Lord Deighton
That this House takes note of the United Kingdom economy and the Government’s role in promoting growth.
The Commercial Secretary to the Treasury (Lord Deighton)
My Lords, as a newcomer to your Lordships’ House, I feel an enormous responsibility in opening this debate on one of the most critical issues for our country: the challenges facing our economy. I value this opportunity to draw on the extensive experience of this Chamber.
The trauma caused by the global financial crisis and the ensuing recession required urgent action. This Government responded with a radical programme of reform, designed both to meet the immediate danger to our public finances and to raise the performance of our economy to ensure our competitiveness in a fast-changing, global environment. This programme has four key components and we are driving forward on each one of them. Let me briefly explain.
The first and principal building block upon which all other policies depend is the return to fiscal stability. In 2010, the UK’s budget deficit was forecast to be the biggest in the G20 and in our own peacetime history. This record deficit has been reduced by a quarter over the past two financial years, restoring market confidence in the UK and keeping interest rates lower for families and businesses. We have avoided the predicament of such large economies as Italy and Spain by gripping our deficit problem and securing financing rates close to those of Germany. This credibility has been hard won, but would be easy to lose.
Although recovery is taking longer than any of us would like, principally because of continuing problems in the eurozone, the economy is moving in the right direction. According to the IMF, our growth rates for both 2013 and 2014 are expected to exceed those of France and Germany. More than 1 million private sector jobs have been created since 2010—more than 1 million—with 2012 seeing the largest annual increase in jobs since 1989.
We cannot risk this restored confidence by compromising the disciplined management of our public finances. I anticipate many suggestions for where we may productively invest or spend. However, to retain credibility, as it is not possible to borrow our way out of a debt crisis, any extra spending has to be financed either by other spending cuts or by tax increases. As noble Lords will appreciate, we do not live in a world of easy choices. None the less, to mitigate the impact of the recession on ordinary families, the Government have prioritised reducing the income tax burden on 24 million people and cancelling the planned rise in fuel duty. The remaining three components of the Government’s programme are geared towards helping the economy to recover and grow within the framework of fiscal discipline.
The second component of this programme is monetary policy. The Bank of England has maintained a record low level of bank rate and has engaged in significant quantitative easing to stimulate nominal demand. This quantitative easing is estimated by the Bank of England itself to have had a positive impact in terms of reduced gilt yields, higher asset prices and a 1.5% to 2% rise in GDP. Last summer the Government and the Bank of England launched the Funding for Lending scheme, which aims to increase lending to businesses and households by reducing bank funding costs.
The third component involves reforms to our financial system. Many noble Lords present today will have seen the Financial Services Bill receive Royal Assent a few weeks ago. This legislation will strengthen the financial regulatory structure and establish a new system of focused financial services regulators. In addition, the forthcoming Banking Reform Bill will deliver structural measures to reform the banking system and promote stability and competition, including the complex issue of separating retail and investment banking functions. Our aim is to retain a vibrant finance sector, but one structured to avoid the systemic instability that caused the recent crisis.
I will concentrate my remaining remarks on the fourth and final component. That involves a comprehensive package of structural reforms aimed at rebalancing and strengthening the economy for the future, including an ambitious agenda of infrastructure investment. This is at the heart of my new responsibilities in government. These supply-side reforms will help British business compete in the global marketplace and will make Britain an even more attractive place to do business. The result will be to draw valuable foreign investment to the UK and drive our competitiveness forward.
Imperative to creating an attractive business environment is the tax landscape. The Government have cut the rate of corporation tax from 28% in 2010 to 21% from April 2014. This is the lowest rate in the G7—significantly lower than in France, Germany and the USA—and will act as a spur for job creation on these shores. Other tax reforms to encourage investment include increasing the annual investment allowance, which will enable firms to invest in new plants and machinery, while increased support through research and development tax credits and legislation for a patent box will give real financial incentives for innovation and creativity. In addition, £600 million has been allocated to the research councils and other projects to drive innovation and science.
