Financial Services: Mansion House Speech

Lord Desai Excerpts

Thursday 21st November 2024 Lords Chamber

[Lord Livermore (Lab)]

I am grateful to the noble Lord for his question and the expertise he brings to this conversation. This comes back to the issue of growth that the noble Baroness, Lady Neville-Rolfe, began with; we see these reforms as part of our wider growth strategy and want these significant consolidations and amounts of money to flow, in part, into UK infrastructure and assets to contribute towards our growth strategy. That is a key part of our investment objectives.

[Lord Desai (CB)]

My Lords, does the noble Lord agree that it is not fair to blame the present growth rate on the Labour Government? There are long and variable lags in economics, so whatever investment we make now will take some time to be reflected in the growth statistics. We all ought to calm down, let this policy go through and then see its effect, rather than immediately blaming whatever we do as having failed.

[Lord Livermore (Lab)]

I am very grateful to the noble Lord. It will not surprise anyone to hear that I agree with the sentiment behind his question. He is right that you cannot undo 14 years of damage in one Budget. Our economic strategy is based on the principles of stability, investment and reform; the Budget was about restoring stability to the public finances and therefore stability to the economy, which is the essential underpinning of any growth strategy. The Budget also talked about increasing levels of public investment in our economy; these Mansion House reforms are part of increasing private investment into our economy. The noble Lord is correct that there will be lags in that investment, but we very much hope to see growth coming through in due course.

Autumn Budget 2024

Lord Desai Excerpts

Monday 11th November 2024 Lords Chamber

[Lord Desai (CB)]

I welcome the Budget. I give it about two cheers, not three, for reasons I shall describe.

First, I am very much in favour of high taxation. Indeed, I am notorious for having been sacked twice from the shadow Front Bench for proposing higher taxation when I was in the Labour Party, so I am very pleased that my recommendations, or desires, have been fulfilled. As the noble Lord, Lord Liddle, said, we have to stop believing that we can have an American level of taxation and a British level of welfare state. We should be much more like the northern European countries, which have a 40% or 45% taxation of GDP.

Unless we get to a seriously good rate of taxation we shall have a bad welfare state, bad schools and no growth. We have to stop this delusion that tax cuts lead to growth. We tried it for 14 years during the Conservative Government, and every tax cut destroyed the infrastructure more and more. We cannot go on living like that. When we compare ourselves with America, we forget that in America there is not just the federal tax rate but the state tax rate. Americans have no healthcare and very expensive education, unlike what we have here. We should stop comparing ourselves with Americans and compare ourselves with Sweden, Denmark, Finland and countries like that, which know how to sustain a welfare state in a healthier way. We have to congratulate the Chancellor on having made a beginning to changing this old psychology of having tax cuts all the time and putting us on the path to finally getting a decently financed welfare state.

Having said that, I cannot resist proposing one more tax. It is necessary to say that growth does not come only from investment and, even if it does come from investment, we have to ask how we can encourage people to save more than they do. One of our problems is that the personal savings rate, or investment by private citizens, is not as high as it should be. I think that is because our tax structure is biased against investing in equities and encourages investing in bricks and mortar. There is only one asset in this country that is tax-free. If you have your own house and invest in it, when you sell it, if it is your principal residence, you do not get taxed on the capital gain. Imagine an asset with a 0% taxation rate for capital gains. Obviously, everybody from a very young age wants to get on to the mortgage ladder. Everyone wants to go on investing in housing. In continental Europe, there is a good, healthy rental market, but we do not have a healthy rental market because we destroyed it 50 years ago. I think we need to make people invest not in bricks and mortar but in stocks and shares. If you are going to do that, you have to tax capital gains from housing properly. I urge the Chancellor, next time she has the chance to have a Budget, to tax bricks and mortar properly so that people will stop investing too much in housing and go into stocks and shares.

Finance Bill

Lord Desai Excerpts

2nd reading & Committee negatived & 3rd reading
Wednesday 21st February 2024 Lords Chamber

[Lord Desai (CB)]

My Lords, it is a pleasure to follow the noble Lord, although I cannot say anything technical like he has. The Bill is coming before us far too late to really matter. I know we cannot amend money Bills and so on, but it would have been better had it come after it originally appeared in the Commons.

I have two observations. First, there has been a lot of effort in the Finance Bill, and by the Government generally, to emphasise tax cuts, especially tax cuts on business corporations. As an economist, I know, and it is very easy to show, that tax cuts do not actually encourage investment in a country. Whatever the corporations do, they do not plough it back into investment. Investment depends not on that sort of consideration but on expectations about growth.

