The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, with the leave of the House I shall now repeat a Statement made by my right honourable friend the Chancellor of the Exchequer in another place.
“Mr Speaker, people will be concerned about the turmoil in the world’s financial markets and what it means for economies here and across the globe. I want to use the opportunity of the recall of Parliament to update the House on what we are doing to protect Britain from the storm and to help lead a more effective international response to the fundamental causes of this instability.
As of this morning, after heavy losses yesterday, markets in Asia and Europe are calmer. But over the past month, the Dow Jones index has fallen by over 14 per cent, the French market is down 23 per cent and the Nikkei by 11 per cent. It is striking that the German market is down 24 per cent and even Chinese equities are down 20 per cent since November. Bank shares in all countries have been hit particularly hard, with French banks the latest in the firing line. Many sovereign bond markets, too, have been exceptionally volatile, with market rates for Italian and Spanish debt soaring before falling back in the last three days.
Sadly, Britain is not immune to these market movements. In the last month, the FTSE 100 is down by 16 per cent and British bank shares have also been hard hit. However, while our stock market has fallen like others, there has been one striking difference from many of our European neighbours. The market for our government bonds has benefitted from the global flight to safety. UK gilt yields have come down to around 2.5 per cent—the lowest interest rates in over 100 years. Earlier this week the UK’s credit default swap spread, or the price of insuring against a sovereign default, was lower than Germany’s. This is a huge vote of confidence in the credibility of British Government debt and a major source of stability for the British economy at a time of exceptional instability. It is a reminder of the reckless folly of those who said we were going too far too fast. We can all see now that their approach would have been too little too late, with disastrous consequences for Britain.
It is not hard to identify the recent events that have triggered the latest market falls. There has been the weak economic data from the US and the historic downgrade of that country’s credit rating. The crisis of confidence in the ability of eurozone countries to pay their debts has spread from the periphery to major economies such as Italy and Spain. But these events did not come out of the blue. They all have the same root cause—debt and, in particular, a massive overhang of debt from a decade-long boom when economic growth was based on unsustainable household borrowing, unrealistic house prices, dangerously high banking leverage and a failure of Governments to put their public finances in order. Unfortunately, the UK was perhaps the most eager participant in this boom, with the most indebted households, the biggest housing bubble, the most over-leveraged banks and the largest budget deficit of them all.
History teaches us that recovery from this sort of debt-driven, financial balance-sheet recession was always going to be choppy and difficult. We warned that that would be the case. But the whole world now realises that the huge overhang of debt means that the recovery will take longer and be harder than had been hoped. Markets are waking up to this fact. That is what makes this the most dangerous time for the global economy since 2008. I think we should be realistic about that. I think we should set our expectations accordingly.
As the Governor of the Bank of England said yesterday, and as the head of the Office for Budget Responsibility has also noted, the British economy is expected to continue to grow this year. Some 500,000 new private-sector jobs have been created in the past 12 months—the second highest rate of net job creation in the G7. But instability across the world and in our main export markets means that, in common with many other countries, expectations for this year’s growth have fallen.
This is what our response must be. First, we must continue to put our own house in order. I spoke again yesterday to Sir Mervyn King and I can confirm that the assessment of the Bank, the FSA and the Treasury is that British banks are sufficiently well capitalised and are holding enough liquidity to be able to cope with the current market turbulence. We have in place well developed and well rehearsed contingency plans. We must also continue to implement the fiscal consolidation plan that has brought stability to our bond markets.
I believe that events around the world completely vindicate the decisions of this coalition Government from the day they took office to get ahead of the curve and to deal with this country's record deficit. While other countries wrestled with paralysed political systems, our coalition Government united behind the swift and decisive action of in-year cuts and the emergency Budget. While other countries struggled to command confidence in their fiscal forecasts, we have created an internationally admired and independent Office for Budget Responsibility. These bold steps have made Britain that safe haven in the sovereign debt storm. Our market interest rates have fallen while other countries’ have soared, and the very same rating agency that downgraded the United States has taken Britain off the negative watch that we inherited and reaffirmed our triple-A status. This market credibility is not some abstract concept. It saves jobs and keeps families in their homes. Families are benefiting from the lowest-ever mortgage rates and companies are able to borrow and refinance at historically low rates thanks to the decisions we have taken. Let me make it clear not only to the House of Commons but to the whole world that ours is an absolutely unwavering commitment to fiscal responsibility and deficit reduction. Abandoning that commitment would plunge Britain into the financial whirlpool of a sovereign debt crisis at the cost of many thousands of jobs. We will not make that mistake.
