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The powers of government go way beyond establishing the right fiscal conditions for the macroeconomy or supply-side measures such as investment in skills and infrastructure, important though those policies are. As we have heard today, what is needed is an activist approach to business and enterprise policy-a recognition that, used wisely and intelligently, government influence can help to create the markets that foster successful companies in the key sectors, which we need. Crucially, an activist approach means understanding what business needs and making sure that public policy is properly aligned and co-ordinated to deliver the confidence and certainty that business needs. Getting bits of it right is not good enough. It is the coherence that counts.

To conclude, I suggest to the Minister that this excellent debate gives her a golden opportunity to give her Government's support for our recently announced growth initiative. This includes a £2 billion tax on bank bonuses to fund 100,000 jobs for young people and build 25,000 affordable homes; bringing forward long-term investment projects, such as new school and hospital buildings; temporarily reversing the recent VAT rise, which would mean a £450 boost for families with children; a one-year cut in VAT to 5 per cent on home improvements and repairs to help small businesses; and a tax break for every small firm that takes on extra workers. These measures would get the economy going and would certainly change the world of employment for those who are unemployed, those who are currently in education and training, and our children and grandchildren. We would all agree that such change would be for the better, as well as saving us from those three great evils that Voltaire warned us about, "ennui, vice et besoin".

2.13 pm

The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox): My Lords, I start by congratulating, as have many other noble Lords, the noble Baroness, Lady Prosser, on securing this debate on a wide-ranging

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topic, on which she spoke with authority and passion, setting the tone for a very serious debate-one that I know the House has been happy to engage in. In the gap it brought to his feet my noble friend Lord Campbell of Alloway-another bonus.

As the noble Baroness outlined and as we can all bear witness, the employment landscape has changed beyond all recognition since the 1960s. Globalisation, technology and social change are still moving at hyper-speed. Europe has expanded eastwards, bringing in cheaper labour, and we face greater competition from the tiger economies. Many British workers will need to reskill to adapt to new job opportunities and many already have.

I will try to answer many of the questions that have been asked during this debate, but if I run out of time all questions will be answered by letter. The good news is that we are living longer but this means that we have to manage the effects of an ageing population. The noble Lord, Lord Young, talked about the removal of the default retirement age. We believe that this will increase the number of older people who are able to be in the workplace, stimulating the economy and leading to more job opportunities for everyone, including young people.

More women are working now than ever before. Part-time working has increased, as has the overall diversity of working patterns. My noble friend Lady Randerson spoke about this growth of part-time and temporary workers. The UK labour market is internationally recognised for its strength and flexibility. Our light-touch system of employment regulation is a key driver of that strong performance. Our labour market has achieved a steady rise in employment, despite cyclical peaks and troughs. During the recent recession employment fell by much less than many had expected, even given the fall in GDP. Part of this success is due to our flexible labour market. My noble friend Lady Randerson rightly pointed out that part-time working is an important choice for many workers, especially some of the older workers to whom she referred, and that part-time staff are a huge resource for business.

The noble Lord, Lord Collins, talked about his concerns over discrimination against lesbian, gay and bisexual workers. The Government's equality strategy sets out our vision for a strong, modern and fair Britain. It is built on our two principles of equality: equal treatment and equal opportunity. This means building a society where no one is held back because of who they are or where they come from. It is obvious from the most moving speech that the noble Lord made that we must be very vigilant in this. In relation to the world of work, we commend the good work of ACAS in promoting better workplaces. I know that the noble Baroness, Lady Donaghy, used to be chair of ACAS. Britain's future lies in nurturing a highly skilled, quality workforce, and in harnessing the ingenuity, creativity, diversity and inventiveness of all the British people.

The noble Lord, Lord Stevenson, asked a question at the end of his speech. I have not had much chance to catch up with it but I hope that this will help. Supporting economic growth is our central task. The

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original growth fund is making a valuable contribution to growing a private sector-led economy in England. In particular, it will support areas and communities that are currently dependent on the public sector in making the transition to sustainable private sector-led growth and prosperity.

Education and skills are vital to our future and essential to building sustainable growth and stronger communities. Here, we agree with the noble Baroness, Lady Prosser. We need a long-term strategy to deal with issues raised in the global market. The Government's priority is to achieve strong, sustainable and balanced growth, and we are sticking to our plan. We are creating a new model of growth, driven by investment and exports. A whole new government drive to promote trade and investment was announced in the trade and investment White Paper. It includes an expanded remit and updated strategy for UK Trade & Investment and refocusing the FCO on commercial diplomacy and new and improved products from the Export Credits Guarantee Department.

Measures so far to take forward our universities, technical colleges and all levels and styles of education include expansion of the university technical colleges programme to at least 24 new colleges by 2014. Each will offer 600 to 800 14 to 19 year-olds the opportunity to take a highly regarded, full-time, technically oriented course of study. An increased apprenticeship budget of more than £1.4 billion this year is enough to train at least a third of a million apprentices. The noble Lord, Lord Young, an apprentice himself-fast becoming the most famous apprentice in the House-was the campaigning Minister in the previous Government. It has been my pleasure and privilege to build on the work that he has already done. He talks constantly about the need to create apprenticeships for 16 to 18 year-olds. We agree and we are doing many things to advance that. We have seen high levels of employment in the UK due to the flexibility of our labour market, but we must work to build on this strength.

The noble Lord, Lord Desai, spoke of the need to encourage inward investment and suggested that national insurance contributions might no longer be a good idea. I was interested to hear this-I always expect something interesting from the noble Lord, Lord Desai. I have a real answer for the noble Lord, Lord Desai which I hope to give him later. The Government's role is to put the right framework in place and provide support where necessary. The noble Baroness, Lady Prosser, and the noble Lord, Lord Kestenbaum, spoke of the need to invest in research and innovation. I was interested in the noble Lord's descriptions, which did not always find favour with some of those on his own Benches.

The noble Lord, Lord Lea, said that the Government should benchmark employment law across Europe. The Government do not have to do that. The World Bank and the OECD conduct such studies regularly and they are always praising this country's strength and flexibility. I hope that he finds that encouraging. The Government are helping women to continue to develop their careers by making a commitment to implement a system of flexible parental leave. This will give families more choice on how they care for their

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children and encourage early discussions between employees and their employers about leave plans in the important first year of a child's life. We agree with the noble Baroness, Lady Prosser, that we need positive action on diversity and participation in the workplace and we are working towards this.

The noble Lord, Lord Lea, spoke about the rolling back of maternity rights and the number of women in employment. Despite the recession, the employment rate for women remains historically high at 65.4 per cent compared with 53 per cent in 1971. I believe that this is the figure that the noble Lord, Lord Lea, could not quite remember in his speech. We have no intention of reducing the total periods of leave and pay available to women. In line with our coalition commitment to encourage shared parenting, we recently consulted on proposals to introduce a system of flexible parental leave so that parents can choose how best to share their caring responsibilities between them. Where families choose, mothers will still be able to take exactly the same amount of leave and pay. Some of the more enlightened companies I have worked with-I particularly remember Unilever 15 years ago-made arrangements to enable women to come in during their parental leave and have their babies looked after while they were brought up to speed and kept up to speed, so that when they returned they had not fallen so far back that someone else had taken their job. I am therefore personally keen to see this piece of work go forward.

Now, more than ever, we need to ensure that the overall system of employment law helps rather than hinders growth. It is essential that the labour market functions in a way that gives employers the confidence to create new jobs. We have an extensive programme of welfare to work policies, but we also need our labour markets to be even more effective. Our aim, therefore, is to set employers free from unnecessary red tape while safeguarding the rights of individuals. Businesses can then concentrate on doing business and employing people rather than filling in forms. To ensure that we have the balance right, we are reviewing employment law. The employment law review has been under way since last May and will continue until the end of this Parliament. The review is an essential element of the growth review, an ambitious and relentless focus on the role government can play to drive, to ensure support and to enable the right conditions for businesses to thrive and achieve strong, sustainable and balanced growth.

The noble Lord, Lord Monks, asked about the current economic model. He thought that the one we had was bust and that we are cutting too quickly. We do not, of course, believe that. It is vital that we renew the balance within the country. Our top priority is to achieve sustainable and balanced growth. We have prioritised capital investments that support long-term economic growth because we believe that is the right way forward to keep our jobs safe and secure. We have launched a growth review and are working closely with industry to create a new model of economic growth, driven by investment and exports. We have taken decisive action to tackle the deficit, restoring economic confidence and stability.

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The noble Baroness, Lady Wheeler, spoke of the importance of leadership and management skills and the Investors in People standard. We look forward to considering the recommendations of the review of the IiP standard that the UK Commission for Employment and Skills is currently undertaking and to which she referred. We are already tackling some of the problems that we have identified. Employers regularly tell us that they want to grow, but are put off by the fear of ending up in employment tribunals. We have therefore consulted on a framework that has, at its heart, dialogue rather than confrontation between employers and employees-conversation rather than diktat. We believe that businesses and workers can sort things out better than government.

The noble Baroness, Lady Donaghy, highlighted the labour market's need to be able to respond to changes resulting from the rise of social media. The noble Lord, Lord Haskel, talked of joint enterprise and employee engagement. We have consulted on plans to improve and streamline employment tribunals and announced that we will extend the qualifying period for bringing claims for unfair dismissal. The noble Lord, Lord Desai, said that making it easier to sack staff will not help unemployment. Our announcement of the increase in the qualifying period for unfair dismissal claims from one to two years aims to increase business confidence in recruiting, which is in everyone's interest. We believe this strikes the right balance between protecting workers' rights and giving businesses, particularly smaller ones, more confidence to take on people to train and to encourage them to take many more.

The noble Lord, Lord Morris, spoke of employment tribunals, unfair dismissal and fee charging. Fee charging by employment tribunals is the policy responsibility of the Ministry of Justice and I hope the noble Lord will respond to the consultation on fee levels which it will be launching in due course. We have concluded that it is right to ask users to contribute to the costs of running the employment tribunal system but it is important that we develop a system which is as fair as we can make it for vulnerable workers. The Red Tape Challenge focus on employment related law will help us gather more ideas on how we can improve or get rid of specific regulations. We are considering more than 1,200 comments on employment related laws which we have received through the Red Tape Challenge website.

The noble Lord, Lord Lea, spoke of Adrian Beecroft's contribution on employment law and protected conversations. Adrian Beecroft has been asked to contribute his thoughts to government to support the work of examining the burden of a cross-government employment related law. This is part of the wider consultation with stakeholders for Red Tape Challenge. His views will feed into that process and we do not plan to publish them. As I have said, we have already announced plans to raise the qualification period for unfair dismissal. This is an outside view that we are taking notice of-that is all.

It is not just about what we enforce. We also need to ensure that the system of enforcement is both effective and cost-effective, and we need to do so in a way that minimises inspections and other burdens on reputable

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businesses. That is why earlier this month we announced our intention to review whether a streamlined enforcement regime could be implemented. As part of this work, we will consider potential enforcement models, including whether there could be benefits from establishing a fair employment agency. By developing a better system of enforcement we will be able to increase its impact and ensure that the most vulnerable are aware of their rights and supported in their protection. We will report again on progress in the spring.

The Government are determined that employers that operate outside the law must not be allowed to undercut their legitimate competitors by exploiting their workers. Ensuring that workers are properly protected from abuse is not only good for workers; it is good for business and the economy as well.

Ultimately, our vision is for an education system attuned to the changing world of employment, with young people given the skills for work and for life-and for a labour market that is: flexible, by encouraging the creation of jobs by making it easy to get people into work and to stay in work; effective, by enabling employers to manage their staff productively; and, above all, fair, with employers competing on a level playing field and workers provided with a strong foundation of employment protections.

Lord Morris of Handsworth: Can the Minister say whether the Government have any plans to charge users of other tribunals, apart from industrial tribunals, for entry and accessing those facilities?

Baroness Wilcox: No, at the moment I cannot give the noble Lord an answer, but I will go back and ask whether there are other plans that I do not know about and cannot answer on today. I will ensure that the noble Lord gets a proper reply to that question.

2.32 pm

Baroness Prosser: My Lords, I am extremely grateful to everyone who has contributed to the debate. It has been rich and wide-ranging, and we have covered all kinds of important issues within the world of work. Skills were mentioned by many noble Lords, as was the growth of technology, the use of social media, equalities and fairness, public and private employment and, of course, employment rights. Importantly, towards the end of the debate, my noble friend Lady Wheeler raised the role of management and the importance of management skills.

Part-way through the debate, a comment was made that the majority of contributors to this debate were people with a trade union background. That is correct, but I should like noble Lords and the House to recognise that as a positive, because the contributions made by those of us from a trade union background represent many years of collective knowledge and experience that we want to use in a debate such as this, not simply to be overtly critical or oppositionist, but to demonstrate that that experience tells us that some of the ideas currently being mooted within government quarters may have unintended consequences. We have been here before. We know just how difficult the world of work becomes when it is out of kilter, out of balance and unfair.

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I very much thank the Minister for her reply. There was a great deal of positive comment in it. I again thank the whole House. I beg leave to withdraw the Motion.

Motion withdrawn.

Eurozone Crisis


2.34 pm

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, I shall now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows.

"Mr Speaker, I wanted to update the House as early as possible on developments in the eurozone and, in the absence of the Prime Minister as he travels to the Commonwealth Heads of Government meeting, report on the good progress made at yesterday's European Council.

The crisis in the eurozone has caused instability in financial markets, has greatly undermined confidence around the world and is having a chilling effect on economic growth in many countries, including our own. It is in our overwhelming national interest that a coherent, comprehensive and lasting solution to the eurozone's problems is found, for the decisive resolution of this crisis would provide the single biggest boost to the British economy this autumn, while the break-up of the euro would be the single greatest threat to our prosperity.

Our view about how to solve the eurozone's immediate problems has been clear, consistent and forcibly expressed. The Prime Minister and I have set it out to the House on many occasions: reinforcement, recapitalisation and resolution. First, eurozone member states need to reinforce their bailout fund to create a firewall. Secondly, weak European banks need to be recapitalised. Thirdly, the unsustainable position of Greece's debts needs to be resolved. But if the solution is to last, as I said many months ago, the members of the euro also need to address the logic of monetary union by pursuing greater fiscal integration within the eurozone, while at the same time we protect Britain's interests.

