European Banking Union: EUC Report

Lord Desai Excerpts

Thursday 24th January 2013 Lords Chamber

[Lord Desai]

My Lords, I, too, join other noble Lords in thanking my noble friend Lord Harrison for an excellent report. I shall not talk about either Mr Cameron or the UK but want to concentrate on the banking union. One question I want to pose is why the eurozone members thought, in the middle of the crisis, that a solution to the problem was a banking union. If you think about the financial crisis, both the US and the UK had a banking union—they were each a single banking union—but it did not prevent a collapse. Having a single banking regulatory authority, in our case the FSA, did not prevent the collapse. It is very good that structures are created but we ought to ask whether those structures actually do the job they are supposed to do.

I remember in your Lordships’ House about two years ago, or maybe more, sitting in a discussion about the European system of financial supervision. A huge structure was set up for a banking authority, an insurance and occupational pensions authority, and a securities and market authority. It is obvious that none of those things helped when the crisis came—or they certainly did not make any impact in preventing anything that happened. We are now adding another institution and, as noble Lords have pointed out, there will be problems in respect of the overlap between the EBA and the ECB.

The basic problem here is that we are only slowly understanding the nature of the euro, which, in a sense, is a private currency. It is not a national currency, such as sterling or the dollar, where Governments have more control over money creation. Euros can be created only if the ECB is approached by a commercial bank that gives collateral, sovereign debt or something else, and counterpart money is created. As the noble Lord, Lord Flight, said, it is like a gold standard but without the Californian or Australian mines suddenly adding more gold to the total supply. In particular, the strong deflationary character of the euro was understood only when the crisis started. Until then, nobody quite understood what the euro was all about. It is a currency for which there can be no democratic accountability, because the whole Maastricht treaty was designed, on the lines of the Bundesbank’s authority, to have the central bank immune from any democratic control, which was thought to be the standard of monetary responsibility.

I think the ECB is a marvellous institution—right now it is the only institution which is working at the eurozone level, and it did a splendid thing by having its outright monetary transactions authority save Spain from seizing up. However, we have to understand that we have created a currency in the eurozone which will be permanently deflationary. Unless you break the Maastricht treaty and allow the ECB to directly monetise sovereign debt, it will remain deflationary.

As far as I can see, something miraculous will happen to our competitiveness, but, by and large for the next 10 years or so, the eurozone will be stagnant. It will be more or less a 0%-to-1% growth-rate economy. Let us remember that Napoleon looked at a map and said, “There is China; there’s a sleeping giant; let it sleep”. Well, that is going to happen to the eurozone. I am not a Eurosceptic—I am a great admirer of the EU—but this is what we have constructed for ourselves. Let us remember that, in the gold standard, you could thrive only with extremely flexible labour and commodity markets; now, you cannot.

As many noble Lords know, the EU is not a genuine single market as yet and we are still waiting for the Lisbon treaty recommendations on flexible markets to be implemented. In that context, a deflationary currency has a problem. One of the problems facing the banking union, as the report quite properly points out, is that you cannot envisage the ECB looking after 6,000 banks. The ECB will look after the big players, especially those which have cross-border operations. It will be like the Premier League—I think the previous speaker said something about the Premier League council. The problem here is that you will have to be the national supervisory authority of those banks to concede power to the ECB. There will also be macroprudential problems. Those large banks will also have connections with smaller banks within their own territory, which will then be supervised by their national authorities. It is not clear that co-ordination between national authorities, which will be guarding the smaller banks, and the ECB, which will be guarding the larger banks—the hub-and-spoke idea that people are talking about—has been worked out as yet. You will therefore have to devise a set of engagement rules between the various national regulators and the ECB, because, as far as I know, the national regulators need not legally be subservient to the ECB—they may be, but they will not be. That is going to be a substantial problem.

Along the way, in a deflationary climate, there might also be mergers and consolidation. Those 6,000 banks will not remain 6,000 banks; we will probably see consolidation. I wish that we had fewer banks in Europe than we have right now, because if you have got a single currency, why do you need so many different banks? It is not clear to me how the ECB will deal with the trickier problem of the dynamics of consolidation, mergers and acquisition and still maintain its authority as a regulator.

Where the issue will finally come to a head is in whether banking union will help the recapitalisation of banks which could possibly fail. When in June 2012 the proposal was made to speed up banking union, the idea was that it would somehow make it easier to recapitalise banks. As the noble Lord, Lord Flight, pointed out, there are difficulties about that, because we lack in the eurozone a genuine pooling of risk. Governments are not willing, so far, genuinely to pool risks. They would rather that each Government look after their local failing banks and recapitalise through issuing more sovereign debt, which the market may not want to buy at any reasonable price.

If so, what happens to the larger banks which are being directly supported by the ECB? Who will bail out the larger banks? We then go back to the national rule. I do not think that Deutsche Bank will fail, but if it was about to, would that be Germany’s or the ECB’s responsibility? Would the money come from the European stability mechanism? How will that be done?

