Economy: Fiscal Framework

Lord Barnett Excerpts

Tuesday 4th June 2013 Lords Chamber

Asked By

[Lord Barnett]

To ask Her Majesty’s Government what was meant by the reference to “flexibility in the fiscal framework” in the Chancellor of the Exchequer’s speech to the International Monetary Fund in Washington in April.

[Lord Newby]

My Lords, the Government’s fiscal strategy is grounded in the clear, credible and specific consolidation plans and new fiscal framework announced in the June Budget of 2010. The fiscal mandate to achieve a cyclically adjusted current balance by the end of the rolling five-year forecast period has ensured a flexible fiscal response to economic developments by allowing the automatic stabilisers to operate and by protecting the most productive public investment expenditure.

[Lord Barnett]

My Lords, if that was an answer to my Question, I thank the Minister. The Chancellor used to be proud to claim the IMF as a supporter of his policies, but it has now said a number of times, and it is worth repeating, that the Chancellor might revisit his austerity programme. Does that mean that he is or he is not?

[Lord Newby]

My Lords, I know that the noble Lord is a great reader of IMF reports and that he will, therefore, have read the following from its recent report:

“The commitment to a medium-term plan has earned the government credibility … While adhering to the medium-term framework, the government has shown welcome flexibility in its fiscal program”.

We agree.

EU: Budget Report

Lord Barnett Excerpts

Thursday 25th April 2013 Lords Chamber

[Lord Barnett]

My Lords, I congratulate my noble friend on powerfully reinforcing what my noble friend Lord Eatwell said from the Front Bench about why this government policy is so inadequate.

I must say to the noble Baroness, Lady Noakes, that I thought she was telling us that she was not too happy about even bothering with these Motions and why did we have do it. We did sign the Maastricht treaty and now this Government are following the previous Government in believing that we have to continue with these Motions. I share her certainty that we are not going to join the euro. That is not because we are as inadequate to join as, for example, Greece and Cyprus, but because Gordon Brown laid it down very clearly in five economic tests, none of which could conceivably be met by any Government. At that time I was not terribly happy with them but that made it certain that we were never going to join.

We have these two Motions before us. I have to tell the noble Lord, Lord Newby, that I could not conceivably support them. I do not know how anybody could. Indeed, if he was sitting on the Back Benches now, I am sure that he would oppose the signing of these Motions. On the first Motion, we are asked to approve what the Office for Budget Responsibility has said about the fiscal outlook and the Budget Report. I certainly do not agree with that and I could not support it. The second Motion is even worse. We are told that we should support,

“the five key priorities of the 2013 Annual Growth Survey which are in line with the Government’s domestic growth agenda”,

and,

“the Government’s view that it is important to focus on implementation of existing reform commitments”.

We are told that we have “growth-friendly fiscal consolidation”. I do not know how anyone could describe the Government’s policy as growth-friendly. I bet that the Chancellor of the Exchequer would not really be able to support that proposition.

As I said, it is impossible to support the two Motions. They are based on forecasts made by the Office for Budget Responsibility. Any forecast beyond today is difficult for anyone to support. What we have now from the Office for Budget Responsibility is regular adjustments of its forecasts. The forecasts are meaningless. I do not blame the Government for the forecasts, all of which are inadequate, but I do blame them for believing them. How anyone can believe a forecast for five years ahead I find difficult to imagine. Today’s forecast happily does not show that we are in recession, but that will be revised in a few weeks’ time by 0.1% or 0.2 %—who knows? That is only for this quarter. The noble Lord, Lord Newby, like everyone else in the Government, keeps telling us that they have cut the deficit by a quarter, a third, or whatever. The fact is that in 2010, the Government forecast that they would eliminate the budget deficit by 2015. It is now called a rolling forecast. Every year, it is rolled forward.

There is now a forecast that it will be in balance by 2018. How can anyone believe that it is possible to make a forecast five years ahead? We do not know. It could be 2019 or 2020 before we get balance; we cannot be certain that it will be in 2018. The reason is that we have not got growth. Without growth, it will get worse, inevitably. Given our constant lower growth, we cannot rely on that forecast for 2018, not 2015. All that we can rely on is what is happening now, and even that is uncertain.