The second thing we need to do is to continue to lead the international response in Europe and beyond. In the G7 statement agreed between finance Ministers and central bank governors this week, we said that we would take all necessary measures to support financial stability and growth. In the eurozone, there is now a growing acceptance of what the UK Government have been saying, first in private and now in public, for the last year—that they, too, need to get ahead of the curve. Individual countries must deal with their deficits, make their economies more competitive and strengthen their banking systems. Existing eurozone institutions need to do whatever is necessary to maintain stability, and I welcome the ECB interventions through its securities markets programme this week to do just that.
But this can only ever be a bridge to a permanent solution. I have said many times before that the eurozone countries need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration. Many people made exactly this argument more than a decade ago as a reason for staying out of the single currency—and thank God we did.
Solutions such as euro-bonds or other forms of guarantees now require serious consideration and they must be matched by much more effective economic governance in the eurozone to ensure that fiscal responsibility is hardwired into the system. The break-up of the euro would be economically disastrous, including for Britain, so we should accept the need for greater fiscal integration in the eurozone while ensuring that we are not part of it and that our own national interests are protected. That is the message that the Prime Minister has clearly communicated in his calls with Chancellor Merkel, President Sarkozy and others this week. I have done likewise with individual finance Ministers, in ECOFIN and in the G7 call at the weekend, and will do so again at the September ECOFIN and G7 meetings.
But this is a global, as well as a European, crisis. At this autumn’s meetings at the IMF and the G20, we need far greater progress on global imbalances. We need an international framework that allows creditor countries such as China to increase demand and debtor countries to make the difficult adjustments necessary to repay them. Everyone knows what needs to be done, but progress so far has been frustratingly slow, with lengthy disagreements on technical definitions, let alone on any concrete actions. The barriers are political not economic, so it is up to the world’s politicians to overcome them. There are no excuses left.
Finally, the UK, like the rest of the developed world, needs a new model of growth. Surely we have now learnt that growth cannot come from yet more debt and government spending. Those who spent the past year telling us to follow the American example with yet more fiscal stimulus need to answer this simple question: why has the US economy grown more slowly than the UK’s so far this year? More spending now, paid for by more government borrowing and higher debt, would lead directly to rising interest rates and falling international confidence that would kill off the recovery not support it. Instead, we have to work hard to have a private sector that competes, that invests, that exports. In today’s world, that is the only route to high-quality jobs and lasting prosperity.
In the developed countries, and especially in Europe, that means making the difficult structural reforms needed to restore competitiveness and improve the underlying performance of our economies. Internationally, we have the greatest stimulus of all sitting on the table in the form of the Doha round—a renewed commitment to free trade across the world—that should be taken up now. Here in Britain, The Plan for Growth has set out an ambitious path. Twenty-three of the measures in it have already been implemented and another 80 are being implemented now. On controversial issues, such as planning reform, we will overcome opposition that stands in the way of prosperity. On tax, we have already cut our corporation tax by 2p, with three more cuts to come over the next three years. In welfare and education reform, we will continue to pursue a radical reforming agenda.
There is much more we can do and much more that we must do if we are to create a new model of sustainable growth. All of us in the House must rise to that challenge in the months ahead and confront the vested interests. They are the forces of stagnation that stand in the way of growth. In these turbulent times for world markets, we will continue to lead the international response, redouble our efforts to remove the obstacles to growth and stick to our plan that has made Britain a safe haven in the global debt storm. I commend this Statement to the House.”
My Lords, that concludes the Statement.
Lord Sassoon
My Lords, I am grateful for the opening remarks made by the noble Lord, Lord Eatwell, but subsequently I heard little that I could recognise as a coherent alternative or even critique of the Government’s policies. On the one hand, the noble Lord talks about the austerity imposed by this Government, which seems to imply that he would like more spending; on the other hand he complains about the dangers of a rising deficit and the forecasts of a rising deficit.