We have to improve competitiveness-competitiveness in the peripheral economies of the eurozone as measured against the core economies like Germany, and competitiveness across the whole European continent versus the rest of the world. This is the solution of the crisis we have been advocating for months and the solution once again advocated by the Prime Minister at yesterday's European Council.

Our view is that last night very good progress was made towards solving the immediate crisis-very good progress on all fronts. The deal put together is much better than was expected yesterday afternoon, but much detail remains unresolved. Having put pressure on the eurozone to get this far, we have to keep up the pressure to get the details completed. They have started down the road; now they have to finish the job.

Let me take each element of last night's deal in turn, and say how it affects Britain. First, on recapitalising banks, we are pleased that the European Council

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agreed to the proposal hammered out by myself and other Finance Ministers at the weekend ECOFIN. All major European banks will be required to hold at least a 9 per cent core tier 1 capital ratio by the end of June next year, including marking to market all of their exposure to sovereign debt. The European Banking Authority, based here in London, assessed that achieving this target means banks will require an extra €106 billion of capital, and the Council yesterday confirmed that if this cannot be raised privately, then Governments will have to step up to the plate.

I can confirm to the House today that, in the assessment of the European Banking Authority and our own tripartite authorities, no British bank requires additional capital. This is an important expression of confidence in this country's banking system at a time of global financial stress. EU member states also agreed to co-ordinate guarantees of term funding, should they be required. We have also ensured that state-aid rules will be properly applied, and European banks will be restructured if necessary, just as the European Commission demanded of the last British Government two years ago.

While some would have wanted an even tougher banking agreement, and even more capital going into Europe's weak banks, we should welcome what has been achieved with this agreement. Unlike the totally inadequate stress tests of last year, we now have a commitment to significant extra resources for the European banking system. However, the UK and others insisted that that commitment from the whole of the European Union on banking be conditional on the two other key components of the solution to the crisis that I set out: a reinforced firewall and a resolution of Greek debt. These are both properly matters for the eurozone, not the UK-and both were matters on which progress was also made last night.

On Greece, a headline agreement was reached to reduce the Greek debt-to-GDP ratio to 120 per cent by 2020. The eurozone will contribute an additional €30 billion. Because the British Government have made sure that we are not part of the Greek bailout, none of that extra €30 billion will come from our taxpayers, while private holders of Greek sovereign debt will be asked to accept a nominal write-down of 50 per cent. A lot more work is needed to put this all into practice, including detailed negotiations with the private sector-but we said Greece's debts were unsustainable and we are pleased to see a resolution in sight.

On reinforcing the size of the firewall, the eurozone has set out two options that could operate in tandem. One is to provide, from the bailout fund, insurance on new debt issued by eurozone countries; the second is to create special purpose vehicles that can attract resources from private and public investors. In their statement, they said that,

but they could be,

We have always believed that the role of the European Central Bank is critical and I welcome the positive statement made by Mario Draghi, the incoming ECB president.

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Talk of special purpose vehicles has given rise to questions about the involvement of the IMF and major shareholders such as the UK. As I have said to the House on many occasions, Britain has always been one of the IMF's largest shareholders and biggest supporters: we helped create the institution 60 years ago; the last Government agreed to increase its resources two years ago; and this Government not only ratified that agreement but helped to make the IMF more representative of the new world economy by brokering a deal last year that gave countries such as China and Brazil a greater say, while securing Britain's seat on the board. The IMF has been an active participant in the packages put together to support Ireland, Portugal and Greece. It has also been active in extending flexible credit lines to Poland and Mexico-neither of which are in the eurozone, of course-as well as supporting other countries in central and eastern Europe such as Hungary, Romania and Latvia. Indeed, it currently has 53 lending programmes around the world, of which only three are in the eurozone.

Supporting countries that cannot support themselves is what the IMF exists to do, and there may well be a case for further increasing the resources of the IMF to keep pace with the size of the global economy. Britain, as a founding and permanent member of its governing board, stands ready to consider the case for further resources and contribute, with other countries, if necessary. Let us remember that support for the IMF does not add to our debt or deficit, and that no one who has ever provided money to the IMF has ever lost that money. But let me be very clear: we are prepared to see an increase only in the resources that the IMF makes available to all the countries of the world. We would not be prepared to see IMF resources reserved only for use by the eurozone. By all means, the IMF can use its expertise and advice to help the eurozone create the special purpose vehicle that it is considering. By all means, let countries with large foreign currency reserves such as China consider putting their own money into the eurozone's special purpose vehicle-that must be their decision-but the IMF cannot put its own resources in; it can lend only to countries with a programme for adjustment.

Moreover, I can confirm today that Britain will not be putting its resources in either. We do not have a surplus; we have a very large deficit. We have had to use our own resources to recapitalise our banks and to stand behind our currency. An active member of the IMF? Yes. A supporter of the IMF, helping with advice and technical support? Yes. But the IMF contributing money to the eurozone bailout fund? No. Britain contributing money to the eurozone bailout fund? No. That is Britain's clear position.

We expect the eurozone members to use the next few days-at most, weeks-to provide much more detail about their plans to increase their firewall and sort out Greek debt. We have made it clear that the sooner this happens, the better for the whole world economy. We must maintain the momentum.

This package will not on its own resolve the longer-term issues of how to make the euro work more effectively. Those longer-term issues were addressed yesterday, and they included proposals for greater fiscal integration

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and mutual control over the budget policies of eurozone member Governments. I said many months ago that this is where the remorseless logic of monetary unions leads, and it does involve a loss of national sovereignty for countries in the eurozone.

It is in Britain's interest that the euro operates more effectively, provided that the interests of all 27 member states are properly protected in key areas of European policy like the single market, competition and financial services. We are insistent that our voice will continue to be heard and our national interests protected. We have found allies among the other 10 members of the EU not in the euro. An important marker was put down in Sunday's European Council conclusion.

No one pretends that sorting this out in a satisfactory way will be easy, but it is a necessity. That is the context in which we should approach potential changes to the treaty. This coalition Government have already proved that they can protect Britain's interest by getting us out of the last Government's involvement in eurozone bailouts, holding down the European Union budget and putting into law the guarantee that no further powers or competencies can be transferred to Brussels without the consent of the British people in a referendum. Now this Government will protect Britain's interests again as the discussions on a possible limited treaty change begin. We will seek to rebalance the responsibilities between the EU and its member states, which in our view has become unbalanced.

Finally, the euro will not find lasting stability until its peripheral members become more competitive. That means credible plans to reduce budget deficits-a commitment made in the very first section of yesterday's agreement-but it also involves difficult decisions on pension ages, business tax rates, welfare reform and educational standards. Britain, thankfully, is not in the euro, but we are taking these difficult decisions because the ultimate lesson of this crisis is that unless you can pay your way in the world, and compete around the globe, then your country will be next in the firing line. I am determined that that country will never be Britain".

My Lords, that concludes the Statement.

2.46 pm

Lord Liddle: My Lords, I thank the Minister for repeating the Statement that the Chancellor made in the other place. As my colleague Rachel Reeves acknowledged there, we on this side of the House welcome the agreement that has been reached, but we also believe that there are many crucial, unanswered questions; I hope that the noble Lord can help us deal with some of those today. The future of the eurozone is vital to our national interests. It has huge ramifications for British businesses and families and that is why we need to see on the part of our Government a policy of constructive and positive engagement, even though we are a "euro-out".

On the recapitalisation of the banks, does the Minister believe that the deal announced is sufficient and that UK banks do not require any further recapitalisation? What estimate has he made of the exposure of UK banks to Greek, Italian, Portuguese and Spanish sovereign debt? What can he tell us about that? Does the noble

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Lord rule out any possibility that the Irish might at some stage ask for similar treatment to that of the Greeks? What would then be the impact on the UK banking system? What would then be the expectation of our partners as to our role?

On the expansion of the European Financial Stability Facility, does the noble Lord believe that the €1 trillion package is sufficient? Is it the big bazooka that the Prime Minister talked about so eloquently before the summit? Does he think that we are going to be back here discussing these issues in a few months' time, which would add to the uncertainty that is undermining confidence?

Can the noble Lord explain in more detail-and I understand the difficulties here-how the leveraging of the EFSF will work? If it is not clear now, when does he expect it to become clear in terms of credit enhancement and special purpose vehicles? If the EFSF must also fund bank recapitalisation, will it be sufficient to give confidence to the markets, and will there be sufficient remaining funds to underpin the sovereign debt of member states in difficulty, such as Italy?

On the question of British contributions, paragraph 22 of the euro summit statement says:

"In addition, further enhancement of the EFSF resources can be achieved by cooperating even more closely with the IMF. The Eurogroup, the Commission and the EFSF will work on all possible options".

Are we to interpret what the noble Lord said in the Statement as meaning that the British would oppose any such exploration and try to veto such efforts?

Is not the big thing missing from the agreement that has been concluded the lack of any plan for jobs and growth in Europe? Is it not the case that countries such as Italy are not conceivably going to be able to solve their debt problems without a revival of growth? Is this not a time when Britain should have been leading the charge with our partners to argue for a proper plan for jobs and growth in Europe? We need not simply collective austerity but a new drive to open up the single market, an investment plan using up unused structural funds-of which there are hundreds of millions in this country-and a greater role for the European Investment Bank, which has already played a considerable role in financing small businesses. We need to look at whether this can be extended to provide central support for privately funded energy and other infrastructure projects. Should we not be putting together that kind of European plan for growth?

However, is not the real problem that this Government cannot do that because unemployment is at a 17-year high, there has been no growth in this country for a year, borrowing is £46 billion higher than was planned and, by clinging desperately to an austerity plan that is failing here in Britain, as my colleague Ed Balls has so persuasively argued, we are nailing our colours to a mast of austerity when what we need is a comprehensive plan for growth? Is not one reason why the Government are being held back from putting forward a plan for growth in Europe that they are fundamentally conflicted on Europe, not really being able to make up their mind whether they want Britain in the room or out of the room?

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On the arrangements for future decision-making that have been agreed, the agreement says:

"The President of the Euro Summit will keep the non euro area Member States closely informed of the preparation and outcome of the Summits".

What does "closely informed" mean? Does it mean anything more than Britain simply being told by a letter in the post, as it were, what has happened in Brussels? What arrangements will be made to ensure that the British voice is heard loud and clear?

On the forthcoming treaty changes, which are mentioned, it is totally unclear where the Government stand. I understand that there was a report this morning from a No. 10 press briefing that any treaty changes were expected to be minor and certainly would not require a referendum in this country. In that case, how will they be a vehicle for the repatriation of powers and the renegotiation of Britain's relationship with the European Union that the Prime Minister promised his Back-Benchers in the House of Commons earlier this week? The fact is that, as long as the Government fail to resolve these fundamental issues about their stance towards our membership of the European Union, our influence over the eurozone's future is going to be minimal.

2.54 pm

Lord Sassoon: My Lords, I congratulate the noble Lord, Lord Liddle, on asking, in my experience, the maximum number of questions in the minimum amount of time, which certainly gives me a bit of a challenge. He addressed some of the key issues that are left outstanding, which is very helpful, and I shall attempt to address as many of his questions as I can.

First, on the sufficiency of the bank recapitalisation, what is important here is that for the first time, unlike the somewhat obscure and clearly failed stress tests-failed in the sense that they were not nearly tough enough-we have a very clear direction about the hurdle of 9 per cent core tier 1 capital on the basis that sovereign debt is market to market and the European Banking Authority has done the calculations on that basis. That is materially different from the way that the assessment was made last year, which was woeful in its inadequacy. To be absolutely clear, through that process and through the ongoing process of the tripartite authorities-particularly the FSA in the UK-under this assessment UK banks do not need any new capital, as indeed is the case for banks in a number of other countries, including the Netherlands and, critically, Ireland.

The noble Lord asked about Ireland and I shall come back to that in a minute. He also asked specifically about the UK's exposure to other peripheral countries, and it may be helpful to give the latest data on that. The information is set out on the Bank of England website, and the latest numbers that it gives are that UK financial and monetary institutions have exposures to the public sectors of the peripheral eurozone countries-that is, Greece, Ireland, Portugal, Spain and Italy-of up to $34 billion, the currency in which the numbers are reported. Twenty-five billion dollars of that relates to the public sectors of Italy and Spain, and a total of $9 billion to Greece, Ireland and

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Portugal-$3 billion to Greece, $4 billion to Ireland and $2 billion to Portugal. These are relatively modest numbers in most cases compared with those for other core European countries. They are much lower than the exposures of banks in France and Germany, for example, to Greece.

So far as concerns Ireland, as I just said, the first thing that came out of the statement overnight is that the Irish banks do not require further capital injections as a result of this package. I support the euro summit's statement on Ireland-that it is making good progress on the full implementation of its adjustment programme. As we all know, it is clearly in our national interest that the Irish economy is successful and that its banking system is stable. Ireland accounts for some 6 per cent of Britain's exports, and that is why we signed the bilateral loan agreement with it. As is clear from everything that has happened since then, the Irish Government have a strong commitment to programme implementation, and we very much welcome that.

A recently completed staff mission ahead of the fourth EU/IMF review of Ireland's programme concluded that Ireland is indeed delivering its programme effectively and making substantial progress on deficit reduction, banking repair and structural reforms. The progress that Ireland has made is a positive lesson for other countries in Europe.

The noble Lord then asked whether the €1 trillion is sufficient. The critical point for now is that, although a lot of numbers have been bandied around in negotiating the package, we have gone up a step from €440 million to €1 trillion and that is a very significant increase. The first priority is to see to the details because, as the noble Lord, Lord Liddle, points out, important details have to be put in place. That has to be the next priority and there is a commitment that we should get the details on that by the end of November, which answers the noble Lord's question. Otherwise, all I would say about indications of the sufficiency of the package is that the markets-whether the equity markets, the debt markets or the markets in European banks-have been positive today and although we should not set too much store by one day's reaction in the market, clearly that reaction has been positive, having looked at the statement and the package.

