Monetary Policy Committee: Inflation
Lord Deighton Excerpts(11 years, 9 months ago)
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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.
Lord Peston
Dare I say to the Minister that he is mistaken? The word flexibility does not appear anywhere in the Bank of England Act. He is entirely right that the Monetary Policy Committee behaves as if it does have a flexible inflation target—the trouble is that it does not, and therefore it is acting illegally. For a great many years my noble friend Lord Barnett and I have been trying to get the Bank of England Act modified so that what the MPC is doing—which, as the Minister says, is quite right—turns out also to be legal.
Lord Deighton
I do not really want to get into a semantic argument about the definition of flexibility, and I do not know whether it appears in the original Act. However, to my simple understanding, the remit and the MPC’s behaviour clearly demonstrate significant flexibility, which is what you would expect in a policy tool to cope with our difficult and challenging economic circumstances.
Lord Lawson of Blaby
I support my noble friend the Minister in everything that he said and I greatly look forward to the court case which the noble Lord, Lord Peston, is about to bring against the Bank of England. I am sure that that will give us great entertainment value. Is my noble friend aware that to jettison the inflation target at this time or at any other time would mean a loss of financial market credibility and a loss of political credibility for no gain whatever?
Lord Deighton
I thank my noble friend for his expert endorsement. He is absolutely right: our inflation target has served this economy extremely well. The Chancellor and the incoming governor as well as the existing governor have been clear that it would take a very high hurdle to climb over to find a better structure than the one that we currently have.
Lord Howarth of Newport
My Lords, particularly after the bad experiences of previous decades, this—like any—Government should always bear in mind that if we again lost control of inflation, the consequences would be impoverishing, divisive and altogether malign.
Lord Deighton
My Lords, I could not agree more with the noble Lord’s observation. There is nothing more insidious than inflation, which is why sticking to our inflation-targeting mandate, which the independent Monetary Policy Committee pursues with great skill and judgment, is absolutely the right thing to do.
Lord Davidson of Glen Clova
My Lords, given the objective that the MPC is set by Her Majesty’s Treasury, how does the Treasury propose to modify the inflation rate target, since it appears that it needs to accommodate Mr Carney’s new desire for flexibility? Or—harking back to something that has already been said—is it that the flexibility already exists because it accommodates the Bank of England’s failure for more than two years to meet its statutory inflation target?
Lord Deighton
My Lords, it is extremely clear from the MPC’s own minutes how it treats that trade-off. With the House’s indulgence, I will read the most appropriate lines:
“The Committee discussed the appropriate policy response to the combination of the weakness in the economy and the prospect of a further prolonged period of above-target inflation. It agreed that, as long as domestic cost and price pressures remained consistent with inflation returning to the target in the medium term, it was appropriate to look through the temporary, albeit protracted, period of above-target inflation”.
That is the perfect mandate for flexible inflation targeting.
Lord Flight
My Lords, how credible does the Minister think it is that the Bank of England could unwind £380 billion of QE and sell £380 billion of gilts, in the event of velocity of circulation recovering and the economy picking up, so as to stabilise the money supply?
Lord Deighton
My noble friend raises an important question: the technical unwind of the quantitative easing strategy, which is not something which would appear imminent. However when it does take place it will be done in full consultation with the Debt Management Office to ensure that we minimise any volatility to the gilt markets.
Lord Stern of Brentford
The Minister sees virtue in flexibility in monetary policy. Will he comment on the virtue of flexibility in fiscal policy?
Lord Deighton
The noble Lord is absolutely right to point out that there is an array of policy tools at our disposal. The unfortunate reality with respect to fiscal policy is that, given the enormous debts and deficit which we have had to contend with and have sought to consolidate, our room for manoeuvre is significantly diminished.
Banking: LIBOR and EURIBOR
Lord Deighton Excerpts(11 years, 9 months ago)
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Lord Bates
To ask Her Majesty’s Government what plans they have to review the working of the Financial Services Authority’s executive settlement procedures in the light of discounts applied to fines levied as a result of misconduct in relation to the setting of the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR).
