Autumn Statement

Lord Desai Excerpts

Thursday 4th December 2014 Lords Chamber

[Lord Desai (Lab)]

My Lords, we seem to have achieved the best of all possible worlds: a Conservative Chancellor was determined to eliminate the budget deficit in one Parliament and has achieved his predecessor’s idea of halving the budget deficit in one Parliament—so a Conservative Chancellor has achieved a Labour goal. We must welcome this but obviously it will take another Parliament to eliminate the rest of the deficit because life is never easy when you are Chancellor of the Exchequer.

In what little time I have, let me try to make sense of what is going on in the economy. As your Lordships may see, economics is very difficult because not only is it impossible to forecast, it is not even possible to tell what happened in the recent past. We have been told that our income was higher than we thought it was and that we had no double-dip recession—indeed, we had more or less continuous growth over the last five years. That is one fact. We also know that while employment has grown, wages have not kept up with prices and that therefore we face a problem with average real earnings. As my noble friend Lord Haskel pointed out, we also have a productivity problem.

The way to understand these things is, first, that the upgrade in national income was due mainly to things that are not visible in the economy. They are mainly abstract goods and services: this is not the old-fashioned idea of productivity, with a person working in a factory producing something physical. Our idea of productivity is very old-fashioned and the economy is moving away from that, so more or less when we talk about productivity we are really measuring only wages. In the public sector, the wage defines the product—but when you shift people from the public to the private sector, they get a lower wage because private sector wages are lower than public sector wages. Also, only a portion of the output counts as the productivity of the worker because there is a value added, which goes to profit.

So, first, the shift from public sector to private sector will lower productivity as calculated; whether a person is less productive or not does not really matter. Secondly, we have growth, thanks to IT, of jobs that are no longer contributing in any skilled way to output because a lot of what one would call the lower clerical jobs in retailing and elsewhere have now been replaced by IT. What people are doing is something further down the scale, in which productivity is bound to be low because there is not much work being done that involves skills.

These compositional effects of national income mean that we may be stuck with low productivity growth for some time to come: while income growth will happen, productivity growth will not. The first phase of this happened when a lot of manufacturing moved away from the UK and went to Asia. Manufacturing jobs declined, people went into services and productivity growth stopped. We will have a persistent problem of the tax receipts never matching up to the growth numbers—and if that happens, we will have to rethink how we are going to achieve the elimination of the deficit in the next five years. That is the bad news, as it were, but the bad news does not stop there. As far as one can see with what the world is going through, it is not just the UK but the eurozone, in particular, and the rest of the developed world. We used to call the other ones emerging economies. They have emerged and we are submerging, so the submerging developed economies are going to be in a low-growth, low-inflation environment for the next 10 or 15 years, as far as one can tell.

If that is going to happen in one of those long cycles, whoever is the Chancellor is going to have to come to terms with the fact that growth will be low. Maybe our growth will be higher than the world’s growth rate but it is not going to be 3% or 3.5%; it will be 2% or 2.5%. Given that, the budgets are going to be very tight, and even after we eliminate the deficit, there will be no room for any parties. As Crosland said many years ago, “The party’s over”. I think that the party will continue to be over.

Banks: Bridging Finance

Lord Desai Excerpts

Monday 20th October 2014 Lords Chamber

[Lord Newby]

I certainly look forward to reading the report. I will be fascinated to see how that right might be translated into reality for a lot of people, but some local authorities are beginning to look imaginatively about how you help people to move. Very often, one of the big problems is just the physical challenges of sorting out the move, switching the bills and so on. Redbridge, for example, and a number of other authorities have started to provide a service to people who wish to downsize, to help them with all those mechanical arrangements which, for some people, prove to be the last straw in stopping them from downsizing.

[Lord Desai (Lab)]

My Lords, does the Minister recall that during the crisis when we changed from rates and the support grant to the community charge, there was a myth that there were many asset-rich but cash-poor people? It proved not to be true. We are again hearing this myth of asset-rich but cash-poor people, but if they are asset-rich, they should not need a mortgage, as they have enough equity in their present house to relocate.

[Lord Newby]

My Lords, that is obviously the case for many people who have been in the same house for a long time. Some people entering retirement who still have a mortgage may require a mortgage if they are moving to a smaller property, but it is almost by definition going to be a smaller mortgage than the one they previously took out, given that there will have been some capital appreciation. One of the key challenges for us is that research shows that almost half of all over-55 households have spare space in the house. If we can facilitate downsizing where people genuinely want to do it, society as the whole will benefit.

Genuine Economic and Monetary Union (EUC Report)

Lord Desai Excerpts

Wednesday 2nd July 2014 Grand Committee

[Lord Desai (Lab)]

My Lords, I, too, join all other speakers in congratulating my noble friend Lord Harrison and his committee on publishing an excellent report. I want to concentrate on an analysis of what has not happened and what has gone right in this economic and monetary union. Perhaps I should say that when a perfectly good phrase such as “economic and monetary union” acquires the adjective “genuine”, you really have to worry. What is that “genuine” going to do to me that did not happen before?

I recall that when we were discussing the Maastricht treaty in your Lordships’ House, it was quite clear—to me at least—that the single currency was a deflationary union. That became clear in the way that the duties of the central bank were described. Economists used to refer to inside and outside money and there was no outside money in this thing. The money could be generated only by private economic activity because Governments were not allowed to monetise debt. People who signed up to this were blinded by the reputation of the Bundesbank and the success of German economic policy, not realising that that was the result of lots and lots of hard work. They had a tough economic regime, which was never Keynesian. Germany never adopted a single Keynesian policy throughout its post-war development. Quite a lot of the rest of us have been relying on the state to print money here and there in one form or another, and bail us out.

Given that this was the difficulty, you almost have an economic and monetary union that is like the gold standard, but without any guarantee that gold will come in and out. Countries really have to deflate their internal domestic cost to keep pace with the most economically efficient country, which is Germany. Clearly, that has not happened and, as far as the eurozone is concerned, we will therefore be in a continuous deflationary position. I do not see any small way out from that. Where the problem with economic and monetary union arises is that the governance mechanism which is available is not adequate to the ambitious task that the programme has set itself. Again, economic and monetary union is probably feasible when you look at having an EU 12, or maybe an EU 15. With an EU 28, however, the governance mechanism is very slow moving and a lot of it requires consensus, which is difficult to establish within a system that has a great diversity of economic circumstances within its countries.

