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The situation is now terribly confused. On the one hand the Government are lending and guaranteeing vast sums of money to the banking sector while on the other they are seeking to fund their deficit by borrowing back from the banks. It is extremely difficult to find out what on earth is really happening. Be that as it may, the Government introduced the dreadful concept of quantitative easing—if they mean an increase in the money supply, I do not understand why they cannot say that rather than “quantitative easing”—and, curiously, did it by going out into the market and

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buying government debt back. At the same time, the Debt Management Office is moving in the other direction. Why did the Government decide to do it this way rather than the traditional way of either underfunding or overfunding the borrowing requirement? The answer to that is because the Bank of England no longer has control; that lies with the Debt Management Office. Have we any reason to suppose that the Debt Management Office, whose main concern is to borrow as cheaply as possible on behalf of the Government, has any idea what to do about general economic management? Perhaps the Minister can tell us how many people expert in demand management reside in the Debt Management Office. The whole thing is split between the Debt Management Office on the one hand and the Bank of England on the other. The sooner we give back control over funding to the Bank of England, the sooner we will have something like a coherent policy.

I agree with the Minister that simply concentrating on the money supply is difficult to do because of the problem of the velocity of money as well as the quantity. Again, I carry the Minister with me, so I hope that we can persuade him to make other active interventions in a field where he has shown that he is making great efforts. However, it is a question of the extent to which the Government are going to fund the deficit since it is utterly inconceivable that they will fund the borrowing they now have to undertake at present interest rates. We have to ask this: who are they going to borrow the money from? I am afraid that this is a rather complicated and technical point, but it is crucial as to whether they borrow from the banks, in which case there will be an increase in the money supply, or whether they borrow from what in the jargon is called the “non bank public”, in which case the effect of the deficit and fiscal laxity will be sterilised. I hope very much that we can achieve a greater degree of clarity on this.

I have pressed the Minister to give the Government’s forecast for the money supply. He has said that they do not have a forecast. It would be a very strange Treasury model if it did not give a forecast, but, at all events, I accept what he said in his recent letter, which was that there have not been forecasts previously. However, what there has been is a specified range for what is expected to happen to the money supply, which was abolished by Mr Brown in 1997. It would be immensely helpful if we could have some idea of what is really happening, because the relationship between the money supply figures, the money supply and aggregate demand is crucial in determining the extent to which we get growth. In the context of growth, there is terrible confusion as to whether it is the underlying productive potential which is going up or the extent to which that potential is used. I suspect that what will be claimed to be growth in the next few months will be the utilisation of excess capacity which is now unemployed, rather than otherwise. However, at all events, these are crucial issues and we must have a much clearer statement from the Government as to where they stand on this whole area of policy.

3.26 pm

Lord Newby: My Lords, I thank the noble Lord, Lord Forsyth, for introducing this debate on what will

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clearly be the dominant political issue in the period between now and the next election and well beyond it. I greatly enjoyed his withering analysis of how things have gone wrong, and I am only sorry that he did not then go on to explain how, were he a benevolent dictator in charge of our affairs, he would get us out of the mess that we now are in. I look forward to the speech of the noble Baroness, Lady Noakes, because I am sure that she will fill that gap.

A number of noble Lords have discussed who is to blame. I think that there is now near-consensus, with the exception of Downing Street, that, although there is a significant US component to the situation in which we find ourselves, most of the problems we now face are home-grown. It is obvious that we had a housing and credit bubble of our own making which was bound to burst at some point with disastrous consequences. The comments of the noble Lord, Lord Marlesford, were particularly interesting, because, as we have concentrated on banks and housing, we have not concentrated on credit card debt, which is another huge and immensely expensive bubble for those who have been caught up in it.

If we can agree that this is largely a home-grown problem, what are our prospects now and how can we attempt to make sure that they are as positive as they can be? The background that we have to assess is how bad things are and how quickly we can expect an upturn. I am relatively positive about the real economy and relatively negative about the state of the public finances. The speed of the upturn will be rather greater than most people believe for a number of factors, of which I shall mention two. The first is that we are not totally dependent on ourselves or on Europe and America for an upturn. The balance of the world economy has moved, and continues to move, towards China, India, Brazil and elsewhere. Those economies are not suffering to quite the extent that we are. Growth is continuing in many of them, and it is interesting that surveys coming out of them in recent days show more optimism. Although I do not believe that they will be the locomotive of growth, I think that they will play a much more significant part in pulling the world out of recession.

Secondly, the technology of decision-making speeds everything up. As people form a view that we are out of the bottom, it is so much easier now to take decisions quickly and internationally, and implement them using modern technologies, so that one can see the whole timetable of decision-making around new investments and opportunities being concertinaed. So, as sentiment changes, people can make decisions quickly and implement them more quickly than ever before, which will play a significant part in how quickly we move forward.