In the second Motion, we are asked to support that view. How can anyone ask us to support forecasts of that kind? Even the OBR does not believe them. It states in paragraph 143 of its latest report:

“There is considerable uncertainty around our central forecast”.

I am not surprised. It is inevitable that there is uncertainty about a forecast for five years ahead. We are then told that all central forecasts are unreliable and uncertain, so why on earth are the Government accepting them and relying on them to carry on with their whole policy?

I find this whole debate, and the fact that someone like the noble Lord, Lord Newby, is blithely reading out what the Treasury have given him, surprising. Unfortunately, I have agreed to give a seminar tomorrow in the Treasury on the 1976 crisis. I took the trouble to look at what I did at the time, what I said in my book and what my dear friend Lord Healey said in his autobiography. He said that there had been a £2,000 billion error in the forecast at the time. I assume that he did not mean £2 trillion, but no one has corrected it since. Even a £2 billion error in the forecast would have been enough. He said that, without it, there would not have been a 1976 crisis. That may or may not be true, but the fact is that we had a 1976 crisis, all because we were relying on those hopeless and inadequate forecasts that Governments have believed.

Personally, because I do not believe any forecasts beyond today, I find it impossible to go along with the two Motions. I am sorry that there will not be a vote; if there were, I would be happy to vote against them.

[Lord Hollick]

My Lords, I want to discuss the political and policy judgments that have been made since the financial crisis. The previous Chancellor, my right honourable friend Alistair Darling, like everyone else, did not see the 2007-08 banking crisis coming, nor the damage that it would do to our public finances, but in the eye of the financial storm, he did an excellent job of judging what needed to be done. He organised the huge recapitalisation of the banks. He sought to find the most effective balance between policies to repair the public finances and reduce public debt and also to promote growth. He recognised that the UK’s ability to finance its ballooning deficit would require the support of the bond markets, which would need to be convinced that the Government were prepared to take the tough and correct measures to achieve those joint objectives. He rightly anticipated that external events might call for additional rebalancing of the policy mix, over and above the deployment of automatic stabilisers. His was a pragmatic and thoughtful response to an unprecedented crisis, and it commanded broad support at home and abroad.

What happened next? One of the present Chancellor’s first and very important decisions on coming into office was to ratchet up the austerity targets and to shun the flexible, carefully nuanced approach of his predecessor and instead opt to wear a very tight financial straitjacket. That approach, which we now know as plan A, was given intellectual credibility by a report from US economists Rogoff and Reinhard, which Osborne cited in a speech as,

“Perhaps the most significant contribution to our understanding of the origins of the financial crisis”.

Buoyed by that report and the plaudits from the hedge funds and bond investors in the City and, crucially, strong backing from the IMF, the Chancellor believed that he had struck exactly the right policy balance between austerity and growth which would lead to the elimination of the structural deficit by 2014-15. Crucial to that judgment was the forecast of strengthening economic growth over that period.

As we have heard from all sides of the House today, that has not come to pass. Indeed, recent employment, bank lending, government borrowing and GDP numbers all confirm that the economy is flatlining. The UK is now the worst performing major economy. As the UK’s performance has weakened, as each forecast is missed and as austerity measures are tightened and extended, confidence—an ingredient vital to economic growth— has evaporated. Domestic consumer spending is depressed, export performance has fallen well short of forecast and companies continue to defer investment projects. Rating agencies downgrade the UK, citing a weaker economic and fiscal outlook and, specifically, the lack of growth.

The high priest of the international bond market, a group that I am sure is high on the Chancellor’s Christmas card list, Bill Gross of PIMCO, the world’s largest bond investor, declared last week that,

“the UK … have erred in terms of believing that … fiscal austerity … is the way to produce real growth. It is not. You’ve got to spend money. Bond investors want growth”.

The intellectual prop of Rogoff and Reinhard turns out to be a shoddy piece of research from the “garbage in, garbage out” school of analysis, with the corrected model—

Banking: Quantitative Easing

Lord Barnett Excerpts

Wednesday 27th March 2013 Lords Chamber

Asked by

[Lord Barnett]

To ask Her Majesty’s Government whether they agree with Sir Mervyn King, the Governor of the Bank of England, that quantitative easing should be increased by £25 billion, as stated at the most recent meeting of the Monetary Policy Committee.