What we have therefore seen is that in a crisis such as we have just been through, the system has a certain ability to respond. Although we have had no agreement on Eurobonds being issued with debt mutualisation, we have a stability mechanism that has some ability to issue bonds. That came as a result of responding to a crisis and, after various acronyms such as EFSF, EFSM and so on, we finally have some small ability to issue bonds. Similarly, the European Central Bank—the one body in the economic and monetary union which does not have to rely on continuing negotiation and consensus— has been able to act quickly and innovatively. Indeed, the eurozone was saved solely by the ECB being able to act on its own without having to go to the Commission, the Parliament or the Council.

“Okay, whatever it takes”, are some of the most powerful words in the history of the economic and monetary union. As the noble Lord, Lord Lamont, said, once a banker has said that, he does not have to do anything. The fact that he gave a guarantee that he will do it calms the markets down and no one comes to borrow any money from him. In a sense, the European Central Bank has proved to be a pivotal institution to the economic and monetary union because it can speedily respond. I know that there are differences within the governing council of the ECB. The Germans, obviously, are constantly worried that the deflationary mechanism might be diluted. But it is remarkable that it has proved to be the most flexible and innovative institution.

However, we have a problem: the decision-making procedures between the Commission, the Council, the Parliament and so on are not fit for the purpose of achieving a harmonious economic and monetary union any time soon. We all know that we need a system of fiscal transfers but that will not be easy to achieve. It is not quite clear how one can aggregate the political will of the citizens apart from the political will of their Governments. One great problem of the system is that there is no direct involvement of the wider citizenry of Europe in the European political framework. They are engaged in their own national Parliaments and they elect European parliamentarians. I do not know who my MEPs are or how many there are. I consider myself a quite politically conscious person.

One thing that may have to be done in the long run is holding more direct elections of the more important positions, such as the European Commission President. We have just gone into battle about whether the Parliament or the Council has a right to elect. Obviously, the Parliament electing is a more democratic procedure than the European Heads of Government electing or negotiating over dinner. Again, it is not a transparent process. If, for example, the President has to compete in a Europe-wide election in which all the citizens vote, the whole process would have greater legitimacy than it has now.

We may not be able to construct a system of fiscal transfer yet but no one has proposed even a mild expansion of the budget. The European Union budget is one of the smallest budgets imaginable. I think it used to be 1.27% of European GDP but I think it has now gone down. Why does no one propose that it should be increased to 2%? That would allow a little fiscal room for transfer, which currently is not available. If we think of the United States and the full-blown federation, it took the US several decades, a civil war and a great depression before it became an integrated federal union with some fiscal transfers and so on.

It may be that the European Union is on the path, over the next 100 years, to achieving an economic and monetary union but it is not going about it in a fast way. For example, the conclusion of the four Presidents’ report in Box 1 says that the idea is to quickly implement the single market. In 1992, when I was young and innocent, I thought that the Cecchini report had told me that, if a single market was implemented, Europe would be richer by several million dollars. Here we are 22 years later, still talking about implementing the single market mechanism. So something is clearly wrong.

As and when we come to the next report of this brilliant committee, I think that we ought to find out whether we can learn anything from the history of the United States. It is the only comparable body where a federation was created from a diverse political union, albeit that it was a 13-member federation. I think that we have a lot to learn from the United States.

I want to make a final short comment on what my noble friend Lord Liddle said about the single currency that is the sterling area and why there are these problems of unevenness between the London pound and the other pound. If you think about it, the current dissatisfaction in Scotland is not about the currency; it is about fiscal transfers. The currency is all right; the disagreement is about whether the fiscal transfer system is adequate. We really ought to advise the European Union, “Whatever else you do, don’t devise a fiscal transfer system that eventually encourages people to leave the Union”.

Budget Statement

Lord Desai Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Desai (Lab)]

My Lords, what a difference one year makes. Last year, we were all worried about a triple-dip recession and the Chancellor’s Budget was a PR disaster of a kind unknown before. This year, we have had only the small accident relating to bingo and beer, forgetting that we are “all in this together”. Perhaps baccarat and Bollinger should also have been offered relief.

This year, we have recovered. I have been saying for some time—indeed, since before this Government came to power—that, given the depth of the recession that we faced, we could not but have a very hard austerity policy to eliminate the deficit as soon as possible. It was not a very popular thing to say. I said it in a letter in the Sunday Times in February 2010, along with the noble Lord, Lord Turnbull—the only other Member of this House to do so—and many economists, and there were long letters from various of my Keynesian friends saying that I had taken leave of my senses. However, I believe that the primary task of any Government taking office in May 2010 was to eliminate the deficit as soon as possible. It has to be said of the Chancellor that, unlike all his predecessors in the post-war period, he is the only one who has stuck to a strategy which he himself has outlined. Most other Chancellors have deviated from the strategies that they have put forward.

It is not all over yet. We are not out of trouble and we are going to have perhaps another five years of pretty tight economic conditions before we get back to what we believe to be the new normal. The noble Viscount, Lord Eccles, asked why our recession was so deep compared with everybody else’s. That is explained quite a bit by the fact that when we began to lose manufacturing in the 1970s, we replaced it partly with public sector jobs and partly with service sector jobs of two kinds. The higher-paid jobs, for the highly educated, were in the City and the lower-paid jobs were in retail and so on. The people who could not achieve the kind of income that they were making in manufacturing realised that they could sustain their living standards only by borrowing. Therefore, from roughly 1990 to 2007 we sustained our living standards by borrowing. However, the growth rate was not sustainable and it was not sustained, and this economy will not get back to that rate.

It is very important to understand—many people say this—that, had we gone on growing after 2008 at the rate that we had been, the gap today would be 15%. How do we know that we could not have sustained that growth rate? We know because the fundamentals of that rate were very weak. Therefore, we now have to form a new growth path where the rate will not necessarily be as high as the one we were used to. One problem that we will have to face is where that growth is to come from. It will not be easy to bring back manufacturing. People imagine that we have a blank page on which to bring back manufacturing, but there are substantial economies competing with us, especially the emerging economies, which are very good at manufacturing—not only in the low-tech and medium-tech industries but even in high-tech industries. Therefore, we are competing against Brazil, China, India, Indonesia and so on.

