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The vital part of any new understanding is threefold: no more public sector growth overall, ever again, in the way we have seen in the past 15 years, and the beginnings of substantial retrenchment; a new and permanent settlement on public sector wages with a fair trade-off for those in the public sector, whose work I certainly value, against their job and pension security; and a return to sensible, not punitive economic-activity-destroying, levels of taxation.

2.23 pm

Lord Ryder of Wensum: My Lords, I congratulate my noble friend Lord Forsyth on his fluent and penetrating speech. The Prime Minister still claims that the recession all stems from global causes, and that the United Kingdom is better placed to emerge faster from the debris than any other country. These assertions warrant brief scrutiny.

Before the collapse in markets, I submitted to your Lordships that our public finances were in disorder and demanded attention. In fairness to the Government, I also questioned the wisdom of the Opposition’s adherence to sharing the proceeds of growth. After all, public spending was exceeding Treasury forecasts year after year; the fiscal rules were fudged and fudged again—to use the words of the noble Lord, Lord Desai; taxes, let alone national insurance contributions, were rising at two and a half times earnings to enable Mr Brown to bloat the public sector; private borrowings were out of control; the savings culture was in chaos; private sector pensions were under pressure from constant Brown raids; and off balance sheet lay the costs of the poorly negotiated PFIs and the burden of gold-plated public sector pensions.

In short, as the Governor of the Bank of England later confirmed, the Government’s balance sheet was enfeebled by debt-fuelled spending in the Brown boom years. According to the OECD, UK borrowings are as much a legacy of the Government’s home-grown structural profligacy as global forces. The IMF has attested that the UK will shoulder the worst fiscal deficit of any G7 nation.

Against this backcloth, it was imperative for the Chancellor to provide a credible framework for dealing with our public finances after the disgrace of his autumn PBR. Above all, the Budget required economic honesty and responsibility. Instead, the Chancellor served up another dodgy dossier, with counterfeit forecasts ridiculed everywhere—even by the Treasury Select Committee yesterday in the other place.

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When the Chancellor uttered the sentence that our growth rate would rise to 3.5 per cent in 2011, it confirmed that his forecasts were works of fiction. Only in one of the Brown boom years did we achieve a growth rate on that scale. The Prime Minister and Chancellor’s forecasts have damaged trust in the Treasury. It concerns me, as a former Treasury Minister, that for eight successive years their public spending forecasts have undershot the outcomes. Either Treasury forecasters are hopeless and deserve replacing, or they are victims of political interference from Ministers and spin doctors, with the apparent acquiescence of the Permanent Secretary. The Select Committee should carry out an inquiry. This incompetence, or abuse, cannot be permitted to persist to the detriment of our fiscal planning and the reputation of our foremost department of state.

The UK’s recovery depends on the Government’s honesty about the true state of our public finances. How did the Chancellor in his Budget seek to allay these anxieties about our public finances? He announced efficiency savings. As my late noble friend Lord Deedes might have said, this hoary chestnut is a dead red herring. Noble Lords will remember the Gershon report of five years ago, which signposted efficiency savings. Well, the National Audit Office, as my noble friend Lord MacGregor has already pointed out, revealed that the Government have delivered a mere quarter of these promised savings in those five years. So why should we believe the Government’s word a second time around?

Treasury competence and honesty matter on several levels. Let me highlight just one. The UK is set to borrow a higher multiple of its reserves and a higher share of its GDP than any major nation. In the next five years the UK will need £700 billion of debt finance—that is £270 billion more than the Chancellor fancifully estimated in the PBR. Billions must be raised in the gilt market, as my noble friend Lord MacGregor reminded us. The peril is that confidence in the gilt markets will wilt further, as the Chinese Government warned us yesterday, if the Government do not explain how they intend to get a grip of their public finances, especially if inflationary pressures surface again. I recognise that deflationary, not inflationary, fears reflect the conventional wisdom. Yet for me, the greater menace is a resurgence of inflation. The Governor of the Bank of England still writes letters conceding that inflation is too high; the CPI and food price inflation hover around 3 and 8 per cent respectively. By the time the printing presses ease up, the UK will have doubled its monetary base, broad and base money spiral, with M4 reaching nearly 19 per cent. If the oil price hardens even by a slice of its last rise and sterling stays weak, inflation will threaten the glimmerings of recovery.

The Chancellor and the Treasury should come clean with us about the state of our public finances and provide us once and for all with a credible framework for setting them right. They should dust off copies of the excellent White Paper, The Government’s Expenditure Plans 1980-81, published under the auspices of my noble and learned friend Lord Howe of Aberavon in 1979. One of its aims was to plan for spending that could be compatible with objectives on borrowing and taxation, with a realistic assessment of the prospects

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for economic growth. We have not been given a realistic assessment, but we must have one, otherwise the markets will crucify this country and it will be the fault of this Government and this Government alone.

