Budget Responsibility Bill

Lord Eatwell Excerpts

2nd reading & Committee negatived & 3rd reading
Monday 9th September 2024 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, the OBR was created by George Osborne to

“remove the temptation to fiddle the figures”.

An entirely non-political evaluation of major fiscal measures was certainly a good idea; unfortunately, it has not yet been achieved. The failure to attain political independence may be attributed to two elements that are not dealt with in the Bill yet are essential to its purpose.

First, key inputs to the OBR’s work are the estimates of future spending provided by the Government. We now know that these can be politically manipulated to ensure that fiscal targets seem to be met. As the Institute for Government commented at the time of the Conservative Budget this Spring,

“the figures that Hunt announced … are based on entirely fictitious future spending plans”.

Since the election, we have learned that not only were the Conservatives fiddling the figures that they provided to the OBR, but they were concealing spending plans too. In the light of post-election findings, Mr Hughes confirmed that the OBR was made aware of the extent of pressures on departmental budgets only in late July. Happily, the Financial Secretary has just outlined the measures that are to be taken to verify the data supplied by the Government. These measures are most welcome.

The second key political element undermining the value of the OBR’s current assessments is the current formulation of the charter. The current charter embodies three targets that the OBR is required to assess; unfortunately, none of them is based on sound economics.

First, there is the objective to have public sector net debt—excluding the Bank of England—as a percentage of GDP falling by the fifth year of the rolling forecast period. As the noble Lord on the Opposition Front Bench just pointed out, this means that whenever the Bank of England sells part of its stock of government debt to the private sector, it automatically tightens the noose around government spending. An important part of monetary policy has damaging consequences for fiscal policy—how foolish is that?

More importantly, the objective treats all government expenditure as having the same economic relevance. A crazy unfunded tax cut is assigned the same economic impact as investment in industrial infrastructure. As the Chancellor of the Exchequer argued in her Mais Lecture while still the shadow Chancellor,

“our fiscal rules differ from the government’s. Their borrowing rule, which targets the overall deficit rather than the current deficit, creates a clear incentive to cut investment that will have long-run benefits … I reject that approach”.

Unfortunately, the next objective, to ensure that public sector net borrowing does not exceed 3% of GDP by the fifth year of the rolling forecast period, is simply a dynamic version of the first objective and is, therefore, subject to the same rejection that the Chancellor has made.

The third and final objective is to ensure that expenditure on welfare is contained within a predetermined cap. One of the important operational aspects of economic policy is the value of the automatic stabilisers in the economy: when the economy booms, welfare spending automatically goes down; in a slump, welfare spending automatically goes up. The notion of a cap would emasculate the automatic stabilisers—again, a silly thing to do.

In short, none of the current objectives in the charter makes sound economic sense. It forces the OBR to make forecasts that are simply not relevant for the Government’s stability and growth objectives. It is imperative that the charter is revised prior to the Budget on 30 October. Given the requirement that revisions of the charter must be presented to Parliament 28 days before coming into effect, will the Minister tell us whether we can expect a revised charter to be presented before 1 October?

To conclude, the OBR is a very good idea, as is this Bill, but major operational aspects need urgent correction. I look forward to hearing from the Financial Secretary how these deficiencies are to be dealt with.

Bank Resolution (Recapitalisation) Bill [HL]

Lord Eatwell Excerpts

Committee stage
Thursday 5th September 2024 Grand Committee

[Lord Vaux of Harrowden (CB)]

My Lords, as we have heard, this group of amendments, including my Amendment 10, probes the reasons for including all banks in the scope of the Bill, rather than just the smaller banks, as originally envisaged in the consultation that started in January. The first sentence of the consultation was very clear:

“This consultation sets out the government’s intention to enhance and keep up to date the UK’s Special Resolution Regime … providing a new mechanism to facilitate use of certain existing stabilisation powers to manage the failure of small banks”.


But, as we have heard, it is not restricted to small banks. Most of the amendments in this group would remove from the scope of the Bill those banks that are required to hold MREL and would be subject to bail-in procedures using those MREL resources. I think the number of separate but similar amendments that we seem to have is probably down to the fact that this all happened in recess, and we did not have the opportunity to get together. I am sure that if the Minister is not able to satisfy us, we will be able to coalesce around something in common.

It is worth quoting from paragraph 7 of the Explanatory Notes:

“This means taxpayers are exposed if a small bank failure is judged to require resolution action but the firm in question does not possess sufficient MREL resources to provide for recapitalisation, unlike larger banks that do possess these resources”.


If larger banks possess those resources, as they are required to do, why do we need them to be subject to the process envisaged by the Bill? The noble Baroness, Lady Noakes, talked about the glide path situation where a bank has not quite got there—yes, I see that point—but for those that are there, does this not imply that we are not confident that the existing MREL scheme is sufficient? If there is a problem with the MREL scheme, surely it would be better to fix that rather than adding a new process on top of it.

So could the noble Lord please clarify under exactly which circumstances he sees the recapitalisation process in the Bill being used for a failing MREL bank? Is there a concern that the MREL resources are insufficient? Other than glide path situations, that is the only logical reason I can see to include big banks in the scope of the Bill.

Secondly, not having the expertise of the noble Baroness, Lady Bowles, I do not really understand how the two processes would work together. Is this an either/or situation; is it either a bail-in using MREL resources or a recapitalisation? If that is the case, surely there is a risk that the industry would be required to fund the recapitalisation of banks with large balance sheets instead of the costs being borne by the failed bank’s shareholders and subordinated debt holders. That would create a potential moral hazard. Or is it a combined process where the MREL resources would be used first and, if insufficient, the recapitalisation would follow on top? If that is the case, it implies that there is a concern that the MREL funds are insufficient. The best way forward would be to fix that problem rather than add another process, as I said before.

So could the noble Lord please clearly explain how he sees the two processes working together? I am drawn to the suggestion by the noble Baroness, Lady Bowles, of a worked example between now and Report to help us see how that could work. In particular, can he clearly confirm that the recapitalisation process can never be used to reduce the losses of a failing bank’s shareholders or creditors?

In the absence of a strong explanation of why, contrary to the originally stated intention, the scope of the Bill has been extended to larger banks, I would be minded to support amendments on Report that restrict its scope to exclude MREL banks.

[Lord Eatwell (Lab)]

My Lords, my Amendment 11 also—I think rather neatly—confines the Bill to what are defined as small banks. However, my concern is somewhat different from those voiced by noble Lords until now. It is that the whole approach to the resolution regime suggests that banks fail one at a time and not all together. Anyone who went through the experience of 2007 to 2009 knows that, in a systemic crisis, it is possible for all the banks in the country to be suffering major problems at the same time. In the circumstances of a systemic crisis, I fear that the mechanism proposed in the Bill could be a source of contagion, in the sense that the cost of the collapse of a bank, or of many banks together, would be seen by the market as imposing costs, which are now unbearable, on other parts of the banking sector.

This comes down to two issues—that of contagion and, I am afraid, that of persistent complacency. The Treasury and the Bank of England refuse to face up to the fact that, in the end, it is the taxpayer who will pay in a systemic crisis.

I will deal first with contagion. The levy links the financial failure of a bank or number of banks to the banking sector as a whole. Does this create a contagion effect? It must be remembered that much of contagion is created by the expectation of a cost, not just the reality. Expectation then becomes the parent of reality. It can reasonably be expected that the failure of a small bank would be manageable under the resolution regimes set out by the Bank of England and discussed in this Bill and its explanatory documents.

However, there are two fundamental problems where one could have significant contagion. One would be multiple failures, an issue I will address in a moment. The other is the potential failure of a big bank, because the Bill and the Explanatory Notes explicitly refer these mechanisms to big banks as well as small ones.

I will take the issue of the failure of multiple banks or a big bank. I wrote to the Financial Secretary about this and he very kindly wrote back a very valuable explanation. I presume that his letter has been circulated to the people who took part—no, I see that it has not. Well, I will quote a bit of it, because it seems to reveal the problem that I am identifying. He refers to multiple bank failures, but I would apply the same thing to a big bank failure. He says that there will be levies when the bank fails and adds:

“These levies are subject to an affordability cap”—


I did not know that—

“by the Prudential Regulation Authority based on how much the sector can safely be levied in a given year. This cap is currently set at £1.5 billion. If multiple firm failures resulting in a recapitalisation requirement is under £1.5 billion, the Government would expect the FSCS to borrow from its commercial borrowing facility and be able to safely levy from the banking sector and repay that commercial borrowing within 12 months. However, if the amount exceeds £1.5 billion, or if it is below £1.5 billion and the PRA has determined that the FSCS is unable to raise the levy on affordability grounds, the Government would expect levies to repay any borrowing from the National Loans Fund to be spread out over multiple years”.