Of course, while we want to promote a competitive tax environment for businesses, we must also ensure that multinational companies are paying the right amount of tax. This cannot be done in isolation; therefore we are working closely with the EU and the G20 to improve international tax transparency and identify gaps in the international tax standards.
For small businesses to grow, access to finance is essential. I have already mentioned the Funding for Lending Scheme, which facilitates more bank lending. We have also set up the Business Finance Partnership to improve non-bank lending channels, the Green Investment Bank to accelerate private sector investment in the green economy, and the business bank to bring together all the existing lending schemes under one roof. These are part of a whole array of incentives put in place to support entrepreneurs and small business.
To rebalance our economy, it is also crucial to develop our export markets aggressively and to support those companies with overseas opportunities. Up to £1.5 billion of loans will be made available through direct lending for the purchase of UK exports. In addition, the UKTI programme budget will be increased by £70 million per year, a measure that will help us to deliver services to more SME exporters and will refocus UKTI activities on the highest value opportunities and the key emerging markets. We are reinforcing the success that has recently led to our becoming Germany's chief trading partner and in 2012 setting a record for car manufacturing exports. Rebalancing our economy requires that we support growth in every corner of the UK. In line with the recommendations of my noble friend Lord Heseltine, we will be devolving more spending to local areas.
We are continuing our root and branch reform of the burdensome and costly planning system. We have already cut more than 1,000 pages of planning policy down to just 50. Under our better regulation agenda, we continue to cut red tape in many areas to protect business and society from unnecessary bureaucracy.
Developing our workforce through training and skills is critical to our current and future competitive success. Consequently, we have made sure that our higher education system gives better information about graduate employment prospects, and we have overseen nearly 1 million young people starting apprenticeships.
The final area that I want to address this afternoon, and a key priority, is our economic infrastructure. By modernising the UK’s transport, energy, water, waste and digital networks, we will create the right foundation on which businesses can compete and grow efficiently.
Total investment in infrastructure has increased from an average of £29 billion a year between 2005 and 2010, to £33 billion a year between 2010 and 2012. At the Autumn Statement, the Chancellor unveiled a further £5.5 billion of investment including £1.5 billion for our road network. This switch to capital expenditure was financed by reductions in current spending, consistent with our commitment to fiscal discipline.
My focus is on developing and delivering our national infrastructure plan. As I see it we need to do five things. First, we must get the right projects built that match our sector-by-sector strategy and ensure that these projects are mutually supportive. For example, the conception and delivery of our road and rail networks must be integrated.
Secondly—and I am really familiar with this—we need to build projects on time and on budget. This means that projects must be properly scoped, structured and resourced and rigorously overseen and managed. My Olympic experience over the past seven years has given me clear ideas about what is possible and about how to forge that critical collaboration between the public and private sectors.
Thirdly, we have to make sure that we deliver projects at the lowest possible cost. We are targeting savings of 15% against the current pipeline.
Fourthly, we must maximise the flow of private finance to avoid burdening the public purse, while still considering affordability in the long term for consumers. This may involve new government-sponsored programmes such as the up to £40 billion of infrastructure guarantees —the scheme that supports the Northern Line extension which has unlocked the huge development around Battersea Power Station or the recently re-launched PFI initiative; PF2 as it is now called. Alternatively, it requires us to ensure that the policy environment we create allows for sizeable private investment, which is the challenge that we are currently addressing in the energy sector, where a significant amount of this investment needs to take place.
In addition, the pension infrastructure platform has been established to consolidate the efforts of UK pension funds investing in infrastructure projects. The fifth and final point in this infrastructure plan is that we are conducting an infrastructure delivery review within Whitehall because we need to ensure we have the appropriate scale and range of skills in the Civil Service to deliver these major infrastructure projects.
