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A week ago, I was in the world headquarters of the Ford Motor Company in Detroit at precisely the moment when the news came through that the Chrysler Chapter 11 proceedings had gone ahead, that it would shut down for three months and that there was a strong risk that General Motors would do that as well. The whole of the Ford Motor Company went into overdrive at that moment to check out the status of every supplier that it had, and a very strange pattern emerged. It turned out that a large number of the principal Chrysler suppliers effectively could not have continued to supply Chrysler even if it had stayed open for the next three months, because its banks in America had stripped out every penny of its facility in line with every pound of cash generated.
When I asked Lloyds Bank how it was getting on with automotive component suppliers, it said that it had about 20 all in the distress situation. I wonder seriously whether there is a bottom-up implication. It will not come from top-down failure of a big company like Chrysler, but a bottom-up failure of component suppliers to keep servicing the 910,000 people in the British automotive industry. FSA supervision of the
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Beyond that, we have to look at the rescue structures that Lloyds Bank will engineer. There are basically only three types of rescue: trade out, reconstruct the balance sheet or a Treasury solution, which is the polite word for selling off everything you can. The trade-out solution is rather like the Loch Ness monster, the Holy Grail or nymphomaniacs. Everybody believes that they exist, but nobody has ever come across them in real life.
There will be no trade-out solutions, because they do not happen. Businesses fail because they have been successful and they have overexpanded beyond the markets capacity to sustain their business, so there has to be a major cutback. If those banks are allowed to dump debt on to Lloyds progressively, that also means that Lloyds will have to finance a huge proportion of the write-off debt required to make those businesses survive into the future.
I wish that the noble Lord, Lord Myners, would now accept that he cannot have London rules back. Will he please get the FSA to do what it can to substitute for the essential London rules to keep a reasonable chance of getting as much of that business back to being generative of GDP for the future of this economy?
Lord Selsdon: My Lords, I get the feeling that a lot of people think that we have sold our birthright for a mess of pottage. What an extraordinary mess we are in. I used to think that I knew what an instrument was; I thought I knew about debt and equity. Now I am completely confused. When I get confused in your Lordships House, I seek the advice of the archives, and I suddenly realise what the best instrument is. When noble Lords have a minute, they should nip down the Corridor to look in that little case showing the tally sticks. The tally stick was introduced before the Norman Conquest as a measurement of debt.
As I sit here today, I realise that I am in this Chamber, unfortunately, because of the Tory Party of Lord Liverpool and Sir Robert Peel, who decided to burn government debt by putting the tally sticks in the boilers, and your Lordships House burned down. I thought that that was an instruction and advice that I could give to the noble Lord, Lord Myners. Burn the government debt or convert it into equity. Those are the possibilities. When people keep talking about trillions and billions, the general publicif there are such peopledo not know what that means. All we know is that it is a substantial amount of money.
I began to get worried about the emerging economic crisisI get worried only because when I was a young Peer in your Lordships House, when no one would speak on economic affairs, I spoke, and I would say, I am very worried that we now have a 16 per cent bank rate, which means that people are borrowing at 21 per cent; inflation is at 22 per cent. Every 10 years, there
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Like the noble Lord, Lord Broers, I suggest that those fundamentals are creating added value through tradeas I explained before, my life has been trade. We are not a self-sufficient economy. Throughout our history, we have always had to import most of our basic raw materials but have been able to create added valuesometimes in our country, not least in the textile industry in Leeds and Bradfordbut also in other areas where the raw materials had added value created by our technological skills.
Now we have the strange situation where no one worries about balance of payments any more. Yes, it is minus £50 billion this year, but every economist will tell you, It is not the balance of payments that matters, it is how you finance it. I look at what we used to call manufactures, or visible trade. Last year, we had a deficit of £100 billion on visible trade. We are net importers of energy and oil now. On every factor that relates to trade, we are moving into deficit. We were supported by the financial services industry contributing to a surplus of perhaps £50 billion, but that has probably gone out of the window. We have a trade problem.
If we look at it another way, we have a trade opportunity. We were always a mercantile nation wanting to attract foreigners. If I had been sitting in the Politburo in the Soviet Union a few years ago, I would be looking at the United Kingdom now and saying, This has gone entirely according to plan. We have effectively decimated and ruined the strength of the United Kingdom on a worldwide basis. Now, at last, the foreigners are leaving their shores, frightened that they will be overtaxed or destroyed. At this stage, with sterling having gone down by goodness knows how much since 1947, it has halved against most currencies, with the exception of the Australian and New Zealand dollars, a bit of Portugal and quite a lot of Spain. Our currency has depreciated. If you present it in another way, now must be the best possible time for those who have liquidity and opportunity to invest in the United Kingdom economy. Whether that will happen depends on their strength of confidence that they are investing in a secure economy.