If we are to bring back manufacturing, we have to find out where our comparative advantage lies. It may be that, as my noble friend Lord Haskel pointed out, it lies in innovations relating to abstract things such as apps and computers and so on. There, our real comparative advantage is in ingenuity rather than in manufacturing as such. Therefore, when we have made the austerity adjustment, we need to think through what we are going to grow with. That will require a large investment in skilling the population and so on, and it will not be an easy task.

One of the things that many people say is that the Government could have borrowed more and could have spent more. The answer is that the Government did borrow more. They have often been criticised for the debt-to-GDP ratio being very high and public debt having doubled. Until we get rid of the deficit, debt goes on rising. The Government have not borrowed on the fiscal account and spent the money but they have borrowed through the Bank of England. Borrowing through the Bank of England is what has kept the interest rates low. Such recovery as we have had is because low interest rates have meant that a variety of zombie firms survived and households feel richer than they really are.

To that extent, QE has given us some sort of relief but it is misleading relief. At some stage we will have to taper off from what the Bank of England has done, and whether we adopt the suggestion of the noble Lord, Lord Myners, is something that I hope the Minister will come back to when he replies from the Dispatch Box. It is an interesting idea that we cancel one part of the debt with another.

That said, the problem will remain that we will have to start producing a fiscal surplus one of these days. It will not be possible that we, having got to zero deficit, start spending once again. The crucial point is that there was a time in the 1960s, 1970s and 1980s when public spending had a large multiplier. The reason for that was that we had a good demographic situation and healthy manufacturing industries. Those two conditions allowed for the multiplier to be high. We no longer have a good demographic situation and we no longer have a manufacturing industry, except for high-tech industry. Therefore, multipliers will be rather low. This is as true of us as it is of many other economies. We are in a post-Keynesian situation, and we will stay there. To the extent that we can steer the economy, we will have to rely much more on the private economy itself having the health and the capacity to be able to generate its own growth, rather than think that someone can crank a handle and growth will occur.

That era ended in 2008 and is not coming back. There has been a lot of debate about productivity growth. I remember from when I was doing this sort of thing professionally, that in the public sector productivity is measured by salary. The output of a public sector worker is what that public sector work gets paid. The output of a private sector worker has a wage component and then there is a profit component. Productivity can be measured when we are actually producing solid things. It is about the hours worked and the value of the output. It is very difficult to measure productivity in the public sector economy. What has happened is that a number of public sector workers have been shifted from the public sector to the private sector. The high salaries that employees used to make, which we thought of as high productivity, have been swapped for private sector jobs. They are probably being paid less and indeed, their productivity, as measured, would be even less than the wage they get.

The productivity gap that we are all worried about may be a statistical illusion. This is my conjecture and it ought to be checked out by people who do this sort of thing for a living, which I no longer do. We ought not be misled into thinking that either productivity is too low or that we do not have enough spare capacity in the system, and so on. I do not know what the spare capacity in the economy is, or whether it is even a valid concept any longer. If we did not have spare capacity and were having a recovery, we should have inflation, but we do not have inflation. If we have a positive growth rate of, say 2.5%, and we do not have inflation, there must either be spare capacity somewhere or we are in a very happy position. These valid questions open up how much the structure of the economy has changed. If we can begin to grasp that, we will be better off.

I have one final point. It is very tempting to think that the people who pay more than 40% tax are middle class; they are not. They are a minority of the population. Please measure class at least by deciles of income and exclude the top three deciles and the bottom three deciles, so that the people in the middle do not pay 40%. Please do not be kind to 40% taxpayers. Please do not be kind to people who pay inheritance tax. Things are bad enough as they are. We do not have to exacerbate inequality or give money to people who do not deserve it. Both things are an inefficient use of money.

EU: UK Membership

Lord Desai Excerpts

Thursday 24th October 2013 Lords Chamber

[Lord Desai (Lab)]

My Lords, I thank the noble Lord for introducing this debate. He said that he cut his teeth on the 1975 referendum. Fifty years ago, when I was finishing my PhD, my first job offer was to inquire into the relative merits of the six nations that had joined themselves together under the treaty of Rome as against the seven who formed EFTA—so I have lived with this problem for much longer. The debate about whether we should be in or out of Europe will never be over, whichever way the referendum goes. The 1975 referendum did not settle any of these matters, and neither will the 2017 referendum, which will no doubt decide that we should stay in the EU.

I will talk in particular about the topic of economic impact, not about a referendum, because that is the topic before us. In light of what the noble Baroness, Lady Noakes, said, I will take up that question. As the noble Lord, Lord Hannay, said, one thing is certain—that there is no certainty about the economic impact of the United Kingdom’s membership of the European Union. The excellent document that the Library has produced shows the cost to range from between minus 6% to plus 8%; and as the noble Baroness said, the new UKIP document—written by Tim Congdon, for whom I have great respect—says that the figure will be minus 11%. So the figure ranges from between minus 11% to plus 8%. It is probably anybody’s choice. The problem is that each person answering the question grasps a different part of this elephant.

I want to say two things about the figure of 11% arrived at by Tim Congdon. There are two large items in his calculations. The cost of regulation is 5.5% of GDP, and the other major cost is resource misallocation, which is 3.25% of GDP. That comes to 8.75%, which, subtracted from 11%, leaves about 2%. So those two numbers are worth examining in more detail.

As for the larger item—the cost of regulation—let me just list the social directives that are supposed to be costly. They include the safety and heath at work directive, the works council directive, the parental leave directive, the race directive, the equal treatment directive, the working time directive and the gender equality directive. Let us suppose that we were not in the EU. Would we necessarily not have some of those directives? Would we not have the race directive? Would we actually say, “No, we want a racist society”? Would we not have a gender directive of some kind? Do we not already have health and safety legislation? Are we going to jettison that? A proper comparison would be: if we leave, what sort of regulation will we keep, and what is the differential effect of being inside the EU rather than outside the EU?

Similarly when Tim Congdon costs resource allocation, the one definite number he has is that the cost of the common agricultural policy—which I have long opposed—is about 0.5% of GDP. The rest of the cost is computed from a study of tariff and non-tariff barriers in the EU by Patrick Minford which is about eight years old. I have not had time to look at it in detail, nor do I have time to talk about it in detail, but I believe that some of those tariff barriers have disappeared. We ought again to calculate properly whether there are still such tariff barriers within EU trade, and if so, determine whether they are likely to be removed, or whether we will have to live with them. Also, if we leave the EU, what sort of tariff barriers would we face vis-à-vis the remaining EU?