What has happened here for the last 15 years is that we have had a number of corporation tax cuts and so on, but the economy has not grown. We have had one of the lowest growth experiences in the last 15 years, roughly since 2008. The Government really ought to think seriously about that, because I know that more tax cuts are promised in the forthcoming Budget. Indeed, the Chancellor is always trying to reassure people that he will find money somewhere—I do not know where—to make tax cuts. Basically, the borrowing rates on government debt are high right now because again and again there have been promises of tax cuts that have alarmed the markets. When the Liz Truss tax cut in particular was announced, it spooked the markets very much and put a lot of pension funds in trouble.

My one piece of advice is: please be careful and do not get mixed up in the idea that tax cuts somehow bring growth. They have the opposite effect from what people think they do. The recession that we have recently experienced, while it was a mild one, shows that all the talk of tax cuts ought to stop. We ought to make quite sure that we reduce our borrowing and enhance other taxes that are not efficiently imposed.

Secondly, there is one major thing, which we have seen the proof of in the Prime Minister and the leader of the Opposition releasing news on their taxes. This showed one major defect in our tax system: that we tax capital gains at a much lower rate than we tax income. That is not healthy. All economists would tell us that we ought to treat income from earnings and from capital gains in a symmetrical way. If we did that, we would increase our tax revenue and reduce our deficit.

Autumn Statement 2023

Lord Desai Excerpts

Wednesday 29th November 2023 Lords Chamber

[Lord Desai (CB)]

My Lords, I wish first to commiserate with the noble Baroness on having a very hard job: of sitting here listening to people and even having to answer questions. Let me assure her that I am not going to pose any questions to her in the course of my speech.

The Statement is not a bad primer for an election manifesto. It is not a serious Autumn Statement but just an election manifesto: “We are going to do such and such”. I should confess that I am an enemy of lower taxation and have been for all of my political life. There is a fallacy in the history of the Conservative Party’s economic policy, which still prevails in this Government after 13 years. They believe that Mrs Thatcher cut taxes, but she actually did not. There are people here who were partners in that crime, so I can tell them about this.

VAT was doubled in the first term of Mrs Thatcher’s Government, from 8% to 15%. The said, “We didn’t quite double it”, because it went up only to 15%. There was money from North Sea oil and from privatisation. This allowed some tax cuts after Lawson became Chancellor of the Exchequer—this was after several years. It was miserable, I can tell you. Until about 1987, it was very miserable and taxes and interest rates were high—up to 15%. I do not want anybody to think that it was nice and happy. It was successful, but to be successful you have to be hard on the economics. You cannot go on planning picnics when you do not have any food in the larder. That is why I worry about this Government. Being a Cross-Bencher, I do not have to worry about which party will come to power, but to believe that tax cuts increase growth is a fallacy that I can disprove any time anyone wants me to. I can give the numbers for that. After the Lawson tax cut, there was a recession, as everybody remembers, and a deficit in the Major Government’s budget.

As the noble Lord, Lord O’Neill, said, if you look at other countries’ taxation, those with higher tax takes than us are richer than us and have a better growth rate. There is an idea that somehow tax cuts raise growth; there is no evidence in the British data on that—and I can tell you that as I used to do this thing for a living. What is interesting is to ask, “Why has growth been so miserably low for the last 13 or 15 years?” I am really surprised when people say, “The growth has gone from 1.5% to 1.6%—how exciting!” As a statistician, I would say that a difference of 0.1% is not statistically significant and nobody should even talk about such small numbers. Anyway, we will let that go; we are not supposed to be a numerate country, so that is all right.

The problem is that we have, at least in this Government, ample proof that, any time you talk about tax cuts, the markets panic and put up the cost of borrowing—so, please, can we stop talking about tax cuts while the deficit is high? We have some room this time, which we have given away in tax cuts, because of inflation. Thanks to inflation and fiscal drag, we had some surplus to spend. But if inflation goes, that surplus will go and the deficit will increase. So please can we not have tax cuts, because it will wreck the economy before the next Government come to power?

I want to propose one tax increase that will actually be growth enhancing. I say that because, more or less ever since the Thatcher years, we have indulged in a luxury that is costing us a lot of money. It is a luxury much beloved by the Conservative Party and by most of the middle classes—who are, according to my friend the noble Lord, Lord Balfe, the people who work. Of course the poor do not work, according to him; only the rich work, which is all right; I do not mind that. The luxury is home ownership. We treat home ownership as one of the biggest tax breaks that I can think of because, when you sell your house, land being in limited supply, you will always make profits—and of course you pay zero tax on it if it is your principal residence. All your unearned capital gain is taxed at 0%. All good middle-class people, with their children going to private schools, if they have money, do not invest in equity; they invest in house buying. Of course you would.

