Budget Statement

Debate between Lord Davies of Stamford and Lord O'Neill of Gatley

Wednesday 18th March 2020 Lords Chamber

[Lord O’Neill of Gatley (CB)]

My Lords, I welcomed the broad spirit and nature of the Chancellor’s Budget, much of which was, of course, designed before the realities of Covid-19. It was focused on a policy to significantly boost investment spending, so-called levelling up and giving proper attention to the northern powerhouse, all of which I hugely welcome. However, there have been events. The rest of my speech will be a brief, adapted form of an article I posted on Monday on the website of Chatham House, which I currently chair.

Linked to the call that Robin Niblett and Creon Butler of Chatham House and I made the day before—Sunday—for a global response to the Covid-19 pandemic, the case for a specific dramatic economic policy gesture from many policymakers across the world is prescient. This should involve most, if not all, G20 nations and should certainly have the same force as that led by Gordon Brown in 2008. We need some sort of income support for all our citizens, whether employees or employers, for the next two months. Perhaps one might call it, as I have done, truly a people’s QE— quantitative easing.

Both so-called modern monetary theory, MMT, and universal basic income, UBI, essentially owe their roots to the judgment that conventional economic policies have not been working, especially since 2008, in the way we are all trained to believe. At the core of these views is the notion of giving money to people, especially those on lower incomes, directly paid for by our central banks printing money. Until recently, I found myself having many doubts about, or not much sympathy with, these views, but, as a result of Covid-19, I have changed my mind.

This crisis is extraordinary in so far as it is both a colossal demand shock and perhaps an even bigger colossal supply shock. The crisis epicentre has apparently shifted from China, and perhaps much of the rest of Asia, to Europe and the United States. We cannot expect policies, however unconventional by pre-2008 standards, including the dramatic monetary steps announced by the Federal Reserve Board and other central banks, to put a floor under this crisis. We are consciously asking our people to stop going out, stop travelling and not go to their offices—in essence, curtailing most forms of normal economic life. The only ones not impacted are those who spend their entirety in cyberspace but even they have to buy some form of consumer goods, such as food, and, even if they order online, someone has to deliver it.

To give a flavour of the kind of challenge that we are now in, data published at the weekend shows that on most measures the Chinese economy probably fell by about 20% year on year in February alone. That equates to taking off something close to $3 trillion worth of GDP in a month. We in the UK, and much of the rest of the Western world, are adopting or have adopted some version of that same policy in March. It would be not at all surprising if we did not do something bolder, and the economic consequences will not be so far different from those in China.

As a result, markets are correctly worrying about a complete collapse of economic activity and with it a collapse of companies, not just their earnings. In my view, an expansion of central banks’ balance sheets in the way that has been done since 2008 is not going to do anything to help to arrest this, especially unless we go beyond just trying to underline the security of our banks, although that is still important. What is needed in the current circumstances are steps to make us believe with high confidence that if we take the advice of our medical experts, especially if we self-isolate and deliberately restrict our incomes or have them deliberately restricted for us, then this will be made good by our Governments. As I have said, in essence we need smart, persuasive people’s QE and quickly.

Having discussed this idea with a couple of economic experts I know, I realise that there are of course some challenges in the implementation of such an idea. For example, I gather that in the US it is probably currently illegal for the Federal Reserve Board to directly transfer cash to individuals or companies, and that could be true here and elsewhere. In my view, though, that is easily surmounted by our fiscal authorities by issuing a special bond, the proceeds of which could be transferred in the manner that I have suggested to both individuals and business owners, and our central banks could easily finance such bonds. It is also the case that such a step may encourage both the perception and the actuality of central bank independence, but I now find myself among those who argue that central banks can operate such independence only if done wisely and when needed.

Others may argue, in the spirit of the equality debate, that any income support should be targeted primarily if not entirely at those on very low incomes, while higher earners or large businesses should be given none or very little. I can sympathise with such spirits, but in my view that ignores the centrality and scale of this particular economic shock. All our cafes, pubs, restaurants, airlines—where do you stop?—indeed, all our businesses are currently at accelerating genuine risk of not being able to survive, and of course all these organisations are enormous employers of people on any kind of income.

As I have tried to say, it is also the case that time is of the essence. We need our policymakers to act on something like this as soon as possible—ideally in the next 24 hours—otherwise many of the transmission mechanisms that we have become accustomed to for the whole of our lives are going to be challenged. We need some kind of smart people’s QE now.