I rather respect the noble Lord, Lord Myners, because we can smile at each other and I know about the difficult position of someone who has not been a Minister before and who wants to speak openly and honestly but is often constrained by his officials. Can he please tell me in simple terms what is the total obligation of Her Majesty's Government in debt, bonds, gilts and everything? The only good advice that I gave people was to say, Why dont you buy war loans,
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Secondly: what is the cost of the British bureaucracy? We have 520,000 civil servants; we have an enormous amount. At the moment, you would advise people: Dont go into the private sector, go into the public sector, because you will be protected. If you calculate forward, depending on your age, given the net benefit, with pensions, it is the best sort of job to go for. I suddenly discovered when I was researching my speech that quangos have been replaced by non-departmental public bodies. I found that they spend £43 billion. At a meeting, I said £43 million, but then I rather jokingly said, I think I have made a mistake; it is £43 billion. What is that expenditure for? If we need only £1.5 billion for the new strike aircraft, £43 billion seems a large amount of money. The Minister would do me a great favour if he could tell me the total level of Her Majestys Governments obligations for, say, the next 10 years, and the total level of their expenditure.
Baroness Warwick of Undercliffe: My Lords, I join others in thanking the noble Lord, Lord Forsyth, for initiating the debate and compliment the right reverend Prelate on a thoughtful, poignant and, for me, rather nostalgic speech. I was delighted to be reminded of so many landmarks in the city in which I grew up. I commend the right reverend Prelate to the incomparable Victorian cemetery in Undercliffe.
I focus my remarks on the role that higher education can play in shaping the future economy. It is reassuring to hear several speakers in the House today with connections to the world of higher educationchancellors of universities, former vice-chancellors and distinguished academics. I declare my interest as chief executive of Universities UK.
One thing that we can be sure of is that the economy and the employment market will look very different after the current recession. The financial services sector, one of the UKs biggest graduate recruiters, has shrunk dramatically during the past 18 months. Professional services firms have also cut graduate recruitment. We need to ask: what jobs will replace them?
Those opportunities include emerging industries such as life sciences and pharmaceuticals, advanced manufacturing, low-carbon technologies and the creative industries. The Government's approach in setting out the direction in which they believe that the economy is going over the next 10 years is to be welcomed, although of course those are predictions, not sure bets.
What is clear is that the status quo of the current economy, with a large financial services sector and a small industrial base, will no longer remain. The Prime Minister himself said in a speech on Tuesday to school head teachers:
Many of the growing businesses to which I referred earlier are predominantly graduate-level professions. That means that we need existing graduates to go into those professions, but we also need to increase the pool of graduates to meet demand. UK universities produce 260,000 graduates each year. Yet the report by the noble Lord, Lord Leitch, said in 2006 that, by 2020, the UK would need 40 per cent or more of adults studying at level 4: in other words, at degree level or above.
Seventy per cent of the 2020 workforce is already in work, so that is where we need to address their skills needs. It is clear that the traditional form of higher educationgoing away from home for three years to study for a degreealthough important is no longer the predominant model of study. Many people now study part time while in work. Indeed, in 2006-07, there were more than 500,000 part-time undergraduate students and a further 300,000 students studying part time for postgraduate qualifications.
The higher education sector has ever closer ties with business and is actively engaged in improving the variety of systems that are already in place to make it easier and more effective for employers to engage with the sector. Universities UK, with the CBI, has highlighted some contemporary examples of workforce development through employer-HE partnerships. These show that universities and business are aware of the need to collaborate and communicate so as to produce high-quality graduates with the high-level skills that society needs now and in the future. They are working together on the development of foundation degrees and vocational degrees, as well as vocational modules, as part of academic degree programmes. All this will be ever more relevant as the class of 2009 enters one of the most difficult labour markets for decades.
Not only have universities been trying to tackle the downturn by providing their own graduates with the skills that they need, but they are reaching out to their local business communities. There is now a contact point for businesses to use at every higher education institution in the country. Universities can offer multiple opportunities: staff training at all levels, with bespoke courses designed for the specific needs of business; business schools that help to improve leadership and management skills and development programmes to improve the customer experience; and consultancy services that help to improve company practices. They engage with business through work placements and similar schemes. Universities and higher education colleges have a strong record in fostering innovation, enterprise and skills, and in helping to create wealth and job-generating opportunities.
To conclude, as part of the debate today we need to consider not only the future prospects of our economy but what kind of worker we need to participate in that economy. I am sure that with continued public investment from this Government and any future Government, and with the right kind of private investment and partnership, we can build on the existing strengths of our already excellent higher education system to help to rebuild the British economy for the challenges of the next century.
Lord Northbrook: My Lords, like other speakers, I congratulate the noble Lord, Lord Forsyth, on securing this debate. At this stage in the batting order, it is always a little difficult to find something original to say, but I have alighted on something of interest.
The Financial Services Global Competitiveness Group has produced a report which the Minister has done his best to keep away from the House. It seems to have been released to the press in advance, but I cannot get a copy from the Printed Paper Office. Perhaps this is why. The report calls for a predictable and stable tax regime to help London to retain its position as a world leader in financial services. According to the Press Association, the group said that tax needed to be,
This does not reflect well on the budget income tax increase to 50 per cent, which the Treasury hopes will raise an extra £2.9 billion by 2011-12. The IFS, in a study on the original 45 per cent new tax rate proposed in the Pre-Budget Report, suggested that it will cost the Exchequer rather than raise money, and concluded instead that the optimum higher tax rate should be 43 per cent. It suggests that the fiscal behaviour of high net worth individuals may change but not to the Treasurys favour.