2.30 pm

Lord Plant of Highfield: My Lords, like other noble Lords, I thank the noble Lord, Lord Forsyth, for facilitating this debate. I am rather dauntingly aware that I am neither an economist nor a businessman; in fact, I am an academic philosopher. I want to concentrate on one thing in my speech. It is an abstract point, but I hope that it will not be arcane or without interest. I shall concentrate on the value or price of toxic assets or sets of assets that are included under that general rubric—CDOs, mortgage derivatives and so on. This is an important issue, as the banking sector will have to be reformed if it is to play a central part in the economic recovery to which we all look forward. Yet we have grave difficulties in trying to understand exactly how we are to do that without getting a grip on the idea of value or price in relation to some of these more exotic instruments.

It is often said—in a way, it is obviously true—that the last 30 years have seen the triumph of economic liberalism. However, there is a paradox. The development of these assets has been a product of economic liberalism and deregulation, yet those who have lauded the development of these assets have neglected one of the central themes of economic liberalism, which is that value and price are fixed in open markets by the relationship between the buyer and the seller, and value is subjective; it is about the preferences of individuals, whether they are buyers or sellers. However, many of these assets have become detached from any clear relationship to a market in which value understood in that way can be credited to them. Let us take the case of CDOs. They are sub-prime mortgages, which is a bad thing in itself, but then they are divided, subdivided, bundled up and sold in different ways to different groups of people. People have a remote understanding of how that relates to ordinary market transactions.

Many people will say that that does not matter, because the value of these assets can be fixed by mathematical modelling of one sort or another. I heard someone making this claim on the radio last week, saying that we need not worry about the relationship between these assets and normal markets because the value of these assets can be fixed by mathematical financial mechanisms. Anyone who has read, even superficially, the economic liberals will know that a great deal of their thought is characterised by the rejection of those sorts of mathematical models. The reasons for that are twofold. First, people such as Hayek argued that markets are too complex and dynamic for any mathematical model, however cleverly constructed, to capture. The second and perhaps more important point—again made by Hayek and Mises, in particular—is that a great deal of the knowledge that is utilised in a market is not propositional knowledge, which is the only kind of knowledge with which mathematics can deal. Rather, the knowledge that is important in markets is tacit, implicit knowledge; it is knowing how rather than knowing that. Yet you cannot bring into economic models in any straightforward way, if at all, this tacit,

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implicit knowledge. Economic models require things to be made explicit that are always actually going to be implicit. There are therefore big buffers or road blocks in the way of an ability to produce models of assets that are not traded in a normal market context.

If any of that is true, as I think it is, we are facing the paradox that economic liberalism has been threatened by products that are themselves a product of economic liberalism but have been created in the face of the basic understanding of price and value within an economic liberal philosophy. If, however, it is impossible to bring those assets into relationship with normal market understandings and transactions, we have to do what the noble Lord, Lord Lawson of Blaby, argued earlier, which is to separate out the exotic—the casino, if you like—aspects of banking from the normal, everyday family and businesslike aspects of banking.

If we cannot find a regime—I am not remotely in a position to suggest what it might be—to bring an understanding of the value of these complex commodities into relationship with, as it were, normal understandings of markets, we have to divide those sorts of assets and how they are dealt with in banking and so forth from those assets that we all understand and are part and parcel of normal market activity. Behind this rather esoteric debate about the nature of knowledge lies something very important: you cannot get way from the idea that economic value is subjectively determined in market exchanges, and that cannot be fully captured by economic models, however complicated they are.

2.38 pm

Lord Sheikh: My Lords, I, too, congratulate my noble friend Lord Forsyth on securing today’s debate. I am very grateful for the opportunity to contribute on such an important and timely topic.

This debate comes just two weeks after the Chancellor delivered the Budget but, according to the National Institute of Economic and Social Research, the economy in this country is contracting faster than in the 1930s and far more than was forecast by Mr Darling in his Budget. Nearly 2 million people are unemployed at present and this figure is likely to rise. In addition to losing their jobs, large numbers of people are having their houses repossessed. On the Government’s own figures, the national debt will double again to £1.4 trillion; every baby will now be born owing £22,500; and interest repayments have risen to £43 billion a year, which is more than the schools budget.