I believe that on all these questions we ought first to calculate the impact costs, and then ask which bits we can remove, examine the counterfactual and allow for the uncertainty of all calculations. I think we will arrive at the conclusion that there is nothing definite to be said about this issue—but then, that is the nature of economics.

Financial Services (Banking Reform) Bill

Lord Desai Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, the noble Lords, Lord Eatwell and Lord Sharkey, have done the Committee a service by raising this issue. Four years on from 2010, when the Government came into office, we have much less competition: banks are bigger; the cost of capital, as the noble Lord, Lord Higgins, said, is more expensive; and SMEs’ credit is still drying up. The problem is that British banking lacks a “spare tyre”, as Adam Posen of the Monetary Policy Committee said. I remember a conversation that I had with Stephen Hester when he was chief executive of the Royal Bank of Scotland. He said, “If you have new entrants into the banks, all they will do is replicate the business model that already exists. You need a Google, a Yahoo or a Facebook to have that disruptive technology”, as the noble Lord, Lord Turnbull, described.

I was of the opinion that, as a commission, we should have a referral to the Competition and Markets Authority straight away because this is an area in which, when talking about change, we are talking about years and possibly decades. If we do not get on to this straight away then we will see very little improvement at all in five or 10 years’ time. As the noble Lord, Lord Eatwell, said, if we are talking about establishing regional banks—an aspiration which the most reverend Primate the Archbishop of Canterbury articulated—we need a secure structure. We have to understand how small banks failed. People say, “Well, small banks are just the same as large banks”. I have a quote here from February 2006 in which an individual said,

“we are now in the midst of another wave of innovation in finance. The changes now underway are most dramatic in the rapid growth in instruments for risk transfer and risk management ... These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively. Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries”.

So, the system is safer. The individual who said that was a certain Tim Geithner, whom the President of the United States then appointed as the United States Treasury Secretary. Mr Geithner had a great knowledge of individual institutions but Mr Geithner, like the IMF and others, was clueless about the interconnectedness of the banks, which is why the banks went down. Whether we are talking about large investment banks or small regional banks we must turn our attention to that area of risk if we want a better system.

My noble friend Lady Liddell mentioned the Airdrie Savings Bank. I was privileged to give the 150th anniversary address there. To re-emphasise what she said, the non-executive directors there were local and unpaid. The Airdrie Savings Bank was a fly on the back of the elephant that was the Royal Bank of Scotland. However, the Airdrie Savings Bank prospered and the Royal Bank of Scotland went under. The Chancellor at that time, Alistair Darling, said that he got a call in the morning from Tom McKillop, the chairman of the Royal Bank of Scotland, saying that it would be out of business in the afternoon if the Government did not step in. Surely there are lessons to be learnt there from the small banks.

I do not accept the proposition that small and regional banks are not on. A chief executive of a very large bank said to me in private that we should look at retail banking in the United Kingdom as utilities—as predictable and boring activities. That is the way we should be looking at our banks. I think a referral to the Competition and Markets Authority would be wise at the moment because we will be talking about this issue for 10 or 15 years to come. If we do not look at the structure of retail banking in the United Kingdom, we are simply going to replicate what we have at present. There is an opportunity for innovative thinking. These amendments offer the Government that opportunity and I hope that the Minister in replying will indicate that this is a fertile area and we can get on to looking at a new structure for our banking.

[Lord Desai (Lab)]

My Lords, I support the amendment in the name of my noble friend Lord Eatwell and want to comment a little on the amendment from the noble Lord, Lord Sharkey, and my noble friend Lord Glasman. The key is what the noble Lord, Lord Higgins, said. Where are the economies of scale in banking from? Why are large banks more successful in surviving and, as it were, swallowing up smaller banks here than they are elsewhere? We had smaller regional banks for a number of years in the 19th century and later. Then we had the concentration of only five large clearing banks left and then even fewer. One question that the competition authority ought to ask is, “Are the economies of scale technological, or is it just that larger banks can borrow money on the money market at a more favourable rate than small banks can? Or are we as authorities putting serious restrictions in the path of small banks to stop them starting and prospering? Are we imposing extra costs on the small banks so that the large banks get away with lower costs than small banks?”. Those are the questions that we ought to examine.

I do not particularly mind whether these are regional banks—what we need is more diversity in banking. Regional and local banks may have failed not because there is something wrong with being local or regional but because there was a storm of cheap credit available and people decided that even if you were a local bank you could still get into the American subprime mortgage market to make money. That is what ruined people; it was not being regional. In a globalised market you have access to buying and selling assets all over the world. German local banks got into subprime mortgage markets in America and lost out.

We really ought to nail down where the economies of scale are and encourage and increase diversity by removing the non-competitive restrictions that currently help large banks to dominate, rather than creating small banks that would have special competitive advantage—as it were, some kind of subsidy—which may be desirable in some larger sense but is not economically efficient. We have to ask whether large banks are surviving because of a competitive advantage and whether they will fail again, costing us a lot of money. Should we look for diversity and a level playing field among large and small banks?

--- Later in debate ---

[Lord Eatwell]

My Lords, I have an amendment in this group and it may be for the convenience of the Committee if I speak to it now. Before doing so, I would like to make two comments about the discussion that has gone on so far. First, Amendment 55 in the name of the noble Lord, Lord Deighton, which includes the meaning of what is a bank, requires very careful exposition by the Minister, because if it says what it appears to say then it seriously undermines the whole discussion about the senior persons regime that we have been having up until now.

Secondly, on the amendments tabled by my noble friend Lord Brennan and his colleagues, it seems that it is incumbent on the Treasury between now and Report to produce a written report demonstrating the noble Lord’s claim that these amendments are unnecessary; showing that the current regime is fully in accord with the latest FATF principles; and therefore providing the comfort which my noble friend might seek if his amendments are indeed unnecessary. Perhaps the noble Lord could also take in some of the points made by the noble Baroness, Lady Noakes, as there are areas that the noble Baroness wants to be sure are equally well covered. Particularly with respect to the issues raised about anti money-laundering and prevention of terrorism principles, it is crucial, as those principles are conveyed into legislation, that we are absolutely clear—and the legislation is clear and explicit—on this matter.

Amendment 100, which is in my name and that of my noble friend Lord Tunnicliffe, proposes to introduce a licensing regime to apply to all approved persons. The noble Lord, Lord Newby, made the extraordinary remark that this would weaken what was elsewhere in the regime as set out in the Government’s amendments. However, I was heartened to hear the noble Lord, Lord Turnbull, use the word licence as I did, and to hear him quote almost word for word the specification of,

“minimum thresholds of competence … integrity, professional qualifications, continuous professional development”,

and so on, which is included in our amendment.