The two areas on which we have concentrated today are, first, what we are going to do about the plight of the financial services sector and, secondly, how bad are the public finances. As for the financial services sector, I share the concerns of the noble Lord, Lord Wakeham, that we are a very long way from being out of the wood. I gather that, as we have been holding our debate today, the Bank of England has announced, somewhat prematurely, that another £50 billion of

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quantitative easing will take place, which suggests that it does not believe that we are out of the wood. I share that view. What should we be doing about reform of the financial services sector? There are two things I think we should do and one thing I think we should not.

The first, to which a number of noble Lords have referred, including my noble friend Lord Oakeshott and the noble Lord, Lord Lawson, is splitting the banks between the utility function and the casino function. There is a widespread feeling in the country that that is what people want to see. I think it will be to the benefit of consumers and to the long-term benefit of the financial services sector and I hope that the Government will revisit it.

Secondly, there has clearly got to be a completely different view about modelling and risk within the banks. When you talk to senior bankers, they say, “Well, of course, all our models proved to be completely useless in the end, they were wrong and they have led us into this mess”. They seem to be passive consumers of models, as if these were created by some deus ex machina, rather than having gone along with them because it fitted their own prejudices at the time. I strongly agree with both the noble Lord, Lord Smith of Clifton, and the noble Lord, Lord Plant, that we need to take account of political economy, of animal spirits, of some things that cannot be measured, in assessing risk. I hope very much that the banking sector tries to grapple with those intangibles rather than with equations which, not only they could not understand in most cases, but have led them to the pass in which they now find themselves.

The one thing that I hope the Government and the banking sector do not do is to return supervision of every aspect of the banks to the Bank of England. It seems to me that there is a considerable degree of nostalgia about the success of the Bank of England in managing the banks. If you go back to the great banking crisis of the 20th century— the accepting houses crisis of 1914, which Lloyd George sorted out very quickly, when the Governor of the Bank of England was asked how he knew which bonds were good and which were bad, the Governor of the Bank of England said, “I smell them”. There is a lot of nostalgia, particularly on the Conservative Benches, for that sort of old-fashioned approach; that, somehow, if only you got back to the Bank of England, the smelling of the bond or the raising of the governor’s eyebrow would deal with supervision of the banks. I do not believe it. I think that if you tried now to put back the clock, you would have a couple of years of complete inertia in terms of supervision, as the FSA and the Bank argued about who was doing what and which individuals were doing what. At this point, that would seem to be almost the worst thing you could possibly do.

Moving on to the public finances, which will clearly have a major part to play in how well the economy does, we have supported the principle of a fiscal stimulus at this point. We have not agreed with the detail of it, if the VAT reduction is a detail, because we think it has not been the most effective way of doing it, but we have supported it for two principal reasons. First, if businesses go bust at this point because of a

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lack of demand and a lack of lending, they cannot be recreated as quickly as they went bust. There is a long-term as well as a short-term cost in businesses—viable businesses in many cases—going bust. The same applies to individuals. We know that if individuals are unemployed for any significant period, their ability to hold down a job diminishes and they lose self-motivation which means that, even as the economy turns up, many of them never get a job again. That is a major cost and for the noble Lord, Lord Forsyth, to describe public borrowing at this stage as stealing from our children seems to me to be a very misleading way of looking at it. However, if you accept that we need to have had a fiscal stimulus at this point, it is clear that we cannot continue with the level of borrowing as the economy begins to grow.

As we think about how we measure and balance the various claims on government, we get back to the interesting interventions of the right reverend Prelate the Bishop of Bradford, whose maiden speech I greatly enjoyed—I once went to see Bradford City and spent most of my time looking at the hills beyond—the right reverend Prelate the Bishop of Portsmouth, and the noble Lord, Lord Judd. It is a major indictment, not just of this Government but of us as a society, that UNICEF rates this country as virtually the worst place in the civilised world to be a child. As we move forward in the new environment, those are the kind of issues that any Government have to grapple with and that they should be looking to as one of the key principles on which to base spending decisions. It is a challenge for David Cameron to articulate what kind of nation we want to be, not just what the level of the borrowing requirement will be. The speeches he has made up to now, such as the one at Davos, address these issues in ways I was sympathetic towards. My concern is that the rhetoric is not matched by the policy restrictions. We now need details of how he is going to implement some of the rhetoric; otherwise, his rhetoric will be severely undermined.