The Commercial Secretary to the Treasury (Lord Deighton)
My Lords, the Financial Services Authority awards discounts for early settlement of cases involving financial penalties, as it considers early settlement to be in the public interest. The Government take the manipulation of LIBOR and EURIBOR very seriously. We accepted the weekly review recommendations on LIBOR, and are implementing them in full. Furthermore, we are ensuring that the money raised from these fines will go to specific causes which demonstrate the best of British values.
Lord Bates
I am grateful to my noble friend for that Answer. Does he agree with me that the manipulation of these rates by some banks was a deeply cynical fraud against borrowers in times when they could least afford it, and that while the fines levied by the FSA on those responsible may be at record levels they were a small fraction of the profits made by those institutions? The fines were substantially less than those imposed by the US regulator. Due to the FSA’s executive settlement procedures, those responsible received over £100 million in discounts on the fines levied so far. Would it not be more in keeping with the way in which banks treat their own customers if the FSA was now to scrap early-settlement discounts and replace them with a system of late-settlement penalties?
Lord Deighton
My Lords, my noble friend makes an important point about the seriousness with which we are addressing this attempted manipulation of LIBOR rates. On the specific question of the penalties, the Financial Services Authority is the independent regulator. It is mandated to set all the rules on regulatory matters. That includes decisions about using early-settlement discounts as a way of managing the process. It considers it in the public interest to settle matters in cases involving financial penalties as early as possible and to provide incentives. There are many advantages in early settlement. It helps consumers to get compensation earlier than would otherwise be the case and prevents cases being contested at the regulatory decisions committee, which could cost a lot of time and money.
Lord Barnett
My Lords, does the noble Lord find it as astonishing as I do that, on an issue such as interest rates, which is obviously of great concern both nationally and internationally, nobody in the Bank of England or the Treasury had the faintest idea about what was going on with LIBOR?
Lord Deighton
My Lords, I absolutely accept the noble Lord’s observation that it is really a swingeing indictment of the financial system that a benchmark as critical as LIBOR—which is responsible for settling about $300 trillion-worth of transactions—could be manipulated in this way. Once this was uncovered, however, the Government have moved extremely swiftly, appointing Martin Wheatley, the chief executive-designate of the Financial Conduct Authority, to do a review. He came up with a 10-point plan, which has been implemented in full. The Financial Services Act was amended to make sure that LIBOR activities were brought within statutory regulation; we created a new criminal offence to ensure that it could be followed up in that way and the FSA has now been given the power to compel banks to participate in LIBOR setting.
Lord Higgins
My Lords, would my noble friend agree that the general public are somewhat bemused by the large sums of money involved in these transactions and are even more puzzled as to why there seem to be very few people who have been either prosecuted or convicted with penalties affecting the individuals concerned? Could my noble friend comment on that?
Lord Deighton
My Lords, with respect to the sanctions and penalties, I would point out that there are ongoing criminal investigations with the Serious Fraud Office. Three arrests were made at the beginning of the year, so it is clear that we are determined to follow through on picking up on criminal activity where that can be proven to have taken place.
Lord Eatwell
My Lords, before asking my question, I wonder if the noble Lord could clarify part of his answer to the noble Lord, Lord Bates, where he referred to the “attempted” manipulation of LIBOR. Is he saying that the manipulation failed? Turning to the Question, when I was a member of the Regulatory Decisions Committee of the Financial Services Authority, discounts on penalties were offered for early settlement only in cases where either the firms had reported their own failings or they had offered exceptional levels of co-operation. Did either of these circumstances apply in this case to British banks prior to measures taken by the American authorities?