[Lord Newby]

My Lords, the Bank of England Act 1998 gives powers of operational responsibility for monetary policy to the independent Monetary Policy Committee of the Bank of England. It is for the MPC to make decisions on monetary policy, including the scale of quantitative easing, based on its own judgment and the balance of risks to inflation in the medium term.

[Lord Barnett]

My Lords, under Section 19 of that Act the Chancellor has power by order to stop the committee doing that just that. Can I assume that as he did not say he did, he does not oppose the idea of there being more QE? On the other hand, we have a new remit for the new Governor of the Bank of England. The Chancellor said:

“the Monetary Policy Committee may need to use unconventional monetary instruments to support the economy”.—[Official Report, 20/3/13; col. 935.]

Does that not mean that there will have to be a change to the Bank of England Act? Without it, how can there be such a change?

[Lord Newby]

My Lords, to deal with that last point I will say that we do not need a change in the Bank of England Act because its basic provisions—namely, of inflation-targeting, and this year, as in previous years, we have a 2% inflation target—remain in place. The Chancellor has suggested, in changing the remit, that it would be appropriate for the MPC to deploy new explicit forward guidance, including intermediate thresholds, in order to influence expectations and meet its objectives more effectively.

Infrastructure: Expenditure

Lord Barnett Excerpts

Monday 25th March 2013 Lords Chamber

[Lord Deighton]

If I may say, my Lords, those are two quite separate questions. I am very enthusiastic about private sector investment. Infrastructure investments lend themselves to financing in the private markets because they generate a cash flow that can repay those investments. The question about Heathrow Airport is an entirely separate one, although I accept that airports are a particularly attractive investment proposition for the private markets.

[Lord Barnett]

My Lords, is not the difference between the figures that he quoted and those quoted by my noble friend Lord Hollick that the previous figures were allocated but not actually spent?

[Lord Deighton]

I bow to the noble Lord’s extensive experience in managing public expenditure. There is absolutely a distinction between what is allocated and what is spent. There is a small additional amount this year that is underspent, but it is in the region of £2 billion, which is consistent with previous years. I agree that that is part of the difference.

Bank of England: Monetary Policy

Lord Barnett Excerpts

Tuesday 19th March 2013 Lords Chamber

Asked by

[Lord Barnett]

To ask Her Majesty’s Government whether they intend to give more powers over monetary policy to the Bank of England.

[Lord Newby]

My Lords, the Bank of England Act 1998 already gives powers of operational responsibility for monetary policy to the independent Monetary Policy Committee of the Bank of England. The Act requires the Treasury to specify the objectives of the MPC at least once every 12 months. The Chancellor set the remit for the MPC at Budget 2012 to target inflation of 2%, as measured by the 12-month increase in the consumer prices index.

[Lord Barnett]

My Lords, there have been widespread reports that the Chancellor was looking at that remit with the possibility of changing it. I appreciate that it may have been only a Lib Dem Budget leak but is it true and, if so, what does he propose to do about that kind of leak? Does the Chancellor, as has been said, believe in a looser monetary policy, and has he told the new Bank governor that that is what he wants him to do?

[Lord Newby]

My Lords, as the noble Lord will be aware, it is Budget Day tomorrow. That is the day on which the Chancellor will re-express the remit for the Monetary Policy Committee. I am afraid the noble Lord will have to wait for 24 hours.

Regional Development

Lord Barnett Excerpts

Tuesday 12th March 2013 Lords Chamber

[Lord Morgan]

My Lords—

[Lord Barnett]

My Lords, the Barnett formula, which, sadly, bears my name, should have been changed a long time ago, as a powerful Select Committee of this House, chaired by my noble friend Lord Richard, and many other senior Members of the House have recommended. When is that recommendation going to be put into effect by the Government?

[Lord Newby]

Not during the course of this Parliament, my Lords.