But, no, you do not have multiple years in a systemic banking crisis; you have to operate now.

The cap of £1.5 billion is worth comparing with the measures that the Government had to take in 2007-08—Lloyds Bank, £20 billion and NatWest, £45 billion. So the failure of one of those banks could be somewhat above the affordability cap, as set out in the Financial Secretary’s letter to me. Indeed, today, those numbers could be multiplied by a factor of roughly five.

Even when MREL is taken into account, the £1.5 billion cap seems to me to expose the fact that this scheme is not applicable to large banks. For example, if we look at the largest MREL plus required capital, it is that of Barclays, which is 30% of risk weighted assets—the largest of all the major banks. That leaves 70% of risk weighted assets to which the taxpayer is exposed. There would not be a collapse of all of those, but there can be very large numbers very quickly. So the idea that with an affordability cap of £1.5 billion, one could handle the Lloyds Bank situation or the NatWest situation as the Government confronted them in 2007-08 is, it seems to me, fanciful.

This brings me to my final related point. There is a persistent reluctance in all the documents concerning the resolution regime to admit that the resolution of a large bank will always fall on the taxpayer. Given the need for the maintenance of confidence in the banking sector, this persistent reluctance and the pretence that MREL has eliminated the taxpayer from exposure is damaging to confidence. It would be valuable for the Purple Book to make clear that, in extremis, Bagehot’s rule comes into effect, the Bank lends without limit and the Treasury will step in to resolve those banks that are “too big to fail”. My amendment clears away a dangerous ambiguity in the Bill. The threat of multiple small failure will continue to exist, but it takes away the ambiguity that this could be involved in the resolution of a big bank in the circumstances of a systemic crisis similar to that which we have faced in the past.

--- Later in debate ---

[Lord Vaux of Harrowden (CB)]

My Lords, this weather sounds like the reason I ended up tabling a load of amendments in south-west Scotland: I had nothing better to do for a few days.

Again, the noble Baroness, Lady Noakes, raises a really important point. I have tried to attack it in a different way in Amendment 16, where I look at the recovery of money from shareholders. I will be interested to hear what the Minister has to say. I had in mind the sort of scenario where a foreign company sets up a bank in the UK, it does not go very well and it decides just to walk away from it, having perhaps removed all the assets in the meantime. Clearly, it does not seem fair that the costs of sorting that out should fall on the industry or, indeed, the British taxpayer. It would be really interesting to understand how we can ensure that foreign shareholders behave properly and how, when it does go wrong, we can recoup the money from them.

[Lord Eatwell (Lab)]

My Lords, I am somewhat puzzled by the amendment in the name of the noble Baroness, Lady Noakes, in this case. Surely, under the Basel accord, the UK regulator is responsible for the regulation of a subsidiary that is legally established in the UK. If “subsidiary” were changed to “branch”, the foreign regulator would indeed be responsible for regulation in that case. It seems to me that this particular amendment would violate the Basel accord to which His Majesty’s Government are committed.

[Baroness Bowles of Berkhamsted (LD)]

I will just comment that we have seen capital being sucked out of subsidiaries and taken back to the States and have been left with the collapse here. Basel accord or not, there ought to be some kind of mechanism of group support. I wonder whether there has been any international progress on that. What other mechanisms could be used to ensure that those kinds of things do not happen? Ultimately, it is going to be quite difficult to do this unless you somehow put on some extra capital requirements–and then you then start to get into all kinds of international difficulty. Perhaps the Minister could say something about what levers, if any, are available.

Bank Resolution (Recapitalisation) Bill [HL]

Lord Eatwell Excerpts

2nd reading
Tuesday 30th July 2024 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, the introduction of the resolution regime in the Banking Act 2009, and the subsequent development of living wills in which large banks are required to produce plans for how they could be wound up, are both designed to reduce the risk of the cost of failing banks falling on the taxpayer. This Bill seeks to add an additional protection for the taxpayer, by shifting the risk of funding the resolution of a bank from the Treasury to the Financial Services Compensation Scheme and therefore to the banking sector as a whole in subsequent levies—so far, so good. The Explanatory Notes provided by the Treasury suggest that the purpose of this legislation is to provide for the resolution of small banks, citing the resolution of Silicon Valley Bank UK as an example of where the successful resolution of a failing bank was clearly preferable to the alternative—namely, insolvency.

Maintaining the operations of a bank, particularly where the asset side of the balance sheet is strong, if illiquid, has obvious advantages. It avoids the disruption of banking services that occurs under formal insolvency procedures. Indeed, the sale of Silicon Valley Bank UK to HBSC for £1—I wonder if anyone knows whether that was actually paid; perhaps the noble Baroness, Lady Penn, knows—ensured that banking services were maintained by HSBC for an important segment of UK industry.

The focus on small banks is important. It is a recognition of the important role—referred to just now by the noble Baroness, Lady Bowles, yet so often unrecognised—that small banks are playing in the UK economy today. I will give the House just one example: a bank called Unity Trust Bank. It has a balance sheet of a little over £1 billion. To give an idea of scale, the balance sheet of Barclays Bank is 1,500 times larger. Last year, 87% of Unity’s quarter of a billion in new lending supported projects in health and well-being, community spaces and services, education, skills and employment, and financial inclusion. Around half of that lending went to parts of Britain defined as areas of high deprivation, as measured by the Index of Multiple Deprivation. It achieved all this while earning a very healthy return on equity and maintaining a tier 1 capital ratio of 20%. If Barclays’ numbers were the same as that, Britain would be a very different and a very much better place. This is just one example of the excellent work done by small and medium-sized banks.

That is why it is particularly welcome that the Bill makes no provision for increased funding burdens on small banks such as MREL provisions. Britain already suffers from the fact that necessary prudential regulation creates an anti-competitive environment in banking, making it particularly difficult for small banks to cover compliance costs. We should not make the task of small and challenger banks even more difficult.

All this adds up to a valuable and proportionate piece of legislation. Unfortunately, the documentation provided in support of the legislation contains a number of disturbing propositions that take some of the shine off the Bill. For example, in the Treasury document replying to the consultation on the Bill we find the following proposition:

“Noting that the expectation is that the mechanism would generally be used to support the resolution of small banks, the government considers it appropriate for the mechanism to be, in principle, applicable to any banking institution within scope of the resolution regime”.


So, this procedure is not deemed to be targeted solely at small banks but might apply to banks of any size. Perhaps the Minister could enlighten us as to what the Treasury has in mind?

Most disturbing of all is the evident belief, held by both the Treasury and the Bank of England, that this new resolution mechanism can deal not just with idiosyncratic risk—that is, failures in just one or two banks at a time—but also with systemic risk: failure impacting the system as a whole. Consider this statement in the Bank of England’s guide to resolution entitled The Bank of England’s Approach to Resolution:

“The need for a financial system to have an effective resolution framework was a key lesson from the global financial crisis of 2007-09. During the crisis, governments had to resort to ‘bailouts’ as some banks had become too big, complex, and interconnected to be put into insolvency like other types of firms. Without a resolution regime, letting them fail would have meant that people or businesses would have been unable to access their money or make payments. The potential risks to the financial system and the economy meant they had become ‘too big to fail’”.


Now it goes on:

“Resolution changes this by providing powers to impose losses on investors in failed banks while ensuring the critical functions of the bank continue”.


Well, I hope and pray that the Bank of England does not believe this nonsense. The ability of a resolution regime to protect the taxpayer depends on the proposition that the banking services can be maintained by sale of the failing bank to a competent and well-funded counter- part. But, in a systemic crisis such as 2007-09, this is impossible because there are no buyers. Everyone is in trouble. In these circumstances, there are only two answers: bailouts by the taxpayer or insolvency.

Size matters, too. When Credit Suisse failed, the Swiss authorities immediately abandoned any pretence at resolution; only public funds could handle the job. This is not just true in the case of a large bank failing. As the Treasury consultation document notes,

“while an individual institution may not be considered systemic, if a risk is common—or perceived to be common—among similar institutions, the collective impact can pose a systemic risk”.