How are we going to bring down the debt? Clearly, it has to be a combination of various tax increases and expenditure reductions. To see a 50 per cent tax rate brings mixed emotions to Liberal Democrats, as this was our policy for quite a long time. However, we dropped it for the reasons that were so eloquently given in the House of Commons by Stephen Byers. Although I suspect the matter will be with us for some time, some of those arguments have force.

There needs to be fairness about the burden of tax and any tax increases going forward. One glaring problem is the level of capital gains tax, which is far too low and should be increased. On public expenditure, there are two components to dealing with the issue. First, there has to be better use of existing public finances. The work that Sir Michael Bichard is doing seems to me to offer help and guidance as to how that might be done, but there have to be real cuts in real programmes. Difficult decisions need to be made. We have set out some, including looking at our long-term defence commitments and public sector pensions. Further, I say to the noble Baroness, Lady Warwick, we have to look at how we fund universities and at how many young people will do full three-year degrees at university.



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The current crisis forces us to question the assumptions on which we run our personal and national finances. The debate has concentrated on the difficulties we now face. Our challenge is how we can turn these into new opportunities, both for individuals and for the economy as a whole.

3.38 pm

Baroness Noakes: My Lords, I follow other noble Lords in congratulating my noble friend Lord Forsyth on securing the debate and on his masterly sweep across the territory. The debate is particularly timely, coming so soon after the Government’s dismal Budget just over two weeks ago. My noble friend Lord Lamont was supported by many of my noble friends when he said that the Budget set out no clear path to the future.

I shall confine my remarks to the economy and not to the various issues that have been raised by some noble Lords about structural issues within the financial sector; that I suggest would make a good debate for another day.

I doubt that the Minister when he responds will have the humility to accept the Government’s share of blame for the economic mess we find ourselves in. I wager that he will not acknowledge the dishonesty of the claim to have ended boom and bust; indeed, he may even try to deny there has been a boom. This year’s Red Book made an attempt to prove there was no boom ahead of the bust. Those clever people at the Institute for Fiscal Studies immediately spotted the Treasury’s creative use of statistics. That can now be put alongside the rest of the dodgy accounting which has been the hallmark of this Government. It remains the case, as yesterday’s report from the National Institute of Economic and Social Research showed, that since 1997 the Government have built up to the biggest bust since the 1930s.

I have no hopes whatever of an acknowledgment from the Minister of the Government’s economic mismanagement. My noble friend Lord Ryder set out the decade of foolish policies of the current Prime Minister in this regard. Indeed, I expect the Minister to give the usual bluster about global forces and what my noble friend Lord Lawson called economic flu from America. I also expect random statistics relating to the last Conservative Government. Let me get in first: this is all wearing about as thin as his Government’s record for economic competence.

Several of my noble friends have referred to the story on growth. Even the Red Book admits, at paragraph B.61, that this downturn is forecast to be deeper than that in the 1990s. We will take no more lessons from the Benches opposite about that period. The extraordinary trampoline forecasts in the Budget were discredited by the IMF’s forecasts minutes after the Chancellor sat down, and further shredded by the ONS’s release a couple of days later, showing, as other noble Lords have said, the first quarter of the year falling by 1.7 per cent. We are expected to believe that this can not only bounce back into growth by the end of this year, but also that significantly above-trend growth will start to accrue after 2010. This is for the fairies.



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Economists outside the Treasury—the economic community and business groups—are united in their incredulity. My noble friend Lord Wakeham wisely reminded us that Chancellors should be careful to use credible forecasts. My noble friends Lady O’Cathain and Lord Lang both referred to the need for confidence and trust to return before we can move forward with credibility again. There is no sign of that yet. These growth forecasts underpin an annual deficit leading to borrowing of over 12 per cent of GDP this year. Only last year, the Prime Minister declared that when borrowing went up to 8 per cent in the 1990s it was “totally out of control”. Who is out of control now?

Debt is forecast to rise to £1.4 trillion, or 79 per cent of GDP. If the growth figures prove optimistic, as many believe, so, too, will these dreadful debt figures. They are not just bad in the UK context, but in international terms. Old arguments about rises in borrowing not mattering because we had lower debt stocks at the outset of the recession were always somewhat dubious. Now they are demonstrably irrelevant, as even the OECD’s forecasts show that our debts soar above the rest of the G20’s.

The IFS estimates that it will take until 2032 for debts to return to the 40 per cent of GDP that Mr Brown’s former friend prudence recommended. As my noble friend Lord Sheikh has reminded us, debt will rise to over £22,000 for every person in this country. That might not sound a lot to a rich man like the Minister—

Noble Lords: Oh!