Lord Deighton
With respect to the noble Lord’s question on whether the attempt was successful, I think that is actually the issue. The FSA’s review found that it was unclear whether the manipulation did result in a change of rates, so that is an open question. On the degree of co-operation shown by the firms under investigation, I understand that the firms were entirely co-operative. Of course, they are all under new management and, effectively, are the new brooms trying to sweep clean. I am afraid that I cannot layer together the timing of that co-operation vis-à-vis the application of the US penalties, but I am happy to look into that and get back to the noble Lord.
Lord Forsyth of Drumlean
Are the Government comfortable with very senior executives in the FSA, who are after all responsible for deciding those penalties, being able to move rapidly into employment with the banks at seven-figure salaries?
Lord Deighton
My noble friend makes a good observation. Clearly, there were some gaps in the historical supervisory structure, which is why we have passed the Financial Services Act reforming entirely the regulatory apparatus around this business. Of course, the FSA is about to be replaced by a combination of the Financial Conduct Authority, the Financial Policy Committee and the Prudential Regulation Authority. We now have a new regime surrounding this arena. I share my noble friend’s concern that moving from gamekeeper to poacher needs to be managed closely.
Lord Campbell-Savours
Are the penalty levels to which the noble Lord referred set in legislation? If so, can we not change the legislation?
Lord Deighton
The penalty levels are a matter for the FSA. In 2010, it re-established the code under which it assesses the fines to make them more transparent. It is an area which has been recently reviewed.
Baroness Kramer
My Lords, may I at least commend the FSA for a new penalty regime which affected misbehaviour after 6 March 2010 and finally had some serious fines behind it? However, I still recommend the US system of triple damages. Does the Minister agree that it is crucial that the Government and all politicians stand behind the regulator in fierce enforcement and tough penalties? It was the slack that we saw cut for the banks under the previous Government that demonstrated to people that government and the regulator seemed to be on the side of the banks and not the people or the taxpayers?
Lord Deighton
My noble friend makes an extremely good point that under the new regime it is critical that government and regulators are seen to work together and to represent the interests of the consumers.
Taxation: Avoidance
Lord Deighton Excerpts(11 years, 9 months ago)
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Baroness Gardner of Parkes
To ask Her Majesty’s Government what proposals they have to deal with any abuse of charitable status for the purposes of tax avoidance.
The Commercial Secretary to the Treasury (Lord Deighton)
My Lords, an organisation must be a charity, under the law of England and Wales, and meet certain other conditions in order to qualify for UK charity tax reliefs. Whether an organisation established in England or Wales is a charity in law is a matter for the Charity Commission. The Government are considering the proposals of the noble Lord, Lord Hodgson, on updating charity law following his review of the Charities Act 2006.
Baroness Gardner of Parkes
I thank the noble Lord for that Answer. I notice that when you complete your tax return, one section asks you to say whether you are a member of a tax avoidance scheme. I am always amazed by that. That makes me wonder whether certain tax avoidance schemes are recognised and approved by the Treasury. Can the noble Lord tell me whether the Cup Trust, which is the one that has been so widely accused in the recent press, is known and approved by the Treasury, or whether it is unknown and that it has come as a shock to the Treasury to have this revelation in the press?
Lord Deighton
My Lords, I cannot comment on the tax affairs of individual taxpayers but what I can do is speak generally. Schemes that abuse the gift aid rules with a view to enabling individuals to avoid tax do fall within the disclosure of tax avoidance schemes rules. That means that anyone who uses such a scheme must disclose it on their tax return. HMRC can then identify those individuals and challenge the reliefs claimed where appropriate.
Lord Davies of Oldham
My Lords, are not the charities that most significantly avoid tax on dubious grounds the public schools? Many of them were granted charitable status when they educated the poor or those of middling incomes. They now clearly educate, overwhelmingly, the children of the wealthy and the privileged, as evidenced by the Conservative Front Bench in the Commons.
Lord Deighton
As I said in my original Answer, the issue of whether an organisation qualifies as a charity is for the Charities Commission. The review of the noble Lord, Lord Hodgson, which reported in the middle of 2012, was given an initial response by the Government just before Christmas. The Public Administration Select Committee is also looking at this and will report, I think, in March. At that point the Government will give their further recommendations on the regulation of the charities sector. That will deal with the issue of which organisations qualify as charities, including public schools.