In other words, the failure of many small banks all at once can be as devastating as the failure of a large bank. But, having made this very sensible point, the Treasury goes on to suggest that somehow “targeted resolution” will sort things out. It would seem that both the Treasury and the Bank of England are prone to wishful thinking.

It is also worth noting that, in the face of a systemic crisis, the levy proposed in the Bill, which is designed to fund the demands on the FSCS, would be a powerful source of crisis contagion. I note that the Treasury is taking steps to limit such contagion.

There is one small irritation with the documentation that is important for later stages of the Bill. The cost- benefit analysis presented by the Treasury has little relevance to the Bill’s subject matter. It compares costs and benefits of the resolution regime with the alternative of insolvency, but that is not the issue here, which is the comparison of the costs and benefits of the new funding mechanism as an addition to the old resolution regime, as set out in the Banking Act 2009. I suspect that the benefits, predominantly of flexibility, are small and that the changes in costs are negligible, even though the allocation of costs is now different. Could we please have a relevant cost-benefit calculation for later stages of the Bill?

This is a very useful measure to deal with the failure of small banks in circumstances in which the rest of the banking system is in rude health. Please let us not pretend that it is anything else.

Public Spending: Inheritance

Lord Eatwell Excerpts

Tuesday 30th July 2024 Lords Chamber

[Lord Livermore (Lab)]

I am grateful to the noble and right reverend Lord for his question. As was set out yesterday, we will conduct a complete review of the new hospital building programme, with a thorough, realistic and costed timetable for delivery. I cannot give him any specific information on the project he mentioned. As I said to other noble Lords, we are absolutely committed to reforming adult social care to create a sustainable system that delivers for the people who draw on that care, their families and the social care workforce. We will work to build consensus for the reforms needed to build a national care service.

[Lord Eatwell (Lab)]

My Lords, with respect to the details revealed in the Chancellor’s statement yesterday, on some of which the noble Baroness, Lady Penn, casts some doubt, has the Minister noticed the statement published by the IFS yesterday evening? It stated:

“some of the specifics are indeed shocking, and raise some difficult questions for the last government. If the scale of these overspends and spending pressures was apparent in the spring—and in lots of cases, there’s no reason to suppose otherwise—then it is hard to understand why they weren’t made clear or dealt with in the Spring Budget. Jeremy Hunt’s £10 billion cut to national insurance looks ever less defensible”.

Does the Minister agree that the Spring Budget was another example of the economic mismanagement and fiscal irresponsibility that is a persistent characteristic of this Conservative Party?

[Lord Livermore (Lab)]

I am grateful to my noble friend for drawing the House’s attention to yesterday’s remarks from the IFS. It is clear that it is as shocked at the rest of us at the scale of this overspend. I 100% agree with my noble friend that the Spring Budget was just the latest and, fortunately, last episode in 14 years of failure from the party opposite.

Spring Budget 2024

Lord Eatwell Excerpts

Monday 18th March 2024 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, debating the Budget Statement carries a great temptation to focus on the short term—on immediate tax and spend decisions—but today we can avoid often misleading short-term analysis and make an informed assessment of Conservative economic policy, relying on the fairly accurate data of the past 14 years. No forecasting is necessary; the facts will do.

The crucial fact with respect to the growth performance of the economy is growth per capita—not the number used by the noble Baroness, which is, as we know, growth driven by the highest level of immigration into this country in modern times. Since 2008—that is, prior to the global financial crisis—UK income per capita has grown at less than one-fifth of 1% per year, one of the worst long-term performances since the war and one of the worst in the G7. Consequently, average real household disposable income after taxes and benefits is lower today than it was 16 years ago, and that is the worst economic performance since the war. Today, following year after year of Tory-led economic failure, we have a no-growth, high-tax, high-debt economy, a crumbling public realm, with education underfunded and an NHS in near collapse.

Of course, there were worldwide economic shocks to navigate—the global financial crisis, the pandemic, the war in Ukraine—but much of Britain’s economic misery was self-inflicted. Consider the following. In the first half of 2010, the UK economy was on the road to recovery from the impact of the financial crisis. In the months before the May election, the economy was growing at a rate approaching 3% per annum. Conservative austerity killed that growth stone dead. The five years of austerity resulted in higher unemployment and lower investment, both public and private. The UK did not recover pre-2008 levels of income until 2015. Germany recovered it four years earlier.

Austerity was defined by an assault on the public sector. For a decade, real spending per capita on health actually fell, and it has still barely recovered. Real education spending per pupil fell by 8%. The police force, the justice system and defence have been criminally underfunded. Then there is the attack on local government: 14 years of swimming pools closed, libraries closed, youth services cut and local skills initiatives cut. The Conservative Party has hollowed out the facilities and institutions that define communities. For so many, they have destroyed hope.

Then came Brexit. In the Economic and Fiscal Outlook, the OBR has taken the opportunity of newly available data to confirm its view that the impact of Brexit is a permanent 4% reduction in GDP. That translates into lost government revenue this year alone of £42 billion. In an attempt to manage the disruption of Brexit, the Conservatives launched an industrial strategy in 2017, complete with glossy brochures setting out 180 diverse policy measures and commitments. In 2018, they created an independent Industrial Strategy Council, chaired by Andy Haldane, to offer evaluation and advice. Unfortunately Haldane’s rather chilly evaluation was too much for the Government. In 2021, the then Secretary of State for Business and Industrial Strategy told the other place that he was abolishing the council, arguing:

“I have read the industrial strategy comprehensively, and it was a pudding without a theme … I am very pleased to announce to the House that we are morphing and changing the industrial strategy into the plan for growth”.—[Official Report, Commons, 8/3/21; col. 678.]


Thus spake Kwasi Kwarteng. A year later, his plan for growth inflicted devastating damage on the British economy. Now, we have Jeremy Hunt’s plan, as echoed by the noble Baroness. The foundation stone is set out in the Budget speech:

“Conservatives look around the world at economies in North America and Asia and notice that countries with lower taxes generally have higher growth”.—[Official Report, Commons, 6/3/24; col. 848.]


Unfortunately, years of academic and policy research have demonstrated quite conclusively that the proposition is simply false. For example, a week after the Budget, the free market Institute of Economic Affairs—close supporters of the Conservative Party—commented,

“tax cuts do not generate sustained higher rates of economic growth … when we compare growth rates averaged over long time frames between different countries there is little correlation, negative or positive, with tax burdens or marginal rates”.

Yet Jeremy Hunt clings on to “Truss-Kwarteng lite”, even citing the Laffer curve—a reference that eliminates any suggestion his thinking is serious.

Commentators across the political spectrum agree that the next Government will inherit from today’s Conservatives a uniquely dire economic situation. If the new Government should be Labour, it is argued that the economic fundamentals are so bad that Labour will be forced to abandon all its economic and social goals. Fortunately, that prediction is incorrect.

Economic history tells us that beginning from the worst can lead to the best. Four policy ingredients are required: a Government with a comprehensive commitment to long-term investment; a vision of the commercial demands of the future and the technologies to meet them; a private sector corporate structure geared to long-term investment; and a financial system that funnels resources to long-term investors. A better characterisation of Keir Starmer’s missions for Britain will be difficult to find: a commitment to the rebuilding of material and human capital; a focus on the inevitable demands for new green technologies as the world faces up to the costs of climate change; legal reforms to stimulate the private sector; and a new national wealth fund to channel investment that fulfils long-term goals.

However, let us go back to this scorched-earth Budget. The past 14 years suggest that the Conservative Party should join “Economics Anonymous”. The party should admit its horrible errors, identify their origin in defective ideology, and rethink its way back to economic sanity. A decade or so in quiet opposition is required.

Autumn Statement 2023

Lord Eatwell Excerpts

Wednesday 29th November 2023 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, I first welcome the noble Baroness to the Treasury Bench. She has a hard act to follow.

A couple of weeks ago, the Institute for Government and the Chartered Institute of Public Finance and Accountancy published a detailed 300-page analysis of the impact of the pandemic on nine public services, ranging over health and social care, education, local services, criminal justice and the police. The study first evaluated performance from 2010 to the eve of the pandemic, meaning that any change in quality of service over the first nine years of the Conservative Government could not be blamed on the pandemic or the war in Ukraine.