Baroness Noakes: That figure is not much short of average earnings, my Lords. In the next two years, the Government will need, by their own figures, to raise nearly £350 billion of debt in net terms, although all the risks, as I have said, are on the downside and we may need to raise more. By 2013, they will have raised more than in the whole of the previous 300 years. My noble friend Lord MacGregor reminded us that we did not know where this comes from, that overseas investors will be frightened off by our weak currency and that we are faced with a high and rising interest rate. I add that, at this level of debt, we are crowding out private sector borrowing, which my noble friend Lord Reay would require to realise his vision of our energy future, not to mention the partly opposing vision of the noble Lord, Lord Broers. As my noble friend Lord Higgins reminded us, we need much greater clarity about the money supply implications of both this level of borrowing and the Bank of England’s monetary policy actions.

The picture on expenditure is depressing. In its masterly deconstruction of the Budget, the IFS demonstrated that this was a Budget of expenditure cuts and tax rises from 2011 onwards, the timing being doubtless dictated by electoral reasons. Overall, current expenditure growth will be slashed to 0.7 per cent in real terms and capital spending will be decimated. Once the growing burden of interest costs, welfare costs and similar costs are taken into account, there will be a severe expenditure squeeze of around 2.3 per cent in real terms up to 2014. We have been given no information on which budgets will be cut. The IFS also demonstrated that the 3.2 per cent figure of GDP

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will necessitate either further tax rises or expenditure cuts after 2014 if the Government’s forecasts are to be achieved. This fiscal tightening that will be necessary beyond 2014 has not been analysed by the Government, so we can only speculate about the impact of that on spending and public services.

All this will require major cuts in some departmental budgets, a far cry from the picture of ever increasing public expenditure over the past decade, of which my noble friend Lord Patten reminded us. This will not be met by yet more illusory savings dreamt up by the Treasury; it will require hard decisions and there is no evidence that the Government can face up to that.

Several noble Lords have referred to the 50p tax rate, or the 51.5 per cent rate when national insurance is added in. I was grateful to the noble Lord, Lord Butler, for saying that it was a mistake in his wise and wide-ranging speech. Even on the Treasury’s estimates, it will raise only £1.8 billion in 2011-12, which is a drop in the £170 billion-plus ocean of borrowing. This is nothing to do with balancing the books; it is no more than a crude political trap into which we are not stupid enough to fall. My noble friend Lord Northbrook set out the views of the IFS and, more surprisingly, those of Mr Anatole Kaletsky, that this increase may not raise anything.

Lord Eatwell: My Lords, the noble Baroness said that the Conservative Party would not fall into the trap of the 50p tax rate. Is she giving a Conservative commitment to repeal the 50 per cent rate?

Baroness Noakes: My Lords, if the noble Lord will just wait, I will come to that. As I said, the rate may well be counterproductive if you look at the IFS analysis, but the biggest problem is that it will drive away entrepreneurial and managerial talent from our shores. This has happened before under Labour Governments. High rates of tax will not only drive away those on whom our economy now depends but will act as a deterrent to inward investment in future. We will remove the 50 per cent rate as soon as we can, but my honourable friend Mr George Osborne has explained that our first priority is to remove the additional national insurance of 0.5 per cent that the Government have pencilled in for next year. This is a tax on the many and a tax on jobs.

The noble Lord, Lord Oakeshott, asked me about stamp duty on shares. I have tried to find out about that during the debate but he will have to wait for the manifesto. There is nothing special in that.

Lord Oakeshott of Seagrove Bay: My Lords, I thank the noble Baroness for asking but as that was a firm and first commitment, the fact that she is saying from the Conservative Front Bench, “We have to wait for the manifesto”, is a very significant backtrack.

Baroness Noakes: My Lords, I am not making a backtrack or a forward track; I am just telling the noble Lord that I could not find out about that this afternoon. I am clear that when we have the nation’s finances under control we will return to the policy of low taxes which served us so well in the past. This is not because we favour the rich but because we want to support our economy and not destroy it.



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This Budget read the last rites for new Labour and few will regret its passing, but we do regret the human tragedy that the Government’s policies have inflicted on the people of this country. I agree with the right reverend Prelate the Bishop of Portsmouth that this debate is also about morality. Personal insolvencies are running at record levels as the unrestricted growth in personal debt takes its toll. My noble friend Lord Marlesford spoke about the credit card debt which will lead to even more insolvencies, unless it is dealt with—

Lord Lea of Crondall: My Lords, the noble Baroness says that we are now discussing morality. Has she anything to say about the way in which these new instruments in the City of London, which were cynically organised to enrich the people involved in these trades, have nothing to do with morality?

Baroness Noakes: No, my Lords, I did not say that at all; I said that I was not going to cover the financial sector in my speech, and I am not saying anything about it whatsoever.


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