Government: Convergence Programme

Baroness Valentine Excerpts

Thursday 12th May 2011 Lords Chamber

[Baroness Valentine]

I declare that I am chief executive of London First, a not-for-profit business membership organisation. I am also pleased to serve on this House's European Sub-Committee B, under the able chairmanship of the noble Baroness, Lady O'Cathain.

I welcome this debate. The EU Committee’s report says of the reform programme,

“No surprises, no panacea, but still worth doing”.

It is worth doing because transparency and scrutiny by other member states, EU institutions, the OECD and others can only be helpful in establishing good practice. However, I take note of the reservations of the noble Lord, Lord Newby, about the practicalities.

Europe 2020: UK National Reform Programme 2011 makes clear the importance the Government rightly attach to growth. The national reform programme states:

“As Europe recovers from the worst recession since the 1930s, Europe 2020’s aims of higher growth and increased employment represent the most important long-term challenges, and opportunities, facing the EU”.

I will focus my remarks on the “bottlenecks” to growth identified in Chapter 3 and suggest some areas where the Government can perhaps do more to overcome these challenges.

First, on competitiveness in financial services and taxation, after tackling the deficit the first challenge identified by the report is,

“ensuring a well-functioning and stable financial sector capable of meeting the financial intermediation needs of the real economy”.

The Vickers commission’s work to improve competition and stability within the banking sector is relevant, but we need to add a third leg to this stool—the global competitiveness of the UK sector. There have been failures in governance, supervision and regulation, but the UK has demonstrable competitive advantage in the financial services sector. We must make sure that any unilateral action does not diminish that competitiveness.

The EU’s annual growth survey calls for Europe-wide co-ordination in the taxation of the financial sector. That is commendable, but London is the EU's only world-competitive financial centre, so taxation in other global financial centres outside the eurozone is just as important. What we actually have, though, is a unilaterally applied banking levy that satisfies neither point. The Government made a good start by consulting on their approach to the introduction of taxation last year. Post credit crisis, politicians attempted to shoot from the hip, but boring, slow, internationally compatible and considered changes in taxation are much better. So, while the tax hike on oil and gas exploration may or may not have been right, its abrupt introduction was almost certainly not.

I welcome the national reform programme’s section on,

“Facilitating an increase in aggregate fixed private investment”,

which reiterates the Government’s objective of creating,

“the most competitive tax system in the G20”.

However, the UK heavily depends on its service sector for growth. We are claimed to be the second highest exporter of professional services worldwide. In this context, the international competitiveness of our personal taxes is important. Recent Treasury signals of a future reduction in the top rate of income tax are welcome. Unfortunately, other changes—to personal allowances for high earners, national insurance contributions, the non-dom levy, pension tax relief and the banking bonus tax—portend anything but a stable and predictable tax regime.

Secondly, on infrastructure and investment, the Government are right to aim for industry to have the confidence to invest in our economic infrastructure. Londoners are relieved that the Government have maintained the much needed and long overdue investment in our transport infrastructure, and we look forward to the forthcoming national infrastructure plan.

However, I would like to highlight some concerns. The Localism Bill, while motivated by an admirable desire for local empowerment, risks giving local authorities powers without resources—again. It risks frustrating development on the one hand by giving weight to the nimby vote while on the other failing to provide the tools to local authorities to fund the infrastructure that underpins regeneration and growth. How does one get the Northern line extended to Battersea power station to create a new economic quarter? While we have good progress with the Olympic Park Legacy Company in sorting out the park and indeed, under the Localism Bill, turning that company into a mayoral development corporation, who will act as client for investment in energy and the public realm south of the Olympic park to catalyse the East End regeneration that we all desire? Surely, alongside localism we need to give local authorities the benefit of the doubt in raising the finance to invest in the infrastructure that is a prerequisite to that regeneration.

The thorny question of aviation capacity in the south-east also remains unsolved. The NRP recommends rebalancing towards net exports. With £20 billion of business services exports driven by London, according to the Work Foundation, the capital’s links to the world are critical. Aviation policy should expand businesses’ international links rather than funnelling them through the most overcrowded airport in Europe.

I turn to Brussels. As the Minister asserts, policies to drive the UK’s growth are largely in the hands of the UK Government, not the EU, but there are important areas of European influence. We need to ditch our little England approach to Brussels. By that I mean not embracing some great Utopian European dream but concentrating on the key areas of policy that affect our businesses and citizens. We must be sure to shape policy-making at the front end of the process and not as a desperate afterthought. In football-speak, we are last-ditch defenders when we have all the skills to be creative midfielders.

I am concerned about two areas in particular: labour laws and financial regulation. Europe 2020 seeks a 75 per cent employment rate across Europe. The Department for Business’s own research indicates that more flexible labour laws lead to higher employment. Well meant protection for existing employees risks reducing employers’ appetite for creating new job opportunities or employing more challenging candidates, when they worry about having their hands tied. The UK and Europe need to get the balance right between what is fair and what leads to more employment.

My second worry is financial regulation. The British financial sector is the most global in the EU and therefore needs more sophisticated regulation, but this regulation must be well informed both about products and about real-world market practice. The UK has 12 per cent of the EU population but makes up just 6 per cent of Commission staff. The UK needs to value people who serve in Europe; it should be seen as a boost to a career in either the public or the private sector. Given the vital role of the new European supervisory authorities in relation to our financial markets, would it make sense for, say, 20 per cent of their staff to have experience of London’s financial services?

In these and other areas, politicians need to get in early and help to set the rules, rather than regarding Europe as a perennial irritation. I wish the national reform programme well.