In eight out of nine areas of public service studied, performance was found to be worse in 2019 than in 2010. In four areas—general practice, hospitals, adult social care and prisons—performance was much worse. Only in schools was performance rated as better. Between 2019 and the present day, nothing at all has improved and eight of the nine major services have deteriorated yet further. Finally, as far as the next five years are concerned, while some services are predicted to stay at the same miserable level, others, including schools and criminal justice, face further decline.

So, will the Chancellor’s Autumn Statement proposals turn this decline around? The answer given by the OBR is clearly no. As tables A.l and A.2 of the OBR outlook make clear, current spending will grow very slowly, while investment in public services will suffer major cuts. The Chancellor’s one big public services announcement was to set a productivity target of a 0.5% increase per year. Productivity is an issue in many services, particularly in the courts and hospitals, but nothing in the Autumn Statement will significantly improve the situation. Indeed, the real-terms cuts to capital budgets ensure that public services will be left with a crumbling estate, insufficient equipment and inadequate IT systems.

But of course, the main focus of the Autumn Statement, as the noble Baroness made clear, was not public services but private sector growth. If significant economic growth is indeed achieved, the positive impact on public services might be considerable. The Autumn Statement commitment of £4.5 billion-worth of support for new industries sounds impressive—until you compare it with United States funding for green investments of $360 billion and European Union plans in excess of €200 billion.

Of course, the Government deserve congratulation that taxpayers’ money has secured the new Nissan investment, and we all hope for similar encouraging results from the investment summit held on Monday. But just as when unemployment rises, some people find new jobs, so these welcome investments must be viewed not as isolated events but in the context of the overall investment picture. The Chancellor’s primary measure to stimulate investment was his decision to make so-called full expensing permanent—a positive step. According to the OBR, this is expected to increase long-run potential output by “slightly below” 0.2% of GDP per annum. However, this positive impact is, according to the OBR, offset by the reduction in

“the public capital stock as a share of GDP”,

which

“would likely also have a material, negative impact on potential output”

over the forecast period.

Here, the OBR has, sotto voce, identified a fundamental error in the Government’s approach to investment and growth: their failure to recognise that public services are complementary to the efficiency of private sector investment. Private profitability requires a thriving public sector. For example, the deterioration in the health service has been a major contributor to the record 2.5 million people out of work due to ill health. If just half these people were in work, this would add a full 1 percentage point to GDP—five times greater than the impact of full expensing. Similarly, the lack of additional support for local government will impact spending on local infrastructure, transport and skills, increasing private sector costs of production, particularly for SMEs. The complementarity of public and private investment was very clear in 2010.

George Osborne’s austerity Budget killed a growing economy stone dead. This was not the immediate effect of his expenditure cuts, which took time; it was the immediate effect of his clear declaration of intent to cut public investment and cut the growth of demand. It was the vision of austerity, together with the reality of cuts, that killed off so much private investment. The Chancellor’s 110 measures to stimulate growth may be successful, but a fundamental problem is that they do not add up to a coherent policy. They are, in Churchill’s famous phrase, “a pudding without a theme”. An economy and society in which the popular estimation is that nothing works is not an attractive place for businesses to invest.

That is why Rachel Reeves’ commitment to large-scale investment in green technologies—the undoubted technologies of the future—is so important. This defining commitment will provide the theme and coherence this Autumn Statement lacks. It is also a long-term policy, a commitment to at least one Parliament—so different from the persistent chopping and changing of the last 13 years, and providing the stable policy confidence investors need. Of course, given the public sector scorched earth that a Labour Government will inherit, an ambitious green growth investment strategy will be a considerable challenge. But it is as nothing compared to the challenges faced by our parents and grandparents in 1945, when, in far worse circumstances, a Labour Government laid the public sector foundations for the next 25 years of transformative growth, under both Conservative and Labour Administrations.

A component of Reeves’ green growth strategy is a long-term commitment to investment in and reform of the public services—reform that recognises not only service to the public but the support the public sector provides to business investment. The green investment programme will be a catalyst, defining Britain’s profitable investment future. It will herald a fundamental change in the way the British economy is managed: a fundamental reform that, as illustrated by the failure of this Autumn Statement, is desperately needed.

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

Is that genuinely funny or is it just performative?

It will not surprise noble Lords to learn that I did not agree with all the points raised, but there have been others that have truly piqued my interest and I will take them away for further consideration.

I will first set out the context, which was noted by my noble friend Lady Goldie in her very spirited speech for an “old bird”. It is very important to think about the context of where we are and where we have come from. There were some notable exceptions, because many noble Lords just glossed the past few years and said, “Oh, it’s all the Government’s fault”. I note that my noble friend Lady Lea gave an excellent speech, with a very authoritative analysis of where we are.

We have faced a global pandemic and global economic headwinds generated by Putin’s illegal war in Ukraine. As a result of those things, we have made decisions. Other countries did not make exactly the same decisions as us; therefore, they had a different experience. The decisions we took included the Covid support of over £350 billion, and the cost of living support to dampen the impact of rising bills has exceeded £100 billion. I invite noble Lords to recall these interventions, because I do not, in my years on the Front Bench in this House, recall any time when the Opposition Benches, in particular, argued against them. In fact, in nearly all cases, I seem to recall many saying that it was just not enough and that more needed to be done during Covid and the recent cost of living challenge.

Therefore, when noble Lords turn around and complain about various elements of the state of our economy, I say that we have not lived in usual times. That is why this Autumn Statement is a blueprint to get our debt down, to get business investment up, to get inflation controlled, output boosted and taxes cut; and this is an Autumn Statement plan for growth. I reassure my noble friend Lord Dobbs that economic growth is and will be at the heart of this Government’s plans, and that the Government will do more on tax cuts when the circumstances allow. I understand that my noble friend Lady Noakes will probably never be happy with what the Government propose and their speed for the interventions that she would like, but I hope that she appreciates that we are making steps in the right direction.

On a minority sport, I also welcome the support of the noble Lord, Lord O’Neill, for the devolution deals: they do not get enough love and, combined with good local scrutiny, can make huge differences to parts of the country. One has only to look at the West Midlands and the great mayor we have there.

Turning to a few of the issues raised and trying to deal with them, I turn to my noble friend Lord Dobbs and his comment about experts and forecasters. When I was quite young, I was an investment banker for many years. I am well aware that forecasts are rarely 100% right. They are forecasts; we know that. However, it is important that we have a framework for decision-making, so I agree with him that forecasts are not gospel. It might have been my noble friend Lady Lea who said that they can be both an art and a science, and of course they get slightly less certain the further out you get. However, we need a framework to make our decisions, and that is why it is really important that we forecast where we think the economy is going to be and that we have the OBR to check our thinking. It is an educated view—a snapshot in time—but one that I believe is useful.

My noble friend Lady Lawlor made some very good points about inflation and its contributing factors. She talked about the role of the Bank of England and mentioned the report on that. I have to confess that I have not yet read that report, but I intend to very soon. I have already brought it to the attention of my officials, and I look forward to debating the report in due course.

My noble friend Lord Northbrook asked why we did not stop QE sooner. Of course, decisions on the size of the APF, which means something that escapes me now—oh, I believe that it is the asset purchase fund—and the pace of purchases and sales are those of the independent Monetary Policy Committee, and the Government do not comment on MPC actions.

My noble friend Lord Howell talked about the impact of high interest rates on government debt payments, and my noble friend Lord Sherbourne of Didsbury also mentioned debt, the size of interest payments and the consequences of those high levels. That is why this Government are absolutely committed to getting debt down, so that the actual cash cost of the debt comes down too. I cannot speculate on bank rates, of course, but we feel that by 2028-29 underlying debt will be 92.8% of GDP.

The noble Lord, Lord Livermore, whom I have not yet congratulated on his new role as shadow Exchequer Secretary—so that is all good news—talked a lot about the tax burden, and I hope I was able to demonstrate in my opening remarks why the tax burden is necessarily high, because we must pay off the debt that we had to accumulate, given the economic circumstances that we were in. He said that he did not think this was a tax-cutting budget, but the OBR has confirmed that decisions made by the Chancellor in this Autumn Statement reduce the tax by 0.7% of GDP—which is a tax cut. I am confused, but I am sure we will sort all that out.

[Lord Eatwell (Lab)]

The Minister just made a mistake. What the OBR argued is that the cut in national insurance means that taxes have risen less rapidly than they would have done otherwise, but that they have risen none the less.

