---

The noble Lord, Lord De Mauley, last week failed to provide any credible answers to questions from my noble friends Lord Eatwell and Lord Kinnock on the impact of the Government's announcement on unemployment, business failures and the cost of breaking long-term contracts. The noble Lord said that today's debate would afford ample opportunity for answers to those questions. I heard not a single answer from the Minister to those questions. It is my sincere hope that Ministers will provide answers in the closing speech or by letter to those participating in this debate. I have no doubt that the answers exist within the Treasury, although they were clearly not shared with the noble Lord, Lord De Mauley, ahead of last week's debate. When I sat on the Benches opposite, I made real efforts in my closing speeches to answer questions raised in debate, and when I was unable to do so, I tried to answer them as fully as possible in correspondence with noble Lords who participated in the debate. If I was slow in replying, I could always rely on the noble Lord, Lord Marlesford, to chase me. I hope that Ministers participating in this debate will respect the House by following the same practice.

A core element in the Government's legislative programme is the establishment of the Office for Budget Responsibility to provide confidence in the management of public finances. We must wait to see whether this is a triumph of spin over substance. The independence and credibility of the OBR is hardly helped by the suggestion that it will be able to provide independent and credible economic forecasts ahead of the Budget in three weeks' time. The OBR's wish to accommodate the Chancellor by agreeing to such a rushed piece of analysis does not auger well. I do not have concerns about or issues of principle with the OBR. It could possibly be a useful addition to transparency and

2 Jun 2010 : Column 276

accountability, although the IMF's cool reaction to the proposal suggests that we should not raise our hopes. But I have questions of detail to which I seek answers. How will the OBR be staffed? Will it have its own independent forecasters, or will it rely on Treasury officials? What resources will be allocated to the OBR, and will they be determined by the Chancellor? What savings in Treasury costs will arrive with the establishment of the OBR? How much time will it have to review Budget proposals before it publishes its commentary on them on 22 June? Sir Alan Budd appears well qualified to chair the OBR, but he is a political appointee, made while the Tories were in opposition in 2009. Will OBR appointments be in accordance with best practice and in open competition, without ministerial or special adviser involvement? How much will Sir Alan and his colleagues be paid? Sir Alan has recently worked for a well-known hedge fund and speculator. Has he now terminated all links with this group, which is led by a well-known Tory donor, or is there an arrangement for him to return to the group on completing his appointment at the OBR? I ask the same question about Mr Geoffrey Dicks and Novus Capital. When did Sir Alan and Mr Dicks last advise their clients and associates on public finance issues? Have they had any contact with these firms since the election?

Critically, we will expect the legislation that establishes the OBR to make it clear that this body should be independent of the Treasury, fully accountable to Parliament, and transparent in its processes-including publishing minutes, as we did in respect of the Council for Financial Stability. The key word in the OBR's title is "responsibility". Let there be no doubt that the Chancellor must continue to take responsibility for tax and spending decisions. He cannot evade them or use the OBR, or Mr Danny Alexander, as a human shield. Sir Alan will need to be careful not to be drawn into politics.

The OBR has little time to prepare its economic forecast and review the proposals that the Chancellor will announce to the other place on 22 June. It is clear that we will see draconian cuts in expenditure that will include the front-line provision of critical services. Taxes, particularly VAT, will also rise. Tax bands will be frozen and benefits cancelled or reduced. Anticipation of these cuts is already sapping consumer confidence, and businesses are placing new investment on hold until they see how bad things are going to be.

We can, however, take some encouragement from the moderating influence of the Liberal Democrats, who are deeply embedded behind lines in the coalition, as already evidenced in the cancellation of plans for raising the threshold for inheritance tax and in the proposed changes to capital gains taxes to bring them closer to the income tax rates. We congratulate the Liberal Democrats on their influence on the Conservative Party in this respect. Raising tax thresholds and the capital gains tax rate is a well argued Liberal Democrat priority, although I note for the House that in previous Budgets we judged it important when in government to encourage capital investment and business creation through low rates of taxation on capital gains. I look forward to hearing the Government's explanation of their thinking behind increasing capital gains tax rates. The Liberal Democrats made great play in their election

2 Jun 2010 : Column 277

pitch about closing tax loopholes and frustrating tax avoidance, particularly in the banking sector. Will Ministers confirm that this is a high-priority action for the new Government and let the House know the actions that they are taking?

Let me now spend a moment on the banking sector. I sense that the European banking sector is moving towards a very difficult space, with heightened risk manifesting itself in wider credit spreads and a reluctance to do business with an increasing number of professional counterparties. This is similar to, although not as extreme as, the conditions that prevailed in 2008. This new Government must now exercise great care if we are to avoid a further banking crisis. The Government have proposed establishing an independent commission to investigate the complex issues of separating retail and investment banking. I wonder whether Ministers can cite a single example of this factor having a bearing on the failure of any UK banking institution, and I look forward to the answer from the noble Lord, Lord Henley, to that question.