To sum up, the UK is dealing with the consequences of the most severe economic crisis in our recent history. This is a global phenomenon and our room for manoeuvre is constrained. But, despite this challenging backdrop, I know that we can deliver growth. Our policies to stem the initial deficit crisis that would have otherwise devastated our country have worked. The Government have made great strides in getting spending under control, but that is a continuing battle. We have put in place a series of reforms, all within a disciplined fiscal framework, that will support our economy's recovery and contribute to the rebuilding of the confidence necessary to fuel growth. The financial markets are performing strongly because our strategy is working.
Our focus is now on the effective delivery of these reforms so that they are fully realised in the real economy. I emphasise delivery. My Olympic experience tells me that having a good plan is important, but all that matters in the end is the impact of what you actually deliver on the ground. What this country showed this past summer is that we have the people, the know-how, the creativity, the teamwork and the determination to deliver in a way that can take the world's breath away.
I accepted the invitation of my right honourable friend the Chancellor to join this Government to see whether we could apply some Olympic and Paralympic inspiration to our broader economy. I look forward with relish to that challenge and welcome your advice and support.
Lord Deighton
My Lords, I thank all noble Lords for the serial welcome. It was very kind of noble Lords to recognise the extraordinary work that went on to deliver the Olympic and Paralympic Games in the summer. That was a big team effort. In fact, many of the team are distributed around this Chamber. I appreciate all those kind words and receive them on behalf of a magnificent national effort.
I shall clear up a few housekeeping points. My name is pronounced Deighton, as in height, if you want the precedent for the English pronunciation, not as in weight. Thank you for pointing that out. There was also a suggestion that it would be useful to spend as much time as possible in the Treasury. The arrangement with my right honourable friend the Chancellor is that I should concentrate my time at the Treasury, which is why I will be supported very closely by my noble friend Lord Newby in this Chamber.
I found the debate highly stimulating. I will be able to do my job better for having listened to all the contributions. I shall leave this debate feeling hugely positive, despite the many challenges that we face with our economy. I propose to make my comments not speaker by speaker but rather consistently against the most important themes in the debate. I shall begin with a review of what I think we heard about fiscal policy—the macroeconomic policy—and I shall then review monetary policy. I shall then talk about reform of the financial sector and finally I shall talk about the selection of things that we discussed that might generally fall into supply-side reforms, including all the discussion around infrastructure and capital projects. If I do not manage to address everybody’s points, I shall certainly write afterwards. I shall also try to focus my comments on what my noble friend Lady Kramer called “doing and delivering”. I think that is what I am here to do, so my focus will be on what we can accomplish rather than on the more esoteric elements of economic theory.
I thought there was a lot that was agreed on. The way I have always operated, particularly in business, is by finding the areas of collaboration and forging ahead on them rather than labouring on the areas of disagreement. However, with respect to fiscal policy, it seemed to me that there was one fundamental disagreement between us, at least in simple theory. I think it boiled down to a very simple question. Should we inject more demand into the economy to boost growth? It is a very fair question. It is quite extraordinary to me that nearly 40 years later we are still arguing about Keynesian economics, how effective monetary policy is and the size of the multiplier. I think that was in the first week. It also convinces me that I made the right choice not to be an academic economist. The debate does not seem to have moved on in those 40 years—we are still talking about the same things—so I am glad that I went out and did something, which I was probably better at because that was not going to work.
It all sounds very easy—we should just go out and borrow more, spend it, and hey presto everything is better. That feels an awful lot like the situation we found ourselves in between 2008 and 2010 when we overborrowed and overspent when the economy was right at the peak of its performance. There has been a lot of discussion about confidence. When deficit levels are at the levels they are, I do not think you reintroduce confidence into the economy by going back on a spending spree. It just does not make any sense to me. I have listened very carefully to what everybody is describing as plan B. I do not think plan B is a plausible alternative. How does it get financed? More borrowing. How does that stack up against the bond markets and interest rates? We have saved £33 billion by being able to borrow at lower rates than had been originally projected because of our success in winning the confidence of the markets. We do not want to lose that. It is absolutely critical.
