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I welcome the fact that my right honourable friend the Prime Minister chose to make the economy the subject of his first major speech as Prime Minister. However, I have some questions about what he called "rebalancing our economy", which he explained meant less dependence on banking and finance and a boost to manufacturing. Banking and finance are not only a major growth industry in the age of globalisation but one of the few major industries in which this country is a world leader. To have the objective of shrinking it would both amaze and delight our overseas competitors. Of course there need to be changes to reduce greatly systemic risk and I welcome the new Government's decision to have an independent commission to look into how best to separate traditional retail and commercial banking on the one hand from high-risk investment banking on the other. As the Governor of the Bank of England, among others, has cogently argued, that badly needs to be done.

I have to observe that, far from assisting manufacturing, the Government, like their predecessor, appear to be hell-bent on clobbering it further by substantially increasing its energy costs in the name of an intellectually incoherent climate change policy. There is no time to elaborate on this today, but I commend to noble Lords the excellent and grim speech made by the eminent engineer Sir Alan Rudge to the Royal Academy of Engineering some six weeks ago. I hope that the Government will read it and ponder it. I add only that to impose this burden on British manufacturing industry unilaterally-for none of our competitors has the slightest intention of following suit-is not only suicidal but completely pointless, since even those most concerned about carbon emissions agree that it is only global emissions that matter. At the very least, I ask the Government to undertake to hold a fundamental review of UK climate and energy policy in the light of the outcome of the United Nations climate change conference to be held in Cancun in December.

5.17 pm

Lord Bhattacharyya: My Lords, I offer my congratulations to the new Government, and to the noble Baroness, Lady Wilcox, on her appointment. I am lucky enough to have known her for some time, and I am sure that she will provide intelligence, experience and vision to her department.

Time is limited and the topic is huge, so I shall limit myself to a subject I know about-technology and manufacturing. From the minimum wage to the science budget, Britain is a better place today than it was 13 years ago. For all the rhetoric from the coalition, there is much that the new Government will not undo. I am pleased that thoughtful Ministers such as David Willetts accept that Britain has changed for the better. In that spirit, I welcome the measures in the gracious Speech to support industry and the Prime Minister's speech last Friday, in which he called for a rebalanced

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economy. I have long been a voice in the wilderness on that topic, and it is pleasant to have such support. The question is how we achieve balanced growth while reducing the deficit as the Government propose. If we improve our manufacturing exports by 10 per cent and cut manufacturing imports by 10 per cent by import substitution, this would contribute £50 billion each year to our balance of payments, which will ensure real growth.

An example is the steel industry. The vice-chairman of Tata Steel, which includes Corus, has said that in 1970 the UK consumed 25 million tonnes of steel; 95 per cent of this was produced at home. Today we consume only about 8 million tonnes, just half of which comes from the UK. Why? Because we have limited demand due to our industrial decline. Britain is the only European country to have had such a dramatic fall. We therefore need an integrated manufacturing policy that brings together all sources of funding, from banks to RDAs to research councils, in order to secure growth. Merely discussing industrial activism does not deliver business growth. I declare an interest: I am the director of the Warwick Manufacturing Group at the University of Warwick. Our funding is largely from the private sector from throughout the world and we contribute to the finances of the university, so I hope that the Business Secretary will not be too harsh on me.

As the coalition begins work, there seems to be some discussion of the role of "impact" in university research. It is true that in areas of blue-sky research and the humanities, impact can become a box-ticking exercise. In applied science and in technology, however, impact is precisely the right measure to judge research. Applied science is successful only if it is useful. For technologists, impact is not a way to secure value for money but a path to economic growth and productivity. The Engineering and Physical Sciences Research Council is already looking at impact, and it should be encouraged to do more.

I am no interventionist-there should be no return to a bailout culture-but we must not turn away good, profitable businesses looking to invest for the future. We have excellent manufacturers in Britain. Two years ago Jaguar Land Rover made a huge loss, but today it exports £6 billion-worth a year. The turnaround has been remarkable, but when the company was in trouble there was no one there to help. There are other excellent industries too: JCB, Rolls-Royce aero engines, British Aerospace and so on. We must not lose them.

As David Green, director of the think tank Civitas, has said, cutting industrial investment now, whichever way you want to cut it, would be like eating seed corn to get through the winter. I welcome the proposal for a green investment bank but a green economy will require contributions from every sector, from automotive to energy to healthcare.