The noble Lord says we should be spending more. Well, if we did not have to spend £120 million a day on debt interest we could be spending it on more police, schools, hospitals—you name it, we could have it. It is precisely because of the record debt, the largest deficit, that we inherited from the previous Government that we are in the bind that we are. That is the answer to his first question about why the UK growth performance has been so weak. We are struggling under the massive burden of debt that was inherited.
The noble Lord challenges the comparison that my right honourable friend made between the stronger performance of the UK economy in recent months compared with the US economy. I give him another statistic: in the UK we now have unemployment of 7.7 per cent, while in the US it is 9.2 per cent. Again, the idea we can somehow look at some mythical way of stimulating the economy to get us out of the bind that we are in is the stuff of dreams.
There were one or two things on which I agreed with the noble Lord, Lord Eatwell. We share an agreement that the eurozone needs to strengthen its institutions. As my right honourable friend the Chancellor said in his Statement, we would welcome the strengthening of the eurozone’s institutions to have real bite in the fiscal co-ordination that there needs to be. If strengthening the eurozone’s management of its fiscal affairs requires treaty changes among eurozone members, we will look sympathetically at that. But as my right honourable friend made clear, that is for the eurozone; the UK will be supportive of its efforts but we will not directly be part of them.
On growth, the noble Lord quoted various things from the Bank of England’s report. The critical thing in yesterday’s report—this is consistent with the Office for Budget Responsibility’s analysis—is that the Bank of England’s forecast for UK growth is 1.5 per cent this year and 2.1 per cent next year, rising to 2.6 per cent in the year after. Although the economic and market conditions are very difficult and fraught with danger, we must not forget that, provided we hold to our plan, provided we remain the safe haven that the UK has become, provided we continue to give our householders and holders of mortgages the benefits of very low interest rates and we continue to give businesses the ability to refinance their debt at those low interest rates, it is that that will underpin the confidence that business needs to invest and individuals need to spend their hard-earned money. That is the fundamental basis on which growth will come.
As my right honourable friend has said, we had a significant plan for growth six months ago. Within the past six months the Treasury has published a progress report to show how far we are getting, including tackling some of the most difficult issues such as the planning rules in this country. We will come forward with more growth-supporting measures this autumn, and that is what will enable this country to get out of the mess that we inherited from the previous Government.
Lord McNally
My Lords, I remind the House that we will now go to a 40-minute session that will follow the precedent of the previous Statement. There will be no immediate answers from the Front Bench but a response at the end. I suggest that we start with my noble friend Lord Oakeshott and then circulate as usual. Forty minutes, even for economists, should be okay.
Lord Cotter
My Lords, we all recognise the need for growth in the economy. The Statement repeated by the Minister today said that we have to work hard to have a private sector that competes, invests and exports. In the light of that and the need for growth, I refer to a report in the Financial Times today. It indicates there has been a flood of applications from other parts of the country for investment funds backed by the state available in the northern part of England. In some cases, it is one in 10 and in some cases, in Yorkshire, one-fifth. That flood of applications indicates strongly that small and medium-sized businesses are desperate for scarce loans and equity funding, which they cannot obtain because they do not come from that part of the country. Can the Government do more to help?
I ask once again, as did my colleagues and noble friends, Lord Oakeshott and Lady Kramer, whether the Government will take on board that that highlights the struggle that small businesses in particular are having to get funding from banks because of high prices, costs and tougher covenants. This is a nation of small businesses. We read the report in the FT today that there is a great demand and wish for funding but it does not seem to be available.
Lord McNally
My Lords, I withdraw entirely the snide remark I made about the long-windedness of economists. May I suggest that we hear from the Minister now?
Lord Sassoon
My Lords, I do not pretend to be an economist. I am sure that if I was sitting an exam paper now, I would fall well short of the mark that the noble Lord, Lord Eatwell, would get. The problem is that we do not live in a pure economics world. A lot of what we are struggling with now is where the world of economists meets the world of markets.