It is also not entirely clear to me that there is such an enormous difference between us. We were unable to surface just how much extra money the alternative strategy would involve borrowing and whether that would make a huge difference. I was much more persuaded by the argument, which I think matches the analysis in the independent OBR, that the principal problem with demand has been external demand, particularly the reduction in demand in the EU. The right strategy in the long term, which is part of the supply-side solution—my noble friend Lord Howell was very clear about that—is all the work being done to switch our focus in markets to the rest of the world— the so-called BRIC economies—where growth is actually occurring.
We also had a lot of discussion around the capital budget and whether it had increased since the original plans of the previous Government. I do not really want to argue about too many statistics because we have had a lot thrown both ways. Essentially the plan we have now is about £10 billion more than the previous Government’s original plan.
I accept the points made by the noble Lord, Lord Barnett, about when the money is being spent but we have to understand that capital spending and infrastructure spending are not, as the noble Lord, Lord Howell, said, a tap you turn on and off. There are long lead times. There are even longer lead times if you want to do this properly. A lot of this capital spending is not a panacea to solve a very short-term problem. In fact, thinking of it that way could create all sorts of difficulties and much more focus should be on ensuring that the projects that are mid-way through their gestation are now delivered into the economy in the right way. They are the ones that are going to have the immediate impact.
My noble friend Lord Lamont mentioned his concern about inflation. That was certainly one of the problems in 2011. The rise in commodity prices pushed our own inflation rate up, I think, above 5%. That had a significant impact on the cost of living. However, all the forecasters are looking at inflation stabilising over 2013-14 down towards the Bank of England’s target rate.
We have all referred to external agencies as supporters of our own cases. One side can produce the economists—the IMF. The other side can produce the chief executive. I could give a quote from the OECD that this is the right plan and we should stick to fiscal stability. We are all capable of producing people to support either argument. It just is not possible to bless your own strategy with the utterings of an external economist.
The noble Lord, Lord Desai, gave a very eloquent exposition of the long-term issues underlying the problems in the economy. I am not going to repeat that. I do not think that anybody particularly disagreed with much of it. However, I have a growth mentality and one of the things that attracted me to join this Government was that the Prime Minister and the Chancellor were very clear in their mandate to me. They said, “We need to deliver growth in this economy. We will support you to get that done in whichever way you can”. They convinced me that they were as committed to performance excellence as any of the other high performing organisations I have worked in. That is really what got me interested in doing this job. I was also very interested in the noble Lord’s comments on welfare. An absolutely key criterion in any of this has to be fairness. We can all argue about marginal decisions but I assure noble Lords that in my work at the Treasury the distribution effects of what we do are absolutely at the top of the criteria for assessing which measures we take.
On monetary policy, I was delighted to hear what I thought was pretty universal agreement that Mark Carney’s appointment was a good thing, if only because it speaks so highly of my right honourable friend the Chancellor’s recruiting skills. I was also a product of that although I was much cheaper.
We had a very interesting discussion about the impact of quantitative easing. Clearly, the noble Lord, Lord Eatwell, is less convinced about its current efficacy but I think we are all interested in what the new regime will have by way of new ideas. However, we should all be extremely cautious before we suggest that ditching the inflation target is the obvious alternative thing to do. That is far from clear and is certainly not the Treasury’s position. In answer to the question asked by the noble Lord, Lord Davies, I think that the Bank of England is paying 0.5% on the commercial bank reserves held by the central bank.
On banking reform—
Lord Forsyth of Drumlean
I am most grateful to my noble friend. Before he leaves quantitative easing, will he answer the question that a number of us raised about what happens when you unwind it?
Lord Deighton
I thank my noble friend for reminding me about unwinding quantitative easing. In summary, the central scenario predicted by the OBR is that it is expected to make a profit over its lifetime as the scheme is wound down but, as always with these things, that depends on a number of assumptions about the future yield curve, the exit, the pace of that exit, bank rate policy at the time and, of course, any changes to the size. However, those are the variables that go into that decision.