I am a regular visitor to China and India, and industries in those countries are climbing the value chain at an alarming rate. We must help our industries compete and partner with these expanding sectors. Given the near double-digit growth of both China and India, we must move fast. Considering Britain's historical decline in manufacturing, some, including our partners

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abroad, think that this cannot be done. Yet in my home region, Advantage West Midlands is helping firms build the skills and technology that will bring investment from the manufacturing giants of the new economies, while supporting productivity and innovation at home.

There appears to be a question mark over RDAs. Yes, they should look carefully for savings, but RDAs can make a vital contribution to future growth. The Government should retain RDAs that work well, because there is no substitute for them.

I come from Birmingham, where we have a long history of Liberal and Conservative coalitions, mergers and unions. I say to the Benches opposite that they will be best served by the radicalism of a Joseph Chamberlain, not the caution of a Neville. We need growth. We should focus on creating the jobs, technology and products that will increase revenues, reduce costs and attract investment. I look forward to the Government's proposals on that.

5.23 pm

Lord Teverson: My Lords, I also congratulate the noble Baroness, Lady Wilcox, on her appointment to the Government. When we were both sitting on the opposite side of the House, with the same portfolio, we agreed on many things, as indeed did much of the House. I look forward to that co-operation continuing, if with slightly different departmental interests. I am also delighted to be the third speaker from Cornwall on this debate.

One of the things that came through strongly in the initial coalition agreement when negotiations took place between the Conservatives and the Liberal Democrats was the detailed manifesto and list of points on energy and climate change issues, which are what I shall concentrate on today. That was extremely important as a joint agenda for this coalition Government. It was certainly reflected again in the formal coalition agreement that was published by the Government a week later and in the gracious Speech we heard last week.

I particularly welcome the energy security and green economy Bill. That includes at least three of the things that several of us from both sides of the House tried to achieve during the last couple of years of the last Government. First, there is a big move forward in energy savings. Again, I remind the House that just under half of carbon dioxide emissions are due to heating, and that we have in the Bill a large move forward to make sure that energy efficiency is much improved in domestic and business premises. That, with the green deal generally and the green investment bank, is a way of moving that agenda forward at last. It is good for improving fuel poverty, carbon emissions and energy security. I very much welcome it, although I look forward to seeing the details of what will be a large sum needed to convert our historic building stock into a much more energy-efficient estate. That will be quite a challenge in times of financial straitjackets and difficulty.

I also particularly like something that we debated during the last Energy Bill-that is, the emissions performance standards of power stations. At last we

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have bitten the bullet and we are there; we are going to bring that forward. It is an excellent advance and one that I look forward to debating and supporting in this House when the Bill comes through. Also in that area, we have the green bank and not just smart meters, which are already in the pipeline, but a smart grid. That is absolutely vital when we still rely so much in the renewable area on intermittent technologies. I hope that, under the Government's programme, anaerobic digestion will come through. That is less intermittent and can help very much with heating.

Also important, though stressed less in the gracious Speech, was the mention of climate change and the conference in Mexico later this year. There are huge challenges in that area. We cannot forget that Copenhagen was-particularly for Europe, but also for the world in general-a failure. It was a deep failure to perform and find a way forward in this important area. The Government are right to emphasise that. I wait with interest to hear how we will tackle that, both as a nation and as Europe, to make sure that there is a positive result. Again, I welcome generally the indication that we will move forward as Europe to a 30 per cent offer if we can keep it on the table. That should be something that we strive for.

There are many other good things in the coalition programme, such as charging points for electric vehicles, no third runway for Heathrow and the high-speed rail network, which I am sure my noble friend Lord Bradshaw will talk about as well. What I hope most of all is that a tradition I came very much to welcome in the House during the term of the last Government-that of general consensus-building on climate change around the whole of the House-will continue over this parliamentary Session.

How do I sum up? The best words are those of the new Green MP, Caroline Lucas, who stated that the Queen's Speech was, on the environment, "pretty half-hearted". For the Green Party, that is praise indeed.

5.29 pm

Lord Oxburgh: My Lords, I, too, welcome the noble Baroness and the noble Lord in their new roles on the government Front Bench.

Today, I will continue the energy theme and talk about electricity supply. Unfortunately, the financial crisis is not the only one facing this country. I believe that every informed observer recognises that we have a looming electricity shortage. Older generation plant is being withdrawn from service without a plan for timely replacement of capacity. The problem has been apparent for years. With every passing month the opportunity to make an orderly transition to a modern electricity supply system slips away. We are facing a crisis that is entirely of our own making. The situation has not been helped by 17 changes of energy Minister in the past 10 years. Energy policy requires both understanding and continuity. I declare an interest as a director of Falck Renewables and Blue-NG and as honorary president of the Carbon Capture and Storage Association.