Amendment 100 would significantly strengthen the requirement for approved persons to be suitably qualified in this country, to be licensed and to face the possibility of having the licence removed. Doctors, teachers and lawyers all require some form of professional licence, so why not approved persons in banking? If the noble Lord really undertook to understand this amendment he would realise that it fits precisely with the goals of the commission and would significantly strengthen the quality of regulation and approval of those working in the banking sector in this country.

[Lord Desai]

My Lords, I support what my noble friend Lord Eatwell said and speak in relation to what the noble Lord, Lord Lawson, said. People who are supposed to be responsible for the conduct of, as it were, their inferiors in the bank sometimes do not understand what is happening below them. Certainly, in the case of Baring Brothers the management did not understand what Nick Leeson was doing. This is a matter of competence. I very strongly support this amendment because we ought to have periodic examinations of people in charge of banks, and see whether they pass those examinations, because the profession is changing and they are way behind a changing business.

[Lord Phillips of Sudbury]

My Lords, I support very much what the noble Lord, Lord Eatwell, has just said. We need a clear and authoritative report from my noble friend the Minister as to who is right between the noble Lord, Lord Brennan, who is a highly distinguished lawyer, and those who are advising my noble friend. If there is any doubt about the matter, I see virtue in the amendments put down in the names of the noble Lords, Lord Brennan, Lord McFall and Lord Watson of Invergowrie. I commend the organisations that have helped to craft those important amendments. There again, the noble Baroness, Lady Noakes, seems to make a strong point. If on second thoughts the Minister cannot assure us that the amendment of the noble Lord, Lord Brennan, is superfluous, one would want him to assure the House that the noble Baroness’s concern is superfluous.

Financial Services (Banking Reform) Bill

Lord Desai Excerpts

Tuesday 8th October 2013 Lords Chamber

[Lord Phillips of Sudbury (LD)]

My Lords, this must be the first time in parliamentary history for the amendments to a Bill to be more than three times the length of the Bill itself. Moreover, as others have said, the complexity of both the Bill and the amendments is quite barbaric. I must admit that when I put all the papers on my dining room table to try to make head or tail of them, they occupied 10 feet of space, including all the so-called explanatory documents. Having said that, I thank my noble friend Lord Deighton, who has at least listened to what was said at Second Reading. He has an open mind, which has undoubtedly led to the introduction of a lot of the measures in the amendments that we are now debating in Committee.

I thoroughly support Amendment 3, largely for the same reasons given by the noble Lord, Lord Higgins. We are groping around in an extraordinarily complex area of life and it is abundantly sensible to have these reviews—not just of ring-fencing but a series of reviews—to see how we are coming along and whether the suppositions we are making in the course of this legislation prove to be correct. I disagree with the noble Lords, Lord Eatwell and Lord Tunnicliffe. We need to give time for these new arrangements to bed down and show their paces. Frankly, in each case, four and five years are likely to be better than two years.

I will make a few quick points on the way in which Amendment 3 is put together. We will have an opportunity at the next stage to make changes to what is currently before us. A review panel formed of five persons is unnecessarily large. You might well get by better with three or even two people, so more thought is needed on that. I also note that there is a requirement that the PRA and the FCA carry out their independent reviews but that they publish a joint outcome. Proposed new Section 142J(4) says that they,

“must publish a joint assessment of the impact of the operation of their ring-fencing rules”.

However, they may not agree. You have at least to allow, in this terminology, that that may be the case. You cannot force consensus upon these two august bodies.

The other point is in relation to the appointment of the chair and the endorsement of the Treasury Committee of the House of Commons. It requires that the person appointed,

“is likely to act independently of the Treasury, the PRA and the FCA”.

We should provide that the person is likely to act independently, full stop. It is not only required that they are independent of those three bodies; general independence is required, and so I suggest that those words be excluded.

Finally, proposed new Section 142JA(3) states:

“The persons appointed to conduct a review must include at least one person with substantial experience”.

That is one person out of five. If we are to stick with five people—and I suggest fewer, or at least the prospect of fewer—it is not enough to have only one with experience of all this. This is an extremely complex area of life—there is no area more complex—and experience on the part of more than one person on this panel of reviewers is essential.

That was not quite my final point; I have another quick comment. Proposed new Section 142JB(4) states:

“The report must include … recommendations to the Treasury as to the provision that should be included in orders and regulations”.

It is not inconceivable that there may be no recommendations. Indeed, it is very conceivable that there may be more than one. Therefore the language of proposed new subsection (4) needs amending. I will leave it at that, but I commend the noble Lords who tabled the amendment in this group.

[Lord Desai (Lab)]

My Lords, I apologise for not speaking at Second Reading; I was out of the country. I support the amendment tabled by my noble friend Lord Eatwell. As many noble Lords said, ring-fencing will be a new experience. However, given what happened in the banking industry, and the damage it caused, we have to start the process with extreme care and great suspicion. Given time, I know that the banks will innovate ways of avoiding ring-fencing; that is the nature of the market in innovation. Therefore, before anything further happens, we ought to have early scrutiny of ring-fencing arrangements, as proposed by my noble friend. Later, if we wish, we may do the next review after four or five years, but the initial reviews must be done as early as possible and as toughly as possible, because if we are kind to the banking sector and it does the same thing again, the public will never forgive us.

[Lord Deighton]

My Lords, there have been a number of comments on the length and complexity of the Bill. I am not here to apologise for the Bill, but I know that my officials in the Treasury have worked extraordinarily hard to try to make sense of it and to deliver comprehensive briefs as quickly as the timetable allowed. Therefore, I hope that noble Lords will bear with us as we work our way through this complex process.

At the heart of this group of amendments is the question of the nature of the review and what it is trying to accomplish. The critical point that I want to clarify is that under the Bill the PRA will review the workings of the ring-fence: how well the rules achieve the ring-fence’s objectives and how far the banks are complying. The PRA is not being asked to judge whether the ring-fence is the right policy.

As the Chancellor emphasised in his evidence to the PCBS, the Government have no objection in principle to independent reviews. Indeed, as the House knows well, the ring-fence has its origins in the recommendations of an independent review: that of the Independent Commission on Banking. As I stated, the Bill provides for regular reviews of the operation of the ring-fence. Clause 6 provides for the PRA’s annual report to Parliament to cover the extent of banks’ compliance with the ring-fence—a provision that Amendment 42 will strengthen, as I will discuss in a moment.

