Economy: Growth

Baroness Kramer Excerpts

Thursday 16th May 2013 Lords Chamber

[Baroness Kramer]

My Lords, I join in the congratulations to the noble Lord, Lord Solely, on obtaining this debate. He is absolutely right—there is no more important issue than growth in our economy—and we in this Parliament and the Government have to focus directly on these crucial issues.

However, I would challenge him on his analysis of how we got where we are today. I fully accept that a financial crisis came—some say like a meteor out of the sky; others, who have looked at the banks, thought it was predictable—and hit us hard in 2007-08. This country was in no position to sustain that blow. We were at a point where the former Labour Government had raised public spending and public borrowing to a point where it offered no resilience. I can understand how the Labour Government got there. They bought into the idea that boom and bust had ended and that there would be a constant flow of substantial tax receipts coming from the financial services industry and that they therefore could let loose the leash on both spending and borrowing because there would be a constant flow of money coming into the Treasury. They should have recognised that we were at the top of an economic cycle—we do not end boom and bust; economies cycle—and every Government have prudently to take cognisance of that. So that is the situation in which we found ourselves.

We also found through that process that the underlying British economy was in very weak shape. We had become so dependent on financial services that we had bled much of the life out of our other activities, both in the service industries and manufacturing industries. We had allowed the balance to swing so heavily to London and the south-east that much of the north was being sustained only by having public service activities there—the private sector had not been building and thriving for a long time—and, worst of all, we had failed to recognise for more than a generation that the backbone of the economy is our small businesses. Twenty per cent of all the small businesses in the EU are in the UK. This is a thriving location for small businesses but it has not been receiving the kind of support that it needs to grow, to take risks, to create new jobs and to build its export base.

For the past few years, the rebalancing of that shift has been the work of this coalition Government. I am encouraged by the comments of Sir Mervyn King and the CBI made earlier in the week which suggest that they can finally see that we are going into a modest recovery. It is very dangerous in this current unstable international environment to focus too much on green shoots, but the same verdict is coming back from small businesses, from the accountants who spend time up and down the country with businesses and even from the commercial section of the banks. They identify that the beginnings of a real recovery are under way, in part because of the rebalancing and redevelopment of those abandoned areas. This work will turn out to be absolutely crucial.

I have often said before that the neglect that most appalled me, not only during the Labour years but during the Conservative years before, was in the area of building skills among our young people. The fact that there was a lack of apprenticeships and that the whole apprentice structure had been allowed to collapse was irrelevant in many people’s minds. There has been a turnaround in that area: more than 1.25 million young people are now either in or have gone through apprenticeships in the past couple of years. That will be important.

We all thought that any debate introduced by the noble Lord, Lord Solely, would undoubtedly touch at some point on aviation and I admire his self-restraint in not addressing the issue of Heathrow. I shall therefore limit my comments on this issue out of common respect to his self-restraint.

However, I wonder whether he recognises the inconsistencies in his own position. I agree that regional aviation capacity is the key issue we must look at. As he knows, that is not hub aviation capacity but very much point-to-point. One of the issues that the Davies Commission will have to take on is whether we should try to build a single London-style hub as our primary connection both within the country and outside. Should we have one main hub and a number of minor hubs? Should we build a balance between one hub and a number of point-to-points? We have to come up with a solution that manages and supports the rebalancing necessary for our economy. That means that it must service the north and the west as well as London and the south-east. That is one of the arguments that leads people to think that much of the London hub should now be shifted somewhere between London and Birmingham, potentially alongside an HS2 route, but there are a number of other visions.

The noble Lord also stressed the fact that aviation, usually thought of as passenger aviation, plays a crucial role in freight. I fully accept that. However, you cannot drag those words out of most of the aviation industry because it becomes impossible to argue for the use of Heathrow, an incredibly expensive and scarce resource, when you are doing a point-to-point freight movement. So that issue has to come into the picture and it will be interesting to see where it goes.

There are two issues I wish to address before I sit down. I shall certainly not use my full time today. One is an issue which is sometimes not addressed in the context of economic growth—that is, tax avoidance. I recommend a speech made on this yesterday in the other place by my colleague, Ian Swales, MP for Redcar. As he was discussing the problem that we face—the inherent reality that most multinational companies now effectively enjoy a corporation tax rate of zero because they export their profits to somewhere such as Luxembourg or outside the G20—he said that one of the impacts of that is greatly to disadvantage those very small and medium-sized businesses in our economy that we need to grow for the future. For example, a chain of three book shops within my local community have pasted on their walls that each book shop pays for a trainee nurse through its taxes on an annual basis, whereas Amazon, their great rival, effectively contributes nothing. Yet they face this price differential because, in effect, the international community has provided a taxpayers’ subsidy to the large multinational entities. We have to tackle the tax avoidance problem for that reason in addition to the failure of those companies to contribute as they should to the public spending that, as it were, pays for the society in which they participate and provides the basis for many of their sales. I think that the level playing field argument is an incredibly powerful one.

In my last comments I wish to pick up on the remarks of the noble Lord, Lord Marland, on exports. I agree completely that building the exports of our SMEs is absolutely vital. However, sometimes I disagree with BIS about its focus on saying to small businesses, “Come on, go to China, Brazil and India”. It is wonderful if small businesses can export to those countries and I have no problem with that, but when you talk to these businesses, you find that many of them have had very bad experiences when they have tried to do it. It is quite risky to export to China if you have a patent you wish to protect. It is very difficult to export to the United States because of all its non-trade barriers. I have talked to quite a few small businesses, but I shall not use their names because they are quite hesitant about this, which have found that in the end they had to form a joint venture to sell into the United States and essentially surrender most of the upside of their additional revenues and the exports from their US operations. Instead, they just accept royalty payments because, without a joint venture relationship, it is impossible for them to operate on American soil.

From the small business perspective, the ongoing debate that David Cameron was leading on in the United States in his discussions with President Obama on an EU/UK trade negotiation to tackle many of these non-tariff barriers, is absolutely crucial. There is a real need for an awareness that this is the kind of thing we can tackle only as part of the EU. I lived in the United States for 20 years and I know a lot of people in the Administration. The chance that they would ever waste time on a UK/US debate along these lines is close to zero. I suspect the same for China and, indeed, for the various developing economies of the world.

We are at an exceedingly exciting point where there is great potential. We are starting to see movement in the economy, but it is crucial that we have sustainable growth, not growth created by a sudden surge in public spending that sparks a short-term response and transient behaviours. We need long-term, sustainable growth by getting new businesses off the ground and encouraging them to export. Any discussion is too much to try to include in this speech, but it is also crucial that the banks back up that growth with a credit supply, because it will be in huge demand as businesses begin take off when they see the end of the recession and can move into a much more investment-focused and expansionary mode. We are at a very interesting point at which the decisions and the way we shape this growth must be such as to set us up well for future years.