The banking union throws up a number of interesting issues. We are still in the early days. It is not at all clear to me that, having said, “Let us have a banking union”, all problems are solved. The problems of the banking union are just beginning.

As I do not want to speak for more than 10 minutes, all I can say is that I hope that the noble Lord, Lord Harrison, is there to give us the next report when things get worse—or better.

Financial Services Bill

Lord Desai Excerpts

Wednesday 24th October 2012 Lords Chamber

[Lord Davies of Oldham]

My Lords, I hope that the noble Baroness, Lady Noakes, can stand the accolades that are coming from this side of the House after her speech. I think that she has posed the Minister some very appropriate questions, while my noble friend Lord Peston goes a little further by saying, “What’s the clause here for at all?”. So the Minister has quite a lot on his plate in responding to this debate already, and all this puts the official opposition amendments very much into the minor case. Our amendments in this group, Amendments 192ZZA, 192ZZB and 192C, call for the directions to be laid before Parliament. These are directions in respect of a direction to the FCA from the Treasury to carry out an investigation into possible regulatory failure. Of course, I am at one with my noble friend Lord Peston when he indicates that investigations are about what has gone wrong, and the lessons which can be learnt in order to prevent any reoccurrence. Intervention in time is what is needed if one wants to prevent things going badly wrong. Therefore, with these amendments, we are merely seeking for the issues to be open and transparent. Nothing could make them more transparent than that they should be laid before Parliament.

In passing, on other amendments in this group, those in the name of my noble friend Lord McFall also have some merit. He calls for the person appointed to chair any inquiry set up under these provisions to be “suitably qualified and experienced”; I hope that the Minister can give a positive response to that. He also calls for an exemption for information in respect of which a claim to legal professional privilege could be made; I am sure that the Minister will look sympathetically on that. Of course, his Amendment 193 says that any investigator appointed must be “suitably qualified and experienced”. Now, the Minister and I understand that he only has to reply to the amendment that has been moved in this group but, as we are in Committee, it might be useful if the Minister gives us as comprehensive a reply as possible to the whole group.

[Lord Desai]

My Lords, before the Minister replies, I am puzzled, given what the noble Baroness has said, when I read the clause. What are the circumstances under which the Government will not order an inquiry? Are they things like when we had the fiasco with RBS, where an inquiry was conducted, hushed up and not published until we literally marched in the streets for the FSA to do so? Can the Minister explain under what circumstances the Treasury would not order an inquiry if such events had happened?

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

My Lords, I will try to address a number of those points. I will stick to the amendments that have been moved or spoken to rather than those that have not.

This group of amendments, as we have heard, relates to two of the mechanisms by which the PRA and the FCA can be held to account for regulatory failures. One of the key lessons learnt from the crisis, of course, is that we need greater openness and transparency about where things go wrong and about what lessons can be learnt. In that context, I think that my noble friend has got it completely right about the circumstances in which an independent inquiry might be called for, as opposed to self-investigation. I will leave that one at that.

I would also just say to my noble friend that Section 14 of FiSMA is being repealed. That is dealt with in Clause 5(1). However, the Treasury can use the new power in Clause 64 to arrange an inquiry into action that predates the Bill.

Infrastructure (Financial Assistance) Bill

Lord Desai Excerpts

Tuesday 23rd October 2012 Lords Chamber

[Lord Desai]

My Lords, as I came into the Chamber this afternoon, I was told that I had missed the U-turn on the badger cull, but I am glad that I am here to see the U-turn on the Treasury’s economic policy. Unlike the badger cull, it is as if only some badgers are not going to be culled, but others will be. It is a very minor regression from their policy by the Government. I guess it will do no harm to spend £50 billion doing something, although I still do not quite understand why it is necessary.

There are two problems. The Government’s economic case—I thought I was one of the few people who understood it—was that they would withdraw from spending money because we do not have any money, which is fair enough, and the private sector would take over investment. The private sector is flush with money. There is absolutely no shortage of funds in the private sector. The balance sheets of private corporations are very generously funded. Therefore, if these infrastructure projects cannot get money from the private sector, one needs to know what the market failure is. If the market failure is that the Government should have been spending this money anyway, why are we doing it? If the problem is that the Government have to spend money because projects will not be funded by the private sector, I understand that. I grew up with that argument and have no problem with it, but in that case, £50 billion is not enough. As my noble friend Lord Adonis pointed out, there are many more things that could be done.

The Government are not doing that, but are doing this. I still have not seen an intellectual case or any evidence that significant numbers of people are unable to get money, although it may be the case. One reason could be that people need some kind of pump-priming investment so the Government have to start something for other people join in. The Government have to show some confidence in the long-term prospects of the economy by, for example, starting a third runway, upgrading the A14 or whatever, and then there would be supplementary investment. But this says that the Government will not do anything except stand there because in 1932 Baldwin prevented the Government doing it. I find it very surprising that the Government cannot do this in any case, but that is a bureaucratic thing, a regular Treasury thing, and so I will never understand it.