The role of government is to steer a smooth transition from a fossil fuel economy to one that is economically and environmentally more sustainable. Electricity generation is the most complex part of energy policy.

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It is complex because different methods of generation have quite different characteristics and because electricity demand can vary by a factor of three. Furthermore, it is not clear whether in the long term electricity demand will increase or decrease. It will decrease because of energy-saving measures and greater efficiency but may increase through population increase and, indeed, through increasing electrification of the economy.

Overall, our priorities have to be pretty clear. We need security of fuel supply and electricity supply; environmental security in the form of minimal emissions of particulates and greenhouse gases; and all that at the lowest cost. The Government have to balance these priorities against each other, take a system-wide view of electricity generation and then provide a regulatory and financial framework which aligns the interests of energy companies with the long-term interests of the country. The framework needs to recognise that many of these companies are international and has to be sufficiently clear that it provides business with the confidence to make the 30 to 50-year capital commitment in the UK. Today confidence is lacking. Building this must be one of the highest government priorities.

Security of electricity supply requires a diversity of generation methods and energy sources. Within a decade there will be an increasing role for photovoltaics, tidal generation, biomass, biogas and other technologies. However, today the main ways that we have of generating electricity are wind, nuclear, coal and natural gas, and the near-term strategy will be based on these. But because their characteristics are so different they cannot sensibly be combined in any proportions that happen to be the outcome of short-term market forces or, indeed, the likes or dislikes of particular pressure groups.

In the absence of government steer, and with uncertainty about the future penalties for emitting CO2, the market would, if left to its own devices, produce a system built entirely on gas. Gas plants are flexible, the least expensive, quick to build, and the gas price risk is carried by the consumer. However, this would not be in the country's best interests.

Time precludes discussion of the complications of different generation mixes, but as an example, the proportion of wind in the mix has implications for the proportion of nuclear. Both are relatively inflexible and because most of the cost of both is paid at the time of construction there is no saving in not using either to the full when they are available. The proportion of wind also has a major bearing on other aspects of the system; for example, whether to build interconnectors with a view to exporting electricity when generation exceeds demand and importing it when we have a shortfall. Danish experience in this respect is not encouraging but there are obviously other ways of managing wind intermittency. I make these points only to emphasise that there is no single correct answer to the balancing conundrum; but there are numerous wrong ones. Action is urgent because lead times are long.

We have to consider the system as a whole and the interactions, both near-term and long-term, between its parts. That includes the electricity transmission grid, much of which will have to be replaced over the coming decade.

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In conclusion, I re-emphasise that we have to consider the system as a whole. There are political decisions, technical decisions and business decisions to be made. I hope that the Government will consult rapidly and widely, and then act decisively. I wish them well.

5.35 pm

Baroness Byford: My Lords, I am greatly privileged and highly delighted to rise to my feet on this side of the Chamber in the debate on the 14th gracious Speech since I entered this House. I am glad that the grouping has placed agriculture alongside business and economic affairs, headed now by my noble friend Lady Wilcox, who richly deserves this post and brings her great experience of the fishing industry to her portfolio. I extend my best wishes to her.

Air, food, water and warmth are the four essentials of human existence and are all endangered by human activity. The Register of Lords' Interests records my connections with farming and I make no apology for speaking on that subject to an audience that is primarily concerned with other aspects of our economy. Farming is a business, and although it employs only 2 per cent of the workforce on farms, some 14 per cent are employed in the food sector. The right reverend Prelate the Bishop of Wakefield clearly laid down some of his concerns and reflected on the dependency of people who live in towns and in rural areas.

Land capable of producing food is shrinking worldwide. Our climate is changing and the world population is increasing. In the UK, we have ideal climatic conditions for producing food, and yet, since the previous Government came to power, there has been a dramatic fall in UK food production from 86 per cent self-sufficiency in indigenous foods, and 75 per cent in all foods, to 72.5 per cent and 59 per cent respectively by 2008. Our food trade balance deficit has increased from £6 billion to £17.4 billion.

Farming in England is highly productive and broadly based, but in some areas is unprofitable. The drive for cheap food has kept prices low, with manufacturers, processors and retailers competing for market share. Legislation and regulation also involve the prime producer in additional costs. There are many examples of the costs of legislation, but I shall give just one example.