In recent months, much has been said in your Lordships’ House about leadership. Instead of strong leadership, we have seen mismanagement of the economy, with the Government appearing to be in crisis-management mode, lurching from one disaster to another. Rather than strong and decisive action when it was most needed, Labour has dithered on important decisions, and this has resulted in the massive debt in which we as a nation and people all over the country find themselves. Today, we find ourselves less well prepared than any of our major competitors.

I think we all appreciate that fiscal responsibility must be the foundation of any economic policy. Rather than having excessive expenditure and failing to save

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when times are good, to my mind it is essential that a Government learn to live within their means. That is not just a good policy for the Government; it is an important lesson for every household up and down the country. We must all appreciate that there is not an endless amount of credit to be had and that restraint is good. British households have the highest debt of any major economy. The number of bankruptcies and repossessions is rising, and this legacy will take years to overcome.

As the chairman of an insurance organisation, I firmly believe in trimming expenditure and feel that the Government must be prudent. I believe that we can cut waste without affecting front-line services, and this is an important goal. There is too much waste in public services—in bureaucracy within the NHS, the police and other areas. By cutting this waste, we will not hamper their efficiency but improve it. Better front-line services are important to everyone, and we must be committed to cutting waste where it exists and ensuring better value for money for the hard-working taxpayer. We must strive to achieve this to ensure that help is in place for those who need it—the sick, the poor and the unemployed—when they need it.

I am an employer. All employers create wealth and provide employment. A number of employers and entrepreneurs earn more than £150,000 a year, and these people will be penalised by the imposition of the 50p tax rate. I firmly believe that higher taxes for the wealthy are counterproductive and that they stifle the creation of wealth for the country.

My business is financial services. In future, the banking and financial services industry needs to exercise proper housekeeping and better risk-management measures. There needs to be a change of culture. We need to revitalise the industry and to think carefully before we apply very strict regulations. The industry of course creates a considerable income for the country.

Most of us have elderly parents and relatives, and we should believe in a fair approach to pensions so that older people do not suffer and are comfortable in their retirement. Older people make a huge contribution to society but this is not always reflected by government. It is important that their potential is recognised and supported. Their savings need to produce an appropriate yield.

I have a number of friends who are doctors and I feel that we need to look carefully at all aspects of the National Health Service. This means that proper funding is needed and, where risk exists, it must be eliminated to ensure that patients benefit. A&E departments and maternity units are vital to communities, and these must be preserved and not cut. All this can be achieved by prudent spending and cutting back on unnecessary waste in the system. Front-line services such as the NHS do not have to be affected in the economic downturn if we are prudent about where the money goes.

Now is the time when we need to help ordinary families; instead, this Budget taxes the people who can least afford it. The national insurance contribution in 2011 will hit everyone earning £20,000 a year or more when we should be starting to see the economy grow further. My party wants to help families. On that note, I shall end as my time is up.

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2.45 pm

Lord Broers: My Lords, I congratulate the noble Lord, Lord Forsyth, on gaining this timely debate and on his excellent speech. As an engineer, I enjoyed the emphasis that he placed on numbers. I intend to spend my time discussing the relationship between stimulus funding and low-carbon obligations.

There is an inconvenient truth—not Al Gore’s—that most of the methods available to us to reduce carbon dioxide production and meet our climate change obligations are more expensive than those that they replace, and that we are going to have to find huge sums of money to pay the subsidies needed before the private sector will invest in them. That is clear in the Budget, where an overall additional package of £1.4 billion is identified to support low-carbon projects, and this builds on existing policies, which, quoting from paragraph 1.32 of the Budget, are already enabling £50 billion of low-carbon investment over the three years to 2011.

How are we going to pay for all this in the long run if indeed low-carbon energies remain more expensive than their predecessors? There may be some low-cost options, such as nuclear energy, and we might even change our lifestyles and reduce our consumption if forced by economic circumstances, but there is no time to discuss these today and they will probably not change the situation. If we are not just to print more money, we will be able to pay for this only by increasing the output of our economy and improving our current account balance. In the absence of the large margins enjoyed by the financial sector in the recent past, this will have to be done by reviving industry and business.

However, our industrial record in recent times has been appalling. For example, overall, the UK’s trade balance has deteriorated at a rate of 20 per cent annually since 2000, approaching a negative £60 billion, or nearly 5 per cent of the UK’s GDP, in 2006, and our current account, of which the balance of trade is the major component, has been in negative territory consistently since 1997. The reason that the deficit has not ballooned more than it has is because of the net positive balance being produced by the financial sector and through the sale of our assets, whether they be airports, aeroplane wings or whatever. None of these is sustainable. These issues were clearly laid out in a report of the ERA Foundation published in March this year.