I find it intellectually impossible to understand why it is being done now, why, if it is being done now, it could not have been done two years ago and why a much more ambitious scheme could not have been done many years ago. Why have the Government waited two years and had a massacre of infrastructure projects before we got to this? Lastly, have the Government any idea whether this is going to work? I still do not know which projects are stuck because they cannot get a bank loan. If they cannot get a bank loan, is it because the project will not make money? If that is the case, is the taxpayer about to lose more money than before?

Financial Services Bill

Lord Desai Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Newby]

My Lords, I can deal with the first part of that intervention more quickly and easily than the second. The first “must” in subsection (2) is there because it is an EU legal requirement. If we are asked to do something, we have to do it; we do not have the option of not doing it. There is a good reason for a “must” there.

With regard to the noble Lord’s second point, I was speculating about the Romanian or Hungarian or Finnish languages as he was speaking and wondering whether there was the same absolute distinction between “may” and “must” in every case. I am not an expert in every bit of regulation in every member state. I realise that this is a major deficiency but I do not think that it pertains very strongly to the amendments before us today. For the second time, the noble Lord has raised a potential other amendment that is not on the Marshalled List. If he will excuse me, I will go back to concentrating on the ones that are.

[Lord Desai]

Perhaps I may say one word in favour of my noble friend’s amendment. It strikes me that there may be what we call a multicultural problem here, that in an investment situation relatives are defined much more broadly in certain communities than others. The noble Lord may be right that “may” will do and “must” will not do, but I have been asked to be non-executive director of some Indian companies and the number of relations they ask me to certify who do not hold assets in that company runs to something like 30. I hope that the regulators are aware that “must” may be a better word than “may”, but I concede the point, as long as the noble Lord assures me that the regulators are aware of the multicultural problem.

[Lord Newby]

I am sure that the regulators are aware of the multicultural problem, but the example given by the noble Lord absolutely exemplifies the problem. If one had a single-trader IFA who came from a particular culture and had a very large extended family, it would be at a disproportionate cost that the regulator looked at every single relationship that he or she had, which could run to many hundreds.

[Lord Desai]

Until it goes wrong.

[Lord Newby]

That is why the regulator has to look at relevant and appropriate relationships rather than everybody who could be conceivably considered to have a relationship with that regulated entity or individual.

Amendment 152 was also put forward by the noble Lord, Lord McFall. I hope that I can persuade the Committee that, again, this is unnecessary. It is important that those to whom permission is granted are not subject to influences that may act in a way which is not in the best interests of potential clients. That is why new Section 55R(1) is in the Bill. The current text in new Section 55R(1) refers to “relationship”. It deliberately does not specify the nature or type of the relationship, so that out of all conceivable relationships—including family, business, and other associations—the regulators can exercise their judgment on which relationships should be investigated and which should be factored in to the instances of decision-making set out in new Section 55R(1). This reiterates the point that I have just been making to the noble Lord, Lord Desai, that a degree of judgment needs to be exercised by the regulator over which relationships are taken into account.

However, I assure the noble Lord, Lord McFall, that the specific types of relationships to which his amendments refer will be among those considered by the regulator and will be looked at where appropriate. Therefore, I hope that the noble Lord will be satisfied that the amendments are unnecessary.

--- Later in debate ---

[Lord Marlesford]

May I just make one very small point to my noble friend? I declare an interest straightaway as a modest customer of the national savings bank. Along with many other people, I suspect, I assumed that if one had money in the national savings bank there was no way in which one would not be paid, however much money one had in it, in the event of any sort of default. When it transpired a couple of years ago that the national savings bank had put most of its money into the Bank of Ireland, certain fears were raised. It then became clear that the rules on the limit of compensation applied to money deposited with the national savings bank, just as they did to anything else. There was an implicit guarantee by reputation, as it were, on money put in the national savings bank, and the noble Lord’s point underlines the need for implicit guarantees to be cancelled by explicit denials of obligation.

[Lord Desai]

I add to what the noble Lord, Lord Marlesford, has said. As a depositor in the US, I had a cheque book and it said on each cheque that I wrote to what extent my deposits were guaranteed by the FDIC. It is all right for the FSA handbook to say something, but it would be much better if on my debit card or cheque book—although people do not use cheque books any more—it said to what extent my deposit was guaranteed. If it said that, it would be very good.

[Lord Sassoon]

I thought that I had said this, but I shall say it again. The detail of what is covered is a requirement that comes with your bank statement, which is a more appropriate place. It is better to have it attached to the bank statement than on a cheque when you are paying money out. So it is there, and it is completely clear in the rules in the FSA handbook.

[Lord Desai]

I do not carry my bank statement with me, but I do carry my debit card.

[Lord Davies of Oldham]

My Lords, I am grateful for the additional contributions from the noble Lord, Lord Marlesford, and my noble friend Lord Desai, who at least emphasised the justification for our concern that we should make this issue as explicit as possible. My amendment would put it in the Bill. I accept what the Minister says on the enhanced flexibility of it being within the framework of the relevant regulators, but at times we need to assure the country that we are addressing ourselves to the very real anxieties that people have in the context of developments in recent years, particularly when considering this Bill. I accept the Minister’s remarks. He may be somewhat relieved that my batting average dropped below 100 as soon as I lost the first amendment this afternoon. It was some relief to me; even Don Bradman, after all, had an average of only 99.94, so I do not mind if it declines a little further, given the assurances that the Minister has given to the House.