The Resolution Foundation has the numbers about Mum and Dad’s bank: we spend an enormous amount—about £80 billion per year, if I remember correctly. The money invested there would go into equity buying if people had decent rental property. Housing services can be rented or owned; it should make no difference to the quality of the houses. But we believe in home ownership as the foundation of our democracy. If you believe in that, you will have zero growth, because investment supplies the funds of money coming from the middle classes. It will not come if they invest in bricks and mortar. Of course, when it comes to bricks and mortar, we love inflation. Do not knock inflation; inflation has helped you—and please, do not have any tax cuts.

King’s Speech

Lord Desai Excerpts

Monday 13th November 2023 Lords Chamber

[Lord Desai (CB)]

My Lords, it is a privilege to follow the noble Lord, Lord Sikka, but unfortunately he has said some of the things I was going to say, so, as the 57th speaker, I will have to invent something new. Let me say this: I am more worried about the Autumn Statement than about the King’s Speech, because the King’s Speech has passed and we have all spoken on that. I worry about what is about to happen. I think there is a sort of madness in this Government who have been here for 13 years, that somehow the way to proceed is to give tax cuts to the rich and tax the poor. It is a very simple sort of logic any time you say something. You want investment? Give money to the businesses, forgive their taxes and investment will go up. Empirical evidence says that that is never the case: giving tax incentives to investors has never led to investment.

The nearest example is what George Osborne did during the 2010-15 Government. He made corporation tax cuts while giving no concessions to the poorer people, and investment did not increase, because we know there was no growth. Interest rates were low in those days: remember, we had historically one of the lowest interest rates from 2008 to 2020. Investment did not increase; productivity did not increase. People just pocketed the money and spent it on whatever they liked, but talk about anything in universal credit—you want to increase universal credit by £1? Suddenly, fiscal responsibility comes to you: we cannot have a deficit. If you give money to the poor, you will cause a deficit. If you give money to the rich, growth will occur. These are two fallacies on which we have built a really weakened and second-rate economy.

In a sense, it is interesting how things are very topsy-turvy. The Prime Minister wants inflation to come down, and I wish him luck, but he also has to realise that it was inflation and him not adjusting income tax limits to inflation which has got him the surplus that is about to be spent at the Autumn Statement. The room that we suddenly have for ourselves is actually due to inflation, and when inflation stops, the room is going to go away, so he had better be careful.

There is a serious rise in child poverty in this country, which is supposed to be one of the richest countries in the world, we are told—the numbers have been given by the noble Lord, Lord Sikka, and others—and we ought to be ashamed of this. However, all the time the discussion is: how can we abolish inheritance tax? The poor rich people are worried about inheritance tax. The wealth creators need more money. Of course, the people who work do not create wealth, they just work. The wealth creators are people who do not work, who just hire people. I am sorry to be left-wing in these matters, but in a sense it is a perverse understanding of public finances and a perverse understanding of public welfare that have got us into this trouble.

Interestingly, nothing I have said does not have empirical evidence. If people want to see it, I can show them empirical evidence that tax cuts do not cause growth. After Nigel Lawson cut taxes—a great big historic moment in the Thatcher legend—we had a recession. I was here then; 1990 and 1991 were recession years. In the Autumn Statement, please do not cut taxes.

Bank of England: Interest Rate Policy

Lord Desai Excerpts

Wednesday 12th July 2023 Lords Chamber

[Lord Desai (CB)]

My Lords, would the Minister not agree that, although independence of the Bank of England is all right, what we need is competence? The Bank of England was more competent when it was not independent than it is now when it is.

[Baroness Penn (Con)]

Much as noble Lords continue to ask me to comment on the conduct of monetary policy by the Bank of England, as I said, the Government do not comment on the conduct or effectiveness of monetary policy. We continue to support the MPC as it takes action, and we focus on making the tough decisions necessary to tackle inflation.

UK Economy: Growth, Inflation and Productivity

Lord Desai Excerpts

Thursday 29th June 2023 Lords Chamber

[Lord Desai (CB)]

My Lords, I thank my friend, the noble Lord, Lord Eatwell, for introducing this debate. I recall that in June 2022—almost exactly a year ago—we had a similar debate on this question. My friend, the noble Lord, Lord Griffiths, was also there. I said then that we were about to enter an era of stagflation. My idea was that we are going through a repetition of what the British economy went through between 1970 and 1990; I think the noble Lord, Lord Griffiths, made reference to that.

