Financial Services (Banking Reform) Bill

Lord Eatwell Excerpts

Wednesday 24th July 2013 Lords Chamber

[Lord Eatwell]

My Lords, I am most grateful to the noble Lord, Lord Deighton, for introducing the Bill. In his introduction he acknowledged the work of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards in developing the thinking behind the policies that this Bill is intended to implement. The whole House is grateful to noble Lords who are members of the parliamentary commission for all the hard work they have done to formulate a new banking policy for this country. We look forward to hearing from three of them later today. The right reverend Prelate the Bishop of Birmingham is, I think, standing in for the most reverend Primate the Archbishop of Canterbury, from whom we hope to hear at a later stage. I hope also that we can hear at a later stage from the noble Lord, Lord Turnbull.

This Bill is the outcome of the Treasury’s intermediation, let us say, of the recommendations of the independent commission and, to a more limited extent, of the parliamentary commission. Less kindly observers might suggest that, instead of one of intermediation, the Treasury’s role might be described as watering down those recommendations. Every dilution by the Government increases the risk in the banking sector. It would assist the House enormously if, when the noble Lord, Lord Newby, sums up, he would list precisely those areas in which the Government have significantly toughened up on the recommendations that they have received.

Anyone who read this Bill without having studied the various documents issued by the independent commission, the parliamentary commission and the Treasury over the past two years would have absolutely no idea what the Bill is intended to achieve. The Bill essentially is an enabling Bill, which establishes the powers to do certain things—particularly with respect to the establishment of a ring-fence in the banking sector—without specifying exactly what is to be done. Noble Lords may search in vain for an indication of where the ring-fence might actually lie, how electrified or permeable the ring-fence might be, what would be the equity capital or primary loss-absorbing capital requirements and the leverage ratio—I prefer the British pronunciation—inside and outside the ring-fence, and so on. All those and many other matters are to be determined by order or handed over to the relevant regulator.

Yet those issues are central to any evaluation of the value of this legislation in the reform of one of Britain’s most important industries. The Government published last week a number of draft orders that illustrated how important aspects of the concept of a ring-fence will be made operational. That document illustrates just how fearfully complex those vital orders will be. To ensure that this crucial secondary legislation—and, indeed, what the parliamentary committee refers to as tertiary legislation—is suitably scrutinised, will the Government implement the parliamentary commission’s proposal that a small ad hoc joint committee of both Houses of Parliament be established on an ongoing basis to scrutinise secondary legislation and the proposed use of delegated powers?

It is clear that the Bill before your Lordships’ House today relates to but a fraction of the measures that either the parliamentary commission has recommended be included in it, or the Government have stated they intend to include. By the way, those are not the same thing, given that the Government have already rejected some of the parliamentary commission’s proposals.

We know that from the second report of the parliamentary commission there were 25 draft amendments. Some of those have been accepted but many have not. What is to become of those amendments?

There are then the important proposals on banking standards and culture contained in the remarkably thorough final report of the parliamentary commission. In their reaction to that report, the Government suggested that 13 of the conclusions will require implementation by means of primary legislation. There is a wide range of other matters that might properly be discussed at this Second Reading. So what will be accepted, and what will not? What form will all these amendments take? We do not know because we do not have them before us today. This Second Reading is being conducted largely in the dark. We wait for the Government to reveal their hand. When will this happen? When the Government publish their raft of amendments, will they publish a commentary on their significance to facilitate debate on this vital but complicated matter?

The Government estimate that the private cost of the Bill for the banking industry will lie in the range between £3.5 billion and £8 billion. Much of this cost is the removal of the implicit guarantee enjoyed by financial institutions too big to fail and is thus an economically appropriate reallocation of costs. Risk is being properly priced. In so far as the extra cost falls on ring-fenced banks, we can be sure that under current circumstances it will be passed on to retail customers and SMEs, increasing what is already an unreasonably marked-up cost of credit.

There is a serious need for increased competition in the banking industry to mitigate the impact of these extra costs. Since the crisis, defensive amalgamations and forced mergers have reduced competition from what was already a seriously inadequate level. This legislation introduces no fundamental change to the competition regime in banking. Account portability is a valuable addition to consumer choice, of course, but it is not a game changer in terms of competitive challenge. In addition, prudential regulation in our sensitive post-crisis world is proving an almost impenetrable barrier to entry for those who wish to establish new banks. The PRA will have competition as an objective, but where will that objective come in the hierarchy of objectives when it is considering a particular application? What are the Government going to do to bring about a game-changing shift in competition in retail banking in this country?

There are two major issues that do not seem to me to have been closely examined either by the independent commission or the parliamentary commission: regulatory arbitrage and the impact of banking structures on the performance of the real economy. In the run-up to the crisis, the activity of European banks raising deposits in the US and recycling them into the US shadow banking sector undermined the impact of US leverage regulations. The ICB refers tangentially to the importance of regulatory arbitrage, but I do not find its assertions convincing. Could the same recycling arbitrage happen to the UK’s ring-fence? Surely branches of EEA banks operating in the UK could undermine ring-fencing by providing the universal and potentially cheaper banking services that UK and EEA subsidiaries are no longer able to provide. What steps will the Government take to protect the UK ring-fence against such regulatory arbitrage?

