheets. When do the Government expect the banks to use the proceeds of quantitative easing to lend to industry? Will the Bank of England also buy corporate bonds to help businesses more directly? The formula MxV=PxT, with which the noble Lord, Lord Myners, is very familiar, has several variables. It is a risky business. Will the Minister tell your Lordships
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Nothing has damaged confidence more than the recent Budget. There is a bad record of past predictions and, on top of that, a worse record of future projections and no coherent plan for the future. It is perfectly clear that the Treasurys future growth figures were chosen and inserted in the Budget tables only once it knew what was needed to give some fig leaf of balance. They bear no relation to reality, and the IMF, the IFS, the European Commission and other independent bodies have rapidly demolished them.
Having brought the country to its knees by excessive borrowing over the past decade and some £600 billion of debt racked up in the good years, the Prime Minister was forced back, in the words of the most reverend Primate the Archbishop of Canterbury,
and now hopes to raise some £700 billion of debt over the next five years. I do not believe that there is another country in the world that will have to borrow more in proportion to its GDP. With other major countries seeking to raise more than $2 trillion this year alone, and with sterling devalued by some 30 per cent, there must be a very real danger, as my noble friend Lord MacGregor pointed out, of a gilt strike and the loss of our triple-A credit rating.
Our Prime Minister likes to think of himself as King Midas. On coming to power in 1997, he set down what he called his golden rules, and proceeded to break them all. Two years ago, he spoke in the Mansion House of,
That claim lies in tatters. But 12 years ago he inherited an economy that constituted, by common consent, a golden legacy, and he destroyed it; 11 years ago he sold almost half the nations gold reserves at the bottom of the market, and put the money into euros. We can only be thankful that he did not leave them in sterling. That is the record of a King Midas in reverse.
This Budget reveals that the United Kingdom, after 12 years of Labour government, is less well prepared to withstand recession than almost any other country. What we need urgently now is a plan to reduce debt. We need plans to get spending down. Why did the Government scrap the three-year spending review this year if not to funk the difficult decisions? Above all, we need to restore confidence that this can never happen again.
In the past, the Prime Minister would move the goalposts and change the dates of the economic cycle. Well, this economic cycle will run for a generation. But he cannot change the dates of the parliamentary cycle, and soon we can elect a Government who will get a grip and start the painful task of rebuilding this country.
Lord Judd: My Lords, I thank the noble Lord, Lord Forsyth, for giving us this opportunity to debate such an important subject. However, I hope that he will forgive me if I suggest that readiness for a little self-criticism
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When I look back at the history and the origins of what faces us, one of the things that strikes me as highly relevant is the whole culture of deregulation for which the previous Administration must take responsibility. However, I am sad that when we inherited the role of government we were not more challenging in that respect. But when I say that we need to take regulation more seriously, I feel equally strongly that it is a rather mad way to run an economy in which everyone is set loose and there are regulators around to blow the whistle. It seems to me essential to have an ethos within finance, industry and society as a whole that has regulation to sustain the situation should things go wrong. In that, the drive for what is right is coming from within the system itself.
Frankly, I have always found it interesting that when people speak of Adam Smith, they seem to want to take from The Wealth of Nations what suits them in the immediate situation, but they do not remember that Adam Smith was a highly ethical man. His writings and his academic career speak for themselves. The Theory of Moral Sentiments is perhaps every bit as important a piece of writing as The Wealth of Nations.
From this side of the House, I reflect on the thoughts of one of my colleagues who I always greatly admired; the late Lord Soper. At the time of the fall of the Berlin Wall, Lord Soper adapted what has often been said of Christianity and said that it is not a question of socialism having been tried and failed; it is a question of socialism having demanded an ethic of which humankind has so far proved itself incapable. I have often reflected on those words. I believe that human society has always evolved by struggleand I am not one of those who is keen to give up the struggle.
Obviously, the crisis that confronts us is economic in form, but my thesis is that its origins are very much in a crisis of values and a collapse of integrity. Greed and short-sightedness have too often taken precedence over responsibility, understanding of interdependence and long-term perspective. Certainly, it is in the realm of values that lasting solutions will be found. What is produced by any system cannot be better than the principles, values and effectiveness of those who operate it. This is a huge challenge to our educational system; a reassertion of the importance of philosophy and critical faculties as distinct from quantitative education.
My own view is that we live in a highly ideological age. I do not remember a more ideological time in my life. Of course, the centre of that ideology is an unyielding commitment to the market. I do not deny the importance of the market; I regard it as foolish to do so because the market is an important part of our system. But it is only part of our system. How does the market on its own meet satisfactorilyand I do not see the evidence that it doesthe challenges of the environment, climate change, security and third-world poverty? In talking of level playing fields, we have to recognise that many countries in the third world have to be helped to become fit enough to take part on the playing fields at all.