Subsection (3) of new Section 142J requires the PRA to carry out a review of ring-fencing rules every five years to assess how well the rules are framed in order to achieve the objectives set for the PRA in the legislation. Should the PRA identify areas where the rules need to be changed, it will have the power—indeed, the responsibility—to do so. Regular reviews of how the mechanics of the ring-fence are working are legitimate and necessary, so it is right that the Bill already provides for them.

On Amendment 42, in response to arguments made in the Commons, we are strengthening the requirement of the PRA to report each year on banks’ compliance with the ring-fence. Amendment 42 requires the PRA to report annually to Parliament on how ring-fenced bodies have used any exemptions to excluded activities or prohibitions. As noble Lords will know, the Bill allows the Government to create exemptions from the exclusion or prohibition of certain activities, as long as the exemptions are not likely to threaten the continuous provision of core services—that is, retail deposit-taking. These exemptions are necessary to allow ring-fenced banks to enter into derivative contracts to manage their own risks. The Government also intend to use this power to permit ring-fenced banks to sell simple derivatives to their customers, subject to safeguards to ensure that this does not expose ring-fenced banks to excessive risks or undermine their resolvability.

It is right that any such exemptions should be closely monitored. We have therefore agreed with the suggestion from the Opposition, who in the other place advocated that the regulator should report on the sale of simple derivatives by ring-fenced banks. However, our amendment goes further, requiring the PRA to report on ring-fenced banks’ use of all exemptions created now or in the future. These will include exposures of ring-fenced banks to financial institutions incurred for the purposes of risk management, providing payment services or trade finance services, as well as the sale of simple derivatives. This amendment will ensure that Parliament has sufficient information to make an informed judgment about whether the ring-fence fulfils its objectives and the exemptions remain fit for purpose.

On the other amendments, it is far less clear to us that we should legislate for repeated reviews of the whole policy. Amendment 3 would effectively reconvene the ICB in perpetuity to ask afresh every few years whether we should continue with the ring-fence at all. I have two main objections to this. First, one of the original aims of establishing the ICB was to secure consensus and certainty over the future of the banking industry in this country. The Chancellor has memorably described how, before this Government took office, he heard four different proposals from the then Prime Minister, Chancellor, Governor of the Bank of England and chairman of the regulator. The ICB process brought together all these voices and others to produce recommendations, including for ring-fencing, that commanded wide consensus support. That consensus gave the industry certainty over the future regulatory framework, which is so important to enable businesses to plan and invest. Reopening that consensus every five years, or indeed even earlier, would undermine that certainty.

If I have learnt one thing in my relatively short period in the Treasury as Commercial Secretary, it is that the one consistent request I get from businesses in every industry is, “Please provide us with a stable and certain framework so that we can plan and invest so as to sustain this recovery”. As I have implied here, shortening the gap between reviews—as Amendments 4 and 5 would do—would add further to the uncertainty. I also question whether it would even be possible for a review to judge after only two years whether ring-fencing was working. Given the scale of the changes involved, any verdict arrived at before ring-fencing has had more time to bed down would surely be premature.

My second objection is to this amendment’s prescription that the terms of reference for these repeated reviews must include considering the case for full separation. This seems rather like requiring that reviews continue until they come up with the right answer. I do not believe that that is appropriate. Given this, I also see no case for delaying the commencement of the Government’s provisions for a firm-specific power of separation until after a review, as Amendment 116 would require.

I turn now to the proposal in Amendments 10 and 14. So that noble Lords are clear, this is quite a different issue. It is for an external review to form part of the procedure for the firm-specific power to require separation. It is the electrification power. As noble Lords will know, the Government have accepted the case for a firm-specific separation power, and we will shortly debate the government amendments designed to make the separation of power already in the Bill more credible and effective. That is what I promised when we first discussed this Bill. However, the Government do not understand the possible justification for an external review to form part of this power. The PCBS proposed this as a safeguard for banks against arbitrary or unreasonable actions by the regulator, but the right of appeal to the tribunal already protects against this possibility. The tribunal, of course, is independent, so an additional safeguard is unnecessary.

Further, an external review could also serve to undermine the electrification process. The PCBS argued powerfully that regulators should not be subject to self-serving lobbying by banks. An external review could easily become an opportunity for banks to lobby during the electrification process to seek to persuade the reviewer that the regulator was acting unreasonably or treating them unfairly. Any bank required to restructure will have a right of appeal at the end of the process, so why give it another opportunity to challenge the regulator? I am also concerned that, even if the bank’s lobbying efforts did not succeed in blocking a requirement to restructure, they could serve to delay it and slow down the process for the regulator to require separation. This seems contrary to the objective, shared by both the PCBS and the Government, of making the electrification process less lengthy and cumbersome. For these reasons, I cannot agree to these proposals, and I call on the noble Lord to withdraw them.

Health and Social Care in England

Lord Desai Excerpts

Thursday 11th July 2013 Lords Chamber

[Lord Desai]

My Lords, I, too, thank my noble friend Lord Patel for initiating this debate. We have heard many innovative speeches already. I think I am the only professional economist speaking in this debate so I had better stick to economics.

First, all projections for 10 years’ time should be ignored. If you predicted backwards, you would find that you were spending negative sums of money 30 years ago. NHS growth has been very uneven. The NHS grew from 3.5% of GDP to 4.5% over 30 years and then from 4.5% to 9% in 20 years, the fastest growth being since 1997. We have been accelerating growth and we did that because of the determination of the Labour Government to increase the proportion of GDP spent on health. There was a target and that target was achieved. GDP growth was good at that time. GDP growth will not resume at anything like the level we had up to 2007. We will have much slower GDP growth with much more attention paid to reducing the size of the state’s share in total spending. We spend up to 48% now and we are going to reduce that to 44% by 2017, but once upon a time we spent only 36%. We will have to reduce it to something like that, and within that smaller share we will have to find money for the NHS. Productivity will have to grow. I must disagree with my noble friend Lord Turnberg. Productivity did not grow between 1997 and 2010. As the King’s Fund report shows, it fell by minus 0.2% per year. Between 2011 and 2015, it will grow by 5%. That is not my number; it is the King’s Fund’s number.