Banking Reform

Lord Desai Excerpts

Thursday 14th June 2012 Lords Chamber

[Lord Sassoon]

The noble Lord, Lord Rees-Mogg, of course speaks with great authority on these matters. All I do is to say that I listen with great interest to his historical analysis.

[Lord Desai]

My Lords, before we had the report from Sir John Vickers at the commission, there was talk of living wills that banks would make. Whatever happens, we are now to make quite sure that the taxpayer does not once again have to bail banks out. While it is all right to have ring-fencing and so on, we have to remember that Northern Rock was not a bank with investment banking divisions. It was a bank which failed purely because of misbehaviour. Are we sure that, whatever happens, if even a ring-fenced bank fails it will not be rescued by the taxpayer?

[Lord Sassoon]

The noble Lord, Lord Desai, as always, brings up important points. Of course, living wills are an integral part of the whole construct for better resolution of banks than we had before. Indeed, the FSA has been leading the project for a couple of years or more to make sure that all the arrangements are in place. The noble Lord draws attention to another important part of the construct.

Financial Services Bill

Lord Desai Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Desai]

My Lords, this has been an excellent debate, especially the maiden speech of the noble Lord, Lord O’Donnell. I am reminded of a debate we had when we considered the Financial Services and Markets Bill. At the time we were sure that the self-regulation of various bodies in the City had failed—the noble Lord, Lord Hunt of Wirral, mentioned self-regulation—and that we needed cross-border co-ordination and an overarching authority. We thought we had that in the Financial Services Authority, because at the time the problem lay in the interconnections between different parts of the financial sector that were not well understood. I recall that we were proud of a special provision in the Bill to ensure that the chairman and chief executive of the authority would be the same person. Sir Howard Davies was chosen. We thought that the centralisation of authority in one person was key to the success of the authority.

We have moved on, and now we have the Financial Services Bill “Act Two”. I have absolutely no practical experience of anything, but I want to emphasise that these Bills are always based on an underlying concept. The conceptual basis of the FSA proved to be wrong. It was not just that it was based on light-touch regulation—we all believed in that—but that the kind of world we thought we were regulating was no longer the world that was out there. My main worry is whether, when these bodies have been set up, they will be able to deal with the problems they have to face. I shall take a line from my noble friend Lord McFall, who said that risk is a black box. Our main problem recently in the cases of MF Global, JPMorgan Chase and others has been that the people who are professional workers in the field can no longer grasp the kind of risk they are undertaking.

What is also happening in the literature is that what was once the standard, basic concept, that of a financial analysis of value and risk, is now in doubt in that people wonder whether it is a robust enough concept to guide them through operations in the financial market. As it turned out in the case of JPMorgan Chase, the product it was engaged in putting money into was so complex that the top management, which is among the best management there is, did not actually understand the nature of the risk that its people were taking. Surprisingly, however, when the so-called London Whale was taking a position in the sovereign debt euro market, someone called the New York Monster sitting in New York knew precisely what was going on and spotted the anomaly in the big bet that JPMorgan Chase was taking. He decided that the bet had to fail. He took a counterposition and cleaned up. The market worked, but the institution has completely failed because the people in charge did not understand the nature of the risks that some of their subordinates were taking.

That is exactly the story of Barings Bank. When it failed, it was because the top management at the bank did not understand why they were making so much money in the Far East. They were making money in the Far East because a man called Nick Leeson was taking unhedged bets on the yen. Those bets were publicly known to anyone who looked at what was happening in the Yokohama market. I remember discussing it here at the time. Not only did the top management at Barings not understand what had happened, the top men in the Bank of England did not understand it either. A report was later produced which we debated in your Lordships’ House. These regulatory people face a problem: can they keep up with the nature of the reality, which is very fast-changing, complex and mathematical, so much so that even those operating in the field do not understand it? It is almost like playing rugby without knowing the rules, and even then the rules keep on changing while you are trying to play.

There has been some coverage in the Financial Times of the failure of MF Global. It was run by Jon Corzine, a very accomplished man who had been with Goldman Sachs. When that large fund failed—the investigations are still going on—what clearly emerged was the fact that the firm had not set up sufficient internal supervisory and regulatory procedures in order to understand what it was doing. It is the long-term capital management story all over again. The company had taken a position believing that if differences in interest rates are very wide, they will converge. It is one of the basic propositions of Economics 101, except when it does not work. It does not work when things do not come together: when, in fact, they diverge. That is what happened in 2008 and it has happened again and again. Somewhere in the intestines of the FPC or whatever it is, I suggest that there ought to be a research capability that can tell those who are regulating how the reality is continuously changing.