Lord Strasburger
My Lords, can my noble friend tell the House whether alleged tax avoidance schemes, such as those operated by the Cup Trust, are likely to be caught by the general anti-avoidance rules when they are introduced? Can he also confirm that the general anti-avoidance rules are still scheduled to be introduced in this year’s Finance Bill?
Lord Deighton
I thank my noble friend for giving me the chance to shed further light on this issue. HMRC is extremely clear that circular schemes which are designed to exploit gift aid do not work in tax law. It will challenge and litigate enthusiastically against any scheme that it believes does not work in tax law. As the schemes do not work in tax law, the anti-avoidance provisions are not necessary and the schemes should fall at the first hurdle of not being legally acceptable. However, I can confirm that it is the Government’s intention to include the general anti-avoidance rules as part of the Finance Bill 2013.
Lord Richard
My Lords, does the Minister agree that it is a principle of English law that that which is not forbidden is permitted? Do not the Government recognise that merely to go on bleating from the sidelines and telling people that they should not avoid tax will have absolutely no effect whatever? Clever lawyers will be able to devise ways of continuing to avoid tax. If the Government want to deal with tax avoidance, they will have to legislate to deal with tax avoidance and stop preaching from the sidelines.
Lord Deighton
The Government are prepared to legislate against tax avoidance in the area of charities law. In both 2004 and 2010, Governments legislated to do precisely that. I see this as two distinct areas. On the one hand, we need to create a tax regime which encourages an enterprise economy and giving to charity. On the other hand, the quid pro quo for that kind of positive environment is that people pay their taxes. I can assure the House that HMRC will pursue diligently those who seek to avoid tax.
Lord Lexden
In relation to the Question from the Labour Front Bench, will my noble friend note that independent schools provide far more in bursaries and means-tested scholarships than they receive in benefits through their charitable status?
Lord Deighton
I thank my noble friend for that important addition to the debate. I was not aware of that but I am delighted that he has been able to share it with the House.
Lord Empey
What is the role of the Charity Commission in this? If an organisation pays out to good causes only less than 1% of its revenue, does an alarm bell ring somewhere?
Lord Deighton
In this particular case, as I understand it, the Charity Commission, which works closely with HMRC, investigated the trust but found that it did not have the legal basis to make a challenge. In that context, I refer to the review of the noble Lord, Lord Hodgson, the follow-up from the Government and the announcement made in the other House this morning that the focus of the new chairman, Mr Shawcross, should be on its role as a regulator.
Government: Economic Policies
Lord Deighton Excerpts(11 years, 9 months ago)
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Lord Mitchell
To ask Her Majesty’s Government what is their assessment of the impact of their economic policies during their 1,000 days in office.
The Commercial Secretary to the Treasury (Lord Deighton)
My Lords, the Government’s economic strategy is underpinned by fiscal consolidation, allowing monetary activism and supply-side reforms to support the economy. This strategy has provided the foundations for recovery. Market interest rates have fallen to near-record lows; the deficit has been reduced by a quarter; more than 1 million private sector jobs have been created; and goods exports to China, India and Brazil have increased by around a third.
Lord Mitchell
My Lords, I thank the Minister for that reply. Today, this Government have been in office for 1,000 days: 1,000 days, and we are teetering on the brink of a triple-dip recession; 1,000 days, and the UK’s credit rating is close to being downgraded; 1,000 days, and our national debt is rising; 1,000 days, and our productivity is falling; 1,000 days, and our trade gap is widening. After 1,000 days, does not the Minister think that this Government should stop blaming the previous Government and start taking responsibility for their own failed economic policies?