[Baroness Vere of Norbiton (Con)]

The noble Lord is exactly right. But the counterfactual is what happened before the Autumn Statement. People are, in general, paying less than they would have done previously. Yes? Okay. We got there in the end.

[Lord Eatwell (Lab)]

People are paying more. In other words, the Minister is arguing a case for cuts in taxation. This is not a cut in taxation; it is a reduction in the rate at which taxes are increasing, but they are increasing none the less.

[Baroness Vere of Norbiton (Con)]

We are both correct.

The noble Lord, Lord Macpherson, asked whether it was the Government’s policy now to favour national insurance reductions over income tax reductions. I think I can say yes. It certainly was true for the Autumn Statement—so, for this moment in time, I think I am covered.

A couple of noble Lords mentioned inheritance tax: my noble friends Lord Northbrook and Lord Balfe. I can assure noble Lords that more than 93% of estates are forecast to have no liability in each year up to and including 2028-29. Those that do are very important in contributing to public finances and in helping to fund vital public services. However, as all noble Lords know, the Government keep all taxes under review, including inheritance tax. That also goes for the stamp duty suggestions mentioned by my noble friend Lord Willetts and the fuel duty suggestions from the noble Baroness, Lady Bennett.

I turn now to public spending. Many noble Lords called for increased public spending during this debate. I would read out the names, but it is actually nearly all noble Lords, apart from notable exceptions on the Benches behind me. Those who called for more public spending included the noble Baronesses, Lady Pinnock, Lady Featherstone, Lady Bennett and Lady Meacher; the noble Lords, Lord Howarth, Lord Macpherson and Lord Thomas; the noble Viscount, Lord Hanworth, and the right reverend Prelate the Bishop of Manchester. The list is extraordinary. However, on the list of noble Lords who came up with a plan for how to pay for those spending increases—a medal goes to the noble Baroness, Lady Bennett. She did come up with a medal.

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

I will go away and see what we can do. I said over 100 because it is now much more than 110. There are a lot of measures, and I will see what I can do to get together some sort of list.

[Lord Eatwell (Lab)]

Can I support the noble Baroness, Lady Noakes, in her request? It would be enormously helpful if the Minister would commit herself to provide an annotated list of the 110 measures and place it in the Library.

[Baroness Vere of Norbiton (Con)]

As I said to my noble friend Lady Noakes, I will do my best.

It is worth spending some time on my noble friend Lord Harrington’s review. I am enormously grateful for his work. This is an area in which he has great interest and, indeed, great expertise. His speech today added colour to his thinking set out in the report; I know that all noble Lords will be keen to see it, and I hope will be able to speak to him about his conclusions. The Government have accepted all the headline recommendations and, as a result, are establishing a new ministerial investment group and backing it with additional resources for the Office for Investment. I have worked with the Office for Investment; it is very good and works across government, pulling together all the bits of government one needs to make a successful strategic investment. I have some minority-sport questions on EIS and VCT on which I will have to write, important though they are.

I believe I should conclude. The measures in the Autumn Statement are important and bold, and rightly so. As a country we find ourselves in a moment when inflation is reducing, borrowing is reducing, and growth is improving. The measures announced by the Chancellor last week will support efforts to boost business investment in the UK, and they will help businesses of all sizes to spend more of their money on the things that bring them success: premises, people, ideas and products. Our measures will get thousands of people working and reward them with better pay. By delivering for the British people, we will see economic growth leading to increased prosperity and well-being for all.

Finance (No. 2) Bill

Lord Eatwell Excerpts

Committee negatived & 3rd reading
Tuesday 4th July 2023 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, I am grateful for the privilege of saying a few remarks in the gap. I will refer to the change in the lifetime allowance. As noble Lords will recall, this change was initially mooted because pensions anomalies were occurring in respect of better-paid consultants in the National Health Service. Then the Government decided to abolish the lifetime allowance altogether, thus creating a tax giveaway, estimated at the time at £1 billion. As the noble Baroness said in her speech, it was given to the

“most experienced and productive workers”.

Since this is just the top 1% of earners in this country, does she not think the other 99% might be rather offended by her words? Would it not be politic to withdraw that phrase when she sums up?

When the LTA was abolished, it was realised that there would be a significant impact on inheritance tax. At the time of the Budget, I asked the Minister what the impact would be and she was unable to give me a figure. Can she tell me now what the impact on inheritance tax revenues was, and therefore what the total tax giveaway from the abolition of the LTA has been? Will she also confirm that this tax giveaway is being funded by the Government’s increased borrowing? In doing so, will she give her assessment of the impact of this increased borrowing and government indebtedness on the rate of inflation?

--- Later in debate ---

[Baroness Penn (Con)]

I am saying that that is most certainly a risk. There is a high amount of uncertainty about the impact of any changes in that area, and it would not necessarily lead to an increase in revenue, as is being relied upon by the Labour Party.

[Lord Eatwell (Lab)]

My Lords, surely there is not that degree of uncertainty, since the Government did raise a base levy on non-doms. Surely, then, we have evidence from the mobility of non-doms reacting to that base levy. What is the evidence? I suggest it is evidence of no mobility at all.

[Baroness Penn (Con)]

My Lords, I was speaking about the difference between changes to any scheme and abolition of the status altogether, but I would say that there is a high degree of uncertainty about the impact of changes made in this area.

Finally, I turn to the pension tax changes made through this Bill and the Budget, which many noble Lords have spoken about. To respond to the noble Lord, Lord Eatwell, I was not implying that only the most highly skilled and productive workers benefit from these changes, but many of them will. They have been designed in response to feedback from the NHS in particular that there was an impact on retention of the most skilled staff.

Regarding the suggestion that a doctors-only change could have been implemented instead, unlike more targeted policies, the Government have considered a range of options to address this issue over a number of years. One of the elements which means that a more targeted approach would not be appropriate in these circumstances is the time it would take to implement. These changes could be implemented quickly, from April 2023, minimising the risk of early retirements in the NHS before any changes take effect.

In the Statement taken before this debate, we heard about the pressures on our NHS workforce and the pressing need to address those immediately. If we were to take a targeted approach to one profession—NHS doctors—we may well come back to the same issue, as the same issues are faced by employees in other sectors, such as air traffic controllers, the police, the Armed Forces and senior teachers. To introduce targeted measures for each profession would not be an effective way to deal with challenges across those different workforces.

The Government are aware of the concern raised by the noble Lord, Lord Eatwell—

[Baroness Penn (Con)]

I think one of the reasons why I frustrate the noble Lord in this area is that the Government do not normally comment on individual taxpayers. On his more general point, the Government have taken action to tackle tax avoidance and evasion over many years and to reduce its incidence in our economy.

Finally, I turn to the impact of the change to the annual allowance and its potential inheritance tax impacts. Noble Lords are right that the annual allowance has meant that there has been a limit on how much individuals can put into their pensions and therefore pass on. The Government are aware of concerns that some may be using their pension pots to reduce future inheritance tax liabilities, rather than for their purpose: to fund their retirement. As with all taxes, the Government keep the rules under review.

[Lord Eatwell (Lab)]

My Lords, before the noble Baroness moves away from the lifetime allowance, I asked her if it was true that this £1 billion was funded by increased borrowing. In her summing up just now, she said very clearly that unfunded tax cuts increase inflation; those were her exact words. Is this not an unfunded tax cut?

[Baroness Penn (Con)]

The OBR has been clear about its forecast for the public finances, which has shown that they are more resilient than previously expected. Debt is lower in every year of the forecast compared with the November forecast. Borrowing falls year on year and the current Budget is in a surplus from 2026-27. All these decisions are taken in the round and assessed against the Government’s fiscal rules and the independent OBR’s forecasts for government borrowing and debt.

We have had a wide-ranging debate today, but if we return to the measures in the Bill, they form an essential part of our plan for the economy. They support enterprise, business investment and employment, including in the NHS. The Bill seizes the freedoms now available to the UK outside of the EU, addresses international tax avoidance and the problem it causes for the sustainability of our public finances, and will help simplify our tax system. For these reasons, I beg to move.

UK Economy: Growth, Inflation and Productivity

Lord Eatwell Excerpts

Thursday 29th June 2023 Lords Chamber

Moved by

[Lord Eatwell]

That this House takes note of the low rate of growth of the United Kingdom’s economy, and the rate of core inflation and its differential effects; and of the necessity of increasing productivity.