A piece by Gillian Tett in the FT last Friday mentioned an article by someone who worked for the SEC, which said that the thing is now so complex that although there is a reporting requirement on firms operating in the financial market in the United States, the firms themselves cannot describe what they are doing to the satisfaction of the SEC because they do not understand the nature of some of the things they are doing. One of the propositions in this article was that it is no longer that the firms are too big to fail; it is too complex to describe and depict what the firms are doing. This comes out of the fact that the people who do these things are in their 20s and 30s and the people who rule over them are in their 50s and 60s and have absolutely no clue what is going on. That problem will have to be dealt with at some stage. I do not know whether the Court of the Bank of England—of which one hears very little normally; it does not do anything at all, and is made up of the great and the good—is a functional part of the organisation. Someone said that it was the decorous part of the structure.

The FPC will need seriously competent people who are able not only to understand how the market works but to keep up with the rate at which the market is changing. This is hard work. I once suggested in your Lordships’ House—I will do it again—that it would be a very good idea periodically to examine people at the top of banks and financial institutions to see whether they understand the changing nature of the market they are in. We really have to license them and have an examination every three years; if you cannot pass the exam you are not competent to be at the top of a bank. This is exactly what happened at Barings. I do not make this suggestion facetiously; I think it would be a very important thing to do.

If we have a world in which the products are so complex that the management of the company does not understand the nature of the business, it is time to think about breaking companies up or doing something so that they are a biteable, good size and people can grasp what they are up to. This would relate to the nature of the competition, and to the banking Bill that we are going to get in the future. Banks themselves have become very complex because they combine not just retail but investment banking and other things. Banks have failed because they were too complex. One of the tasks of the FPC should be to keep on doing research at a sufficiently high level so that it understands the complexity. The noble Lord, Lord O’Donnell, mentioned a joint parliamentary committee to which the FPC, the PRA and the FCA would all answer. We need political oversight so that these bodies are accountable.

Finally, I cannot see how the FPC and the MPC can be two separate bodies with no communication between them. Someone has already mentioned that if the interest rate is the instrument with which you control inflation and things like that, it is also a very important instrument for financial stability. If you are going to do things like that, you have to be careful. It is a fallacy to think that macro and microprudential conduct are separate things. There are large micro units and their misbehaviour can have serious macro implications. That is another overlap between the FPC and the PRA that we ought to look at very carefully and not build Chinese walls that will be big obstacles to serious regulation.

Queen’s Speech

Lord Desai Excerpts

Wednesday 16th May 2012 Lords Chamber

[Lord Desai]

My Lords, it is a great pleasure to follow the noble Lord, Lord Tugendhat. Before I get to what I want to say, I offer one suggestion to his excellent proposal. I have thought for a long time that, in order to curb high salaries, we should consider adding the wage bill of top executives to the profits and putting corporate tax on all that. Perhaps I may use old-fashioned terminology: let us consider production workers and non-production workers. The wages of production workers are outside this but the salaries of non-production workers are added to profits, and tax is put on both of them. I have always believed that moral exhortation is neither here nor there. It is when it hits the pocketbook that companies will behave themselves.

I want to take up the challenge before us all; namely, what is happening and how we can make things better. In the week since the gracious Speech, the situation in the eurozone has worsened more than we ever thought would be possible. I presume that in the next week or so we may see a serious crisis in it. I start with a proposition which reflects on the speech made by the noble Lord, Lord Skidelsky. Yes, it is possible that there is denial and cognitive dissonance. But if a lot of countries simultaneously are in denial and in cognitive dissonance, it behoves us to ask whether there is another explanation than wilful obstinacy for doing what has to be done.

No Governments want to be unpopular or to have austerity. If a Government choose austerity, there may be a reason behind that. After all, over many years, we have all been brought up on Keynesian economics. Why have we suddenly gone off Keynesian economics, not only in this country but across Europe? Even in the United States, often cited as an example to the contrary, there has not been a major boost to the economy since the first year of the Obama presidency.

I have always thought that there is another explanation for why Governments do not adopt more borrowing and spending to get growth now and to get themselves out of the problem. I believe that this crisis is not like other crises of the past. It does not come from a lack of effective demand. Keynes was always worried about oversaving. This is a crisis of undersaving and we have been in it for many years. In one way, this crisis started in the 1970s when we began to lose manufacturing industry across most OECD countries. There were few exceptions. A lot of the manufacturing industry, especially the low and medium-technology manufacturing industry, moved east or south to where it was wanted. That led to a huge hollowing out of the job market for unskilled or semi-skilled manual workers.

Countries which had a good welfare state put all those people into long-term unemployment and have sustained them. Countries which did not have a good welfare state, such as the United States, let the wages of those people drop to a very low level. In America, we have seen stagnation in the average wage. People who cannot be in manufacturing are in very low paid service-sector jobs. Across Europe, we have maintained long-term unemployment and those who are in employment have been able, for a while, to increase their wages. However, even there, there is a lot of inequality because in the service sector you have either very highly paid jobs—for example, financial services—or very low paid jobs in the retail or restaurant trades and so on.