The need to comply with regulations on nitrate vulnerable zones has involved the construction of very large, effectively double-skinned, slurry pits, the erection of fencing to stop livestock from accessing watercourses, the introduction of systems to prevent fertilisers reaching watercourses and training for staff on the new rules. I am not against sensible legislation, but we have a superabundance of it, much of which lacks proportion. I also wonder what happens in other countries.

This Government are committed to controlling the growth of the deficit and, thereafter, to reducing it. Included in this first step is a saving from Defra of £162 million. In March, Defra was fined a total of £15.6 million for failures in 2007-08 in the provision of payments by the Rural Payments Agency and in the running of the rural development scheme. I have no reason to believe that the RPA will not incur further penalties for 2010. The Minister acutely needs to look

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at this area. The overhaul of that agency is urgent and imperative. In a Written Answer on 17 March, the Defra Minister stated that,

That figure applied to English farmers. The Scottish equivalent was £300, and its farmers are paid on time and correctly.

Today's debate incorporates the environment and energy, both of which are important to farmers. Climate change is already having a profound impact in some areas and there are tough decisions to be taken about whether agricultural land should be given over to flood relief or even abandoned to the sea. The Campaign for the Farmed Environment is progressing well, and I welcome the move on the natural environment paper. Farmers have been recompensed for looking after parts of the environment, and for a long time they have looked after it well; but biomass and anaerobic digestion will become important energy resources in future.

On rereading the gracious Speech, I was particularly pleased to reflect on the Government's commitment immediately to address the deficit reduction; to a swift curtailment of bureaucracy; and to the rapid extension of high-speed broadband, which will so help rural areas. I welcome my noble friend Lord Henley, who will respond in this debate, to his post. He is well qualified for it and I know that he has a demanding task ahead. I congratulate him on his appointment and look forward to working with him.

5.40 pm

Lord Lyell of Markyate: My Lords, I am glad to follow my noble friend Lady Byford, and warmly to congratulate my noble friends Lady Wilcox-both on her speech and on her appointment to the Government-and Lord Henley. I am extremely grateful that, for medical reasons, I am speaking much earlier in the debate than my economic knowledge justifies. I apologise for the fact that, for sensible reasons, I shall not be present for the wind-ups. I will speak on the prospects for improved financial regulation; briefly on the environment and renewable energy; and briefly on the challenges of reform of this House and the House of Commons.

I congratulate the new Government on the thoughtful wording of the gracious Speech on the credit crunch. It stated:

"Legislation will reform financial services regulation to learn from the financial crisis".

There is much to learn, and I listened with great interest to the speech of the noble Lord, Lord Myners. I speak not as an economist but as someone with a background as a commercial lawyer. I express my debt to Gillian Tett of the Financial Times for her excellent account of the origins and development of the crisis in her book, Fool's Gold.

Financial services regulation certainly needs reform, but I hope that this will concentrate on the big picture-on the fundamentals of banking and accountancy-and not become a box-ticking exercise. One of those

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fundamentals is that banks should hold adequate reserves in relation to their assets and their true risk exposure. Under the Basel Accord of 1988, the required figure was about 8 per cent. In Basel 2 in 2004, it was thought that this could be reduced if it was replaced by entities such as credit default swaps and collateralised debt obligations, and much more freedom was given to banks to judge how risky assets might be. The seeds of the problem already existed, and this did not work. As we know, the innovative notion that credit risk could be adequately managed if it were sufficiently widely sliced and spread around the market proved to have built a house of cards. Governments here, in Europe and in the United States must reach a new accord and decide what reserves should reasonably be required and what role if any is to be permitted for these innovations. There may be a role for credit default swaps, collateralised debt obligations and so on; but a jaundiced eye must be cast on the lack of transparency which pervaded this market for too many years.

The second fundamental improvement relates to accounting practice. It is not acceptable that debt for which a bank is ultimately responsible, or on which it relies in time of crisis, should be hidden off the balance sheet in SIVs-structured investment vehicles. Care must be taken to ensure that statutory accounts once again give a true and fair picture of the bank's assets, indebtedness and vulnerability to risk as a whole. If SIVs are to be used at all, their existence and extent must be clearly shown on the bank's balance sheet.

I do not wish to be simplistic and those are just two points-there are many others. The expressed desire of the Government, articulated in the gracious Speech, to learn from this massive financial crisis is a very wise starting point.

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