[Lord Davies of Stamford (Lab)]

Is it not the case that what is really alarming here is that the collapse of consumer demand is likely to last for a very long time and that there is going to be a substantial negative-wealth effect, given that people will have been out of jobs while their businesses and indeed the stock market has collapsed? People will require years to build up their savings again to where they were before. That means that for a very long time there is going to be a substantial shortage of demand from the consumer sector.

[Lord O’Neill of Gatley]

My Lords, my frank answer is that I do not know, but the longer that we delay an imaginative and forceful response, the risk of what the noble Lord has just described will rise. The whole reason why I am suggesting such a very unconventional and dramatic policy approach now is to stop exactly the kind of things that he is suggesting. If we give all our people confidence that they can essentially have something close to an eight-week paid holiday, and there is no reason for any employer to lay any of them off permanently or for those employers to worry about their income, that should give the confidence for us to allow what has been done so well in Asia to be fully done here, and get this virus behind us.

Economy: Productivity

Debate between Lord Davies of Stamford and Lord O'Neill of Gatley

Monday 5th September 2016 Lords Chamber

[Lord O'Neill of Gatley]

My Lords, the noble Lord has raised an important and interesting question. It is something that I spend quite a lot of time trying to explore. It is a feature throughout the western world that levels of cash held by corporations, including in economies that might be perceived as being more successful than ours, are very high, but despite low interest rates and favourable tax rates, the reported amount of investment being undertaken by corporations in many parts of the developed world remains disappointing. We need to understand this further and when we know why, we must try to do more about it.

[Lord Davies of Stamford (Lab)]

My Lords, is it not the case that devaluation is the enemy of productivity because, for a time at least, it keeps in being inefficient firms whose factors of production would be better deployed elsewhere? Is it not also the case that one of the great drivers of productivity is competition, and therefore if we are serious about improving productivity in this country it would be crazy to leave the single market, whether or not we have to leave the European Union?

[Lord O'Neill of Gatley]

My Lords, most of the independent measures of competitiveness would actually rank the UK among the highest in the world. On the first part of the noble Lord’s question, there has not been any official devaluation of our currency. It was a consequence of what happened, and in the context of what I said earlier, it is interesting to note that in recent days the pound has recovered somewhat.

Surplus Target: Corporation Tax

Debate between Lord Davies of Stamford and Lord O'Neill of Gatley

Monday 4th July 2016 Lords Chamber

[Lord O'Neill of Gatley]

My Lords, in response to my noble friend’s question, let me repeat that the fiscal charter, including all its rules, allowed specifically that if an external shock—in this case one that we essentially brought upon ourselves—would result in a four-quarter basis GDP forecast of less than 1% the framework could be adjusted. That is the environment in which the Chancellor made his comments in the other place, and that is what I am repeating here. With respect to the comments on corporation tax that are receiving so much attention, the Treasury will—as it always does—indicate what any cost or benefits revenue-wise or otherwise might be as and when a specific policy proposal is brought to Parliament.

[Lord Davies of Stamford (Lab)]

May I correct the noble Lord? Brexit was not an external shock. It was an internal shock. It was a policy shock. Does the noble Lord think it is serious that we have lost our AAA credit rating? What is his estimate of the increase in borrowing costs we will face as a result of that?

[Lord O'Neill of Gatley]

My Lords, I notice to my right some noble Lords with strong views on and experience of these kinds of events. Let me just reflect on my own judgments, including some from my past life. Let me also quickly state that in the last week our long-term borrowing costs have gone down. It is the job in terms of policy to focus on doing what is right in the circumstances. I do not believe that we should react to or be excessively focused on what a rating agency may say one way or another. It is important that we do the right thing.

The Economy

Debate between Lord Davies of Stamford and Lord O'Neill of Gatley

Thursday 28th April 2016 Lords Chamber

[Lord O'Neill of Gatley]

My Lords, as I said, I will make some further specific comments in answer to this question after I have heard the collective input of the whole of the House.

[Lord Davies of Stamford (Lab)]

My Lords, is it not the case that the Treasury document referred to by the noble Lord, Lord Forsyth, makes it absolutely clear that the growth in our income as a result of our remaining part of the EU will be much greater than would occur if we left the EU under any circumstances and that the amount of additional gross domestic product that would be generated as a result would be more than sufficient to cope with any additional costs involved in social security, health or educational provision?