We have had an economic transformation. For a while, we have filled the gap of manufacturing employment with service sector employment and borrowing. Personal borrowing fuelled demand for us for a long time. Corresponding to our undersaving—savings practically disappeared from western society—there was always saving in Asia. Basically, all that saving in Asia was used by us to perpetuate employment, but it was not a sustainable model. If government borrowing had been self-liquidating, and every time the Government borrowed money there was a sufficient multiplier effect and the debt retired itself, we would never have been in this situation. The point is that even European Governments, including France and Germany, were borrowing and running deficits at full employment level, because that was the only way in which they could sustain their welfare states. If that model is not feasible, we have to do something.

I am sorry to be so gloomy, but I do not believe that we will get out of this any time soon. A lot of people think that there is some magic potion that will get us growth. There is a lot of micro-thinking on cutting red tape and this and that. But all those things, even if you did them, would not increase the growth rate immediately, and when they did they would increase the growth rate by no more than one-quarter of 1 percentage point. It is worth doing, but it is not enough.

The issue that we face is whether we can spend our way out. As the noble Lord, Lord Skidelsky, said, we have a problem. The corporate sector is sitting on surpluses and not investing, and the government sector has decided—the noble Lord rightly disagreed, as a lot of other people have—that the Government should borrow more money and get out of it that way. This is the central problem to which the Government have not yet seen a solution. Just as once upon a time we used to believe in crowding out, we now want there to be crowding in, which is not happening. Just because Governments do not spend does not mean that business spends, so I think that there is a missing link in between.

I suggested when we discussed the Budget that there was a way out for the Government, and I know that the Minister will pooh-pooh my suggestion as he did once before. But if there is a windfall gain from an asset sale, such as the Government had from selling Royal Mail for £28 billion, you could say that you cannot spend that money because there is a big liability, yet money is fungible. If you get £28 billion when you did not expect it, there must be £28 billion somewhere else that you can release. The Government should decide on the very low rate of growth that we have achieved. The negative numbers may be slightly more positive and we may not be in a double-dip recession, but that does not matter—we are now counting growth in basis points, not even percentages. What is true and what the OBR has said is that this is going to be a very difficult year. Given that asset sale, or any other asset sale that the Government might plan—I hope they do—we should allow ourselves a little bit of slack. Perhaps they could spend the money not on infrastructure investment but in immediate vouchers to those poor grannies whose tax they have increased. Give the grannies £1,000 per granny and you will see a revival in the economy.

Economy: Budget Statement

Lord Desai Excerpts

Thursday 22nd March 2012 Lords Chamber

[Lord Desai]

My Lords, it is a great pleasure to take part in this debate on the Budget. When I came into the House 21 years ago, I was able to extract a concession from the then Government that the Budget would be discussed. I was proud to open the debate on the Budget from the Back Benches. That practice was discontinued in 1997, when my party came to power. I am glad that after a few years we have resumed this practice, and I hope it continues. Of course, I should add that we have had an excellent maiden speech from the noble Lord, Lord Heseltine. It was a treat to be able to listen to what I can only call a class act. We look forward to many more interventions from him.

I have been known to be partisan about the policy of a rapid elimination of the deficit. Indeed, before the election, I was one of the people who wrote the letter to the Sunday Times saying that a total elimination of the deficit within a Parliament was absolutely essential, so I make no question about the overall strategy that the Chancellor has adopted. Unlike many previous Chancellors who in two or three years attempted to deviate from the path they set for themselves, the present Chancellor has kept to that path at considerable cost to his popularity.

I am not going to dwell on matters of tax policy and so on as other people have spoken about that. I do not find it shocking that the Conservative Party benefits the rich and taxes the poor. What else is it for? That is what economists call rational expectations. That is what we expect to happen, so I regret that none of that shocks me. However, what does shock me—and I think nobody else has mentioned this so far—is that the Chancellor had an excellent opportunity to revive growth and has made a tactical blunder in not taking it.

So far, when we have mentioned plan B, or something like that, the Chancellor has correctly said that he cannot hatch a plan B or give more money to the green bank because if he does that the debt numbers will go up. I quite agree that he has set a path for five or six years, whatever it is, and has to stick to it. However, he earned himself a windfall of £28 billion from the Royal Mail pension transaction. I take the view that he should have spent this windfall in reviving the economy rather than salted it away repaying the debt. People may consider that that contradicts what I said before, but once the Chancellor has set a timescale of five or six years, and it has been approved by the market, he does not need to overegg the pudding. On the other hand, as the OBR points out, there is a one-in-four chance that 2012 will see a recession, a drop in growth. The OBR predictions of 0.8 per cent this year, 2 per cent next year and so on are all right, but they are not very exciting. If he had had the courage to take this £28 billion and put it into the economy—and I shall come to how I would put it into the economy—put it into the green bank, done an infrastructure project or whatever, he could have shown that he is doing something to get growth in the economy without affecting his long-run strategic plan to eliminate the deficit. This is a matter of choice. I would do it, he would not do it, but he is the Chancellor and I am not. However, he is missing a good opportunity that will not come again in the next three or four years.