Understandably, the thinking behind this Bill concentrated on the problems of the stability of the banking sector and, in particular, on ensuring that essential banking services are maintained during a crisis. This legislation also provides the opportunity to address a wider question: what structure of banking industry would best serve the needs of British industry as a whole, including manufacturing, the creative industries and internationally traded services aiding them to grow and compete in the global economy? Is the current structure that we are shoring up in this legislation really appropriate to the needs of the rest of UK plc? Is there a need for a British investment bank to supplement the Green Investment Bank and the infrastructure bank? Is there a case for regional banks? If the answer to both these questions is yes, will the Minister tell us how such institutions would fit into the ring-fenced structure proposed in the Bill?

An unfortunate aspect of the Treasury’s analysis has been the continued reliance on risk-weighted assets as the reference point for equity capital and potentially loss-absorbing capital and for the gradation of prospective measures with size. This reliance must be abandoned. As currently formulated, risk-weighted assets are a flawed and discredited measure. Consider, for example, the recent assessment by BaFin, the German banking regulator, on the capital requirements of German banks, as reported in the Financial Times on 28 May.

“Germany’s largest banks were €14bn short of the capital needed to meet incoming Basel III banking rules at the end of last year … BaFin’s estimates suggest that banks have mainly improved their capital ratios by … recalculating the risk weightings attached to some assets … Reducing the quantity of risk-weighted assets on the balance sheet means a bank can report a better capital ratio even if the amount of capital has not changed”.

If you do not like the numbers, just change them.

Three weeks ago, the Basel committee announced a major reconsideration of the role of risk-weighted assets, given that the measure is now so widely discredited. However, the Government’s response to the parliamentary commission’s final report states:

“The Government shares the concerns raised by the Commission and many other experts that flawed risk-weightings played a major role in the last crisis”.

That is all well and good, but after turning a single page, we read:

“Risk-weighted capital requirements should remain the primary measure of prudential capital regulation”.

This Government are deeply confused. A fundamental problem of risk-weighted assets is that they are excessively complex. As everyone knows, complexity is the friend of evasion, whether in taxation or regulation. However, a simpler measure is available: the leverage ratio. The parliamentary commission has recommended a leverage ratio of 4%. The United States has announced that it will be 6% in the US. The Treasury insists on sticking to 3%—why?

A higher leverage ratio of course reduces the return on bank equity—hence, by the way, bank bonuses—but it also significantly reduces risk. Why are the Government postponing handing determination of the leverage ratio to the Financial Policy Committee until 2018, despite the Bank of England repeatedly asking for this power now?

The vagueness of the ring-fence is exacerbated by the need to define various terms. What is an SME? If non-ring-fenced banks can inject capital into ring-fenced banks in times of need—a benefit claimed by the independent commission—cannot capital flow out when needed elsewhere, increasing the possibility of damaging contagion? If banks are also allowed to sell derivatives within the ring-fence, rather than act as agents, does this not reintroduce the fee-based culture that has already done so much damage in retail banking, whether in the form of PPI or selling to SMEs derivative protection that was anything but?

Surely it is not enough to claim that mandated activities do not pose a threat today, since activities that are safe today may prove very dangerous tomorrow. These dangers may even be part of systemic phenomena that are no fault of the individual firm. These and many more issues raise the core question of the permanence and permeability of the ring-fence. It is central to the attainment of the objectives of this Bill that the fence is impermeable; and it is vital for future confidence and investment in the banking industry that the fence’s location is clear, well-known and reasonably permanent.

The PCBS’s proposals on the electrification of the ring-fence are vital to the credibility. The Government have accepted the “first reserve power”, whereby a group containing a ring-fenced bank that is deemed to actively undermine the ring-fence could be forced to divest itself of the ring-fenced bank or the non ring-fenced bank—in other words, splitting them up. However, as we heard from the noble Lord today, the Government have rejected the inclusion of the second reserve power, whereby the ring-fence would be abandoned and full separation of all domestic and commercial banking strictly enforced.

Surely the Government have got the matter the wrong way round.The decision to split up a single group would have severe financial and competitive consequences and would undoubtedly entail a lengthy and expensive legal and political battle. It is such a nuclear deterrent that there will be a high expectation that it will never be used. It is not a credible threat. However, if banking as a whole might be split, there is a powerful incentive for mutual monitoring. Accordingly, the incentives motivating the sharpest minds in the industry, ensuring that their colleagues do not undermine the interests of the banking industry as a whole, would be aligned with the statutory objective. What could be better than that?

There are many more complex issues in this legislation which we will debate in Committee. I totally understand the Government’s desire to have this legislation on the statute book as soon as possible, and we on this side will do everything we reasonably can in support of that endeavour. However, this is the most significant reform of the structure of UK financial services in the past 40 years, and we must get it right. That is why we will scrutinise the legislation line by line and demand the early and comprehensive publication of secondary legislation to better judge the true implications of the Bill.