I think we are in a very bad situation and likely to remain so for another 10 years or so, I am sorry to say. Although we are not in recession yet, we are going to be in a recession because, as some noble Lords have said, the Bank of England is failing right now to tackle inflation. It has lost the habit of tackling inflation because, between 2000 and 2020, we had such low rates of inflation that central banks around the world attempted to increase the rate of inflation slightly, to get nearer their target rate. It sounds cruel to say it, but the rate that the Bank of England has fixed right now is not enough to tackle this inflation. I am sorry to say that. I think we are going to get a recession, and it is very hard to say when we will get out of it.

I am now old enough to have cranky views. I believe in something called Kondratiev cycles of 50 years, and I think we are now going to a new phase of a Kondratiev cycle, between 2020 and 2070, as we went through between 1970 and 2020. I am not just making this up. The problem with the British economy is that we deliberately deindustrialised in the 1970s and 1980s as a way of tackling inflation. I cannot give the numbers, but for example the share of industrial trade unionists in the total membership of trade unions was much higher than it is now. We have become a service economy, but our services sector is not as productive as it used to be.

If we look at other economies which are relatively industrialised, such as the US, the US transited to a very productive service sector economy, with digitisation and all that, much faster than we did. We tried to substitute our financial sector for our industries, and our financial sector right now is going through a recession. The City of London is losing business both to the US and to the EU. We have to think of this issue in a slightly longer view than we have been thinking. My guess is that, given where we are in this cycle, if we are going to invest, we will have to invest in higher education, research, fintech, AI and things like that, because that is the only way we will grow.

We are not going to re-establish a steel industry, a car industry or anything like that: those things have gone to Asia. They went to Asia during the 1970 to 1990 cycle. Indeed, very few people know that we conquered inflation not so much by central banks being very efficient, but by our losing industry and that industry moving to the low-tax, low-wage region of Asia. Our imports became cheaper and therefore inflation went down. All the central bank chiefs claim credit for that, but I think it had nothing whatever to do with central banks; it was the transformation of the economy. Basically, the capitalists decided to abandon the West and went to Asia, and that brought inflation down.

We have not actually understood that process: we still think that we are in the old world and we still talk in terms of productivity growth. Productivity growth is very much more difficult to measure or to target in a service industry. One thing we ought to do, if nothing else, is have a commission, or some such thing, to re-examine the notion of productivity. Productivity is a very different thing in a service economy.

Finally, we need a thorough reform of our education system, so that more of our young people get a proper education, including higher education, and can then contribute properly to the service economy.

UK-EU Relationship in Financial Services (European Affairs Committee Report)

Lord Desai Excerpts

Wednesday 17th May 2023 Grand Committee

[Lord Desai (Non-Afl)]

My Lords, I used to belong to a committee which dealt with these financial matters before we Brexited. It was always obvious that, if we did Brexit, we would have some loss of business to Frankfurt and other centres in Europe; after all, that was the whole scene. We somehow convinced ourselves that by breaking free of Europe, the entire rest of the world was suddenly going to congratulate us and come to do business with us, and all sorts of things. The surprising thing is that we are still not finished with the Brexit business.

Seven years later, we are still debating the protocol and all sorts of other legislative things are going on—about cutting European legislation from us, and so on. So it does not look like we are free of Brexit yet, but we have suffered all the disadvantages of it. We are neither free of the EU nor friendly with it, so we are paying a big cost. This is not relevant to our debate, but on the television today two big car factories have been complaining about the fact that they are losing out from Brexit and they are going to have to stop operating in the UK.

One of the surprising things is the slowness with which the party in power has dealt with its great dream. It dreamed about Brexit and said, “Get Brexit done”. Okay, you got Brexit done—but you have not got Brexit done because it is still a problem in the economy. This very nice report valiantly tries to deal with all the problems which are going on. But ultimately, the fact remains that we have not explained to ourselves that the City is losing out. It may still be very big and very profitable, but it is no longer as big as it used to be and it is losing out as much to the US as to the smaller centres in the EU.

The problem we really have to face is how quickly and how soon we can get over this barrier. Having decided to Brexit, let us Brexit, but let us have speedy and neat arrangements whereby we can organise our own affairs. The impression that I get from this report is that, somehow, there is a failure on the part of the Government—I am sorry to say this—to get their act together and decide what it was that they wanted to do, what they expected and how they decided that it was not going to happen because what they expected was far too optimistic and they had not actually calculated the problems of the real world.

One very useful thing that this report says is that there are more financial centres in this country that just the City of London. We must be absolutely careful that these centres thrive. We must do things so that they thrive and do not suffer any disadvantages as against London.