Turning to jobs and growth, of course we want the EU27, as well as the eurozone, to be putting in much more effort, as I have already said, to questions of structural reform, competition policy, external trade and so on. From the Statement it is clear that yesterday the Council was looking hard at these matters, not least in drawing attention to the Spanish plans for structural reform and the new Italian plan for growth. To be fair to the eurozone, both in the generality and in relation to two of the countries that wish to see speedy action, growth issues are certainly not forgotten.

On the noble Lord's jibes about the UK, I stress again that the approach of the UK Government is threefold: first, we must stick to the deficit reduction plan if we are to have the continued low interest rates which we need for sustained recovery; secondly, yes, there is room for monetary activism, as seen in the Bank of England's recent announcement on more quantitative easing but also in my right honourable

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friend the Chancellor's announcement that we are looking at further credit easing measures; and thirdly, yes, we need to continue to bring forward supply-side reforms, as we will do in and around the autumn Statement next month to underpin medium-term balanced growth.

The noble Lord asked about issues concerning the structure of the euro-ins and the euro-outs, treaty changes and so on. As regards what "closely informed" means, the best evidence is what happened over the past few days: the Prime Minister successfully argued that we needed to have a seat at the table yesterday for issues that concern the whole EU27 and specifically there was the bank recapitalisation. That was accepted; we were there; the other euro-outs were there and we were kept extremely closely informed about the deliberations within the eurozone. The best thing to look at is the evidence of how that worked over the past couple of days.

The eurozone Statement talks about possible treaty changes, so we must not jump the gun and say that there will be some. I do not have the wording of that paragraph in front of me, but it makes the point that they are not necessarily extensive changes-I forget the adjective.

Lord Liddle: Limited.

Lord Sassoon: I thank the noble Lord for that-possible limited treaty changes. We should not get excessively excited too soon about that but, if and when the treaty changes come forward, the first priority of the UK Government will be to ensure that those treaty changes are fit for purpose in terms of the better governance that we want in the eurozone, and the second is that we will take every opportunity at that point to see what advantage we can get for the UK out of the discussions around any package that may come forward. I hope that that rather briskly answers the noble Lord's many questions.

3.05 pm

Lord Newby: Reverting to a question raised by the noble Lord, Lord Liddle, and the IMF, the Chancellor very helpfully pointed out in the Statement:

"Let us remember that support for the IMF does not add to our debt or deficit, and that no one who has ever provided money to the IMF has ever lost that money".

Why, therefore, does he go on to say,

"But the IMF cannot put its own resources in-it can only lend to countries with a programme for adjustment",

not least because I thought all the countries that we were talking about had a programme for adjustment? I cannot see why the Government are so averse to involving the IMF, particularly given that the eurozone Ministers are very keen to work with the IMF. Secondly, I ask specifically about tax co-ordination. The European statement says:

"Pragmatic coordination of tax policies in the euro area is a necessary element of stronger economic policy coordination ... Legislative work on the Commission proposals for a Common Consolidated Corporate Tax Base and for a Financial Transaction Tax is ongoing".

The implication is that the eurozone countries are considering imposing those taxes themselves. Is it the Minister's understanding that they will be in a position

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to impose those taxes and that common tax base-with the UK out, under the outs-and, if they did that, what would be the Government's attitude towards it?

Lord Sassoon: My Lords, first, I shall try to clear up what I think is a small confusion in relation to what the IMF can or cannot do under its own rules and what we would be prepared to be part of or not part of. Of course, the IMF is involved directly in the Greek package, as it is with two other packages within the eurozone. So three programmes out of the 53 in which the IMF is currently involved are indeed eurozone ones and that is perfectly proper and we support the IMF's commitment in adjustment programmes of that kind. We would not support the IMF participating in some special purpose vehicle fund, but I do not believe that it has the ability to do that anyway and the UK certainly will not be involved in that. If China and other countries want to be involved, that is fine and that is their decision, but we will not be involved and we will not support any IMF involvement in that route. We will support the IMF's involvement in country adjustment programmes, such as it has done throughout its history. That is what the IMF is there for. There may be some confusion on that.

On tax co-ordination, first, the UK Government stick strictly to their position that we believe that taxation is, and should remain, a matter of national competency. It is up to the eurozone if it wants to propose some different arrangements within the eurozone consistent with the need for greater fiscal co-ordination in it. On the one specific proposal that has come forward so far-the financial transaction tax-first, we have said that there may be some basis for such a tax but only where it is globally applicable because if it is applied in Europe it will simply drive business away from Europe and, critically, away from the City of London, and that makes no sense. Secondly, in bringing forward that proposal the Commission was completely clear that the article under which it comes forward is one on which unanimity is required and therefore QMV could not force us into it.

Lord Reid of Cardowan: My Lords, I do not in any way want to belittle any of the efforts that have been made, but does the Minister accept that over the past 24 hours in Europe we have been arguing over the size of the sticking plaster on a corpse that has an underlying chronic problem? Did he not indicate the nature of that problem when he said that the eurozone will work only if the countries in it approximate towards relative competitiveness? Is not the key problem that that should have preceded the onset of a single currency? The delusion that you could politically impose a single currency on such variegated competitive levels inside 17 countries was always bound to end with the chronic problem that we are facing. In view of that, what is the strategic thinking of the Government? Do they now maintain that the present membership of the euro is an inviolate and irreducible minimum? If they do, do they therefore accept that it can exist only with the concentration of ever closer political and fiscal union inside the eurozone? Can the Minister explain how support for ever closer political and fiscal union inside the eurozone accords with the Government's view of

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opposition to ever closer political union within the wider 27? If not a contradiction, is there not at least a very difficult paradox underlying the strategic position in which the Government now find themselves?

Lord Sassoon:First, it is probably not productive to rake over too much of the history of this. An awful lot of those who advocated the creation of the euro and the UK's participation in it have been proved completely wrong by the way that events have unfolded over recent years. Therefore, arguing about whether competitiveness should have come before or after the creation of the euro is more for historians. That is why it was in my right honourable friend the Chancellor's Statement that the competitiveness of the euro-periphery countries, vis-à-vis Germany as the benchmark of economic and industrial efficiency in Europe, is a critical issue that has to be addressed; and that the second dimension is the competitiveness of the EU as a whole in a global economy. I completely agree with the noble Lord that this has to be central to the solution going forward.

As to who should or should not be in the euro and what the size of it should be, that is for the euro to work out. The Government have no view on whether euro membership is inviolable. We simply say that that is a matter for the eurozone. What we want to see is these issues of competitiveness within and without the eurozone very high on the agenda. As far as dealing with internal competitiveness is concerned, that inevitably means a degree of closer fiscal co-ordination, the inevitability of transfer payments between members and all the logic that flows from that.

The competitiveness of the EU27 and the outward-facing euro are completely different matters that do not require similar questions of political union. We have a very good paradigm in which the EU27 can co-operate. It is just a matter of them focusing on the structural, market, competition and financial regulation issues, none of which requires any closer political union. They are technocratic, single-market trade and economic issues.

Lord Higgins: My Lords, I congratulate the Chancellor on the extremely active and skilful way in which he has defended British interests in the course of these very complex negotiations. As far as the possible costs of the operation are concerned, will my noble friend clarify the situation? Is he saying that under the arrangements that are now put forward there can be no cost to the UK taxpayer? It would seem to be true of the first part of the Statement. The position with regard to the IMF seems a little obscure because, if I understand it correctly, the Chancellor is saying that he is prepared to contribute more to the IMF but will not contribute if that money is going towards bailing out the eurozone or members of the eurozone. Will my noble friend say how that is to be achieved because, from my experience of the IMF, I am not at all clear?

As far as the banking side of things is concerned, my noble friend suggests that the Government may get involved in the process of recapitalisation if other methods do not succeed. Will he tell us what the likely or potential cost of that could be and, in particular, if

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we are going to contribute to the recapitalisation, is there any implication as far as ownership of the banks is concerned?

Finally, I shall pick up the point just made. At the end of the day, as far as I can see, none of these huge amounts of money being thrown around will make a significant difference to the competitiveness of, let us say, the Greeks. If the IMF is involved, then perhaps it will because it imposes very stringent conditions which, on the whole, have been enforced, but all this money is simply flowing around to bail out the Greeks. It is not making them more competitive. Indeed, is it not fairly apparent that the Greeks joined the eurozone at an exchange rate at which they were not competitive? As far as one can see, it is inconceivable that they will become competitive. These measures certainly do not do much to achieve that. In that case, are we simply delaying the day, sooner or later, when the Greeks have to leave the euro?

Lord Sassoon: My Lords, let me try again on the IMF because my right honourable friend and I seem to have failed so far to get this clear. I will have another go. There was a proposal under the previous Government, which was endorsed by this Government-and voted against by the Opposition in another place even though their party had previously put it forward-for the IMF to increase its resources to match the growth in the global economy. It has nothing to do directly with the eurozone but is to do with the size of the global economy and the IMF's global mandate. We support that increase in resources.

I should say again that no member shareholder of the IMF has lost any money on the back of the IMF's contribution to the many adjustment programmes that it has entered into for many years. In relation to Europe and the eurozone, the IMF is involved in the three eurozone programmes. We have no difficulty about the IMF being involved. That is what it is there to do, provided it is entering into adjustment programmes related to eurozone countries on the same basis as it has done to this point and as it would do with any other country. That is absolutely fine. However, the IMF should not contribute to some special eurozone fund-that is not what the IMF is there for-and I have no reason to believe it will do that. We certainly would not be part of any such special use of IMF resources.

It is not correct to say that there will be any UK contribution to the recapitalisation of the eurozone banks. If there is a contribution from the public sector, the taxpayers of Europe, it will come from those countries that have contributed to the ring-fenced fund, the EFSF, and the UK is not part of that fund. We have recapitalised our own banks. We are not contributing to the recapitalisation of the eurozone banks. I hope that that is also clear.

Greek competitiveness is addressed by the adjustment programme agreed with the EU and the IMF. The challenge is to make sure that, under the normal ongoing monitoring programme over the next few years, Greece is held to its commitments. But, critically, there are, in its adjustment programme on which its bailout package is conditional, all sorts of conditions aimed to increase Greek competitiveness.

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Lord Brooke of Alverthorpe: My Lords-

Lord Lea of Crondall: My Lords-

Lord De Mauley: My Lords, there is plenty of time. Perhaps we may hear from the noble Lord, Lord Brooke.

Lord Brooke of Alverthorpe: I am grateful and I will be brief. I should like further clarification on the position of the IMF, which has been significantly involved with these negotiations. As I understand it, the IMF is already subscribing to three country adjustment programmes and will continue to do so. It has indicated that it may be required to look for more money from members of the IMF to put more cash into those programmes. I think that I am correct in my understanding of the Minister on that. If that is the case, we are therefore putting more money into the eurozone venture.

Lord Sassoon: My Lords, I will not repeat at length what I have said. It was the proposal of the previous Government, and endorsed by this Government, that we should support an increase of resources of the IMF to match its global commitments, which continues to be the situation. We will continue to be supportive of the IMF having resources in total commensurate with its global mission and mandate. That is quite separate from its contribution to EU programmes, which are looked at country by country in the same way as the IMF looks at the other 50 programmes that it has on the go at the moment, and other proposals that may come forward.

Lord Maginnis of Drumglass: My Lords, I thank the Minister for bringing the Statement to this House. Perhaps I may digress slightly from the euphemistic terms that he has used today to explain away a potential disaster. I have noticed that the Government bring domestic issues to this House in fairly radical terms instead of, perhaps, in succinct amendments. I am thinking of education, health and so on. How is it that the Government ignore the fundamental flaws in the European arrangements which have brought us to this state? How is it, for example, that we are prepared to accept in July 2012 the Republic of Cyprus taking over the presidency, when it is an acolyte of Greece that is probably £6 billion to £8 billion in debt, if one discounts the funny Russian money? How is it that we are prepared to allow from July next year for six months something that is bound to impede any efforts by the Commission to move the problem forward in the Greek situation?

Lord Sassoon: My Lords, I am answering questions on the eurozone crisis. The question of Cyprus has nothing to do with it. I am sure there will be other opportunities to discuss that.

Baroness Falkner of Margravine: My Lords, today marks the beginning of a profound change in our relationship with the EU. If we are going to have fiscal and political integration in 17 countries, leaving 10 outside, it is undoubted that we are going to have a different relationship. Winston Churchill said that the British nation was unique in wishing to hear bad news, irrespective of how bad it was. In saying that British

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banks do not require recapitalisation in the assessment of the European Banking Authority, can the Minister tell us when the authority made that assessment in the light of the fast-changing nature of the evolution of this crisis and the lack of transparency in the role of credit default swaps? The timing of when this assessment was made would be very useful to know.

Lord Sassoon: It made the assessment very recently. Indeed, the numbers are going to be reworked over the coming days and weeks to make sure that they are as absolutely up to date as they need to be for the recapitalisation to take place.

Impact of Government Policies on Family Budgets


3.26 pm

Moved By Lord Knight of Weymouth

Lord Knight of Weymouth: My Lords, I am pleased to introduce this debate on the impact of government policy on family budgets. Before I come to the substance of my contribution, I want to say something about the choice of the word "family" in this debate. Yesterday I asked, through Twitter and Facebook, for examples of how people have been affected by government policy in the past 18 months. I quickly had a response from someone called Ma on Twitter. She-I think she may be a she-said:

"Every single politician who talks about families is talking about those with kids. That has never changed. For my entire life in this country, I've been an irrelevance. Why? Talk about being 'excluded'".

I apologise to her if she felt excluded by the use of the word "family". Over a series of tweets she had important things to say for us in this debate. I quote:

"I'm visibly older. What happens when I need to find a new job and can't? This government will have me out in the street. I'm way past old enough to be a grannie now. Am I supposed to live in a student flat or crummy bedsit now? One wage coming into my home to pay for fuel. How does that work, exactly? One wage to pay for housing? All very well to care about kids. I didn't have them in part because I couldn't afford them. So I'll freeze now? Nae good".