Now £28 billion is okay, but it is not a large sum of money. One of the frustrating things about reading the Red Book and so on is that nowhere do you find the figure for the total GDP of the country. You have proportions and percentages and you have to divide one by the other to find out. I think it is roughly £1.7 trillion, give or take a few hundred billion, so £28 billion is around 1.5 per cent of GDP. It would be a good spending boost to give the economy—maybe in one year, maybe over two years—and if you admit that the multiplier is, I do not know, one and a half, you will be able to revive the economy to the extent of, say, £2 billion to £3 billion. That would be a high growth rate. If that came on top of the 0.8 per cent, you would have a 2 per cent-plus growth rate.

There was a choice for the Chancellor to make here. He has deliberately not made it. He mentioned in his Budget speech that he was not going to spend the £28 billion but he is going to repay the debt. If you look at the debt numbers given in the Budget, it gives him a slight advantage this year, but there is really not that much difference in the path to debt repayment. I would have liked the OBR, which has done an excellent job, to have tried out the stimulation effect on the economy if the Chancellor had taken the liberty of spending £28 billion this year.

Of course, some people may prefer to give it to the green bank. If the noble Lord, Lord Skidelsky, had been here, he would have argued once again for his investment bank. I would prefer something much quicker. Twenty-eight billion pounds is roughly £1,000 per household. Give every household a £1,000 Diamond Jubilee voucher on the condition that it cannot be saved; it has to be spent. If the Chancellor had done that, it would not only have tremendously lifted the doom and gloom from the economy and been a good celebration for the Diamond Jubilee, it would have been an excellent boost to growth. This would have been a win-win situation, instead of which the repayment of debt disappears somewhere in the footnotes of a table.

As the OBR has said, the Budget does not alter the growth path of the economy one tiny bit, so the repayment has brought no advantage to the Chancellor. He did not ask me, but had he guessed what I might say and done it before I said it, it would have been a tremendous boost to the economy. If there is any chance even now to recook the books and go back and forth, that would be a very good idea. It is desperately needed if we are to avoid what is very likely to be an output drop this year. There is sufficient excess capacity in the economy not to worry about inflation. A £28 billion boost would have been a good thing.

Finally, I welcome the idea that the Chancellor wants to float perpetual bonds, taking advantage of the lower interest rates. I only have one suggestion: they should be called Gideons.

European Union Membership (Economic Implications) Bill [HL]

Lord Desai Excerpts

Friday 25th November 2011 Lords Chamber

[Lord Desai]

My Lords, let me first say that I very much compliment the noble Lord, Lord Pearson, on getting this Bill for Second Reading and, over the years, on pursuing what he strongly believes about the dubious case for being inside the European Union. He reminds me of my former noble friend Lord Bruce of Donington who used to go through every document published by the EU, and he knew more about auditing than anyone else that I can think of. I should also say that the noble Lord, Lord Pearson, is a great champion of liberty, because he is always championing the maverick and unpopular view. Given that we inhabit the same space on the Back Benches, which is for mavericks, I very much feel at one with him.

This Bill is not about whether the European Union is a good or bad thing. It is about whether we should have a commission to examine our case for it. Those who are very strongly in favour of the EU have nothing to fear because they should say, “Once and for all, we will establish the case for the European Union and send the Pearsons and the Stoddarts of this world far away into exile, and they will never again question our membership of the EU”. Those on the other side say, “Once and for all, let us prove our case and we will show that the costs exceed the benefits of our membership, and that will settle the hash of those who support the Union”. That is fine.

What has happened over the years is that many opinions have changed. My party used to be very anti the Common Market, as it used to be called. In the teeth of opposition, Harold Wilson managed a referendum—in which I voted yes, incidentally—but it was not until Jacques Delors came to the TUC meeting in 1988 and told us that the European Union would bring us back the trade union rights that Mrs Thatcher had taken away that we suddenly became pro-EU. I also noticed that on the Front Benches of all parties, perhaps with the exception of the Liberal Democrats, there are no giants in favour of the European Union. There is no longer Sir Edward Heath, Lord Jenkins or my late and lamented friend John Smith. They were doughty champions of and enthusiasts for the EU. My noble friend Lord Mandelson is the only one who is senior enough to claim that title now and that he is strongly and positively for the EU.

My opinion has changed. I used to be a federalist. I wanted a single market and a single currency in 1992—no questions asked. That might have been easier, but no—our views have changed. Some have gone from anti to for, and some have gone from for to anti, but the truth is that the general public and political mood is of sullen indifference. The Government may be doing a cost-benefit calculus every day, but we do not really want to admit to whether we should make the threshold decision of being in or out. We say, “We are in. Why bother? Just let it go along”. That is not a healthy situation. If there was in this country a great enthusiasm for Europe, we would be clamouring to get into the euro. We are not. We would be strongly in favour of a closer political union. We are not. Nor are we strongly arguing—despite what every Conservative leader has said—in favour of breaking up the EU or making it more decentralised. Whatever we may say about getting our powers back from Brussels, no political leader has seriously put forward a scheme for getting us back to whatever the situation was in, say, 1975 or 1980. We are where we are by our own volition, as the noble Lord, Lord Empey, pointed out. We agreed to everything that has happened, but without enthusiasm. We agreed but said, “Why bother? Let it go. It is not worth questioning”. Therefore, we have had this debate for 40 years and people have changed their views.