I do not want to go on for very long because people have said what it is worth saying. However, I feel that, at some stage, we ought to know—perhaps from the Minister—how soon we can expect to wrap up all the adjustments and restrictions and get on to a real, normal, post-Brexit UK economy. We are still swimming around in the muddy waters and, until we get out of those muddy waters, we will not know whether we have gained or lost. So far, I think that we are losing but, if we are to gain from Brexit, we had better get Brexit done—and quickly.

Central Bank Digital Currencies (Economic Affairs Committee Report)

Lord Desai Excerpts

Thursday 2nd February 2023 Lords Chamber

[Lord Desai (Non-Afl)]

My Lords, I thank the noble Lord, Lord Bridges, for the committee’s excellent report. Around the time it was issued, I wrote for the website of OMFIF, a think tank that I am involved with, totally rejecting and criticising this scheme. It is not so much that it does not solve a problem but that it will create one.

The most significant problem it will create is that it will deprive ordinary people of easy access to cash. We have to be honest: it may be that cash is declining in terms of total payments but larger payments are made by richer people and smaller payments are made by poorer people. As somebody in Parliament, I feel that it is my duty to care for the smaller people rather than the big people. I do not care what commercial or central banks do with each other about sending money via digital or non-digital means. What concerns me is people who are budgeting their expenditure from day to day. They value cash, access to cash and the ability to approach their bank in person to explain the problem they are in.

When I lived in Camberwell and I went to my local bank branch—that is a rarity nowadays; there are no local bank branches left, which is bad enough—I could see how people were in serious trouble and could not solve their problem unless they were face-to-face with their bank so that they could explain why they needed money and how they could have it. They needed cash. It is also true that we have numeracy problems at all age levels in this country. It is bad enough having to count cash. CBDCs will alarm people in their day-to-day behaviours. It is not a question of what problem CBDCs would solve; I am worried about the problems that they would create, which would be much more serious than the problems they would solve.

The original sin in this respect, if I may say so, is bitcoin. Because it was called a coin, people thought it was money. It is not; it is a token. I call it a “Zen token” because it has Japanese origins. It has no useful value whatever and it has a very uncertain exchange value. Only a gambler would hold bitcoin. Because bitcoin was called a coin instead of a token, lots of copies of those assets have been introduced. As we saw from the FTX debacle, a lot of money can be swindled out of ordinary people.

The sooner we get away from this digital nonsense, the better off we will be—definitely in terms of people’s welfare. We have enough problems with the unequal distribution of money and so on. We certainly do not want to add to those by chasing the latest technology just because it is the latest technology and harming our own citizens. Rather than asking what the Bank of England wants to do, can the Government please say categorically that they have no intention of introducing CBDCs, which would deprive ordinary people of access to cash as they have always known it? Anything else would be deeply harmful to the body politic.

Autumn Statement 2022

Lord Desai Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Desai (Non-Afl)]

My Lords, I shall speak in the gap. In July last, when Boris Johnson was still in power, I said in this House that things are going to get very bad and we will see a repetition of the 1970s and 1980s. The only thing against the Autumn Statement is that it is too optimistic about the future. It more or less says, “Let’s hold on until the election and then we will face up to the reality.” It is not just the UK that is in trouble; I emphasise that this is not local trouble. We had an energy price shock in 1973, and it took us another 16 years before the economy more or less went back to growth. In a situation like this, we have to be ready for a very hard, harsh reality, which we were. We abandoned Keynesianism in the 1970s. We took up monetarism in the 1980s. Governments change, and our philosophies change. We are going to go through a similar crisis now. I am sorry to be the bearer of bad news, but I thought I had better say that.

In a number of ways, we do not realise that our economy has changed fundamentally. In the 1970s and 1980s, we lost manufacturing as a major activity in this country and became more or less a service economy. Manufacturing went to Asia. Part of the story of productivity growth being slow is because we lost manufacturing and gained services. All western countries have similarly lost productivity, partly because productivity is difficult to measure if you are not manufacturing, but partly because we are less productive, and that is the reality. I do not know what the solution is. Yes, history does repeat itself, but there is one difference that I want to mention. During the 1980s, Mrs Thatcher, to her great credit, squeezed the economy dry until inflation went out of the system. She had North Sea oil as a support. She sold social housing, which made some money, and she sold some of the nationalised industries. We do not have that chance any more.

If anything, we are going to face a much worse situation than currently envisaged. We ought to get our thinking out of this current tax and growth nonsense. Forget about all that. Regardless of whatever damage Liz Truss may or may not have done, long before that I had a premonition that this economy was going to go down the drain. That is all I can say. I am not the Chancellor and have no chance of becoming Prime Minister, so I will sit down.