She may have been Scottish. Clearly single people are suffering under this Government as well as more traditional definitions of family and I am happy to speak for them too as best I can. The other most striking response was on Facebook from Caroline O'Brien. She wrote:

"One thing that I haven't seen mentioned is the effect of cuts in local services on family budgets. Particularly on families with special needs children. Very often as services are withdrawn families are forced to try to make up the shortfall or see their children suffer. Whether that is getting independent assessments of educational need, private speech therapy, funding activities previously coming from youth services or providing transport. The withdrawal of EMA is going to hit us too, as my daughter starts A levels next year and as for thoughts of university, the debt levels are terrifying. I am also noticing that charities are being hit hard, so far less help is now available from them. Many of these

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things are just starting to have an effect but from where I am standing the future seems bleak for so many families. I know I am lucky. We can afford to buy the food we need, heat our house and pay the mortgage but is equality of opportunity for my kids really something that should be cut? After all it is the tax payer who will have to pay if my kids are unable to participate in society in the future".

Lord Campbell of Alloway: Would the noble Lord forgive me for asking whether his interesting speech is within the remit of the problems of this particular Statement?

Lord Knight of Weymouth: I am speaking to the Motion in my name around the impact of government policies on family budgets and I believe I am speaking directly to that, but I welcome the interest from the noble Lord.

Those two responses are the authentic voice of people in this country-not the poorest perhaps but certainly what has been described as the "squeezed middle"-and it is appropriate that we heard from them first in this debate.

In the remainder of my time I want to make three broad points. First, the lack of growth in the economy is hitting family budgets hard and the country desperately needs a credible and urgent plan to return to growth. Secondly, tackling two of the big inflationary items in budgets, food and energy prices, means taking on vested interests and pushing them to act in the long-term interest rather than for short-term gain. Finally, this Tory Government are failing because they are out of touch with the problems of ordinary families in this country.

I start with the last of those first. It was, I think, in George Osborne's 2009 party conference speech that we first heard his soundbite: "We are all in this together". The Government want us to believe that the pain is shared fairly. Does the Minister still believe that to be true? The evidence that he is hitting the poorest hardest is stark. I quote from Peter Wilby's excellent piece in the 17 October edition of the New Statesman, where he said:

"One of Labour's most outstanding achievements in office was to reduce child poverty during an economic boom. This sounds nonsensical, but isn't. Poverty is defined relatively; children living in families that receive below 60 per cent of median income count as poor. As the median nearly always rises during a boom, more children automatically become poor unless employers increase their parents' wages or ministers increase their benefits. The Tories are about to pull off the opposite trick. In recessions, the median falls and so, unless poor families' wages and benefits are hit harder than average, child poverty automatically falls. In 2009-2010, that was exactly what happened, with 300,000 children coming out of poverty. But that was before the Tories got to work. Now, the Institute for Fiscal Studies reports, we can expect the same number (though not necessarily the same children) to go back into poverty over the next two years, despite the likelihood that median incomes will remain, at best, stagnant. You couldn't have a clearer illustration of the difference between Tory and Labour governments".

On the income side of family budgets, we know that wage increases are not keeping up with inflation and that families are therefore suffering real-terms cuts. The Government are adding to that by their own attacks on pay in the agricultural sector by abolishing the Agricultural Wages Board, on the pay and conditions of school support staff by abolishing their negotiating

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body, and on public sector workers generally by imposing an effective extra tax on them through increased pension contributions beyond those being recommended by the noble Lord, Lord Hutton.

At the same time, the Government are of course cutting the benefits bill. Their cuts to housing benefits, to tax credits, to child benefit, to childcare, to educational maintenance allowance, to baby tax credits, to the maternity and health in pregnancy grants, to concessionary transport and to disability living allowance amount to a list that is long and painful. These cuts are hitting the poorest hardest, because it is the poorest who claim the most benefits, both in and out of work. Worst of all, for some families, unemployment is rising once more, with too many families now going through the trauma of a sudden collapse in their income. It is clear that "We are all in this together" rings hollow. If Ministers want to continue to claim that their choices on spending have been spread fairly, they are even more out of touch than I thought.

I turn to spending. The biggest hit on family spending overall was the Government's decision prematurely to raise VAT to 20 per cent. As former Monetary Policy Committee member Professor Blanchflower wrote recently:

"It certainly appears that increasing VAT from 17.5 per cent to 20 per cent was a big mistake-it increased ... Consumer Prices Index inflation by 1.5 percentage points and hit ordinary working people's living standards".

His call to reverse that increase was repeated by last year's winner of the Nobel Prize in economics, Christopher Pissarides, who said this month:

"Cutting VAT back to 17.5 per cent ... will revive job creation and reduce unemployment. Deficit reduction is best done with spending cuts when the economy is recovering, not with higher taxes in a downturn".

Last week's inflation figures made grim reading. CPI, the Government's preferred measure, has never been higher at 5.2 per cent, and RPI, at 5.6 per cent, is the highest since June 1991. It is little wonder that the Markit Household Finance Index published this week showed 37 per cent of UK households expecting their financial situation to worsen this month, against only 7 per cent expecting an improvement, or that the Family Lives survey of December last year found that 53.3 per cent of families said that their finances were in a worse state now than last year.

If we look at the detail of the inflation figures, we see the reality for families. Bills for gas and electricity have risen by 9.9 per cent in the past month and are up 18.3 per cent since last year. Transport has risen 12.8 per cent in the past year and food is 6 per cent higher than 12 months ago. I expect that my noble friend Lady Smith of Basildon will talk about energy prices in her speech, but we know that the poorer you are, the higher the proportion of income is used in food and heating. I fear that this winter many more will have to choose between the two as the decision to cut winter fuel payments to £200 for over-60s and £300 for over-80s adds to the misery.

With regard to fuels costs, I have to press the Government on why they are not giving teeth to the groceries code adjudicator. This new body will be funded by the supermarkets. The responsible Minister,

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Ed Davey, has said it will "safeguard the consumer interest", and it will lead, in the words of the National Farmers Union to,

Yet the Government have rejected two Select Committee reports calling on them to implement the regulatory body quickly. It was ready to go last summer. The Government rejected proposals to allow it to fine without a resolution in both Houses of Parliament and to allow it to act on anonymous complaints. On the three big tests, the Government have shown that they are unable to resist the power of the vested interests of the supermarkets and unwilling to set up an effective regulator-the effective regulator that consumers and producers of food want and need.

Since the Minister is so well briefed on Europe now, and given the warm relationship that the Prime Minister has developed in Europe with the likes of President Sarkozy, perhaps the Minister can tell us how we will get heard on more radical reform of the common agricultural policy, which his friends in the TaxPayers' Alliance claim costs every household in this country £398 per year in higher food prices. If the Government are serious about helping family budgets, they must be willing to take on the short-termism and vested interests that are raising food and energy prices. That is the new bargain with business that Ed Miliband talked about last month in Liverpool and it is sorely needed.

Finally, what families in this country need more than anything is growth in the economy. Growth brings jobs, job security and consumer confidence. We are in a vicious circle that needs reversing. Today's British Retail Consortium figures show 23,000 fewer workers in high-street stores than a year ago because of the collapse in consumer demand. How are the Government going to reverse it? To get the economy moving, we need spending to increase. As we have seen, that certainly will not come from consumers. Despite the welcome deal overnight in the eurozone, the best prospect of an export-led recovery is if China starts to import more, and we cannot see any signs of that. The lack of delivery by Project Merlin means that the prospects of businesses accessing the finance that they need are poor, so they are unlikely to start spending either.

That leaves the Government. In this downward spiral, we need a kick-start from the Government. That is the consistent lesson from history. We need a plan for growth. Call it plan A plus, call it plan B, call it whatever you like, but give us a plan for growth that will work. The Shadow Chancellor, Ed Balls, has offered his plan: reverse the VAT increase until growth is sustained; cut VAT to 5 per cent for home improvements; bring forward investment in schools and hospitals; repeat the bankers' bonus tax to invest in building new homes and thereby create work for 100,000 more young people; and offer small business a national insurance incentive to take on new staff.

The Minister may say we cannot afford to do it; we say we cannot afford not to. Where else is growth going to come from? Families in this country are up against it. The conversations around the kitchen table are very bleak. Too many cannot tighten their belts much more, and the real impact of many of the cuts is still to come. The poorest are hit the hardest. It is not

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fair. Without a change of heart from this Government and without serious progressive measures, I fear massive social problems, a sustained recession and a blight on families' chances for a generation. The families of this country need action now.

3.39 pm

Lord Stoneham of Droxford: My Lords, this debate is being held at a time of worrying outlook for the economy. No family or household who saw the figures last week of a 5.2 per cent increase in inflation and a comparable increase in salaries of 1.8 per cent needs telling that grappling with high energy and food prices is very tough indeed. There is huge concern about job security, declining real incomes and frail confidence both in business and in households.

When I joined the House of Lords I thought that it had a reputation for being best at strategic policy debates. Although I would like to thank the noble Lord, Lord Knight, for initiating this debate, I regard it as more of a tactical debate with strong political undertones if not overtones. I have always admired his political skills, not least in retaining Dorset South in 2005. As somebody who was helping to organise the Liberal Democrats' election campaign that year, and also as a man from Portsmouth, I admired the way in which he arranged for the Sea Cadets to give the Prime Minister a welcome on the first day of that election campaign in Weymouth. It was one of the high spots of the campaign, which certainly did not get better in my view. It showed real political skill.

I would, however, like to correct the noble Lord. He kept referring to the Tory Government: this is a coalition Government. There are good reasons why this is a coalition Government. The Government are trying to grapple with decisions. If there had been a Labour Government, they would have had to grapple with the same problems.

All recessions are painful but I have worked through five of them and this one is undoubtedly the worst. This one is particularly bad because there has been a decline in gross domestic product, and that is bound to cause a fall in living standards. All recessions, sadly, weed out marginal companies and businesses, and that creates unemployment. Sadly, resources at a time of recession are always at their weakest to protect the vulnerable, and that is one of the difficulties that we face now. The aim of the Government is obviously to ensure that the broadest backs share the greatest burdens in this situation as we work to restore the economy, the destruction of which, I must point out again, started under a Labour Government.

At this difficult time, I recall JK Galbraith's warning to President Kennedy. He said:

"Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable".

Sharing pain in these circumstances is not easy, but the broad parameters of what the Government are doing are right. There will be no restoration in confidence, job security and growth unless there is confidence in the fiscal debt recovery plan both nationally and globally. Wherever possible we have to direct help to the most vulnerable. I particularly welcome the Government's initiative, made despite all the pressures, in raising tax

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thresholds. At a time of severe economic pressures we have also given the triple guarantee for state pensioners, building on the pension credit scheme of the previous Government, which should protect those who are most vulnerable to inflation and least able to protect themselves. The brave universal credit reform will seek to reduce poverty, simplify a very complex system and improve work incentives.

The problem now is that many of the principal factors impacting on household budgets are externally driven. The exchange rate devaluation was 25 per cent in the last two years of the Labour Government. It has helped growth but-as Harold Wilson rudely discovered in 1967-the pound in your pocket is bound to be affected by higher prices.

The noble Lord, Lord Knight, mentioned fuel. Prices are obviously affected by the weak pound and the rise in wholesale energy prices. We would normally expect energy prices to fall in a recession. Most forecasters have been surprised that they have not fallen and there may be hope now that we may see some fallback in wholesale prices. But energy prices are now acting as a squeeze on real disposable income and deflating the economy. That is not a new problem. In a recent independent review of fuel poverty, Professor Hills has shown that the growth in households in fuel poverty grew from 2 million to 5.5 million between 2004 and 2009. This is a problem of rising wholesale energy prices and poor quality housing stock which is not sufficiently insulated to reduce the demand for energy, and therefore to help offset the price increases.

Although fuel costs and the weakened exchange rate are two key components of the extra costs on household budgets, we must accept that VAT has imposed a significant one-off increase in prices this year. I accept that the consequences of this tax and how regressive it is are disputed, depending on whether you assess it on income or household expenditure. However, the arguments are more complex when choosing between a cut in public spending or an increase in VAT. The critical question is where £13 billion in revenues would otherwise come from. Let us also not forget that no other authority than Alistair Darling was going down this track in 2009. I do not think that there is any guarantee that reducing VAT necessarily increases consumer spending; spending declined by 3 per cent in 2009 when the last Government tried it.

Let us also not forget-the noble Lord, Lord Knight, did not mention it-the benefits of low mortgage-interest rates. As the noble Lord, Lord Sassoon, reminded us in Questions today, a 1 per cent rise in UK interest rates today would add £10 billion to family mortgage bills alone. Actually, in the last year, the average fixed mortgage rate has fallen by almost 1 per cent. At least in this recession, unlike in 1989, we have not had negative equity in serious terms, with people forced to sell their homes because of high interest payments.

The Governor of the Bank of England has warned us that we are about to face the longest decline in real disposable incomes for some time. So what needs to be done to protect households? I believe that the Government must keep to their strategy that the broadest backs should suffer the greatest burden and that the most vulnerable should be protected. It is more than a

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symbolic gesture that we are maintaining high-pay restraint and the top rate of tax and that we have increased the CGT rate to 28 per cent.

Though all those aspects have to maintained, we must also maintain the Government's ongoing commitment to raising tax thresholds as we can afford it. We must also maintain the commitment to the triple guarantee for pensions in April 2012. With quantitative easing, we must also recognise that this will create problems for those depending on interest from their savings, and indeed those approaching retirement and taking up occupational pensions. We must not forget that the consequences of low interest rates mean that people living on their savings and on occupational pension schemes are under severe pressure at this time.

In the energy sector, I hope that we will look at recognising what Professor Hills has said this week-that fuel poverty is very much linked to the issue of quality of housing as well as pricing, and that we need more schemes for better insulation, pioneered and financed by energy providers. Indeed, we need a whole series of partnerships. If the Government cannot provide the money then the partnerships will have to come through activity in the housing sector, with housing associations and the private sector, to develop funds for more social housing. It will have to come from energy companies, through some of the work of the regulator, to help those on low incomes and to encourage schemes for energy insulation, all of which are employment-generating activities. The banks need to be seen as sources of credit for small businesses. We need to work on that.

Always remember that once confidence has been shaken it takes a long time to rebuild it. The best protection for vulnerable groups is a growing economy, low inflation, and more choice of jobs. That requires a renewed partnership between industry and Government, to use the resources for business investment which they have but, for the time, are cautious in using.