I would say one thing about the noble Lord’s Bill. Like the noble Baroness, Lady Falkner, I do not know whether I would find two people for, two people against and three neutral people who could swear to me that they had always been for, against or neutral. The situation is important enough not to confine it to just seven members or to just the economic implications. I quite agree that there are other—strategic, geopolitical or whatever—implications. This is a big constitutional issue for the country. The Government should take it up and arrange for a proper, deep inquiry and, perhaps by 2013 or whichever year is the 40th anniversary of our passing the Bill to join, we will have a thorough and comprehensive report and we can ask ourselves whether it is worth staying in or leaving, what the different alternatives are, and what the different scenarios are, as people in business often say—being completely out, being in EFTA or being in the EEA. Let us see the full menu of costs and benefits, economic and otherwise. There are ways of doing that—it is not rocket science.

Let us not shy away from debate or inquiry. Let us not conclude that just because the noble Lord, Lord Pearson, is in a minority, he must be wrong. There is no proof as to which is wrong and which is right. I should love to see this committee set up; I should like to see what comes out at the end of the day about the costs and benefits of membership. Let us keep an open mind and go for knowledge rather than dogma.

Finance (No. 3) Bill

Lord Desai Excerpts

Monday 18th July 2011 Lords Chamber

[Lord Desai]

My Lords, I welcome the debate. I have nothing particular to add to what other noble Lords have said about the interesting report of the noble Lord, Lord MacGregor, which I welcome. I especially welcome the transparency and the consultation that the Government have introduced in deciding their tax legislation.

I want to concentrate on why the recovery is so slow and faltering. That is an important question that we all ought to take up. The general proposition in many quarters is that somehow the Government have gone wrong and they need a plan B—or C or D, I do not know. I think that we face a very different kind of crisis from those we are normally used to. Recessions normally happen because of a lack of effective demand, and we know the standard games and policies that we have to follow. We got into this crisis not because of a lack of effective demand but because of overspending and overborrowing. When you have to carry an economy through a crisis in which the major consideration is deleveraging by both households and Governments, you need a very different kind of strategy from the one you normally encounter in a standard recession.

That said, we do not have a road map for such crises. Normally all economic theory is about the other kind of crisis. There is a paradoxical conclusion that we might follow. If the task is to deleverage, we ought to hurry that up. That leads to the idea that we should not have low interest rates at all; we should have proper high interest rates so that households that falsely think they can afford their mortgages should be told that they have negative equity and cannot afford them. That is a cruel thing to say, but right now we are postponing deleveraging rather than assisting it. That is a choice that the Government can make.

We have, of course, decided to deleverage public debt at a rate that is now known, and the task of eliminating the deficit within five years has been adopted. The problem of deleveraging is not just a problem of the recession. We are observing from the crises of both pensions and elderly care that we, not just in the UK but in western economies, are suffering from a serious undersaving problem. We have been undersaving for far too long and we will completely have to change our habits of thinking, living, taxes, and so on. The task of the tax system should be as far as possible to tax consumption and not income, to tax pollution but not work. I do not know at what stage we will get into those kinds of discussion. I welcome the proposal to merge income tax and national insurance contributions. I have never understood national insurance contributions because they are a tax on earned income, while unearned income gets taxed less, which is a very peculiar thing that successive Governments have tolerated.

If we are to face up to the challenge of saving seriously, we will have to adopt something like what Lord Kaldor talked about in his expenditure tax proposal. We may have to move to an expenditure tax proposal as that would reward savings much more than we have done so far. We have been led to think that expenditure leads to income. I am sorry that the noble Lord, Lord Skidelsky, is not in his place as we have had long arguments about this. If you think that expenditure leads to income and income then leads to output that leads to inward gain, we have a certain trajectory. Our problem is that we cannot go through the politics of income growth if there is consumption expenditure.

The gap is in investment. The Government face the challenge that despite the quantitative easing that they have been practising for a couple of years, the money is there but no one is investing. That is very much the reason why the money supply is not expanding, as the noble Lord, Lord Higgins, said. People are not borrowing the money that is available. Therefore, there is a lack of investment by the private sector despite the fact that interest rates are low and people should be encouraged to invest. This is a difficult thing to do. I do not believe that it is necessarily within the Government’s control to encourage investment if they can no longer pick winners or horses that will start a race. However, the Government ought to concentrate on how they can give a certain boost to new investment proposals, perhaps in green technology. Unless they get an investment programme going, they will find that even if people decide to save they will be frustrated.

Whichever way the Government go—I welcome some of the taxation proposals—they should be aware that in the short term and in the long run the crisis arises from undersaving. We have to try to correct our overborrowing and then provide for a proper level of saving to finance the problems created by longer life expectancy and people needing elderly care. If these two challenges are properly thought through and met, we may yet have a prosperous future.