Inequality: Income and Wealth

Lord Barnett Excerpts

Monday 11th March 2013 Lords Chamber

[Lord Deighton]

My Lords, I absolutely agree—I am sure everybody does—with the sentiment that it is much easier to argue over the slices of an increasing cake than to divide one up that is static or shrinking.

[Lord Barnett]

My Lords, on the noble Lord’s major point about increasing personal allowances as a factor, does the greater relief go to somebody on £50,000 a year or somebody on £15,000?

[Lord Deighton]

What I can tell the noble Lord about the increase in personal allowances is that it is a highly progressive change in the tax system. It applies to about 24.5 million or 25 million taxpayers, who will enjoy a benefit of about £400 from it in 2013-14, and it takes just over 2 million people out of the tax system.

EU: Eurozone Financial Transaction Tax

Lord Barnett Excerpts

Tuesday 5th March 2013 Lords Chamber

[Lord Newby]

My Lords, the estimate that the Commission has produced is that the tax would raise €35 billion. It would not be raised from all financial institutions across the EU; it would be raised only from those established in countries which levy the tax. A tax such as this, which covers things like shares, trickles down through multifarious channels but, obviously, at the end of the day, a very large number of people end up paying a small amount towards it.

[Lord Barnett]

If the treaty eventually proposes a tax that would affect this country, will the Minister make it clear that we would veto it?

[Lord Newby]

My Lords, the noble Lord needs to understand the difference between a tax which we would levy, where there is a veto, and a tax which we would help collect, of which there are a number of existing examples in EU law and this would be another.

Economy: Rating Agencies

Lord Barnett Excerpts

Wednesday 27th February 2013 Lords Chamber

Asked By

[Lord Barnett]

To ask Her Majesty’s Government what is their assessment of the role of rating agencies and the impact of any downgrade of the United Kingdom’s rating.

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

My Lords, last Friday Moody’s downgraded the UK rating to AA1, with a stable outlook. It says that the UK’s credit-worthiness remains extremely high but warns that it could downgrade the UK rating further in the event of,

“reduced political commitment to fiscal consolidation”.

The credit rating is one of the important benchmarks for any country but near-historic low gilt yields continue to reflect the credibility earned by the Government’s economic strategy.

[Lord Barnett]

I think I thank the Minister for that Answer. If it is all so good now, why did he covet the AAA rating so strongly? Is it not true that the United States had a downgrading, and that it was not a problem and interest rates remain low? Another risk is that the pound will drop further. If it does, there is a real risk to lenders, who could lose a lot of money as it is repaid in downgraded pounds. In those circumstances, would the Chancellor be minded to do anything at all?

[Lord Deighton]

I thank the noble Lord for those observations, which contain several of different questions. If you review Moody’s analysis of the UK economy you could not see a stronger recommendation of the Government’s policy of fiscal consolidation. I commend it to everybody as background to policy and why it is the appropriate one in these circumstances.

On the specific question about the impact of currency movements on the exposure of various lenders, my experience in those markets tells me that lenders manage their currency exposures very effectively and that the currency devaluation should not increase those particular exposures.

Monetary Policy Committee: Inflation

Lord Barnett Excerpts

Wednesday 13th February 2013 Lords Chamber

Asked by

[Lord Barnett]

To ask Her Majesty’s Government what is their response to the proposal by Mark Carney that the Monetary Policy Committee’s inflation target should be flexible.

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

My Lords, the Chancellor set the remit for the Monetary Policy Committee at Budget 2012 to target inflation of 2% as measured by the 12-month increase in the consumer prices index. Inflation targeting has served the UK economy very well.

[Lord Barnett]

The Minister did not quite answer my Question, my Lords. He will know that Mark Carney, the new governor, has said that,

“flexible inflation targeting offered the best chance of boosting growth while maintaining price stability”.

Does the Chancellor agree with his new governor, who he has said is the best in the world?

[Lord Deighton]

My Lords, if I did not quite answer the Question directly it was because the Question implies that we currently do not have flexible inflation targeting, but I believe that that is precisely what we have already. The remit given to the MPC actually lays out the conditions which provide for adjustments, given what may happen with shocks and disturbances, so that we can take a longer time to reach the inflation target. To my mind, that is a definition of flexibility.