3.49 pm

Lord Stevenson of Balmacara: My Lords, I am delighted to be participating in this debate. I congratulate my noble friend Lord Knight of Weymouth on initiating it and on his speech, with which I agree 100 per cent. I will talk today about debt and its impact on families and on the financial services sector. In so doing, I declare an interest as the chair of the Foundation for Credit Counselling. Operating currently as the Consumer Credit Counselling Service in all parts of the United Kingdom, we are the UK's leading debt advice charity. We provide confidential, free and independent counselling and money management assistance and, now in partnership with Citizens Advice, we have reached nearly a million financially distressed families in the last two years.

Our typical client-just to give a sense of what we are dealing with-owes over £25,000 to between five and eight lenders, which include the banks, the credit card companies, store cards, utility companies and the Government. The role of the charity is to work with lenders-who do not get nearly enough praise for the highly responsible way they work with us on this issue-to find an appropriate way of dealing with

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problem debt, including setting up an affordable debt management repayment plan, which is free to the client, welfare benefit checks and other debt solutions.

As I said, we are in contact with over 1,000 clients a day. The issues which they tell us are worrying them at the moment include the rising cost of living-with CPI inflation at 5.2 per cent last month, and RPI inflation at a 20-year high of 5.6 per cent-and energy prices, which, as has been discussed, have increased: electricity by 7.5 per cent and gas by 13 per cent. From our statistics we find that 30 per cent of clients are in fuel poverty, defined as having to spend 10 per cent of their net income to heat their homes adequately. A similar proportion of those seeking our help did not have the means to meet their day-to-day cost of living let alone to repay their debts. Underemployment, mainly part-time employment as opposed to unemployment, is starting to emerge as a major reason for debt problems.

We also work with other think tanks and organisations, including the Bank of England, which uses our data to provide more information. In a recent report, Debt and Household Incomes, the Financial Inclusion Centre reported that, in its calculations, 6.2 million households can be identified as financially vulnerable; that 3.2 million are already in financial difficulty, because they are either three months behind with a payment or in some form of insolvency; and that 3 million are at risk because they find it hard to make ends meet or may be vulnerable to increases in household bills. The Resolution Foundation reported in August, having done a MORI poll, that 48 per cent of people on low to middle incomes have no cash remaining at the end of the month after meeting their expenses. This month, a Lloyds Bank survey of their current account holders reports that one in 10 Britons do not have enough money to meet their monthly outgoings, such is the parlous state of their personal finances. That report's other main finding was that incomes continued to fall in real terms in September, being on average 1 per cent down on last year, and that spending on essential items such as food and petrol has risen by 3.5 per cent compared to last year.

What are we to make of all this? In the immediate future, we know from our clients that people are borrowing less and, where they can, repaying their debts. That is a good thing, even though it may impact adversely on GDP. Yet as incomes are declining in real terms and saving is still not yet a habit, more and more people who come to us are unable to pay their debts. I will share some of my medium-term worries with your Lordships' House. First, on the timing of the return to what we might call normal mortgage interest rates, we kid ourselves if we think that this extended period of ultra-low interest rates will last indefinitely. When we get back to real mortgage interest rates, which will be of the order of 5 per cent, it will cause significant damage to the budgets of millions of home owners.

A second concern is the impact that student debt will have on people who go to university after 2012. We had a recent Written Answer in this House which estimated the debt burden for new graduates after 2015 at between £40,000 and £50,000. How will they ever earn enough to repay that, and how will they get other borrowings in place to buy a house or start a family without recourse to the bank of Dad and

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Mum? This will certainly discriminate against those from deprived backgrounds and do nothing for social inclusion. My third and major worry in this area is that unless the bottom two deciles of income distribution get a real increase in their basic earnings-say of the order of 10 per cent-I do not see how they are ever going to square their family budgets, let alone repay the debts they have accrued. Where is that growth in real incomes going to come from?

The UK economy faces hard times. Debt is increasingly defining the experiences of what I might call the haves and the have-nots. The haves are households with no or low debts, savings and assets to provide a cushion in case of hard times, as well as sufficient income so that they do not have to rely on credit to make ends meet.

The have-nots are the millions of households who are burdened by debt, with little or no savings to protect them, struggling to make ends meet every month and increasingly vulnerable to predatory lending practices. I call on the Government to protect consumers from the aggressive practices of predatory lenders and commercial debt management companies who exacerbate, rather than alleviate, financial problems. This needs to be done through a combination of tough, properly enforced consumer protection and ensuring that financially vulnerable households have access to independent, objective and free debt advice.

In the future the legacy of personal debt will be one of the single biggest influences on the quality of household finances and will have an impact on the financial services industry. UK household finances have become unbalanced. Converting the UK from a debt culture to a savings culture, so as to promote self-reliance, is a major public policy challenge. This may be comparatively easy for the haves; however, if the financially vulnerable have-nots are to be supported on the road to self-reliance and freedom from debt burdens, they will need good, independent, free debt advice and financial work-outs from trusted intermediaries. However, this legacy of debt has wider implications for UK households and the financial services industry. UK households may be entering a new economic paradigm: a sustained period of high public debt, low economic growth, low interest rates and higher inflation with record levels of personal debt. This will affect household disposable incomes, consumer behaviour and attitudes to risk. This in turn will impact on the revenues and sustainability of business models in the financial services industry.

3.56 pm

Baroness Pitkeathley: My Lords, I am grateful to my noble friend Lord Knight for initiating this important debate. I wonder how many of your Lordships know what it is like to live on the margins. I am not referring to those who live outside the norms of society, to those who break the law, have a drug or alcohol problem or are homeless. I mean those who are just about coping, either financially or emotionally, and often both. I well remember a time, as a single parent, when I was just about coping financially, when I would go to sleep every night and wake every morning wondering how I could balance my income with the demands on it and constantly juggling the importance of paying this bill while putting off paying another.

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I am glad to say that that was a long time ago and now I feel confident enough to know that I have some leeway, some cushion to protect me if disaster strikes, if I become severely ill or if the roof blows off. I suspect that most of your Lordships are the same, but for millions of people, that is not how it is. They live just coping, because of a network of factors, financial, social and emotional, which, if they are kept in balance, allow them-just-to cope.

I want to talk about the experience of two such families. First, take the experience of Annette, a single mother of two children, newly divorced from a violent husband. She has an almost full-time job in a supermarket and receives tax credits, help with childcare and child benefit, all of which are now being reconsidered and are likely to disappear or be reduced. At present her children go to a breakfast club two mornings a week, to an after-school club once a week and to a play day at the local library on a Saturday morning. This helps her with her shifts at the supermarket and with the food bills. Every other Saturday the children have a supervised contact session with their father at a local children's centre. Midweek, she and the younger child attend a Sure Start centre where she meets others and receives help and support. She greatly values the social contact this gives her and the friendships she has made.

All these services, the things which mean that she just about copes, are now under threat because of cuts to either their voluntary-let us never forget how many of these services are provided in the voluntary sector-or statutory funding. If this young mother were like most of us in this House and had a cushion, even a cushion of £20 a week, this would not be so important, but she does not have that cushion and, as a consequence, she very soon may not cope at all, because this fragile network of support on which she relies is being taken away What will be the result of that? It does not take a genius to see that extra stress on this already highly-stressed situation will have dire consequences down the line. Annette's mental health is likely to suffer. The children's relationship with their father may be broken. The nutrition of the children may suffer. Let us not forget that a quarter of Britain's schoolchildren go to school without breakfast. Annette may lose her job and become entirely dependent on benefits. Need I go on? What is the potential bill for the state then, compared with the small amounts that it is investing in this family now?

The next family to which I want to draw your Lordships' attention is that of a carer, Shirley. She is aged 55. She is looking after her mother, who is 85 and is disabled by a stroke, which has affected both her mobility and her speech. Shirley's husband is about to retire but of course his pension is not going to be as much as they had expected. She works very part-time and receives the carers allowance-which, fortunately, is not to be taken into the universal benefits proposals, as was originally intended-but she is increasingly worried about the impact of local authority spending restrictions on the services they use for her mother. One of the day-care centres has already closed. The respite service, which enables the carer and her husband to have a night out once a fortnight, provided by a voluntary organisation, is under threat. The speech

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therapy group at the local hospital will come to an end next March when the specialist nurse who runs it retires and is not replaced. Shirley, not surprisingly, is very worried about fuel bills as her mother is immobile and some form of heating has to be provided in the house night and day. Her experience is typical.

Age UK says that spending cuts are projected to reduce spending on older people's care by £300 million over the next four years. Real spending on older people's care will be £250 million lower in 2014 than it was in 2004, but over the same period the number of people over 85 has risen by two-thirds. In 2005, 50 per cent of councils provided support to people assessed as having moderate needs, but in 2011 the figure has fallen to 18 per cent. As a result, the number of people receiving local authority-funded care at home has reduced from just under 500,000 in 2004 to just under 300,000 in 2009.

A survey in April 2011 of 61 councils by Emily Thornberry MP showed that 88 per cent of them were increasing charges for social care services, 16 per cent were raising eligibility criteria and no fewer than 54 per cent were cutting funding to the voluntary sector, which provides so many essential services. In addition, two-thirds were closing care homes or day centres.

I emphasise that cuts in support to caring families like this are a false economy. If financial and practical support to carers is cut and caring breaks down as a result, there will be a considerable knock-on cost to health and social care services, as well as serious damage to family life. I remind your Lordships, as I often do, that there are 6 million carers in the United Kingdom providing care to a value of £119 billion every year.

Both those typical families are doing their best to cope. They are fulfilling their family and societal obligations lovingly and dutifully, but government policies are having detrimental effects so significant that the end result may be family breakdown, with all its attendant costs to the state and to society itself.

We are all aware of the dire financial situation in which global events have placed the UK, but it must surely make sound economic as well as moral good sense to continue supporting families such as those that I have set before your Lordships. Local authorities and the voluntary sector are having to cut services that provide the difference between people just coping and not coping at all, and we shall all reap the whirlwind from that before many years have elapsed.

May we be assured that the Government, however inexperienced Ministers are in the normal lives of citizens, understand that many of them are just coping and just managing? Can the Minister assure the House that he understands that withdrawing these networks of support will result down the line in fractured and fragmented families which, in the end, will cost us all a great deal more?

4.04 pm

Baroness Smith of Basildon: My Lords, we owe my noble friend Lord Knight of Weymouth a debt of gratitude, not just for bringing forward this debate today but for his passionate comments. I like to think that when I am winding up a debate I can say how much I have enjoyed the contributions. While these

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have been very valuable, I regret to say that "enjoyable" is not the word that I would use on this occasion, given the depressing and serious impact that government policies are having on families, whatever their shape and size.

I was particularly interested in the comments of the noble Lord, Lord Stoneham. He expressed concern over the political nature of the comments of my noble friend Lord Knight. While he paid great tribute to my noble friend's political skills, we have to understand that economics and politics are inextricably linked, and that it is political judgment that has led to the economic decisions that the Government have made.

At the previous general election the economy was the key issue. There was little disagreement over the need to tackle the deficit. Where there was a real divide was on the issue of how that should be done. The Labour Party took the view that it could and should be reduced alongside economic growth, while the Conservative view was that cuts had to be harder, deeper and faster to have the kind of impact on the economy that the party wanted to see. In the event, no political party won an outright majority. In fact, more people voted against all three major political parties than voted for them. Eventually, a Conservative-led coalition Government was formed with the Liberal Democrats and those hard, fast and deep cuts that were promised by the Conservatives became a reality.

As we have already heard from my noble friend Lord Knight, at the 2009 Conservative Party conference the Chancellor in waiting, George Osborne, promised that everyone would play their part in a deficit-reduction plan. He said:

"Everyone must pay their share".

The famous and now discredited, "We're all in it together", was repeated three times in his speech, and then again by David Cameron. It is an excellent soundbite; it was attractive, understood and believed by many to be a commitment. It appealed to that very British sense of fairness. Everyone in the country would suffer equally in the pain that was to follow, no section of society would hurt more than any other, and all would pay their fair share. However, in their impact the Government's actions have achieved precisely the opposite, as we have heard today. The noble Lord shakes his head but I urge him to talk to people who are feeling the impact of this Government, and not just read the brief that he has received from civil servants.

That impact has achieved the opposite of what the Government said that it would. The evidence that some people have been hit harder than others is overwhelming. We have heard something of the pressures on families from my noble friends Lord Knight, Lady Pitkeathley and Lord Stevenson. We have heard real examples of real families. My noble friend Lord Knight read out what he called a long and painful list of cuts that are hitting the poorest hardest. My noble friend Lady Pitkeathley's examples of particular families highlighted not just the suffering that they face but the invaluable role that the voluntary third sector plays and how hard charities are being hit as local authorities cut their funding. That issue was raised with David Cameron at Prime Minister's Question Time. He said that local authorities should recognise the value of

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charities before they cut their money. I have to say to Mr Cameron that they do recognise the value, but when their funding is being cut and they are under pressure local authorities are often left with little choice.

The comments of my noble friend Lord Stevenson were particularly useful to this debate. His experienced observations from supporting those in debt via a charity add a significant contribution to the matters before us today. However, it is also very worrying that this will just get worse. I welcome my noble friend's constructive comments about what would help and hope that the Government will take them on board.

My noble friend Lord Knight referred to the Institute for Fiscal Studies report that was published earlier this month, which forecast the biggest drop for middle-income families since the 1970s, pushing 600,000 more children into poverty, taking the figure up to more than 3 million within two years. That is alongside 2.5 million working-age parents and 4 million working-age adults who do not have children being forced into poverty. However, for those not in poverty but who are struggling to make ends meet-the squeezed middle, as we heard from my noble friend Lady Pitkeathley-the IFS predicts that average income will fall by 7 per cent after inflation. That is the biggest fall in living standards for 35 years.

This is not just about numbers. As the chief executive of Barnardo's, Anne Marie Carrie, said:

"This isn't just about statistics as every day thousands of families are being forced into making choices between heating or eating".

Unfortunately, that is not an exaggeration. The most startling increases in energy bills are forcing people to go cold or face alarming bills, which they may not be able to pay. The increase in energy prices of around 18 per cent in the past year-more in some cases-is crippling for families.