I am not sure where to start with the many interesting interventions that we have had. I go back to the question about the deficit reduction plan: there were some concerns about the size of the deficit rising and others expressed the opinion that we should be investing more and driving borrowing up. It is worth getting a little bit economicsy about this and remembering that there are things called automatic stabilisers, which mean that if the economy does not grow as fast as anticipated there will be additional payments in areas such as welfare, for example. It is worth remembering that the deficit goes up and down. Within the Chancellor's fiscal plans, more money gets pumped into the economy—crudely put—if growth is lower. We should always bear that in mind. There is no absolute rigorous number at which we shoot that does not vary as economic circumstances change.
On the point raised by my noble friend Lord Oakeshott and others about interest rates, of course low bond yields themselves are not a guarantee of growth. Germany has been mentioned, and I will come back to that. Yes, it would be great if we had a deficit as low as Germany and bond yields as low as it does, but the fact is that we have a deficit as high as Greece but interest rates as low as Germany. They are not in themselves a guarantee of growth, but if we divert from the basic course we could very well find ourselves with both a very high deficit and very high interest rates. In those circumstances, growth would be choked off very quickly. That is fundamentally why we have to stick to our plan. My noble friend also talked about tax cuts. To remind noble Lords, the coalition is set out on a track which is significantly raising, and already has raised, the starting level of tax for those at the bottom end of the income scale. That is an important part of the whole rebalancing of the tax and welfare package to get people back into work. Equally, at the other end, my right honourable friend the Chancellor has made it clear that, over the medium term, a top rate of tax of 50 per cent is not conducive to an economy growing consistently and driven by entrepreneurial activity.
My noble friend Lady O’Cathain reminded us of the very big picture and questioned the chances of getting agreement to action on the imbalances. She was right to say that it will be for the autumn meetings of the G7, the G8 and the G20 to make further progress on that. Although there has been considerable frustration about turning good words into action, the latest statements from Ministers are, let us say, modestly encouraging, but it requires a big push this autumn. My noble friend then moved from the very big picture to more micro matters, with the question of regulation and how difficult it is for businesses that want to grow. That is precisely why we have a moratorium on new regulation for micro businesses in the period up to 2014 and that new tests under the “one in, one out” rule are being applied to all new proposals for regulation from Ministers.
Lord Pearson of Rannoch
My Lords, what about the regulations that come from our friends in Brussels? The Government’s Answer to me recently said that a majority of all our business regulation comes from Brussels, and we can do nothing about it.
Lord Sassoon
If the noble Lord will be a little patient, I will get back to Europe in a moment.
It was nice to have confirmation from the noble Lord, Lord Radice, that we are all on the same side when it comes to wanting to strengthen the eurozone, even if he questions the motives of some of us in wanting to do so. It really is very important that this happens, and we should give it all our support.
On the other European matters raised by the noble Lord, Lord Pearson of Rannoch, his main questions were around the cost of this country’s contribution to Europe. He makes that contribution £25 million a day. I cannot calculate things that quickly, but the fundamental difference between that £25 million a day and the £120 million a day of debt interest that I referred to earlier is that the £25-million-a-day contribution to Europe buys us value for money. Of course we believe that Europe needs to get its budget in hand, that there needs to be much greater fiscal discipline in Brussels and that the proposals for a great expansion of the European budget are unacceptable. Nevertheless, we have to bring ourselves back to the main point that this country gets considerable value from its membership of the European Union, and that that is fundamental to making sure that we have good strong markets for our exports. Yes, there is a burden of regulation from Brussels, and we must make sure that Brussels starts to apply the disciplines that we are applying in this country before it brings forward yet more regulation.
A number of questions were asked by my noble friends Lady Kramer and Lord Cotter and the noble Lord, Lord Harrison, about access to various domestic and European funds. All I say as a general point is that I hear very loudly what is being said. The Government’s objective is to make sure that in direct lending by the banks and in other finance—the most reverend Primate reminded us that the banks are far from blameless in the situation that we are in, and my noble friend Lord Oakeshott and other noble Lords reminded us of the importance of the banks—there is a whole range of financing channels. We have the critical Merlin agreement and European funds such as the regional growth fund—
Lord Harrison
Would the noble Lord be kind enough to write to me on the regional growth fund and update the House on what has happened to it with regard to helping small businesses?