[Lord Eatwell (Lab)]

My Lords, a few days ago there was an historic event: an inflation-busting 9.5% pay demand was submitted by that hotbed of union militancy, the clergy of the Church of England. This is just one further indication of the economic desperation suffered by most of Britain, including the clergy, as average real pay has fallen lower and lower. It is now down to the same level as 2007—and that is even before the impending rise in the cost of mortgages.

The only sustainable way to recover real incomes, and hence cut inflation, is to increase productivity—output per head. Increasing productivity requires investment that expands productive capacity and incorporates innovation. Investment requires the confident prospect of future growth. Achieving that nexus between investment, productivity and growth is the fundamental challenge that we face.

The past 15 years have been tough for the world economy. Every country has endured the shocks of the global financial crisis, the global pandemic, and the devastating impact of the war in Ukraine on energy and food prices. Yet since 2010, in the crucial variables of investment and productivity, Britain has done consistently worse than comparable countries. Since 2010, year on year, investment as a share of UK GDP has been the lowest in the G7 every year. On productivity, the National Institute of Economic and Social Research argued in a comprehensive study:

“In the years leading to the global financial crisis, the UK was closing the gap on its international competitors; UK productivity was growing at a faster pace than the United States in the pre-2007 period. This has changed since 2007, with productivity growth rates collapsing in the UK, more so than in most advanced economies”.


The result of this succession of low productivity and low investment is that, in 2009, typical household incomes in Britain were roughly the same as in France and Germany, whereas 10 years later they are 16% lower than in Germany and 9% lower than in France. The persistent economic underperformance of the past decade is the key to why Britain is today locked into low growth and high inflation, with ever-rising taxes and interest rates, and why the public realm is in an advanced state of breakdown as despairing public sector workers suffer even severer cuts in real income.

Why has this happened? The explanation is not hard to find. In the face of every major shock suffered by the economy over the past 13 years, the Government have time after time taken the wrong decision. In every case, misguided government policies damaged investment, growth and productivity. In the first half of 2010, the UK economy was recovering strongly from the shock of the global financial crisis, but the cost of rescuing the banks and supporting the economy in the downturn had left the UK with a high level of debt relative to GDP.

Any serious study of economic history demonstrates beyond doubt that the only enduring way to reduce the debt to GDP ratio is to grow GDP. Accordingly, in the first half of 2010, the Chancellor, Alistair Darling, had steered the economy on to a steady growth path, approaching an annual growth rate of 3%. In May of that year, the new Chancellor, George Osborne, reversed Darling’s policy and austerity killed the growth rate stone-dead. Austerity was supposed to cut the debt; the trouble was that it cut GDP too. To the Chancellor’s continuing puzzlement, despite his having eviscerated public spending, the debt to GDP ratio did not fall as predicted. He had chosen the wrong policy. The damage that Osborne’s austerity did to the foundations of growth and productivity lives on to this day.

The next major economic shock to the UK was the vote to leave the European Union just seven years ago. Following the referendum result, the Conservative Government took the wrong decision once again. Instead of negotiating a close relationship with our largest trading partner post Brexit, they decided on a so-called hard Brexit, raising trade barriers and exiting supply chains. The result has been that, since the referendum, while the value of French exports has grown by 16% and that of German exports by 23%, demand for UK exports has grown by just 6%. The growth of business investment in Britain, which had shown a sharp recovery in the three years before 2016, stopped dead and has never fully recovered to this day. That is what happens when you make the wrong decision and give up the supreme trading advantages of close proximity to the world’s largest free trade area.

Next came the double whammy of the pandemic and the war in Ukraine. The new Government, led by Liz Truss, correctly identified Britain’s fundamental economic weakness—the slow rate of growth. But once again, the Conservative Government chose the wrong policy—in this case, fiscal incontinence. Instead of tackling directly the low-investment, low-growth problem, they sprayed—or planned to spray—tax cuts on the better-off. They ignored the fact that similar tax cuts for the wealthy by Donald Trump had had no lasting impact on US growth. The result of that Conservative mini-Budget has been soaring interest rates and a collapse in confidence, hammering investment and growth yet again.

The 7 million-plus NHS waiting list, the 2 million-plus fall in the labour force, the world-beating rate of inflation and spiralling mortgage rates are all the result of a succession of bad policy choices made by Conservative Ministers at crucial times in the past 13 years. And now the Chancellor is at it again. He tells us:

“We have to do everything we can as a government … to squeeze inflation out of the system”.


Yet while the Government tighten their hands around the throat of the British economy, has the Chancellor not noticed that the inflation rate in France is just over 5% and falling and in Spain just over 3% and falling? What did they do? Both the French and Spanish Governments have deliberately targeted support notably on food prices and on the lowest wage earners. In doing so, they weakened the damaging link between the first round of food and energy inflation and the second round of wage inflation. Core inflation has been driven by desperate attempts to protect the standard of living. So, by contrast with the French and the Spaniards, Jeremy Hunt is determined to squeeze working people into accepting a lower standard of living, whatever damage may be done to investment in growth. This string of bad decisions, from austerity to EU trade, to fiscal incontinence, to squeezing the economy, has undermined investment and growth for the past 13 years.

That raises another issue. Why has Conservative economic decision-making been so bad? After all, everybody can make the occasional mistake. But to make decisions that damage investment and growth over and over again is more than just careless. Perhaps the answer lies in the Conservative characterisation of the state as a burden on the wealth-creating private sector, allied with an overarching faith in market-driven private sector efficiency.

All evidence from modern successful economies points to the foundation of investment and productivity growth being the essential complementarity of public and private investment. If we are to build a competitive economy with a high rate of productivity growth underpinning rising living standards for all, Britain needs a new relationship between government and industry, to be consummated in the pursuit of a single dominant objective: investment, public and private.

Public-private complementarity is vital, and not just in the oft-cited examples of education, law and infrastructure. Life sciences, as we know, are the jewel in Britain’s crown, yet the UK’s share of global pharmaceutical research and development has halved since 2012. Why? Quite simply, an overwhelmed, demoralised health service has struggled to prioritise the clinical trials that are a crucial component of pharmaceutical development—a vital complementarity between public and private sectors.

For years, Britain has not had the level of investment it needs because our economic institutions, public and private, have not been up to the job. We have proved unable to capitalise on Britain’s undoubted strengths in artificial intelligence, the life sciences and our research universities. What is needed is a long-term government mission to create a new institutional environment, financial and corporate, that sustains the needed investment with ideas, skills and finance and, crucially, is supported by the confident prospect of future demand. Without the prospect of future demand, including export demand, there will be no investment, however good the projects and however abundant the finance or tax incentives might be.

Britain needs not just to catch up but to use our technological and research expertise to leap-frog our competitors in a world economy that has changed fundamentally since the pandemic. We knew already that the successful economies of the future will be those that secure the lead in green technologies. We also learned that national security will require safe supply chains and strong, home-based industries and services. The globalisation free-for-all is over.

The United States has got the message. President Biden’s Inflation Reduction Act and the CHIPS and Science Act chart a green and secure future. We start from so far behind that we need to do more than the US. At the moment we spend 1.2% of our GDP addressing the demands of climate change; the US spends 1.9%, France 2.5% and Germany more than 5%. Nothing could illustrate more that Britain needs a public/private industrial policy to build the green industries of the future.

I accept—it is well known—that defining a credible industrial policy is much more difficult than focusing on the broad sweep of macroeconomic objectives. Industrial policy consists of a broad range of diverse initiatives: an enhanced British Business Bank, reform of the energy sector, rejoining the Horizon programme, funds for further education colleges, new financial institutions to support SMEs, university industrial parks, a substantially revised trade policy and so on. It even includes investment in the NHS to maintain a fit labour force and support pharmaceutical trials. Crucially, we need a stable macroframework that provides a sustained growth of demand.

The necessary coherence of all this is achieved by focusing all these policies on the common investment objective, bound together by a sustained commitment to the common mission. We have not had that sort of policy for 13 years. I hope that when she sums up the Minister will tell us what the Government have learned from their litany of grievous economic errors. Britain cannot take any more economic blunders. I assure the House that just “holding our nerve” will not do the job. Our future economy needs new management, and it needs it now.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, I am grateful to all noble Lords who have taken part in this interesting debate and for the many interesting ideas and views expressed. I will make a closing remark on the topic of inflation.

