Economy: Monetary and Fiscal Policy

Tuesday 8th November 2011 Lords Chamber

Question

14:45

Tabled by

[Lord Barnett]

To ask Her Majesty's Government how they are co-ordinating monetary and fiscal policy in the current economic climate.

[Lord Peston]

My Lords, on behalf of my noble friend Lord Barnett, and at his request, I beg leave to ask the Question standing in his name on the Order Paper.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, the independent Monetary Policy Committee has operational responsibility for monetary policy. Fiscal policy is a competence of the Treasury. When making its monetary policy decisions, the MPC takes into account fiscal policy, among other factors, when judging the outlook for growth and inflation. A non-voting Treasury representative attends monthly MPC meetings and plays a key role in ensuring the appropriate co-ordination of fiscal and monetary policy. This includes, when appropriate, briefing the MPC on the Budget.

[Lord Peston]

I thank the Minister for that. Bearing in mind that the monetary policy of the Bank of England is failing in its statutory duty to hit the inflation target set by the Government and does not even seem to be trying, and that fiscal policy has got us nowhere near full employment or a sustainable rate of real growth, is it not the case that far from there being co-ordination of monetary and fiscal policy, what we see on the part of the Government is simply an utter shambles?

[Lord Sassoon]

My Lords, the Bank of England is completely sticking to its statutory responsibilities and to the letter setting out its monetary policy mandate. If the noble Lord, Lord Peston, would care to look at the latest commentaries in the Bank’s quarterly documents —he is nodding—he will see that they identify the risks to inflation on the undershooting rather than the overshooting side. They identify a number of factors that will reverse the trend in inflation early in 2012. That is why the Bank decided to recommend increased quantitative easing to the Treasury to ensure that there is no risk of an undershoot on the inflation target.

[Lord Newby]

My Lords, does the Minister agree with the recent report of the Treasury Select Committee that, in a time of economic crisis, the buck stops with the Treasury, and that it should therefore be able to direct the Bank in such circumstances?

[Lord Sassoon]

My Lords, it is completely the case that the Chancellor of the Exchequer sets the inflation target for the MPC. I am sure my noble friend is not suggesting that we should go back on the previous Government’s decision, which I applaud, to give the Bank of England independence in this area. Monetary policy should be the first line of defence in the face of economic shocks.

[Lord Myners]

My Lords, monetary policy should be the first line of defence against the ravages of inflation. I put it to the Minister that the Government's fiscal policy, draconian as it is, is forcing the Bank of England to adopt a highly accommodative monetary policy with a disregard for the inflationary consequences, as is evidenced in the Bank's quarterly report in its failure to achieve any of its inflationary objectives over the past five years.

[Lord Sassoon]

My Lords, I am sorry that the noble Lord, Lord Barnett, is not here, because we have not had anything from his quote book for quite a time. I offer the noble Lord, Lord Myners, this from another place on 23 November 1978, when the noble Lord, Lord Barnett, was asking for cross-party support on inflation. He said:

“I had hoped to have the support of the Opposition instead of the carping criticism that we receive constantly … We intend to make our counter-inflation policy work”.—[Official Report, Commons, 23/11/78; col. 1468.]

Well, as it was in 1978, it is now. We should let the Bank of England get on with it.

[Lord Forsyth of Drumlean]

My Lords, will my noble friend confirm that opinion polls show that a vast majority of voters believe that the deficit is the same as the debt? Can I suggest to him that, in order to get across the difficulties which the Government are facing because of the size of the debt, which is still growing, he should consider putting on the Treasury building a large screen that shows how the deficit is going up every day?

[Lord Sassoon]

The debt is going up. Far be it from me to criticise my noble friend, who quite rightly makes this point. If the deficit was running at the level that we inherited from the previous Government, of 11.1 per cent a year—the highest deficit level in our history—it would not take very many years before our debt got up to the level of the Italian and the Greek debt. That is why we will continue to keep our deficit policy on track and keep our interest rates low. I entirely agree with my noble friend that we must be reminded about the level of debt as well.

[Lord Eatwell]

My Lords, in his first Answer to my noble friend, the Minister said that the Monetary Policy Committee takes account of growth and inflation, but its statutory responsibility is to take account only of inflation. When did the Treasury change the policy?

[Lord Sassoon]

My Lords, I will let the noble Lord, Lord Eatwell, read the actual words in Hansard tomorrow. [Interruption.] No, I am not changing anything. The MPC has to take account of the prospects for growth and inflation when it is judging how to set the direction of monetary policy. Its target is an inflation target, but it needs to take account of a wealth of other factors when making its decision, so that is what it does.

[Lord Taverne]

My Lords, do the Government not agree that in the present circumstances a simultaneous policy by many countries of rigid deficit reduction and fiscal contraction carries the danger of leading to depression, which will not cure the deficit?

[Lord Sassoon]

My Lords, I certainly agree that different countries should be taking different tracks, depending on their particular deficit and debt positions. I can only quote the concluding statement of the IMF, in its recent assessment, that:

“The current policy mix of tight fiscal and loose monetary policy remains appropriate”.

[Lord Kinnock]

My Lords, the Bank of England is patently seeking to foster growth with its very low interest rates and record QE, but the Government are actually depressing growth to virtually zero with their policy of public expenditure cuts that are too far and too fast. Is it not patently obvious that there is absolutely no co-ordination in the national interest at all?

[Lord Sassoon]

My Lords, I know that it is not for me to ask the questions this afternoon, but I wonder how much more expenditure and deficit the noble Lord, Lord Kinnock, would advocate before we risk getting into interest rates that are at the level of France, let alone of Italy. Last night the UK had 2.3 per cent 10-year interest rates, and Italy had 6.6 per cent heading for 6.7 per cent. Which would the noble Lords opposite like? We will stick to our deficit reduction plan, because that is what keeps interest rates low, and that is what our households and our businesses need.

[Lord Howarth of Newport]

My Lords, if the Minister insists that there is no case for altering the configuration of monetary and fiscal policy, may I draw to his attention another suggestion? Will the Government respond positively and energetically to the proposal put forward by the Society of Pension Consultants that a proportion of the vast resources held under management by pension funds could safely and sensibly be mobilised to lift investment in infrastructure and, through appropriate provision for early access to pension lump sums, to lift personal spending?

[Lord Sassoon]

I certainly agree with the noble Lord that infrastructure is one of the themes and priorities of the forthcoming growth review. The Government are looking at encouraging anything that encourages a further source of investment into our infrastructure from pension funds and others, so I certainly take his suggestions on board.