Lord Sassoon
I will take away the noble Lord’s question. Forgive me, but I cannot now remember when we are committed to making regular updates, and it may be that we should wait until the next regular update. I will see whether any more can be said, but maybe we should be patient. I understand that he would like a quiet bilateral discussion, but I cannot promise him early information. The important point that he and other noble Lords make is that we have to work very hard to ensure a suitable range of channels for access to both debt and equity finance.
Incidentally, on the other point made by the noble Lord, Lord Harrison, I was taken away from some European-related reading yesterday. I had just got to the chapter in Edward Heath’s biography on the first negotiations for our European entry, so I have a few years to go before I get to the latest report from your Lordships’ committee. If I am allowed to go back on holiday, I will get there as quickly as I can.
The most reverend Primate the Archbishop of York raised another critically important point, which was about inflation. Clearly, inflation makes an enormous difference to the spending ability of individuals and has a significant effect on the costs for businesses. As we have discussed in this House on many occasions recently, it is critical that the Monetary Policy Committee continues to have free rein and is not constrained by the Government in any way in meeting its mandate. I commend to the most reverend Primate the words of the Governor of the Bank of England in his latest report, issued this week, in which he acknowledges that inflation may go over 5 per cent in the short term but says that he expects inflation to moderate in the medium term and to come down to slightly below the target that the Chancellor has set of 2 per cent. As my noble friend Lord Oakeshott will know, in the context of that discussion the governor made some interesting remarks about the possibility of quantitative easing. No doubt when the MPC’s minutes next come out we will look to see what was discussed at its last meeting, but clearly this is a live topic.
My noble friend Lord Flight gave a perceptive analysis of the markets. I do not think that he asked me a question in that, but I agree with a lot of his analysis.
The noble Lord, Lord Lea of Crondall, raised questions about the UK and Germany and made reference to BMW. All that I would ask him is why BMW has announced in recent months a further massive investment, of hundreds of millions of pounds, in its car manufacturing in this country. I suggest that that is because the best of our manufacturing is at least as good as and in some cases significantly better than the best of manufacturing in Germany, fine manufacturing economy though it is. We have in this country—Mini exemplifies this absolutely—design skills that are second to none. If the noble Lord would like to fire off at me another Written Question or three, I will be happy to try to answer better next time his points on relative added value, but I do not think that we have anything to be ashamed of—far from it—in a comparison between the best of our industry and the best of German industry.
Lord Foulkes of Cumnock
My Lords, will the Minister try to answer the question—I know that it is a difficult one—that I asked about credit rating agencies, which was also raised by the noble Lord, Lord Oakeshott, and by my noble friend Lord Harrison? I know that the Minister has travelled a long way to answer the debate, but I have travelled a long way to ask just the one question, so I would appreciate an answer.
Lord Sassoon
I am happy to answer the question that the noble Lord, Lord Foulkes, asks. I do not believe that nationalised institutions of any kind, including nationalised credit rating agencies, are the best way to go. Europe and the international organisations are looking at the appropriate form of regulation for credit rating agencies. That is ongoing business and it is quite proper that it should be done. Others question whether the whole rating system should be completely liberalised and say that one should not have a small number of institutions running the show. I recognise that that is an important debate and both Europe and the G20 continue to look at the issue.
I am conscious that I should wind up. I just go back to some of the fundamental points that underlie the interesting debate that we have had this afternoon. Noble Lords are well aware that when the coalition Government came into office we inherited the UK’s largest ever peacetime deficit. Tackling that deficit has been and continues to be our number one priority. The recent events that we have been discussing this afternoon vindicate that approach. It is by securing Britain’s AAA rating and the very low bond yields that we now have that we underpin the prospects of recovery. As the Governor of the Bank of England highlighted yesterday, 500,000 UK jobs have been created by the private sector over the last year. We should not forget that.
We have always said that recovery will be choppy but both the bank and the Office for Budget Responsibility forecast growth to continue through this year and the next. The decisive action taken by the Government to deal with the nation’s debts and restore private sector growth has meant that the UK has been in a better position to withstand the very considerable global uncertainties. Abandoning our plans would be disastrous, resulting in rising interest rates, falling international confidence and undermining the recovery.