I am very nervous that the Bank of England’s policy will not work. The increase in interest rates has a much smaller base to operate on than it used to, given that fewer mortgage holders in this country have variable-rate or fixed-rate mortgages that will mature very shortly. Moreover, it is extraordinary that we are relying in our attack on inflation on worsening the economic circumstances of a small group of mortgage holders in this country.

Moreover, the other way in which the Bank of England’s policy can work is by raising the exchange rate and thereby reducing costs. We have seen some increase in the exchange rate as interest rates have risen, but that policy is very frail and insecure. Capital movements around the world, especially short-term ones, can move interest rates in various directions in quite different ways from those that might be expected by policymakers.

I am very concerned, and my concern is shared by the Bank for International Settlements, which argued last week that monetary policy will not be enough. Therefore, we must look to other ways of taking the pressure off the labour market by supporting basic well-being in the labour force in particular, so that there is not the same pressure to bid for higher money wages.

I will not go on. There is much more for all of us to debate on this. I very much thank all noble Lords who have taken part and the noble Baroness, Lady Penn, for her summing up. I beg to move.

Motion agreed.

Financial Services and Markets Bill

Lord Eatwell Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Viscount Trenchard (Con)]

Both my noble friends have a much more sensible approach to this matter.

I echo the other remarks of my noble friend Lord Forsyth, whose Amendment 101 I was minded to support. I too am most grateful to my noble friend the Minister for listening to the opinions of your Lordships expressed in Grand Committee. I added my name to Amendment 227 in Grand Committee, tabled by my noble friend Lady Noakes. Her amendment was debated on 13 March alongside Amendment 215, tabled by my noble friend Lord Moylan and other noble Lords. I would have added my support to my noble friend Lord Moylan’s Amendment 105, but it was too popular and there was no room.

My noble friend the Minister will recognise the disproportionate difficulties which UK PEPs must endure as a result of the money laundering regulations 2017. On balance, I would have preferred to be excluded by virtue of being a UK citizen, but my noble friend has decided that exclusions will apply to domestic PEPs, which does not sound so nice, but will achieve the same outcome.

Unfortunately, it will take years for British citizens resident abroad who are connected to UK PEPs to be released from similar regulations in many different jurisdictions. For example, my son has found it impossible to be appointed as a bank account signatory in Taiwan and South Korea. However, my noble friend the Minister’s amendment should make the life of UK PEPs easier. I am interested to see whether, in a year’s time, the amendment proposed by my noble friend Lord Moylan will be the triumphant, most successful and best one of these. In any event, I am most grateful to her for taking up this point, as she said she would.

[Lord Eatwell (Lab)]

My Lords, we seem to be predominantly discussing personal experiences at the moment, so I declare an interest as the former chairman of the Jersey Financial Services Commission.

The definition of a politically exposed person in Amendment 96 refers to persons

“entrusted with prominent public functions by the United Kingdom”.

Presumably, that would not apply to the Crown dependencies, since they are not part of the United Kingdom. I think that this is a mistake; it should be corrected by the Government, given the important role many UK citizens play in the Crown dependencies and in the financial services industry in the Crown dependencies. Would the Minister agree to take this away and see whether the omission of the Crown dependencies is just an error that has been made in drafting this amendment.

--- Later in debate ---

Overall, you could put many more things into this and it will not be the end of the story, but I think it is important to put this into the Bill so that work starts on it quickly, because we are almost in an emergency with the state of investment in this country and, therefore, the sooner we begin to address to address it and to make our money work for the things that are better for the economy, the sooner we will get results.

[Lord Eatwell (Lab)]

My Lords, this is not just a good amendment, it is a very important and timely one. Noble Lords will recall that after the death of Robert Maxwell and the exposure of the way in which he had looted the Mirror Group pension funds, the Government introduced a new pensions structure to protect defined benefits pensions, as well as new accounting standards which needed to be obeyed by pension funds. The effect of this protective barrier placed around defined benefits funds has been that they have adopted extremely conservative investment strategies and the return on investments has correspondingly been extremely low compared with what could be achieved by quite modest amendments of investment strategy.

These issues are now a matter of widespread discussion where the unfortunate unintended consequences of the post-Maxwell legislation have been revealed. It is necessary quite rapidly to take account of the discussions, to assess the performance of pension funds since the last significant pensions legislation, and to come up with sensible proposals for reform. That is why this amendment is crucial, for both the pensions funds industry and the wider economy. I encourage the Minister to support this amendment because by doing so the Government would make a major contribution to the future prosperity of a whole raft of pensioners in this country and to the success of pension funds as investment vehicles within the UK economy.

[Lord Blackwell (Con)]

My Lords, I am concerned that, while seemingly innocuous, this amendment might turn out to be the thin end of the wedge of government intervention in pension investment. Clearly, the obligation on pension trustees should be to do their best to get the right returns for their investors. Once we start incentivising trustees to take decisions based on incentives offered to them, that raises the question of who then bears the consequences and the responsibility if those investments turn out in the long term not to be the right thing for their pensioners to be invested in.

I do not dispute the point that pension fund investments have not been optimal in the past, but to my mind that is to do with regulatory restrictions that have been placed on pension funds and the requirements to meet those restrictions. I think there is a case to look at the regulations around pension funds that restrict their investment choices and to enable them to invest in a wider set of assets, but I do not think the right way to do that is to start proposing incentives that would turn into the Government mandating the way that pension funds should be invested.

--- Later in debate ---

[Viscount Trenchard (Con)]

My Lords, the noble Baroness, Lady Kramer, and the most reverend Primate have retabled as a single amendment—Amendment 106 —the two amendments that were debated in Grand Committee: Amendment 241C on ring-fencing, and Amendment 241D on the senior managers and certification regime.

As my noble friend Lady Noakes said during that debate, these amendments are trying to set in stone for all time the conclusions of the report of the Parliamentary Commission on Banking Standards. Times change, and I cannot support this amendment because it introduces an inappropriate degree of rigidity.

As my noble friend also pointed out, the lesson of the HSBC and Silicon Valley Bank episode was that the ring-fencing rules were not, after all, considered inviolable. It was necessary to provide HSBC with special statutory exemptions from the ring-fencing rules to enable it to acquire Silicon Valley Bank. That exemption has brought permanent changes to the ring-fencing regime for HSBC which affect it alone. Can my noble friend say whether that means it has a permanent competitive advantage over rival ring-fenced banks in the UK?

In any case, I rather doubt whether the introduction of ring-fencing has reduced the risks to which bank customers’ deposits are exposed. I disagree that it is therefore important to make it very difficult to weaken the ring-fencing regulations in any way. As I said in Committee, I worked for Kleinwort Benson for 23 years, for a further 12 years for Robert Fleming and then for Mizuho. All three banks operated both commercial and investment banking businesses. Internal Chinese walls between departments made it quite impossible for customers’ commercial banking deposits to be diverted to risky investment banking activities. As I said in Grand Committee, there is no positive correlation between the two cash flows of retail and investment banking. It follows that universal banks are in fact gaining diversification benefits. There is little global evidence that splitting up the banks has made them less likely to get into trouble.

Following the Lehman shock, is it not interesting that the US Government did not go for the reintroduction of a kind of Glass-Steagall Act? I am not convinced that ring-fencing is a good thing, and in general I am opposed to market distortions of this kind, which actually make the consumer less safe rather than safer. Ring-fencing also makes it harder for smaller banks to grow, because they must compete for a small pool of permitted assets against the capital of the larger banks. Will the Government conduct a review of the effectiveness of ring-fencing?

As for the senior managers and certification regime, I am sceptical as to whether it has been effective, because there is no hard evidence that it has been used as the stick that was originally intended. Most well-run banks operate in a collegiate manner, and I think it rather odd to attempt to attribute personal responsibility to managers and directors of banks for the decisions and actions of those banks, beyond the responsibilities that the directors carry in any event.

The SMCR has especially inconvenienced foreign banks operating in London. As an example, I refer to the Japanese megabanks. It used to be their practice to assign a very senior executive to London to take responsibility for all the bank’s activities in the UK and in most cases the whole EMIR region. Often, this might be the executive’s last major management position before retirement, and would typically be for two to three years leading up to his retirement date. Such executives have typically worked for 40 years or more for that bank and have managed regulated financial businesses in Japan for many years. However, the FCA has consistently been extraordinarily slow in approving those executives under the SMCR.