What is to be done? The first thing has to do with universality, which is one characteristic. The noble Baroness, Lady Boothroyd, was quite right. How do we ration this to only people who are entitled? When I arrived in 1965 I was given a card by the NHS with my number on it and I was told I had to show it. Nobody has ever asked me for the card. Why can we not have that very simple thing? The Labour Party abandoned the idea of an identity card. It would be very simple to have our NHS number, which exists somewhere in the ether, and to be asked to show it whenever we go to the doctor. That would sort out the tourists from the citizens. That is one thing.

Secondly, we have to make people aware of what they are getting. My biggest worry about the NHS is that people are not aware of how much they are costing the organisation. If we are spending, say, £2,000 per capita, give everyone something like an airline loyalty card containing 2,000 points and say, “These are your points for this year”. Every time you used the NHS, you would be shown how many points had been deducted. If you missed a GP appointment, it would cost you twice as much as going to that appointment. No one would need to pay anything, but this would make people aware that there are costs for what they do. As people in middle age typically will not need treatment, they would accumulate points over a lifetime so that they could finally spend those points when they needed them. You could have a lifetime budget of shadow points. This would be very good for people. Since I do not have much more time to speak, I think I can sit down.

Budget Statement

Lord Desai Excerpts

Thursday 21st March 2013 Lords Chamber

[Lord Desai]

My Lords, once the Chancellor laid down his strategy for five years, there was not much that he could do in each Budget. That is a consequence of having a long-term strategy. This Budget does not do very much, and I welcome it for that. I do not think that half way through a five-year strategy you should suddenly start listening to people who say, “Cut more”, or “Spend more”, or things like that. If you have a strategy, you stick to it.

Obviously, as many noble Lords have pointed out, external forces and perhaps the miscalculation of the growth process have meant that we are growing at a much lower rate than we expected when the strategy was laid down. I should also say that most other countries have been growing much slower than they thought was possible. So there are structural problems for the economy, as I have said before. We still regard growth as something that will happen automatically, or as something that we deserve. In retrospect, it is clear that some of the growth that occurred between 1992 and 2007 was unsustainable. A lot of it was engendered by easy credit and occurred mainly at the consumption end. Therefore, it was not sustainable. If we are to have growth again, as we will one of these days, let us make sure that it follows structural improvement in the economy and is not credit-driven but genuine productivity-driven growth.

There is not much to say about the Budget because it does not do very much. In the OBR and elsewhere, much emphasis is laid on public sector borrowing and public sector debt. However, we also have the problem of household debt. We have not done enough about the deleveraging of household debt. A chart on page 56 of the OBR report lays down the debt equity ratio of households and the ratio of debt servicing charges to household income. In my view, both those figures show that we are deleveraging far too slowly. Indeed, as the projection shows, the debt equity ratio will go up in the near future. The debt servicing charge income—the income leverage ratio—shows somewhat good results but that is because of QE, which has depressed interest rates, so the cost of servicing household debt is that much lower. That phenomenon should have danger signs attached to it because a lot of households are in negative equity and are just bumping along the bottom thanks to low interest rates.

QE postpones deleveraging. However, we have chosen to concentrate on public sector debt reduction and not to worry about household debt reduction. I hope that the Minister will comment on the fact that the household debt deleveraging problem is not being tackled by the Government to the extent that it should be. In that regard, I am alarmed by the house purchasing initiative. One of the great problems that we have experienced in the British economy, not just recently but for many decades, is that of overinvestment in housing. We have incentivised people to buy houses as opposed to other assets. Like many other economies, we got caught in a housing bubble and have regretted it.

I had hoped that the Government would encourage renting to a much greater extent than they have done. There should be a healthy rented sector for the younger generation and people entering the labour market. However, instead of having a healthy rented sector, we will enter yet another housing bubble. No doubt there will be tears at sunset given that table 4.1 of the OBR report shows the rate at which residential property prices will go up in the next two to three years. That is just a forecast; they may go up at a faster rate than that shown.

Once growth starts, a lot of the money which the OBR has generated, which is lying idle somewhere, will come into play and there will be much greater inflationary pressures for the economy once the recovery begins. There will also be a housing bubble, which will lead to the next financial crisis. I am normally a friend of plan A, but I am worried that there is a temptation for Chancellors to give money away for house purchase. If only we could get people used to the fact that you do not need to own a house and that if you rent one instead you can save your money and invest it in a more productive asset.

I welcome the reduction in national insurance contributions. Some noble Lords may remember that on the previous occasion we debated a Budget, I said that we ought to move away from taxes on income and towards imposing taxes on consumption. National insurance contributions should be abolished forthwith, if possible, and we should shift from income tax to a consumption tax. Further, we ought to have no zero-rated VAT commodities at all—a policy recommendation that got me sacked—and we ought to rely much more on VAT than on income tax for collecting revenue. I do not think that the Chancellor will do that. He is in enough difficulty as it is, and if he follows my policy he will only get into more difficulty, albeit that it would be the correct policy.

Economy: Growth

Lord Desai Excerpts

Tuesday 29th January 2013 Lords Chamber

[Lord Desai]

My Lords, I, too, congratulate the noble Lord on his new appointment. I am afraid I was out of town when the Olympic Games were going on, so I missed the full glory of his achievements, but I am sure that he will match them in his new position.

It is a strange debate in which 25 men and only one woman are speaking. What is wrong with economics that it puts off women? It happened to us last Thursday when we discussed the banking union, and only the noble Baroness, Lady Falkner of Margravine, from the Liberal Democrats was speaking. The noble Baroness is also the only Lib Dem spokesperson, so she is unique in two different respects.

My perspective on this crisis has been different to that of many other noble Lords. It is a much deeper crisis than we think and will take much longer to sort out than we think. The idea that we will get rid of our deficit in five years was never on. We will have to work much harder for this because the roots of this crisis go much deeper.

There are three parts to this. First, around the early 1970s we started de-industrialising, losing our industry, and our industry started migrating to Asia. This happened not only to us but to many other European countries. Germany is an exception, to which I will come. Incidentally, Germany has never adopted any Keynesian policies that I know of. It has always been a non-Keynesian-run country and has always taken horrendous cuts in real wages. Even now, its consumption to income ratio is lower than in the UK, regardless of what growth it has. It is a very different kind of economy and we are not about to replicate Germany. We can forget that.