From my experience, the failures of RBS and others were down to poor credit judgment, poor management and poor governance. Universal banking was not a causative factor. Yet the establishment of this commission is causing the banking sector considerable alarm, as is Ministers' talk of the Government forcing banks to lend regardless of their commercial judgments of risk. The uncertainty that is being created is leading banks to review their lending commitments until the Government are clear about their intentions. This contraction of credit is another force that pushes the economy back towards recession. Will Ministers tell us when we can expect a comprehensive statement on this commission, and their policy thinking behind obliging banks to lend?

It is unfortunate that the uncertainty created by the new commission must now mean that the Government are not in a position to realise the full value of the investment taxpayers have made in Lloyds Banking Group and RBS. The taxpayer currently has a substantial gain from the aggregate interventions made by the Treasury and the Bank of England in 2008-09-something well in excess of £10 billion of gain as a consequence of well structured programmes of intervention and support. UK Financial Investments had well developed plans to work towards sales, which I imagine must now be postponed while this review is carried out, with the risk that the opportunity for gain will pass.

Finally in respect of banking, the new Government have talked of robust action on bonuses. Can Ministers explain what they have in mind and how their thinking in this area and their proposed actions differ from the actions of the previous Government? Are they considering the introduction of a special tax or a higher rate of corporation tax for those banks, or some direct involvement in decisions about remuneration? If they are going to do this for the banks, will they do it for insurance companies, hedge funds and others who compete with the banks? There is complete uncertainty here because of the lack of clarity about the Government's intention. The time has passed for the Government to be vague about this. We need clear statements if uncertainty is to be addressed.

2 Jun 2010 : Column 278

The Government are also proposing changes to the structure of banking supervision. Their thinking here is confused and the wisdom of making wholesale changes to the regulatory architecture must be very questionable at a time when the world's banking system is showing loss of confidence. The Government talk about bringing forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation. When can we expect to see these proposals? Do they accord with the wishes and recommendations of the Bank of England? Does the Bank of England have the capability to perform these new roles or will people need to be recruited-possibly, ironically, from the FSA? When does oversight move to control? When does micro morph to macro?

In respect of macro-prudential regulation, will the Bank of England seek to influence market values of homes, property and businesses? Will it have powers to ration lending? How would those powers operate given the global nature of banking and financial markets? Will this macro-prudential regulation be co-ordinated with the work of the OBR? On these subjects, the Government are absolutely silent. How will the Bank manage the potential conflicts between its role in determining the price and availability of money, and its new responsibility for micro-regulation, where these two may move it in opposite directions? There is no clarity on these issues in the Government's thinking at all. We look to the noble Lord, Lord Henley, to provide that clarity. I mentioned governance earlier. I hope that the new Government will continue to promote the cause of good governance and stewardship, and ensure that the UK continues to lead in this important area.

I have little time to comment on other matters in the Queen's Speech, but I would express my general support for the intention to give all employees the right to request flexible working hours and the promotion of equal pay-two policies where the influence of the Liberal Democrats is again very clear. The same could be said for the enthusiasm with which the Government are proposing to focus on legislation to take action on climate change.

The Liberal Democrats endow the Government with a more caring complexion than would have been the case if the Conservatives had governed alone. The new Government are coming together impressively at ministerial level but the debate on the humble Address has already exposed Back-Bench tensions that will need to be managed.

For our part the Queen's Speech contains a number of measures which we will wish to support, subject to detail. But there are other areas where thinking is simply flaky or reckless-areas where the interests of economic prosperity and stability are subserviated to dogma, blindness to risk and the hazards of foolish action. The Government can expect us to be unstinting in our opposition to such measures.

5 pm

Lord Bilimoria: My Lords, I congratulate the Minister on her appointment. We have all witnessed the hard work that she has put in in this area. I also congratulate the noble Lord, Lord Henley.

2 Jun 2010 : Column 279

Today, we have a huge public sector debt and a huge deficit. Working-age employment is at its lowest level since 1996 and we have over 5 million out-of-work benefit claimants. We are one of the most highly taxed economies in the world and Europe is on the brink of disaster. The previous Government blamed our crisis on the global situation and now the current Government are blaming the previous one for everything. Surely we have had enough of the blame game.

Being out of the euro has saved the British economy from being added to the list of the PIGS countries. For the euro to be truly effective, I believe that you need political, emotional and economic alignment. In reality, countries set their own fiscal measures, there is no emotional commitment and, as we know, there is no economic alignment-just look at Germany and Greece. Thanks to being out of the euro, we have not been straitjacketed by the euro interest and exchange rates. I am all for keeping a mutually beneficial relationship with Europe as a trading partnership.