Therefore, the Japanese banks have given up on this strategy and feel compelled to appoint as head of their UK and EMIR operations not the person most appropriate for the job, but the most senior person who has already been working in London for three years or so, merely in order to meet the criteria of the SMCR regime. This has caused considerable inconvenience, because it is unreasonable to send a trusted senior executive overseas for five or six years in the last years of his active career, rather than a more reasonable stretch of two to three years. I know that the SMCR is much resented by Japanese and other foreign banks and I ask my noble friend if she will agree to conduct a review of how it is being implemented by the FCA.

[Lord Eatwell (Lab)]

My Lords, I must say that, listening to the noble Viscount, Lord Trenchard, just now, I think he has given strong arguments in favour of this amendment—strong because what the amendment asks for is accountability to Parliament on the performance of the ring-fence and the SMCR. If that accountability existed, the noble Viscount would have the opportunity to present his views in a framework, which might then have greater effect than, I am afraid, his speech had without such a mechanism.

Financial Services and Markets Bill

Lord Eatwell Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

[Lord Vaux of Harrowden (CB)]

My Lords, this is the first of two groups that seek to improve the level of parliamentary scrutiny and accountability. Arguably, I think the groups are the wrong way around from a logical point of view, but we are where we are. We had long debates on this in Committee, and it was clear that accountability and parliamentary scrutiny was probably the single biggest issue on which Members from across the House felt that the Bill fell woefully short, particularly given the huge amount that is being transferred to the responsibility of the regulators by the Bill.

We heard in Committee of the need for three legs to the whole process of scrutiny and accountability: reporting, independent analysis and the parliamentary accountability elements. This group is about the second leg—the independent analysis that will support the parliamentary scrutiny and accountability. The Government have listened, and that is welcome, but I am sure I am not alone in finding what they have proposed to be rather thin gruel.

The Government have introduced a number of amendments which enhance the role of the various policy panels, in particular the cost-benefit analysis panel. These are welcome, but I am afraid they really do not go far enough. Other noble Lords, especially the noble Lord, Lord Holmes of Richmond, have tabled further amendments to enhance and support the role of the panels. Again, that is very welcome but not, I think, sufficient. Despite these improvements, the panels remain appointed by the regulators and are not genuinely independent.

I remain strongly drawn to the amendments in the name of the noble Lord, Lord Bridges of Headley, introduced by the noble Baroness, Lady Bowles, to which I have added my name, to create a genuinely independent office for financial regulatory accountability. As I said, so much responsibility is being handed to the regulators that it must make sense to have a genuinely robust system of oversight over the regulators, not just responding to consultations about proposed changes to regulations that the Government have put into the Bill but a much more holistic oversight of the whole regulatory direction—something that deals with what the noble Viscount, Lord Trenchard, referred to as the multiplicity of panels. We need to draw this all together, and we need to be much more forward-looking about the direction of regulation, rather than backward-looking as to what is proposed.

This is such an important matter and such a huge volume of work that, if we are to scrutinise it effectively, we need to have something such as the proposed office for financial accountability to enable parliamentary committees and others to carry out the meaningful scrutiny. The noble Baroness, Lady Bowles, talked about the need for resources; we will come on to that in the next group, but she is quite right. This would really help because, if the independent information were available to the committees, it would save them the job of doing all the sifting and all the rest of it, and they would be able to concentrate on the bits that really matter.

Even with the amendments proposed by the Government, I do not think that we get anywhere near that real scrutiny. I am sorry to hear that the noble Lord, Lord Bridges, does not intend to push these amendments; I would have liked him to do so and would have supported him if he had. I hope that he will continue to use his influence as the chair of the Economic Affairs Committee to push for a similar approach.

[Lord Eatwell (Lab)]

My Lords, I totally agree with what the noble Lord has just said and therefore I will not repeat his words. The office for financial regulatory accountability proposed by the noble Lord, Lord Bridges, would become an important part of the whole regulatory architecture in this country. The reason why I have proposed a couple of amendments—I am delighted to hear that the noble Lord, Lord Bridges, actually likes my amendments to his amendments—is to enhance the position of the office within that architecture.

We have to recognise that there will be virulent opposition to this in the Treasury. The Treasury’s darkest day in recent years was the day that the Office for Budget Responsibility was established as an independent entity evaluating the performance of the economy. In the same way, having gone through that dark day, I can imagine the horror with which the Treasury observes the possibility of an independent entity evaluating the performance of regulators and the performance of the Treasury in its activity in guiding regulation. It is no surprise at all that we have what the noble Lord has quite appropriately called “thin gruel”, instead of something that would be truly effective and would create both an independent assessor and a sounding board for the industry, consumers and others who have an interest to express in regulation to get their views on to the front line.

With my Amendments 67 and 72 I am again in slight opposition to the noble Viscount, Lord Trenchard, in the sense that I want to remove the lines in the amendment from the noble Lord, Lord Bridges, that specifically focus on the competition objective, because I do not want to second-guess what the office might do. The office could choose to travel over any part of the regulatory countryside. I regard my Amendment 72 as much more important because, as part of the architecture, the office should be funded through the levy in the same way as other parts of the regulatory system; the FCA, the Financial Services Compensation Scheme and so on are all financed via the standard levy on the industry. After all, this would be a trivial amount of money because—as has been pointed out—it would be only a relatively small entity. I am delighted that the noble Lord, Lord Bridges, liked my amendment to his amendment. I hope that he will be able to carry forward these proposals in the way that the noble Lord, Lord Vaux, suggested.

I will comment on Amendments 44 and 47 from the noble Lord, Lord Holmes, on the membership of panels at the FCA and the PRA. I support his view that placing practitioners on panels can have a very positive effect. I say this because I was an independent member of the board of the old Securities and Futures Authority, which was a practitioner-run regulatory authority with independent members, of which I was one. I was very impressed by the way that practitioners, when required to be regulators and placed in a regulatory role, assumed the role of regulators—they were not just representatives of their special interests. In fact, their special interests were left at the door; what came in with them was their specialist knowledge. I was sceptical when I first joined the board of the SFA but was won over by the performance of practitioners there. The proposal from the noble Lord, Lord Holmes, for practitioners will add to the regulatory effectiveness and knowledge of these panels.

--- Later in debate ---

[The Deputy Speaker (Lord Faulkner of Worcester) (Lab)]

I must advise the House—this will not surprise the noble Lord, Lord Forsyth—that, if this amendment is agreed to, I will be unable to call Amendment 26.

[Lord Eatwell (Lab)]

My Lords, I will comment briefly on the proposal which has emerged and is contained in Amendment 30 in the name of the noble Baroness, Lady Penn. It refers to the possibility of parliamentary committees being

“the Treasury Committee of the House of Commons … the Committee of the House of Lords”

or a Joint Committee. It says “and” but I presume that they would be mutually exclusive.

What is extraordinary about this amendment is that it contains a seriously bad idea which might lead to an extremely good outcome. The seriously bad idea is that the two committees, one in the other place and one here in the Lords, would be sitting at the same time and looking at the same material, requiring the same levels of expertise to advise them and the same commitment of time by the regulators—and, perhaps, producing divergent opinions which would lead to regulatory uncertainty. That is a very bad outcome. Why I fully support these amendments, however, is that the seriously bad idea will lead to an extremely good outcome, because people will see that the possibility of having a committee in the other place and a committee here doing the same thing, with all the negative connotations that I have just discussed, will lead to the rational outcome of a Joint Committee of both Houses.

[Lord Vaux of Harrowden (CB)]

My Lords, I added my name to the amendments by the noble Lord, Lord Forsyth, so I thought I would stand and associate myself completely with his comments. I am delighted that the noble Baroness has effectively accepted the proposal. I will add my voice to say this: the subject of financial services is so huge, complex and important that it really requires a dedicated committee, whether a Joint Committee or committee of this House, not just to be part of, say, the Industry and Regulators Committee or the Economic Affairs Committee. It is much too big a subject to be covered by a committee that is not dedicated to the subject—and, if you have a dedicated committee, it must be properly resourced.

The Government rightly say that this is a matter for Parliament, but let us be realistic: they have huge influence on what happens there. I really hope that the Government and whoever the powers-that-be in this House who make these decisions are—even as the chair of the Finance Committee, this is still slightly opaque to me—are listening. This is so important. We must go ahead and must resource it properly.