Conservative voters do not like infrastructure development, such as HS2. Forget about Labour; our prosperous people are anti-growth with regard to HS2. Our prosperous people are against the third runway. We have a deeply anti-growth mentality. This is not my main point, but I want to point out that we are somewhat perverse in our desire for growth. When it actually comes to our doorstep, we say, “Take it somewhere else, thank you very much”.

But to go back to my point, we got into de-industrialising early in the 1970s, and this happened to quite a lot of other countries. When we finally lost a lot of industry, some of which we could not keep here because we had priced ourselves out of international markets, we replaced it with a service sector through much of the 1990s. Economics is a strange subject. In neoclassical economics, it does not really matter whether you dig ditches or make a car or make candyfloss. It is all income. If you make candyfloss and not cars, you are still growing. In the 1990s, we had the longest boom, for 15 years, but it was entirely based on the growth of the financial services sector. Our wealth creation was in the financial services sector. I know it is no longer fashionable to like the financial services sector and we find it not socially useful, but we lived off that sector for 15 years. We did not reindustrialise or do anything about upskilling. I have been in this country for 45 years and every year we say, “We should have more apprentices, German-style”. Wow, there we go again. We have not reindustrialised; we have been happy with the financial services sector.

As a part of that, we stopped saving. Households stopped saving, and Governments stopped saving. Our crisis has arisen from over-spending, under-saving and over-borrowing. It was not only us; almost the entire western world under-saved and over-borrowed, and the poor, fast-emerging Asians were lending us a lot of their money. They were not only lending us money, they were also exporting goods to us which we bought with the money they had lent us. So, in a vicious circle, we went on having balance of trade deficits thanks to the money they had given us. It was like a drug dealer giving you money to buy drugs and then you need more drugs.

Getting out of an over-spending crisis is not easy, as the noble Lord, Lord Skidelsky, pointed out. This is a portfolio of a stock disequilibrium crisis, and it will take a long time for our savings to recover to anything like a decent standard. The noble Lord, Lord Lang, talked cogently about our problems with the pensions industry, and so on but, given our demographics, we need to get to a level of savings higher than what it was in the 1990s. The question is what we are going to do to get our level of savings higher than it previously was. How are we going to get to that stage?

I know that there is a clear division between Keynesians who think that one more bout of spending will get us out of this crisis. I have studied Keynesian economics and I have been a Keynesian economist, although I am not one during this crisis. Our problems arise from what we did during the prosperous years about spending. It is not what we borrowed after 2008 that is the problem; our problem is that we borrowed at the top of the boom and that our debt to GDP ratio went up in the good years. Had it been the case that borrowing was self-liquidating, we would not have been in this situation. So, to some extent, there is a problem, not about borrowing but what you spend it on. Some spending is self-liquidating, while other spending is not. Obviously, we had a balance between the public sector and private sector or, perhaps, between the wealth-creating sector and the welfare-creating sector. That balance went awry somewhere during the boom years. We started at 36% of GDP being spent by the state in 1997, when Labour came to power; it was 44% by 2007 before the crisis hit us. At the end of all the misery that this is going to cause us, we are going to return to 44%. All the adjustments, no matter how long they take, will only get us back to 44%, and there will still be a lot more structural adjustment to do when we are through with this. After we have eliminated the deficit and stabilised the debt level, we will start rebuilding the economy. This is just patchwork. We have to think about this problem more seriously.

I believe, and have always believed, that QE was a disastrous mistake. When you need to raise your savings, if you cut interest rates you discourage savings, a point made by the noble Lord, Lord Lang. Furthermore, we know that while households and Governments are in debt, corporates are in surplus cash and no one is investing. One reason could be, of course, that there is no demand, but another problem is the uncertainty about interest rates. Everyone knows that one of these days QE is going to come to stop and interest rates are going to go up. Until I see how interest rates are going to go up, why would I invest? Why would I invest now, when interest rates are 0.5%, when I know that they are going to 6% further down the line?

One thing that Mark Carney can do—although I do not think he will listen to me, if anyone—is to stop QE. Let us get out of QE as fast as we can. A very loose monetary policy and a very tight fiscal policy have so far not had much effect on the economy. We are bumping along at the bottom. Minus 0.3% is neither here nor there because, in any of these things, the standard error is plus and minus 1%. It is like opinion polls; we are always told that error is plus to minus 3%, so do not take the actual numbers assessed as serious numbers. We have been bumping along at the bottom for roughly three years, as has the eurozone economy. The Americans are doing slightly better. However, relative to their potential growth rate, they are also quite far down, and this is a problem of the entire western world.

It is not easy to be convinced, and I am not convinced, that a reinvigoration of the Government’s spending programme on the capital side will necessarily lead us out of this problem. This is partly because, if you are going to spend on investment projects, the pay-off is delayed and long. So your spending today is not going to bring economic growth immediately. The IMF studies show that if in one year the multiplier is one-half and in the second year it is two-and-a-half, the model needs re-examination. What sort of model is it? Next year it may be three-and-a-half or one-quarter, I do not know, but it is not a Keynesian problem—it is a very different problem—and we will have to bump along on the bottom.

Many of the policies suggested will not work, partly because of the delays which feature in infrastructure, as the noble Lord, Lord Birt, pointed out, and as we well know. So even if we planned to spend money, even if the Government were to announce £50 billion of investment, that £50 billion is not going to enter the economy at any time soon and, if it does, it will not lead to income growth rates. I am very gloomy about bumping along the bottom until confidence revives in the private sector and it starts investing again. The noble Lord, Lord Sheikh, mentioned that stock markets are feeling very happy. They must know something that we do not, but they are clearly feeling euphorious. People are into junk bonds and equity markets, so maybe there are some undercurrents of optimism, but we do not know what it is.

Everyone else has spoken about infrastructure, so I will not talk about that. One reform that I hope we can accomplish, I do not know how soon, is to start not taxing income but taxing expenditure. It is a long-delayed reform. If you have an economy which needs to save more, you do not tax income, you tax consumption and expenditure. Secondly, I do not think we should tax profits. We should tax material consumption or carbon emissions, but not profits. Nor should we tax employment, as we do with national insurance contributions. We are doing everything wrong. If we are going to permanently change the economy, stop taxing income and tax expenditure; stop taxing profits and tax material consumption; and stop taxing employment, as far as possible. If we begin to make those kinds of long-term changes, perhaps we will get back into the spending habit and, if the savings are there and interest rates fall back into the normal pattern, we will have growth coming from the private sector and not necessarily the public sector.