I think that all those who spoke about banking reform agreed that it was important to develop financing, particularly for smaller businesses, and that the Funding for Lending scheme, although in its early days, was showing every sign of being a successful scheme, so we are delighted with that introduction.
On the broader question of structural and regulatory reform, I could not agree more with the comments of a number of my noble friends that although it is absolutely critical to ensure that we have more resilience in the banking system so that the same mistakes are not made again, we have to be extraordinarily careful—I think the timing of the introduction of some of the measures reflects that—that we do not overshoot and significantly damage the banking system which exists to provide finance to the real economy. In my own mind, the real issue with many of these institutions has less to do with capital or liquidity rules and much more to do with the culture of leadership and management in those firms. We are beginning to see some promising signs of improvement there.
As regards the supply side, we have had many interesting contributions on small and medium-sized enterprises. I apologise to the noble Lord, Lord Mitchell, for the SME labelling, and note the comments of the noble Lord, Lord Birt. The United Kingdom is an extraordinarily successful incubator for small businesses. I absolutely take on board what my noble friend Lady Kramer said about thinking small. Two days ago I attended a small business forum. Everybody there was very supportive of all the initiatives that are going on. The discussion was all about implementation and taking advantage of things that are happening.
We have had a number of contributions on planning. No one ever puts forward the case that there should be more red tape, so we are all heroes in terms of our desire to cut it out and to enable faster planning permissions. As I think I mentioned in my opening speech, we have already cut 1,500 pages of planning policy and have speeded up the rate of approval of planning applications. My personal approach to this will be to follow through some of our projects to see where there are barriers and to use those as pilots for seeing where there are thematic problems that are holding up our delivery in the broader economy.
My noble friend Lord Lang referred to the defined benefit pensions issue. Rather than going through the details in my response, I will write to him separately on that. On the question of industrial strategy, I have sat in a number of meetings with my colleagues in BIS and they are absolutely focused on picking out where this country has competitive advantage and reinforcing that advantage in every way the Government can.
There has been a lot of debate on the subject of infrastructure. I want to focus on the fact that our investment in infrastructure is not about pump-priming the short-term economy. It is about modernising and improving our economy so that, over the longer term, its productive capacity is significantly enhanced. If, in the short and medium terms, that has the extremely attractive by-product of generating a significant number of jobs and short-term growth, then that is a dream package. However, that is the way around we should refer to it. There was quite a lot of discussion about roads: the ones that we have announced and have not built yet. There are a very large number of roads that we are currently building that were announced the time before: those are the lag periods. I am very interested in looking at schemes which allow us to take a longer-term perspective on creating the right investment package to support them.
The noble Lord, Lord Mitchell, was rightly concerned about broadband rollout. I have been focused on that as part of our rural broadband rollout and the urban strategy. Last month, the Chancellor announced a further £50 million to help 12 more cities deliver their ambitions for superfast broadband and I am working closely with my colleagues in DCMS and Broadband Delivery UK as well as the Economic Affairs Committee to drive delivery of that important rollout.
I see the value of smaller infrastructure projects, particularly those in local areas. This is highly consistent with implementing the reforms contained in the report by my noble friend Lord Heseltine, No Stone Unturned. For example, we have already launched 27 schemes with local authorities to help deliver that.
Lord Davies of Stamford
Before the Minister sits down, may I thank him for his answer to me that the interest rate paid by the Bank of England on bank deposits is 50 basis points, not the 75 basis points that I thought? Does he agree that any interest rate paid by the Bank of England to banks in those circumstances is undesirable, because it runs counter to the whole object of the exercise, which was to maximise the incentive on the banks to lend as much as possible?
Lord Deighton
I thank the noble Lord for the follow-up question. The scheme which we have employed to encourage banks to lend—the Funding for Lending scheme—is a very effective mechanism to improve lending to businesses and households.