If we are going to find the right solutions, it is time to look honestly again at the importance of the mixed economy, of accountability and of pragmatism, not dogma, about what fits best in the private sector and in the public sector. It seems to me that a healthy mix of the two is appropriate. Certainly we need a healthy rehabilitation of the concept of public service. That concept has been denigrated year after year, as it seems to be said that failed people in society go into public service while clever people go into merchant banks. We have to get back to the ideal where to consider serving the public in the public sector is, if you are able and are highly qualified, a very fine thing to do.
However, we must also accept that ethical investment is not an option, an add-on, that you might consider after you have got on with the really tough stuff of running a business. Surely, if the current crisis has demonstrated anything convincingly, it is that ethical investment is absolutely central to the successful and enduring appropriateness of management in industry. I am not sure that all my colleagues will necessarily cheer my reflection that perhaps the logic of the situation in which we find ourselves is that we ought to reflect on the relevance of democratic accountable socialism.
Lord Patten: My Lords, in declaring my long-established corporate and financial interests in the City, I am saddened to hear the noble Lord, Lord Judd, excoriating bankers and banking, and the lack of regulation, in the way in which he has. It might shock your Lordships to hear me this afternoon come out and say that I have a number of investment bankers as close friends, and that I regard them as a very good bunch indeed. They are moral men and women who seek to do good and not to do evil, and such blanket condemnations do not befit this House. No class or group of people should be condemned root and branch, and certainly not here.
That said, I have just two points to make. First, I want to stress the need for a new economic understanding to replace the violent swings in opinion that we have seen on how to run things since World War 2. I agree with something the noble Lord, Lord Judd, just said, so correcting the balance. Secondly, I want to give a few pointers on how that might be done. I must tell the House that in those two tasks I am no futurologist, no seer, and, having been born with but two hands, unfortunately I am no economist.
On my first point, I assert that times have changed so much and we have all learnt so much; there are pendular accusations that this time free markets have failed just like the last time statism failed. Phrases such as, Thats enough financial engineering; lets get back to real engineering, seem to me to be permanently redundant in the way we are having to live now. Although I am no economic historian, I suspect that such people will look back to the mid-1990s and say that that was when the doctrine of permanently high and ever-growing public expenditure was found to be a disastrous failure; that somewhere in the mid to late 1990s we began to cross an expenditure fault line which has had a devastating effect on our country.
That is demonstrable because if we were to continue with business-as-usual spending at current rates, by 2020 national debt would equal at least one and a half times our gross domestic product. This is certainly not a time for a welter of figures, but these few that I will give will do. Back in 1993-94, public spending was £283 billion. In the 15 years since, it has grown, largely under Labour, to the current £623 billion. That is a 5.4 per cent per annum growth at a time when inflation has averaged over the same period at 2.4 per cent per annum. So the real annual growth in public spending has been 3 per cent year after year over the past 15 years.
There are two friends and colleagues with whom I work closely in the City, Mr Malcolm Offord, and Mr Jamie Arnell, who have demonstrated to me, in a mercifully algorithm-free model, that if public spending had grown in exact sync with inflation, today public spending would be at £404 billion, not £623 billion. So the current public sector overspend is £219 billion. That is the end of the figuresno more, I promise. I hope that the Minister, who has the unenviable task of winding-up, will not leap up, either now or during his speech, to say that he does not see any overspend, he just sees investment in public services. Let him come canvassing with me in the forthcoming elections and tell that on the doorstep to people who experience the failures of public services.
I think that many across the Chamber privately recognise that we are spending too much and that we need to retreat across the public expenditure Rubiconand do it permanently. I suspect at the moment there is much less of a consensus on tax rises with the temporary Nelsonian refusal to recognise that the problems of toxic assets, about which many in this House have complained, are now likely to be followed by those caused by the toxic taxation which was so brilliantly set out by my noble friend Lord Forsyth of Drumlean in his very important speech. He points outI do not need to elaboratethat punitive taxation rates punish the poor probably more than they punish the rich.
Companies too are now rushing to the UK exits and to new tax domiciles. The litany of large corporate tax leavers and therefore people paying less and less tax is growing inexorably. Last weeks leaver was Informa plc, heading out of this to another tax domicileanother good plcs profits and taxation lost to the Treasury. I have one question to ask the Minister, which I hope he will, with his characteristic courtesy, find time to reply to during his winding-up speech. Is it right that the Treasury is currently exploring ways of trying to stop this cross-border exodusyes or no?
With these few examples I turn to my second point: what can be done? Self-evidently from what I have just said, we should reverse these destructive tax hikes; most importantly of all, we should ensure that the public sector is treated fairly but realistically. I agree once again with the noble Lord, Lord Juddthat is two agreements and one disagreement with the noble Lordwhen he says that people in public service should be greatly valued. On the other hand, they have to be treated in a way which is fair in relation to those in the commercial world. Sixty per cent of private
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