On the subject of trading partners, I am absolutely delighted that the enhancement of the UK's partnership with India was mentioned by Her Majesty in the gracious Speech. I agree with Larry Summers, who said that,

"the dramatic modernisation of the Asian economies ranks alongside the Renaissance and the Industrial Revolution as one of the most important developments in economic history".

I am proud to be president of the UK India Business Council, supported by UKTI. India's economy has grown by over 6.5 per cent while we have been in recession. British business, in particular our SMEs, could be doing so much more.

The coalition Government's move to reverse the national insurance increase is welcome; according to the FSB, it will help to protect 57,000 jobs. On the other hand, the 50p top tax rate, the non-dom levy and the proposed capital gains tax increases not only send out all the wrong signals to the world but also hinder our ability to create a balanced economy. Many studies suggest that an increase in capital gains tax does not actually increase tax receipts; it is quite the reverse. For example, during the last century in the United States, virtually every time taxes were lowered, whether on employment, savings, investment or risk taking, tax revenues went up, not down. A small country such as Britain can flourish only if it is able to create a highly skilled, highly creative, innovative, open and value-added economy, and this can be achieved only by the Government creating the right economic environment that attracts both inward investment and the best brains. Creating a competitive tax structure is essential to enable this. As Winston Churchill famously said,

"for a nation to try and tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle".

The introduction of the Office for Budget Responsibility is a positive move, as is the plan to increase the Bank of England's regulatory power. In my opinion, the FSA was asleep on the job and definitely not up to the job. I am convinced that, if the Bank of England had been in charge, much of the suffering in our financial sector and the economy over the past three years would have been prevented.

2 Jun 2010 : Column 280

The welfare reform Bill is also welcome. We have a benefits trap in this country. Today, the difference between welfare support and a 40-hour week on minimum wage is just £37-hardly enough to inspire people in difficult times to seek jobs. As I have said before, in 1997 government spending accounted for 40 per cent of GDP, similar to the level in the United States. Last year the figure rose to 52 per cent of GDP. That is just not sustainable. We have a public sector that is not delivering; it is overpaid and full of jobs for life and gold-plated pensions. Setting a target for reducing public sector spending to 40 per cent of GDP is essential and would, in effect, wipe out our deficit.

This is not just about making cuts; it is about making the right cuts. Ring-fencing services for votes has led to an incredible sense of imbalance. On the one hand, the Department for Work and Pensions has a £135 billion budget, yet we skimp on national security and our Armed Forces while our brave troops are making the ultimate sacrifice for us.

I am delighted that the Minister has talked about supporting SMEs. There is talk of a £500 million loan guarantee scheme, but that is a drop in the ocean when compared with the £1 trillion of quantitative easing for the financial sector. Again, this is about priorities. Britain's higher education sector punches above its weight and is the best of the best in the world, in spite of 13 OECD countries outspending the UK as a proportion of GDP. It is important that cuts in the area are completely avoided. Education is our future and the key to our competitiveness.

I believe that this Government can snatch victory from the jaws of defeat if they recognise that it is the private sector that creates the jobs that pay the taxes that pay for the public sector and that thus pay the people who genuinely need our help. We must never forget, as the Minister said, that by stifling business we kill the goose that lays the golden egg.

This was a game-changing election and I am very hopeful about this new coalition. However, our economy could either be "Con-Dem-ed" or "Con-Liberated". For the economy, although things look incredibly bleak at this moment, now is the time to seize the opportunity-to go down the route not of the politics of envy but of the politics of aspiration. Now is the time to unleash the spirit of enterprise and achievement for which this great country has been famous for centuries and centuries.

5.05 pm

The Lord Bishop of Wakefield: My Lords, on behalf of these Benches, I, too, congratulate the noble Baroness, Lady Wilcox, on her new role.

As all the analysts remind us, food stands at the top of the hierarchy of human needs, so some self-sufficiency in food production should be a priority for us. There is much to welcome, both in the gracious Speech and in the programme for government, on the subject of agriculture and food supply. The decentralisation and localism Bill picks up the heralded emphases on subsidiarity, removal of overregulation and a movement towards big society. Encouragingly, this retains some bias towards poorer regions and a real attempt to avoid the worst effects of the cuts in West Yorkshire,

2 Jun 2010 : Column 281

where I am based, and in similar post-industrial areas, where there are areas of related urban and rural poverty. Agriculture, indeed, in our part of the world can often be a subsidiary career standing alongside teaching, industry or commercial business within the same family. Moreover, the Bill will go some way, I hope, towards redressing the recent decline of local services in rural communities.