That brings me to the point that I wish to make today: we should ensure that stimulus funding is focused on reviving industry and business so that we can afford to implement high-cost, low-carbon technologies, rather than it being spent almost entirely on the high-cost energy technologies themselves. If we spend too much on high-cost, low-carbon projects, we will merely drive the nation more and more into debt and end up not being able to pay for the means to meet our climate change targets.

The Budget contains a strategic fund of £750 million to support business, but a third of that is contained in the £1.4 billion to be spent on low carbon. Even some of the additional money going to the TSB is also to be earmarked for low carbon, so the rest of business will get only about £450 million. This is far too small in relation to the other sums of money that are being

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bandied about. Our obsession with low carbon ignores the fact that there is much more to our industrial base. If we are to increase the volume of the high-performance, competitively priced products and services that we produce and sell so that we are rich enough to meet our carbon targets, we will have to find projects that support a broader technology base, and it will also be necessary to improve the efficiency and thereby lower the cost of our communication, transport and health systems.

Stimulus funding should be spent on projects that will ensure that our workforce possesses the skills broadly needed to support industry and business. We need to be able to harness the latest communication technologies, including optical, wireless and satellite transmission. We need to design large, complex software systems, to implement state of the art microelectronics, including control systems, data processing, coding and storage, and to be expert on sensors and actuators, as well as the complex instrumentation now essential in healthcare. A thorough understanding of the characteristics and application of newly developed materials is equally important and is relevant to all branches of industry, from aerospace to pharmaceuticals.

The list is long, but without our industries bringing their technology bases up to date across a broad spectrum they will not be able to compete internationally. Stimulus funding methods must be found as soon as possible to encourage all of industry to do this, to bring their levels of R&D spending up to internationally competitive levels. If we spend our stimulus funding almost solely on low carbon industries we risk broad industrial collapse and we will deny the stimulus that the bulk of our industry deserves.

2.51 pm

Lord James of Blackheath: My Lords, two weeks ago today, I was at the meeting of Lloyds Bank’s intensive care and corporate rescue operation, which is now responsible for running the combined Bank of Scotland and Lloyds Bank book. I was representing another financial institution at that meeting and came away with a number of strong impressions of what is going on in the undergrowth of the corporate rescue world.

At present the Lloyds Bank activity employs 180 staff in intensive turnaround operations; it has had to set aside a separate unit to cope with the very large multi-bank invested operations, which are causing serious concern, and on which it needs some assistance from the noble Lord, Lord Myners, in a way with which he will be familiar and of which I shall remind him in a minute. The other great impressions are that there is a world of difference between the quality of the problems of the ex-Lloyds Bank book and those of the ex-Bank of Scotland book. It would be worthy of the Government’s attention to think very hard about the implications that this might carry for the Scottish economy. The book of Scottish debt is fragmentary, relatively minor, with many start-up operations. The smaller the business, the harder it is to rescue. One will be full of very deep forebodings about the extent of the impact of the collapse of those businesses collectively on the Scottish economy.

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As to the rest of the book, the problems are considerable, but the team is confident that within six months it will have cracked the burden of most of the turnaround situations and have them on recovery. We need that, because it is a staggering amount of debt, which runs into tens of billions of pounds and is by far the biggest corporate rescue book ever attempted in this country. It must represent an enormous amount of the lost GDP of this country that these businesses are locked up in corporate rescue. We need to have them back as generative, thriving businesses again, without which there is not the slightest prospect of the Chancellor’s optimistic 3.5 per cent GDP in a couple of years ever being fulfilled. I should think that a high proportion of that is sitting in Lloyds Bank at the moment.

We can go back to the famous remark made by the Prime Minister to the effect that he would save the world, but I do not recall him ever saying that he would start by saving Ireland and Australia. He should have warned us. At present, the Allied Irish Bank and the National Australia Bank are ripping off Lloyds Bank merrily at every opportunity by calling in the significant loans on which they participated in a syndicate, forcing Lloyds Bank to buy them out simply for the preserve of keeping the Lloyds Bank—or Bank of Scotland—interest alive long enough to do a rescue. This is a progressive dumping of toxic debt into Lloyds Bank, which I am sure was never intended and would never have been allowed under the old London rules. It must be stopped now.

I know that the noble Lord, Lord Myners, will say that London rules cannot come back and that the Bank of Scotland does not exist on the same basis. I am sympathetic to his arguments, but the sort of activity that is going on could easily be addressed by the FSA if it were to take it on. It would not be so difficult for it to have the same supervisory role to ensure that facility positions are maintained and not called in unfairly to make the national economic situation worse.

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