Lord Deighton
I thank the noble Lord for that question. I confirm that we are facing extraordinarily challenging economic conditions, but the economy is recovering from the most damaging financial crisis in generations after a decade of growth built on unsustainable levels of debt. This Government inherited the largest deficit since the Second World War and the largest in the G20, and we experienced one of the deepest recessions of any major economy. This Government’s strategy is designed to protect the economy through this period of global uncertainty, to maintain market confidence and keep those interest rates low, and to lay the foundations for a stronger, more balanced economy.
Lord Soley
Where is the evidence of growth? Without growth, you will not get out of this deficit. We had larger deficits than this several times in the 19th and 20th centuries, but we got out of them through growth. It is growth that is lacking.
Lord Deighton
I agree with the implicit statement of the noble Lord that the economy is taking a long time to recover. That is because of the depth of the problems that we confront and the global nature of the economic recession with which we are dealing. There is only one effective solution to that, which is to restore market credibility. The only way in which we can do that is to ensure that our finances are absolutely stable. The alternative strategy of borrowing more to increase demand has already been proven, given the state that we got into, not to work. You do not borrow your way out of a recession which is caused by a deficit created by borrowing too much.
Lord Forsyth of Drumlean
Will my noble friend confirm that the reason the Government are facing such terrible economic difficulties is because at the height of the boom created by Gordon Brown, that Government continued to borrow? As a measure of their economic competence, they sold gold at the bottom of the market, which is affectionately known in the City as the “Brown bottom”.
Lord Deighton
I thank my noble friend for that excellent contribution. I will not comment on the timing of selling the gold. Hitting a market high is tough to do. I will refer to what I would call the “scissors of doom”, which is the graph I was first shown when I entered the Treasury, which shows that between 2008 and 2010 spending was heading north at a rapid rate while receipts were heading south at an equally rapid rate, a situation that we are now trying to recover through this period of fiscal consolidation.
Lord Tomlinson
Does the Minister agree that confidence in the United Kingdom is being illustrated by the way sterling is devaluing against the euro—the much derided euro on which we blame so many of our economic ills? If the medicine is so good, why is the patient looking so ill?
Lord Deighton
There are many positive signs. I do not think that the patient does look so ill. I refer to the extraordinary employment levels—the biggest increase in employment for the past 20 years. On the question of the exchange rate, the noble Lord is absolutely correct that sterling has recently weakened against the euro. The exchange rate has two sides: the strength of the eurozone versus the UK economy. What that exchange rate reflects is that many of the risks that have been confronted by the eurozone over the past two or three years are perceived by the market to be diminishing.
Lord Flight
Does the Minister agree that, beneath the aggregate figures, the private sector has actually grown by about 4% since 2010 but that this has been matched by the public sector reduction?
Lord Deighton
I welcome my noble friend’s encouragement to delve a little deeper into the figures. Certainly, with respect to employment, we are seeing a switch from an overinflated public sector to a much more dynamic private sector, which will stand us in very good stead in the longer term. If one looks at the specific factors relating to the output figures, there are some very interesting facts; for example, the majority of the decline in the fourth quarter relates to maintenance in the North Sea, and coping with the long-term decline of that source of revenue to the United Kingdom is a structural problem to which we must adjust.
Lord Barnett
Can the noble Lord tell us, if the economy is going so well, why the deficit is rising?
Lord Deighton
My comments were not intended to imply that the economy was going so well. My comments were intended to imply that the economy is facing extraordinarily difficult circumstances that were a function of the historical debt we accumulated, and a very difficult global situation in terms of demand. With respect to the deficit, I confirm that it has been reduced by a quarter.
Baroness Browning
I think my noble friend will be aware that the fourth-quarter GDP figures in the USA have been missed by miles. Will he assure us that the UK Government will not emulate the Obama spending spree?
Lord Deighton
I thank my noble friend for reinforcing the fact that demonstrating to the world’s financial markets that our spending is properly controlled, and consistent with our capacity to repay the debts that we develop in the international markets, is absolutely at the foundation of our recovery.
Economy: Growth
Lord Deighton Excerpts(11 years, 9 months ago)
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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.