The Government's response, with Chris Huhne complaining that people can not be bothered to switch energy companies, is an insult and is also inaccurate. It proves how out of touch he and the Government really are on this issue. In a Which? investigation, a third of calls to energy companies failed to elicit the lowest tariff, as requested by the customer. If an energy company is unable to identify the lowest tariff, how can the Government possibly expect the customer to do so? Why do the Government not ensure that the energy companies reduce the number of tariffs and automatically offer the lowest to the customer? Am I right to be curious about why any company would want such a confusing and complex system of tariffs, which it does not apparently itself understand? Whose side are the Government on in this argument?

Given the dramatic increases in energy prices, the Government must take action to stop those who have the least paying the most. Individuals with pre-payment meters are not eligible for any discounts, so they end up paying more and often, in effect, disconnect themselves as they just cannot afford it. As prices rise to their highest ever, the over-60s will get £50 less winter fuel payment this year than last year, and the over-80s will get £100 less. Warm Front, the Labour Government's scheme for over 10 years, of which we are extremely proud, has brought warmth to the homes of pensioners,

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those with disabilities and the vulnerable. It is now being wound up. Having helped more than 2 million people with their bills, insulation and energy efficiency, the budget has been drastically cut this year and next, and will be ended altogether by 2013. The Government's answer is the Green Deal. I appreciate noble Lords' concerns about energy efficiency, particularly in private sector homes, but in principle the Green Deal is a good scheme which can make a contribution to making homes more energy efficient and reducing bills, as energy efficiency measures can be installed and paid back over time through energy bills. However, given that it is not to be available initially to those in some of the coldest, most energy-inefficient homes in the private rented sector, there is a lost opportunity to support those most in need.

I turn to feed-in tariffs for renewable energy. The best reasons for feed-in tariffs are an increase in energy supply, thus making a contribution towards energy security, and to help those on lower incomes and local communities reduce their bills. But the Government have changed and cut the scheme so that the main beneficiaries will be private households that can afford the initial capital cost, knowing that they can recoup this in time. That is great for them but, despite today's announcement, the restrictions placed on the scheme have greatly reduced the benefits when just some relatively minor tweaks could have achieved the Government's objectives in reducing costs without losing so much capacity and limiting those who can benefit.

Although VAT on domestic energy bills remains at 5 per cent, the Government have increased VAT on energy bills for business customers from the Labour Government's reduction. This really hurts businesses, especially when prices are so high, and the increase just gets passed on to the customer in consumer prices. So we have higher costs at a time when unemployment is rising. In the quarter from June to August 2011, the average weekly pay increased by 2.8 per cent, compared with last year. However, bonus payments are up 28 per cent. In that same three months, 178,000 fewer people were in employment than in the previous three months. ONS statistics show that the two constituencies in my home town of Basildon are suffering a 12 per cent and 10.9 per cent increase in those who are unemployed and claiming JSA. That is just one side of the equation and I want to come back to my opening remarks and those of my noble friend, Lord Knight.

The Government said, "We're all in it together", and that everyone would take their fair share of the pain. The Government promised to tackle bankers' bonuses. It was reported earlier this year that the chief executive of Barclays said it was time for banks to stop feeling remorseful-as he wallowed in his £9 million payout. Labour's plans for greater disclosure were rejected and, despite the Government's levy on banks, the bonus culture continues unabated with an estimated £7 billion to be paid out this year. In 2009, before the General Election, George Osborne said that the Government should act in the light of the unacceptable bank bonuses and that we could not wait for the "promised land" of "responsible bonus culture". Does that mean that the Government now think these bonuses are responsible and acceptable? We are told that the

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best the coalition Government can now hope for is a declaration that bonuses are less than they would have been, despite reports that salaries will increase by up to 40 per cent in some cases to compensate for the so-called cuts or deferral of bonuses. So no fairness there.

The Secretary of State for Communities and Local Government, Eric Pickles, said he would crack down on the pay of council chiefs. Yet it is reported that even in the council next door to his in my home town of Basildon, the chief executive is to work for just three days a week from 2013 on a salary of £100,000 a year, and the council still has not cleared up the mystery of whether he will receive his pension at the same time. This is what really hurts people-when unemployment is rising, energy prices are soaring, those travelling to work face an average 8 per cent increase in their fares, supermarket prices are increasing, and the Government fail to act. Yet others are completely immune from pain, or at least from the fairness that the Government said they were so keen on.

It does not have to be like this. My noble friend Lord Knight read out to your Lordships' House the five-point plan proposed by the shadow Chancellor. The Government are cutting too far, too fast and too deep. They are cutting jobs and choking off economic growth. That is the choice the Government have made; but it is the wrong choice. It is not just bad politics-it is bad economics, because it is hurting people and the economy. This includes people such as Caroline O'Brien to whom my noble friend Lord Knight referred; Shirley the carer to whom my noble friend Lady Pitkeathley referred; and it includes my noble friend Lord Stevenson's charity that is helping people with debt.

The Government need to start thinking about such people as individuals and take action that will support them and their families-and the economy. I urge the Minister to take on board the comments that have been made today.

4.16 pm

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, I am grateful to the noble Lord, Lord Knight of Weymouth, for initiating this debate on an important topic and for all the contributions that have been made.

As your Lordships are aware, and as we have been reminded, we are living through a period of real international uncertainty and instability. The eurozone, as we heard earlier, has been and is at the epicentre of this crisis, but the volatility has reached right around the world-to the US and China, and of course here in the UK. We are not immune from what is going on in our largest export markets. That instability acts as a powerful drag on what was already a difficult recovery from the deepest debt-fuelled recession in living memory.

It is right when we face such difficulties to ask ourselves: are we doing enough to support families; are we doing enough to protect the budgets of the poorest families; are we doing enough to provide opportunities for the youngest in our society; are we doing enough to support working parents; and, most importantly, are we doing enough to put the economy back on track to provide the opportunities, jobs and

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growth that we all need? When we came into government we inherited the deepest recession since the war and the largest budget deficit in our modern history. The adjective that the noble Baroness, Lady Pitkeathley, used was "dire". I agree. It was absolutely vital that we tackled that deficit. High deficits lead merely to higher inflation, taxes and interest rates. Cutting the deficit is a vital precondition to growth and prosperity. I am grateful to my noble friend Lord Stoneham of Droxford for underlining this point.

As we have seen over the past year, UK gilt yields and interest rates generally have fallen dramatically in response to the tough choices that we made in our spending review. Low interest rates help businesses to refinance debt and help families to stay in their homes. Of course the noble Lord, Lord Stevenson of Balmacara, was quite right to remind us that even in this time of low interest rates, debt is a very real problem for many in our society. Even a 1 per cent increase in interest rates would take £10 billion out of the pockets of families through higher mortgage payments. I therefore applaud the debt advice provided by a wide range of private and not-for-profit organisations. It is important that consumers know that many free and high-quality sources of help and advice are available from publicly supported projects and the voluntary sector.

Perhaps I may add a comment on one aspect to which the noble Lord, Lord Stevenson, drew attention-graduate debt-because I do not entirely share his analysis. Under the new system, all graduates will pay less per month than under the old system and they will have a longer repayment term of up to 30 years compared to the current 25 years. It is important to remember that.

Generally, on the deficit and interests rates, it is by getting ahead of the curve, by consolidating on our own terms, that we have avoided the uncertainty and the instability that have cut through other countries and plunged families in other parts of Europe into even more austerity and difficulty. More than that, in our spending review, we took the decisions to tackle the deficit in a proportionate, responsible, but also a fair, way. Therefore, I completely reject the charges coming from the noble Lord, Lord Knight of Weymouth, and the noble Baroness, Lady Smith of Basildon. Indeed, we are all in this together and it is critical that those who can, pay most. That is why we have tackled the deficit in the way we have.

The first transparent analysis of the distributional effects of our budget and spending measures-something never produced by previous Governments-shows that after combining the impact of tax, tax credit and benefit, and public service spending changes announced by this Government, the top 20 per cent of households will make the greatest contribution towards reducing the deficit as a percentage of their income and benefits in kind from public services. We take those distributional effects very seriously.

We are also taking more from the banks in our ongoing taxation of them than the previous Government did through their one-off tax on bonuses. In relation to VAT, I share the analysis of my noble friend Lord Stoneham of Droxford. I believe that what we did to reverse the previous Government's national insurance tax-a tax on jobs-is what really mattered in making

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the difficult choices about where to prioritise tax measures so as to get our economy going again. These are painful choices, but it was our partial reversal of that tax on jobs, which noble Lords opposite did not mention, that was key to getting the economy going again. We took particular care to reduce the impacts on family budgets.

In relation to fuel poverty and rising fuel prices-a very important subject raised by the noble Baroness, Lady Smith of Basildon, my noble friend Lord Stoneham and the noble Baroness, Lady Pitkeathley-we have to acknowledge first of all the reality of rising world oil prices. We cannot be insulated from that. But what has this Government's response been? We cancelled the previous Government's fuel duty escalator and cut fuel prices. We have taken action on fuel duty, which has resulted in average pump prices being about six pence a litre lower than if we had continued with the previous Government's fuel duty plans. A typical Ford Focus driver will be paying about £56 less this year than he or she otherwise would have been doing. We have introduced the fair fuel stabiliser so that when oil prices are high, and oil profits are higher, fuel duty will increase by inflation only. This will ensure that the burden of high oil prices is better shared between oil companies and motorists. I say again that energy price increases are never welcome for consumers and we recognise that. It is important that these are limited to the costs and risks borne and are not about energy companies making excessive profits.

That is why we strongly support Ofgem's work in ensuring competition in the energy industry, including the recent proposals stemming from the retail market review launched in November last year. That is why we are taking a range of other actions to increase people's control over-and help them reduce-their energy bills. We are setting up the Green Deal for energy efficiency and the supporting energy company obligations. We are rolling out smart meters that will enable consumers to manage their energy use better and introducing the warm house discount to provide cash rebates for around 2 million vulnerable households by 2014-15. So, yes, we share the concern but I reject the charge that we are not going about it in a sensitive and proportionate way.

Taking some of our other measures to help families, we have made significant above-indexation increases in the child tax credit for the next two years, increasing it by £255 and benefiting 2.4 million low to middle-income families. This will also ensure that modelled tax and welfare policy introduced by this Government will have no adverse impact on child poverty for the next two years. I say that directly to the noble Lord, Lord Knight of Weymouth. He shakes his head but, again, we now have the benefit of the introduction by this Government of the independent Office for Budget Responsibility so that we can no longer make up such claims; all these things have to be independently assessed.

We made changes to the personal allowances to provide support for hard-working families on low and middle incomes, and increased the rewards for work. The increases in the personal allowances announced at the 2010 and 2011 Budgets will benefit 25 million individuals in 2012-13 and take 1.1 million of the lowest-income tax payers out of tax altogether. Our aim

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is to ensure that no one earning less than £10,000 will be caught in the income tax net. My noble friend was completely right to draw attention to this policy.

Lord Knight of Weymouth: I am grateful to the noble Lord for giving way. I would not normally intervene but he mentioned the Office for Budget Responsibility. Would he support the OBR having to report on relative child poverty as part of its reporting?

Lord Sassoon: The OBR has a very clear and extremely wide remit. The previous Government had absolutely no check on any of their numbers. They could rewrite cycles or determine what path of growth they wanted to show. So I think we are now in a completely different world. Perhaps I may press on, because time is short.

We have reformed child benefit so that families with a higher-rate taxpayer are no longer eligible. Low and middle-income families are no longer being taxed to pay for child benefit for the rich. That, again, is another aspect of fairness. Of course, noble Lords have mentioned the important triple lock on pensions that we have introduced.

Finally in this area, this month my right honourable friend the Chancellor announced a freeze on council tax bills. Therefore, there will be a council tax freeze for a second year and that will provide real help for households in difficult times. Of course, in the spending review there were still difficult decisions to make on what to cut, but the previous Government's welfare spending was both unsustainable and unsuccessful.

Tackling poverty is not about moving families and children above some arbitrary line. It is not reduced by throwing good money after bad. This Government are taking a long-term strategic view to tackling poverty, which is about more than just welfare transfers; it is a strategy focused on transforming people's lives and the lives of future generations. I am grateful to the noble Baroness, Lady Pitkeathley, for reducing these almost abstract concepts to some really vivid case studies. I say to noble Lords that it is to that end, and it is in recognition of these very difficult situations, that we are increasing expenditure on public services where they can tackle the root causes of disadvantage. That is why we will introduce the fairness premium, refocus Sure Start and improve education. That will help to break cycles of disadvantage. The new fairness premium is worth £7.2 billion over the spending review period and will provide support to the poorest families in the UK. It will extend 15 hours a week of early years education and care from 2012-13 to all disadvantaged two year-olds; it will maintain Sure Start in cash terms, including new investment in Sure Start health visitors; it will introduce a substantial schools premium, rising to £2.5 billion by 2014-15, to support the educational development of disadvantaged pupils; and it will protect those on the lowest incomes in higher education through a scholarship fund of £150 million by 2014-15.

We are also reforming welfare to ensure that welfare payments are targeted at those who need them most and we are reforming tax credits to focus them on those who need them most. That means reducing the

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rate at which tax credits are withdrawn, while reducing the threshold at which they are paid. Importantly, we want to ensure that those who can move into work have a real incentive to do so. Currently some 800,000 individuals, including around a quarter of a million children, live in households where no one has ever worked. That has to be changed and it will be changed through the new universal credit being introduced over two Parliaments. To support working parents, the Government have agreed the extension of support with childcare costs to those working less than 16 hours, as part of the new universal credit, which will enable the transition of second earners, typically women, into the labour market.

In conclusion, this Government fully understand the difficulties that families face in the current economic environment. The biggest thing that we can do as a Government to help families is to return the economy to sustainable growth: private sector growth through innovation, enterprise and export-sustainable, not debt-fuelled growth-that delivers the stability and jobs that we need across the country. That is our overriding priority. Tackling the deficit is the precondition to realising that ambition. The recovery will be difficult, but we will not let the poor and vulnerable bear the brunt of these difficult times. We are committed to helping families, young people and jobseekers realise their ambitions and fulfil their proposals. I am grateful to the noble Lord for introducing this debate.