Even if higher taxes were justified in the long term for reasons of social equity, the decision to rush forward this reform amid a recession will do serious damage to the economy and the public finances. Hopes of the quick improvement in UK economic conditions assumed by Treasury forecasts rely more than ever on maintaining the Citys role as the dominant centre of global financial and business services.
The Budget Red Book says the financial sector provided 25 per cent of the £47 billion in Britains total corporation tax before the recession, plus a significant proportion of income tax and national insurance receipts. The financial and housing sectors between them accounted for half the total growth in tax revenues from 2002 to 2007, but are expected to decline by 1.75 per cent of GDP, or £25 billion, this financial year. That is more than half the total decline in tax revenues expected as a result of the recessionand the Treasurys hopes of ... recouping half the revenues lost from finance and housing by 2013.
Overall, the new higher rate of tax seems to be deliberately designed to stop the UKs financial and service sectors returning to the predominance they enjoyed. I am surprised that the Minister did not advise the Chancellor against it.
I want next to concentrate on two areas covered in considerable detail by other speakers; first, the economic background to the Budget compared to the growth forecast presented by the Chancellor and, secondly, the state of public finances as revealed in the Pre-Budget Report and the estimated weak economic growth. Moving on only five months, the figures have deteriorated rapidly. As other speakers have mentioned, even the dreadful revised 2009 forecast could be optimistic. Only two days after the Budget, the ONS reported a contraction of 1.9 per cent in the first quarter. According to the FT, the European Commission has predicted a decline of 3.8 per cent. Shortly after the Budget, the IMF predicted a 4.1 per cent full-year contraction in GDP in 2009.
As other speakers have noted, just yesterday, the National Institute of Economic and Social Research predicted that the UK economy would decline by no less than 4.3 per cent this year. The Treasury Select Committee in its report on the Budget says that there is considerable uncertainty around the Governments GDP growth forecast for 2009-11. It believes that predicting a return to growth in the last quarter of 2009 is questionable and that the sharp recovery predicted for 2011 might be too optimistic. All that weight of opinion from independent commentators suggests that the Chancellor may be calling the recovery too early. If he is incorrect, that will have a further negative impact on the Governments finances. In particular, the assumption that the economy will grow by 3.5 per cent in 2010-11 looks very optimistic.
The debt situation is also horrendous. Table C3 in the Red Book shows 2008-09 borrowing at £90 billion, which is up 16 per cent from the time of the Pre-Budget Report. For 2009-10 it is £175 billion, which is up a staggering 48 per cent from the PBR and represents 12.4 per cent of GDP. Borrowing for 2010-11 is forecast at £173 billion, which is an increase of an even worse 65 per cent. According to the same table in the Red Book, as the noble Lord, Lord Ryder, has stated, total borrowing over the next five years totals £700 billion.
The Treasury Select Committee notes that the Chancellors forecast for public borrowing and national debt represents the worst fiscal outlook since the Second World War. What is particularly alarming is the rapid increase in borrowing, which is so exceptional, and there is concern that the UK may lose its AAA credit status, which would not be helpful for the gilt market. The status is vital to attract international as well as domestic investors. The Government have squandered the golden legacy left by our party. They exacerbated the problem of finances by selling the gold reserves. Labour Governments always run out of money in the end. Debt levels were high going into the crisis and now we are saddled with it for generations to come.
Lord Higgins: My Lords, as the noble Lord, Lord Northbrook, has pointed out, the National Institute
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Secondly, he dismantled the system of financial regulation introduced by my noble friend Lord Lawson and introduced the tripartite system, which we all know has turned out to be a complete failure and, indeed, a disaster. Thirdly, he gave independence, so called, to the Bank of England. This was widely welcomed, but not by me because I pointed out at the time that he had combined doing that with taking control of funding from the Bank of England and putting it into the Debt Management Office in the Treasury. I am glad to see that the Minister agrees with me. However, funding is absolutely crucial in the link between fiscal and monetary policy and is a major determinant of the money supply. I have stressed before that it is very important indeed to distinguish between monetary policy concerned with the supply of money and interest rate policy concerned with the price of money. I see that again I carry the Minister with me on the point. I am glad of the debate with him at Question Time and grateful for the various letters he sent to clarify points that may not have been entirely clear on the Floor of the House. We should all be grateful to Ministers who follow matters up by correspondence.
The Government have been using interest rate policy and monetary policy as if they are synonymous, but they are not. They are related, of course, but they are not the same thing. What is curious is that although the then Chancellor decided to set up a Monetary Policy Committee, for the past 10 years we have not had a Monetary Policy Committee. It ought to have been investigated under the Trade Descriptions Act. What we have had is an interest rate policy committee, a one-club golfer concerned with a single interest rate with a variable relationship to other interest rates, and that is the only thing it has had. Only recently has it been concerned with monetary policy in the sense of controlling the money supply.
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