Only once have I found myself performing the role of a flying picket. It was unfortunately ill timed very early one January morning outside a dairy in Leeds where, in temperatures of minus 10 degrees, we protested about the absurdly low prices being offered by supermarkets to dairy farms for their milk. I am therefore happy to see in the programme for government the proposal to bring forward a Bill to introduce an ombudsman to enforce the grocery supply code of practice and to curb abuses by the supermarkets. I have been told time and again by local farmers of an almost piratical abuse of power-for example, premiums are demanded of smaller suppliers if supermarket chains are to market their products. Although it was not in the gracious Speech, I hope that this Bill will be a clear and urgent priority for government.

The programme for government happily mentions the huge potential of energy production from the waste products of anaerobic digestion. Like politicians, clergymen are not immune from being accused of purveying the dung of bulls, but on this occasion I am prepared to glory in it. Last month, when I was visiting Kellingley colliery, I spoke to representatives from the enormous Drax power station, who talked of co-operation with farmers, locally and further afield, in the production of biomass fuel to be used alongside coal. I am glad that Her Majesty's Government recognise that the urban, industrial and rural are far more directly interdependent than is sometimes appreciated. I hope that this kind of process will be continued.

There remain crucial challenges to the rural and agricultural sector, not least from animal disease. One need only recall foot and mouth, bluetongue and BSE as relatively recent examples. The issue now of bovine tuberculosis remains critical and affects the financial viability of far too many farms. I hope that Her Majesty's Government may be able to work with the Farm Crisis Network and other voluntary bodies, using the big society model once again-but, at the same time, providing the finance and incentives where these are needed-to rise to these challenges and to help to reduce the incidence of this disease.

Perhaps most crucial of all is the provision of an infrastructure that can encourage a proper self-esteem in the rural agricultural sector in these coming years. Many things, including disease, as I have just noted, and overregulation, have contrived to reduce self-esteem in this sector. Self-esteem is crucial to any individual or community if they are to move forward and prosper. Here, the gracious Speech offers much encouragement: high-speed broadband, reform of the Post Office locally, decreased regulation and dispensing with unnecessary quangos. However, I would plead for subtlety and care in taking forward reform. Post offices provide a vital lifeline for rural communities. Our churches can help in this by offering outreach services within our own

2 Jun 2010 : Column 282

buildings-I hope that we can be used further here. I trust, too, that we can make access easier to other facilities offered by post offices. For example, direct debit facilities with suitable support services can enable even the poorest in society to take advantage of the discounts available when paying utility bills.

The Book of Common Prayer-in a way, the Church of England's title deed-includes prayers and thanksgivings for fair weather, for rain and for plenty. Quaint as the articulation may now seem, this reminds us of the crucial part played by food production and its wider role in human flourishing. The welfare of the agricultural sector and all those who work within it, alongside the care of our rural areas and populations, impinges indirectly but importantly on every one of us.

5.11 pm

Lord Lawson of Blaby: My Lords, it is a great pleasure to follow the right reverend Prelate, who speaks with such authority about some of the problems of rural England. I also congratulate most warmly my noble friend Lady Wilcox on her maiden speech as a Minister. I cannot pretend that I agreed with every single word that she uttered, but she uttered them with enormous charm. Above all, I wish the new Government every success in the massive task before them and the resolve to stick to that task despite the deep unpopularity that inescapably lies ahead.

I warmly welcome the statement in large type at the end of the coalition's agreed Our Programme for Government, which states:

"The deficit reduction programme takes precedence over any of the other measures in this agreement".

Quite right. There must be no sacred cows and no sacred departments.

Meanwhile, I welcome the start that has been made in cutting public expenditure and reducing the public deficit, with an in-year cut of a little under 1 per cent of total public spending. This is, of course, only a minuscule fraction of what has to be done, but essentially it is an earnest of the Government's intentions. The first Budget of my right honourable friend Mr George Osborne later this month will need both to get to grips with the immediate crisis and to set out, in convincing terms, the financial prospect and programme for the next five years. I wish him well.

I detect unease in some quarters about the promised increase in capital gains tax rates. In so far as I understand it, I fully endorse what the Government have in mind, which is perhaps not surprising, since I introduced a similar reform in my 1988 Budget. I do not have time to set it out now, but I refer noble Lords to cols. 1004-06 of the Official Report for 15 March of that year. That reform-it is not without interest that the Reagan Administration in the United States introduced much the same reform at much the same time for much the same reasons-worked very well and lasted successfully for more than a decade.

The previous Government's foolish decision to undo that position, abolishing both indexation and the tapering relief, which was a rough and ready substitute for it, and replacing it with a capital gains tax rate of 18 per cent, has had three main consequences: it created a bonanza for short-term speculators; it led to a massive

2 Jun 2010 : Column 283

increase in tax avoidance and thus a serious and continuing loss of income tax revenue-the point is the income tax revenue, not the revenue from capital gains tax; and it greatly stimulated the buy-to-let boom, thus hugely inflating the housing market, which has been a major cause of the worst boom and bust that we have suffered since the war.

---