4.31 pm

Lord Knight of Weymouth: That is all right, then. The view from the Treasury is that everything is just fine. To too many families up and down the country, who are really struggling with their budgets, I am afraid that that will sound complacent and out of touch because, quite simply, the Government's economic policy is not working for them.

We have had a really interesting debate and I am sure that we shall return to this subject. I am grateful to the noble Lord, Lord Stoneham of Droxford, not only for his kind comments about me, but also for being confident and brave enough to take on responsibility for the economic policy on his party's behalf, the Liberal Democrats, as well as the Conservatives. I am grateful to my noble friends Lord Stevenson of Balmacara and Lady Pitkeathley for making very important speeches. What my noble friend Lord Stevenson said about the legacy of personal debt is something that we should keep in mind when we return to this subject. My noble friend Lady Pitkeathley's two poignant stories told the stories of so many more people who are now struggling to cope. I am obviously grateful to my noble friend Lady Smith of Basildon for the detail that she gave us about the impact of the high cost of energy now.

The Minister started off his comments by saying that it is difficult but that external forces are responsible for making the recession more drawn out and more painful. If he is going to pray in aid external forces now for why his Government's economic policies are not working, he cannot talk any more about the legacy that they inherited and the economic mess because that was down to the external forces of the global financial crisis. I shall come to a truce with him: I will not bang on at him about how he has got it all wrong,

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how everything that is going on with the economy of this country is all the Government's fault and I will admit that there are some external forces if he, too, will stop going on about how it is all the horrible inheritance from the Labour Government because that was all down to the global financial crisis. Before that hit, our level of debt in this country was the second lowest of any of the leading industrialised nations in the world.

We shall return to this subject, but it has been a good debate. I beg leave to withdraw my Motion.

Motion withdrawn.

Middle East: Water

Question for Short Debate

4.34 pm

Asked By Lord Alderdice

Lord Alderdice: My Lords, first, I declare my interests as in the Register of Lords' Interests. I am president of ARTIS (Europe) Ltd, which is a research and risk analysis company that takes some interest in the affairs of the Middle East and further afield. I have a number of non-remunerative interests in the Gulf policy forum, International Dialogue Initiative, World Federation of Scientists, Conflicts Forum, and Oxford Research Group. Of course, as I think noble Lords are aware, my real interests in this issue, this area and this subject go back a good deal further than any of my involvements in the organisations that I have mentioned and come from my experience in my part of the world, where I became aware that groups of people can be set against each other not because anybody wants conflict or its terrible results, but because they find themselves trapped in it.

I am particularly honoured not only that a number of noble Lords who share those interests are participating in this debate but, in particular, that the noble Lord, Lord Williams of Baglan, has chosen this debate for his maiden speech. He is an extremely distinguished diplomat, but I was privileged to come to know him through his involvement as UN special representative and then UK special representative in the Middle East. In conversations with him, I have found him thoughtful, enlightening, instructive, supportive and encouraging. It is a great delight to me to see him on the red Benches of your Lordships' House because I have no doubt that he will bring a very distinctive style and an extraordinary and distinguished experience to the corpus of knowledge and understanding in your Lordships' House.

Even before meeting the noble Lord, Lord Williams, I found myself very much involved in trying to find ways in which it was possible to encourage or facilitate people in the Middle East, not just in Israel and Palestine, although that is an important part of the area, but in other places, to see if any of the experiences

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that we had in the United Kingdom and more broadly might be helpful to them in finding a way out of the problem. Initially, I found myself doing what I had found extremely difficult to do at home, which was to engage with people who I not only disagreed with deeply but who were prepared to use or to threaten to use violence. I found that although it was possible for me to do that, many others simply found it beyond what was possible for them to consider, at least at that juncture, although my experience is that eventually it is necessary in most cases, but not all, to engage with those who cause the violence if you want to bring the violence to an end.

I then began to look at what had been necessary to create the context where we could address the issues between the British and Irish Governments and within the Province of Northern Ireland. The truth was that we probably would never have been able to do it if there had not been a wider framework in which that was possible: in particular, the European Union, and the good relations of both our countries with the United States. Some noble Lords will remember that some years ago I introduced a debate in your Lordships' House on the development of an inclusive, semi-permanent conference on the Middle East, the creation of a table where people from different countries with very different prospects could meet and engage with each other, as we have done in the European Union. Despite all the current financial and economic difficulties, we must not forget that we have now had two and more generations of peace in western Europe. I sometimes think we forget about that when we get so involved in the economic questions. Fundamentally, the European Union is an instrument of peace and conflict resolution much more than it is a matter of economics, which is the instrument, not the purpose.

I found that even as we tried to press this question there seemed to be a lack of urgency, so I went back to my colleagues in the Strategic Foresight Group, which is based in Mumbai, who had helped to put together that report on the inclusive semi-permanent conference for the Middle East and encouraged them, along with some other friends from the Middle East and the United States, to produce a report on the cost of the conflict, which is many trillions of dollars over a number of years. I rather hoped that when people saw the enormous cost, not just to people in the region, but to all of us, perhaps it might encourage them to address these questions. But while we think that economics is the dominant factor, I am afraid that the truth is that there are some things that are even more important for us as human beings, and we sometimes engage in activities that are to our massive economic detriment because there are other values that drive us.

I went back to my colleagues in the Strategic Foresight Group to think about whether there were things that we were missing or that we did not understand and were necessary. As we looked back at the European Union, whose development has been of such importance, as I have said, we were struck by the way in which, after the Second World War, the matters chosen for co-operation-coal and steel-were the very materials used to create the weapons of war and were based in the very areas that had been matters of dispute. We began to ask whether there are similar commodities in

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that region that could be or could become the cause of conflict, but which, if handled in a different way, could become the mechanism for co-operation, because they are shared requirements and shared needs. In the Middle East, the issues are not coal and steel, but water, energy and the environment. These things transcend borders in any case, but in a region like the Middle East many borders were simply straight lines drawn on a map with little cognisance given to social questions of tribe or community, to geographical and economic geographical questions, or to rivers and mountains and other kinds of naturally bounded communities. Things like water, energy and the environment transcend all our borders, especially in the Middle East.

Through colleagues in the World Federation of Scientists and a number of other such specialist groups, we began to look at water in particular. We thought that, if it is possible for people to understand that we need to engage with these issues as human communities and that we can learn a great deal from each other, perhaps with that engagement on human, social, economic and scientific projects, separate from the apparently almost insoluble political questions, we can build relationships between the countries that will enable us to address these other questions, as has been the case in our own part of Europe.

Our friends in the Strategic Foresight Group put together a report, which some noble Lords will have read while others will have read a précis of it. But noble Lords will clearly see that a thorough, thoughtful and deep piece of work has been done on many of the technical and scientific questions that must be addressed. But that, in a way, is simply to show that these are serious issues which need exploration. In practice, when we have gone to these countries and Governments, and have been able to bring many of them together in conferences in Turkey, Switzerland and elsewhere, it has been clear that there are opportunities to co-operate.

Noble Lords will not be surprised to know that we very quickly ran into the problem that most countries in the region simply would not sit down with the Israeli Government. We tried various ways to facilitate that but we came to the conclusion that for the present that is not possible, which is a dreadful pity. The Israeli Government and the Israeli scientific community have been remarkable in the developments of technology that they have been able to make in their region. Their capacity for recycling water, for example, and for using it is way ahead of any other country in the world. There are so many things that they could give-and in terms of the availability of water, a country like Turkey has so much to give. But it simply proved to be impossible to get them together at this stage.

Therefore, we tried to bring together those countries in the north-Turkey, Syria, Lebanon, Iraq and Jordan-and to bring Israelis together with Palestinians and, indeed, with Jordanians. There has been some progress and there is an interest in moving forward on these issues. Of course, it is true that with the advent of the Arab spring, profound uncertainty has been thrown over all of this. In particular, it is impossible to do any work with Syria and the Syrian Government at the moment. One might well say, "Surely, that just throws the whole thing to the side". I do not believe that for

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two reasons. First, the proposition that we tried to create institutions that enabled governments to co-operate on issues like water is not something for this week, next month or even the next year or two. We did not develop the European Union over a year or two but over many decades. This approach requires decades of overcoming hurdles and working together. The second thing is that if we do not have positive outcomes and directions for the Arab spring, then what may have started as an exciting prospect for the region could turn out to be much more disappointing and difficult.

I am grateful to the House for the opportunity to raise this question and I hope that the Minister may at least be able to indicate Her Majesty's Government's preparedness to address this issue. We are not looking for money from the Department for International Development but for diplomatic encouragement through the Foreign Office to our diplomats in the region.

4.45 pm

Lord Palmer of Childs Hill: My Lords, I thank my noble friend Lord Alderdice for putting down this subject for debate in your Lordships' House. I also thank him for inviting me to a seminar earlier this year where I heard detailed speeches about the report to which he refers. It made me thirst to find out more about water. We must remember, as he has said, that there are other examples such as the European Coal and Steel Community, which was a six-nation international organisation. That brought people together in what were difficult times. Whatever one's views on the European Union-this week there have been a lot of views on the European Union-it must be said that linking economies together has resulted in western European peace for over 60 years.

So can the same be achieved by a regional sharing of water? I believe it can. The problem is that there is not enough natural water to go round. Water or lack of it could be tomorrow's conflict in many arid regions-Turkey/Syria, Turkey/Iran and Egypt/Sudan to name several. The region described as the "southern circle" in the tome to which my noble friend Lord Alderdice refers shows how co-operation in this field can be made even without formal peace and has been shown for decades between Israel and Jordan. I take a certain amount of pessimism from his comment about people not being able to sit down, but Israel and Jordan have been sitting down quietly on this issue. I believe the way forward is shown by water technology in Israel, as he referred to. Israel is a leading producer of alternative, marginal water-essentially, desalination and waste-water treatment. This will in the next 10 years make up 50 per cent of Israel's total water supply. Ninety-two per cent of Israel's waste water was treated and about 75 per cent of that is used in agriculture. Other technologies include three large desalination plants. Within 10 years 23 per cent of potable water in Israel will be from desalination. Of course, the water of choice is freshwater and recharge from rainfall.

In the Palestinian territories in the West Bank, waste-water treatment is sadly poor and there is no production of desalinated water. They have obviously had other problems which have been given priority. There are some desalination plants in Gaza but there

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is a great need for more. With Gaza's geographical position on the coast, there is a huge potential for more desalination. As the Arab spring, referred to by my noble friend Lord Alderdice, moves into the autumn, it is bound to struggle. When economies suffer terribly and agriculture is sadly devastated because of water shortage and desertification, co-operation needs to be built as soon as possible. Know-how on water treatment, sophisticated desert agriculture and the fight against desertification exists in the region in centres of excellence. I hope the EU, including the UK, will push forward with cross-border co-operation in these areas without waiting for slow political processes or listening to extremists in any country who flourish when conditions deteriorate. Co-operation in these areas is vital and might create better grounds and confidence that will accelerate political solutions.

I welcome The Blue Peace report on which this debate is based. There is, however, a view in the region that existing co-operation on water resources in what is called the southern circle in the book-that is, Israel, Jordan and the Palestinian territories-is already more advanced than the proposals in the report. Things move fairly quickly but there is always room for improvement. As an example of this, an expert on regional water co-operation at the Israel Ministry of Foreign Affairs was this week in Oman at the biannual meeting of the organisation for regional co-operation in water, the Middle East Desalination Research Center. The organisation is located in Muscat in Oman, and its members are, amazingly, Oman, Qatar, USA, the Netherlands, Japan, South Korea, Spain, Israel, Jordan and the Palestinian Authority.

Next week, Israel is planning to hold a course on desalination in Israel for Palestinians and Jordanians. Next week, too, the biannual meeting of another regional organisation for co-operation on water, EXACT, will take place in Jerusalem. At the same time, a new trilateral project between Israel, Jordan and the Palestinians, managed and sponsored by the USA and Norway, will be launched to deal with monitoring polluted ground water.

There is already impressive dialogue and co-operation on water issues between Israel and its neighbours in the region. This far exceeds regional co-operation in other areas and, amazingly, has managed to survive the problems that have beset the peace process.

Regional co-operation and dialogue on water issues began as long ago as 1992 as one of the five working groups established at the Madrid summit in 1991. The five areas covered were, as your Lordships will remember, water, environment, refugees, regional economic development and security. Water is the only main activity that has survived from the five groups and it remains active. Matters have moved on from the position in the Blue Peace paper.

The idea proposed in the Blue Peace paper to import water from Turkey is currently off the table for Israel as well for the Palestinian Authority, first of all for economic reasons. Even if Israel were to change its mind, it would need the water only for the next two years before it completed its national desalination project in 2013-14. The Palestinians do not have the

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facilities to absorb and distribute this water, even if Turkey were to provide it for free, although that may be a pessimistic viewpoint.

The paper suggests that the RSDSC-the Red Sea-Dead Sea Canal-is a long-term project, but the feasibility study is, I am pleased to say, in its final stage. By way of a subproject of the Red Sea-Dead Sea Canal, the general intention of the three beneficiaries, Israel, Jordan, and the Palestinians, is to build a desalination plant in Aqaba to create additional water for all three parties in the short term.

Co-operation on water between Israel and Jordan has improved in the past two years. During that period, because of the drought in the region and common work on the feasibility study for the Red Sea-Dead Sea Canal, new ideas were exchanged and things have moved forward, and there is an element of optimism. With the Palestinians, relations are more complex-perhaps I should not go into them in detail.

Israel implements its commitments on water provision. However, it is true that not everything goes smoothly and none of the Governments in the area is perfect. But generally, if one takes into account the multilateral regional co-operation, it can be said that the water situation is in some ways the opposite of the political situation in the region.

Water co-operation can help to build confidence between rival parties. No doubt this can be a good model for other areas of co-operation, but it cannot be a substitute for other tracks of the peace process.

We have a conundrum: can water bring peace, or does peace bring water? I am not sure, but what I am sure of is that I compliment my noble friend Lord Alderdice on bringing this debate to the House, on the expert way in which he has presented the paper, and on the background briefing that he has given to people such as me to make us more enthusiastic about water as a means to peace.