[Lord O'Neill of Gatley]

My Lords, for now I shall try to answer that question in the context of the remaining part of what I had planned to say—otherwise I will be eating into everyone else’s valuable time.

As somebody who has spent considerable time exploring the rise of the so-called emerging world and the changing patterns of world trade, I believe that I can articulate the case for the UK to benefit from a rise in the role of China, India and others while continuing to benefit from being a member of the EU. Indeed, as was clearly shown in this document, despite the challenges that being a member includes, the growth in our trade has been quite considerable since we became a member.

It is important to recognise that the presumed changes in trade patterns that I have been at the centre of articulating may never happen anyhow: that is a possibility. Even if they do, though, it remains the case for the foreseeable future that the EU is set to remain our dominant trade partner, currently accounting for around 44% of our exports. As I said, there is no doubt that our membership has made it easier to trade with not only the EU but the wider world. Trade as a share of national income has risen to over 60% in the last decade, compared with under 30% before we joined the EU. Membership has also made the UK an attractive place for foreign investors, with the equivalent of £148 million invested here every day for the last decade. Almost three-quarters of foreign investors cited our access to EU markets as an important factor in their choice of the UK.

In conclusion, there have been indications recently that our economy is continuing to grow—but, as I have highlighted, there are clear risks to that being sustained. We must continue to work hard to address the systematic issues that are a barrier to strong growth, in particular those of weak productivity and our current account deficits, where the issues are genuine and not, as perhaps some aspects are, statistical quirks and issues of economic interpretation.

The financial markets will of course continue to watch closely what happens in the debate over the UK’s membership of the EU. This has clearly had an effect already in the recent past. Some measures of so-called sterling volatility have increased dramatically since January, and in the week following the February European Council the pound fell quite sharply. The Monetary Policy Committee commented a couple of weeks ago that,

“much of the fall in sterling reflects uncertainty surrounding the forthcoming referendum on the United Kingdom’s membership of the European Union”.

In the past week the pound has made a notable recovery as the markets have readjusted their probabilities concerning the EU vote outcome. No doubt this volatility will remain and possibly intensify.

The longer-term ramifications of us leaving could be far more wide-reaching than just volatility for the pound. In my judgment, a vote to leave would constitute a considerable risk to both our economic security and our global influence that we would be bringing on ourselves with no certainties about the alternatives. In that regard, it is not a risk worth taking. There are no silver bullets for our challenges. That is why the Government must continue to follow a long-term plan to take action over not just the next few months but the next few years and decades.

Greece

Debate between Lord Davies of Stamford and Lord O'Neill of Gatley

Monday 6th July 2015 Lords Chamber

[Lord O'Neill of Gatley]

My Lords, as far as I understand the considerable things written on this topic, it is somewhat unclear. It will be a very interesting test case in the event of such an outcome from these important discussions in the next couple of days, and I can imagine a number of legal types will have some fun pursuing these discussions in the event of such an outcome.

[Lord Davies of Stamford (Lab)]

My Lords, I do not think I can readily recall another instance in history in which a Government have succeeded in such a short time in running their economy into the ground, going in six months from an economy which was expanding again and with falling unemployment, to the brink of catastrophe, where Greece stands at present. The Greek Government have now been supported in their policies by the Greek electorate in yesterday’s referendum, apparently on the basis that the more self-destructive their behaviour, the more likely they are to get a large amount of money out of the rest of the world—either out of the rest of the eurozone, or out of the rest of the European Union or the IMF, both of which we are of course members. Does the noble Lord agree that it would be extremely regrettable if such a precedent were created? It would be a major moral hazard if one could get away with such blackmailing policies, and it is very important that this country in particular, as a member of the IMF and the European Union, has nothing to do with any such proposal.

[Lord O'Neill of Gatley]

My Lords, I am afraid that I will answer in a similar spirit to my answer to my noble friend Lord Lawson’s question a couple of minutes ago. I have spent many years talking about these kind of things, but we are at such a delicate stage of discussions following the outcome of the weekend’s referendum, which, I think I am right in saying, was considerably larger than was anticipated by virtually anybody. Now, through this evening and tomorrow, very delicate discussions will take place, and it would not be advantageous for anybody if I offered my opinion on anything that the noble Lord asked about such important, critical details.