4.54 pm

Lord Williams of Baglan: My Lords, I begin by thanking your Lordships for the warm welcome that I have received from all sides of this House. Noble Lords may recall that I was introduced on 18 October last year, but took a leave of absence from the House to continue my assignment as UN under-secretary- general for the Middle East for 12 months. I take this opportunity, therefore, to apologise to your Lordships for the delay in my maiden speech.

There are many Welsh men and women in this House, and two bear the name of the town in which I was brought up-Aberavon, or Port Talbot, in English. Indeed, as a child, I remember my noble and learned friend Lord Morris and the noble and learned Lord, Lord Howe, fighting the general election of 1959 for a seat in the other place.

I have spent nearly my whole career in international affairs. It has often taken me overseas for extended periods, to Indonesia, Bosnia, Cambodia and Lebanon. I have worked as an academic, as well as for Amnesty International, the BBC World Service, the Foreign and Commonwealth Office and the United Nations.

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In my UN career I had the privilege-not always a pleasure-of addressing the Security Council on several occasions, usually on the Middle East. I find it somewhat daunting now to address your Lordships' House in this important debate initiated by the noble Lord, Lord Alderdice. He has shown a strong interest in the Middle East over many years, and I commend his attention to an area that remains critical to world peace. I also thank him for his very kind remarks about our previous meetings and my experience in the region.

I have spent the last six years working almost exclusively on the Middle East, the past three based in the region. In particular, I was entrusted by Secretary-General Kofi Annan, and then by his successor, Ban Ki-Moon, to secure the cessation of hostilities established by Security Council Resolution 1701 following the 2006 war between Israel and Lebanon. That resolution has worked remarkably well in securing stability, and there have been no major incidents between the two countries over the past five years. The people of Lebanon have been spared the many Israeli incursions that marked the quarter of a century between 1982 and 2006. For their part, the people of Israel, as former Prime Minister Ehud Olmert remarked to me, have been spared the many Hezbollah rocket attacks and raids that marked the years before 2006.

However, it has not been possible to move forward to a formal ceasefire, let alone a peace treaty. To some extent, the intransigence of both parties is at fault. In particular, there are Israel's daily violations of Lebanese airspace and continued occupation of a Lebanese village. On the Lebanese side, there is the presence of perhaps the world's most strongly armed non-state actor, Hezbollah, an organisation with a formidable constituency among Lebanon's Shia community. On the one hand, Hezbollah presents itself as a party that contests Lebanon's democratic elections and, on the other, it maintains a powerful militia outside the authority of the Lebanese state.

The failure to secure a Lebanese-Israeli peace, despite the fact that the two countries were until recently the only democracies in the Middle East, has been maintained by other factors. One has been the role of President Assad's Syria casting its dark shadow over Lebanon and facilitating Hezbollah's rearmament by an Iranian leadership that denies the very right of Israel to exist. Finally, the absence of progress in the peace process between Israel and the Palestinians inevitably freezes the prospects of peace between Lebanon and Israel and between Israel and Syria.

The immediate prospects for peace appear bleak. Frustration among the Palestinian leaders has led to their bid for statehood at the UN. That frustration has been intensified by the Palestinian sense that the efforts of President Mahmoud Abbas and Prime Minister Salam Fayyad to ensure security in the West Bank have not been met by an adequate response from the Israeli Government. In recent years, I have seldom met an Israeli general or security chief who has not attested to the genuine endeavours of the Palestinian leadership in this regard. Israel has offered talks, but with the continuation of extensive settlement activity in the West Bank and east Jerusalem and with far-reaching security demands regarding the Jordan Valley.

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It is striking and ironic that the impasse over the Middle East peace process, the most serious since the Oslo agreements of 1993, has coincided with the unprecedented wave of political revival in the Arab world epitomised in the last week alone by the elections in Tunisia on Sunday and the demise of Muammar Gaddafi. Israel has not been alone in failing to comprehend the strategic significance of the Arab spring. The era of one-man rule and of authoritarianism is drawing to a close in the Arab world as it did earlier in eastern Europe and other regions of the world. We must brace ourselves for further political tumult in the region, some of which may not be to our liking.

In the Middle East, differences between states are too often seen through the prism of the Arab-Israeli conflict. The issue of water raised by the noble Lord, Lord Alderdice, is one such. Palestinians believe strongly and with some justification that their water resources have been taken advantage of by settlers in the West Bank. One often hears that argument, with less justification, in Lebanon and other Arab countries. It often fails to recognise the fact that while Israel goes to great lengths to preserve its water supplies, Lebanon's infrastructure, for example, is woefully inadequate in this regard.

In recent years, new sources of tension have arisen, aside from the issue of water that the noble Lord, Lord Alderdice, has drawn to our attention. I think particularly of the development of maritime resources and, above all, gas. Israel is well advanced now in the exploitation of natural gas in the offshore blocks that abut its coast. Cyprus and Lebanon are taking the necessary steps in this regard and Turkey has recently signalled its intent to embark on exploitation of maritime resources in the eastern Mediterranean. I hope that these resources can be seen as a source of opportunity and work for all the countries and peoples of the region but, in a region where maritime borders and boundaries are barely defined, I am concerned about the potential that exists now for further sources of conflict between its countries.

In closing, I wish to record my indebtedness to my sponsors, my noble friend Lord Dubs, and my former UN colleague and noble friend Lord Malloch-Brown. I also register my gratitude to the staff of this House, without whose advice a new Member would not find his way around.

5.03 pm

Baroness Falkner of Margravine: My Lords, it is a particular pleasure to follow the speech of the noble Lord, Lord Williams of Baglan. He and I share many similar interests. He read international relations a few years before I did, but he put it to far better use through a long and distinguished career in academia, the Foreign and Commonwealth Office, the United Nations and think tanks. Looking at his background, I was struck that our House, too, is becoming a refuge for that elite band of political fixers, the special advisers. The noble Lord was a special adviser to the late Robin Cook and to Jack Straw, Foreign Secretaries who in their time were certainly in the hot seat.

The noble Lord also brings a wealth of knowledge on the Middle East, as we just witnessed in his maiden speech. He will be pleased to know that a singular

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feature of this House is its expertise and strength in numbers of Peers who speak on foreign affairs. No matter how esoteric a subject, he will always find friends here to share his concerns and we look forward to his active participation in this House.

I turn now to the substantive debate, for which I am very grateful to my noble friend Lord Alderdice for initiating. It is seldom that one sees an initiative on peace in the Middle East without the presence of my noble friend somewhere in the frame.

Water was always a source of conflict, but what has changed in recent years is that it is being seen much more clearly in that light. It is therefore appropriate that the Strategic Foresight Group has gone to the heart of the region which is most conflict prone-the Middle East-to look at this aspect of what constitutes an impediment to peace and prosperity.

Prosperity in the region, and the role of water in providing for this, is the key to future development for the millions who live there. The pressures of demography, the requirements of agriculture and food security, jobs and livelihoods, sanitation and health and the natural environment are all dependent on adequate supplies of usable water. The politics of water is therefore closely linked to the politics of sovereign statehood. It is seen as an essential element of territorial integrity, but one which is increasingly beyond the control of a single state, if it ever was.

One factor that is gaining recognition in the debates over water security is the advent of climate change. As is now widely recognised, continuing climate change will exacerbate the water crisis in arid regions of the Middle East. Given that average global temperatures are likely to rise by 2 degrees Celsius during the 21st century, Middle Eastern countries are inevitably faced with a worsening water crisis.

This report builds on a successful record of transboundary water co-operation, which can be drawn on as models to go forward. In 1963 the European countries along the Rhine river signed up to the International Commission for the Protection of the Rhine against Pollution. This helped to institutionalise co-operation between Germany, Switzerland, France and the Netherlands, and led to a dramatic decline in pollution. In 1972, the United States and Canada signed the Great Lakes agreement to protect the Great Lakes from pollution. This, too, significantly improved water quality in a heavily industrialised area.

The single distinguishing factor in those successful examples was that those countries already had good relations between each other. There was little fear of conflict and all had an economic interest in improving quality rather than disputing quantity. The main problem with water in the Middle East is scarcity. The competition for scarce water promotes a zero-sum mentality and can lead to greater tension.

Pollution issues, by contrast, are more amenable for resolution in a co-operative manner, as they can give rise to positive-sum co-operation. In the case of the Middle East, as we know, history has a long tail. The legacy of Ottoman rule still affects relations between Syria and Turkey. The more recent tensions in the Lebanese-Syrian relationship are being further aggravated by current events in Syria, and the Israel-Palestine

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dispute is one which has been already mentioned. The deteriorating relationship between Turkey and Israel also makes political co-operation in the region more challenging, as does Iraq's relationship with Turkey.

Let me turn to the most significant proposal in the report-that of taking a coalition of the willing, to establish mutually agreed circles of co-operation. A body comprising a political mechanism to define and take forward a common vision, to identify priorities, and to arrive at and implement decisions, would represent a major step forward. I like, too, the idea that the co-operation council would create protocols, devise guidelines and promote practical measures for joint projects. In reading the report I was struck by the singular lack of scientific consensus on how much water, and of what quality, was available as the sources flowed downstream. The lack of agreed data sets is bound to lead to conflicting versions of reality. This is further compounded by seasonal variations in rainfall and water surges across the region, which makes it impossible for one country to be able to realistically measure what has happened in another country without any co-operation on the ground.

It is also right that the envisaged activities of the council focus on issues that are less politicised and require relatively low levels of international co-operation. Developing common principles, promoting research, setting up early warning systems and developing methodologies for water management are all sensible steps and can be achieved below the level of high politics. Streamlining the legal architecture within countries is far more doable than trying to get countries to sign up to fresh treaties from the outset.

The proposals are ambitious-rightly so, in my view-in calling for engagement at the level of heads of government and/or high representatives. Unless the political will is there to support and deliver the objectives of the co-operation council, there will be little advance in policy co-ordination.

What was nevertheless confusing in the proposals was the rejection of the council as a negotiating platform. It seems to me that it is sort of self-contradictory to define a body as being run by Governments to reach political decisions yet to deny that negotiations between the parties will take place, particularly where concessions are sought in the face of a perceived national interest.

However, I also take encouragement from the examples of co-operation in the report, using water as an instrument for peace. The 1993 formation of the executive action committee including Israel, Palestine and Jordan, to share information and keep a dialogue open regarding their shared water resources, points the way. The setting up of joint measurement stations on the Tigris and Euphrates rivers also moves us forward. The initiatives between Syria and Turkey in 2009 and 2010 also show promise by focusing on areas where agreement is within reach, rather than being bound down by the evident disagreement that already exists. However, with the political situation in Syria, as with all other politics I suspect that there is now little progress in building on those measures.

Turning to that other long-term conflict-that between Israel and Palestine-I welcome the proposals for confidence-building measures between Israel and the

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Palestinian Authority. What is urgently needed, however, are moves towards reconciliation between the Authority and Hamas to allow for the Palestinian people to be represented by a single Government. I was in Gaza in July and saw for myself the effects of water scarcity there which are so graphically described in this report. In fact, at the main water management station which we visited, the maps defining usable aquifers painted an even starker picture than that presented in the report.

Overall, the report gave us a wealth of ideas for managing the problem of water. Seeing how pressing the problems are, I was disappointed in its lack of development on the theme of demand management. We know that poor infrastructure, inadequate use of waste water, leaking pipes, agricultural misuse and household demand are all significant contributors to water waste. Lebanon, which is described as being in the middle of the spectrum of water scarcity, loses over 40 percent of its available water to leakage and poor transportation networks. We have the example of Jordan, which loses 35 per cent of its water to bad systems and old pipes, while in some parts Syria loses 60 per cent.

Many of the solutions to managing water can be found in domestic politics and can thus be adopted without waiting for international solutions. Developing a comprehensive water law, investing in drought and flood management and improving water use efficiency by households and businesses are all measures that can be undertaken here and now. I note that the report details Israeli expertise in this area and points to successful pilots in reusing waste water in the West Bank territories. I also know that the UK has expertise in all these areas. Can my noble friend the Minister tell us today whether the Department for International Development has resources that can provide assistance in this regard?

To conclude, the work of the Strategic Foresight Group has provided an excellent platform for anticipating a potential problem, looking at it comprehensively and arriving at pragmatic solutions which can be implemented in the short, medium and long terms. All that remains is to find the political will to implement it. The changes in the Arab world in the past year have provided both opportunities and threats. It is for the countries involved to see that doing nothing is no longer an option. If they are to safeguard the interests of all the people who live in the region, The Blue Peace's idea is one to build upon.

5.14 pm

Baroness Deech: Like others of your Lordships, I welcome and feel privileged to have been here for the maiden speech of the noble Lord, Lord Williams of Baglan. We can readily see that the House will benefit from his wide experience and I wish him a long and happy career here. I also congratulate the noble Lord, Lord Alderdice, and agree with all the encouraging words and actions that he has described, stemming from his own experience. I express an interest as a trustee of the Jewish National Fund, which invests inter alia in environmental projects in Israel.

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I welcome the fact that the international community is addressing in a constructive way, in the excellent report The Blue Peace, the issue of transforming water supply into a trigger for collaboration and peace in the Middle East. As I will show, there are some grounds for hope. Already, as a result of the peace treaty between Israel and Jordan in 1994, Israel provides Jordan with a significant contribution to Amman's water supply, plus a storage capacity, and in return Israel is allowed to pump groundwater from the Arava basin from wells in Jordan. Israel and Palestine have an active joint water committee that meets regularly and Israel supplies water to Gaza, although maintenance is another issue.

The entire region is beset by common problems; a growing population, a diminishing supply of water and elevated expectations coming with higher living standards. Syria is drought-hit, through climate change, manmade desertification and lack of irrigation. One has to think long-term, for the alliances and enmities in the Middle East may change. Alongside the massacres inflicted by Syria's Government on their own people, their mismanagement of agriculture and irrigation add to their woes. Israel can hardly be expected to reach a deal with Syria over Lake Kinneret while that country is in a state of uprising. Iraq accuses Syria, Iran and Turkey of practices that reduce the flow of water to the Tigris and Euphrates. The political instability of these countries exacerbates the environmental concerns. Turkey is unlikely to be a reliable partner in relation to the export of Turkish water to the Jordan Valley, a project which has been considered, because of Turkey's changing needs.

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