It is vital that this legislation succeeds. If it is watered down, or if it is too complex and does not succeed, it may well do more harm than good. As the parliamentary commission commented in its final report:

“The banking industry can better serve both its customers and the needs of the real economy, in a way which will also further strengthen the position of the UK as the world's leading financial centre. To enable this to happen, the recommendations of this Commission must be fully implemented in a coherent manner”.

Sadly, the Government’s response to the independent commission and the parliamentary commission has been anything but coherent. This incoherence has grave implications for Britain’s financial services industry. On this side, it is our intention in Committee to restore coherence to the Bill.

--- Later in debate ---

[Baroness Kramer]

I thank the Minister for giving way. The commission recommended some form of ad hoc committee to try to look at secondary legislation. The problem with secondary legislation is that you vote it up or down, so you cannot actually amend it. Given that it carries so much of the weight of the purpose of this Bill, is there a way in which there could be a more constructive discussion of its contents so that it could come finally and formally in an amended form after that discussion has taken place?

[Lord Eatwell]

Before the Minister stands up, can I firmly second what the noble Baroness, Lady Kramer, has said? It would be enormously valuable if there were an ad hoc committee which could consider the secondary legislation, write a suitable report and thus inform the House’s debate.

[Lord Newby]

My Lords, there is an issue about the timing of an ad hoc committee which produces a report to inform your Lordships’ debate. Agreement has been reached with the usual channels that we start Committee stage very soon after we come back and I am not sure that such an ad hoc committee would help. I will talk to colleagues in the Treasury and in another place to see how best we can facilitate proper discussion of secondary legislation, because, obviously, as everybody agrees, much of the meat is in the secondary legislation.

Can I reassure the noble Lord, Lord Barnett, that the banks had no part to play in drafting the Bill? It was produced by parliamentary counsel in the normal way. I should have said that draft secondary legislation was published on 17 July.

There was much discussion about standards and culture. The right reverend Prelate the Bishop of Birmingham talked about banks discussing doing what is right and about personal virtue. I agree with him that a wind of change is blowing through the banks and I am not as gloomy as a number of noble Lords have been about the extent to which the culture within banks may change. I would not put it any higher than that. I think there has been a big change in Barclays, and that is not a legislative change, it is because of the change of leadership and a change in culture.

In response to the commission, the Government propose to bring forward a number of amendments which specifically deal with standards and culture. These include a new senior persons regime for senior bank staff; introducing a new criminal offence of reckless misconduct; reversing the burden of proof, so that bank bosses are held accountable for breaches of regulatory requirements within their areas of responsibility; and giving the regulators new powers to make rules to provide enforceable standards of conduct for all bank staff.

Virtually every noble Lord who spoke has talked about the need to increase the degree of competition in the banking sector. I absolutely agree with the noble Lord, Lord Flight, that this is, if anything, the fundamental issue now facing the sector. I congratulate him and Metro Bank on its third birthday, and I congratulate him on the work that he is doing to increase competition in a very practical way.

Clearly, there is no simple way of getting to the state that most noble Lords would like, which is having a plethora of new banks providing effective competition to the existing big banks. What we have done, however, is to make it a lot easier for new banks to enter the market. In July last year, the Chancellor commissioned an FSA review of barriers to entry and expansion in the banking sector and the result of that review, in answer to the noble Lord, Lord Northbrook, is that for new banks we could see capital requirements fall by up to 80% over what was previously required. This is a big change and one of the many components that will be needed to transform the competitive landscape.

The noble Lord, Lord Eatwell, said that he was concerned about whether branches of EEA banks in the UK could arbitrage the ring-fence. EU passporting law makes branches subject to regulation and supervision in the home state, so UK branches of EU banks would not be subject to UK regulation or to ring-fencing, as the noble Lord said. The presence of EEA banks in the UK market at the moment is very small and we believe that domestic banks enjoy a strong home advantage, so there is not likely to be significant arbitrage. However, EU law has within it provisions to ensure that institutions cannot simply move to avoid regulation. We and the regulators will of course be keeping that issue very much under review.

A number of noble Lords talked about leverage—what an appropriate ratio should be, and where the power to set ratios should lie. There is a certain confusion about where powers lie at the moment. Although I am sure that we will discuss this at greater length later on, I would point out that the Government’s proposal, based on the Basel process, is that we would have a statutory minimum leverage level across the piece. However, the regulators already have the power to set a different leverage ratio for individual institutions, as we have already seen in the way that they have looked at Barclays and Nationwide—and completely without any political interference. That power will obviously continue.

The noble Lord, Lord Eatwell, drew a comparison between the 3% leverage ratio here and the 6% ratio in the US. We do not believe that these are even remotely comparable. Indeed, Mark Carney described comparing the two as being like comparing apples and oranges. I am sorry that I do not have time to explain in great detail why we believe that to be the case.

Electrification was possibly the issue that took most of your Lordships’ time. There are two issues here, given that we have agreed that in respect of an individual bank we will take powers in the Bill to enable that bank to be wholly separated. In respect of that, there has been considerable criticism of the provisions in the Bill on the basis that they provide too low a voltage, as the noble Lord, Lord Lawson, possibly said. We will be bringing forward amendments before Committee which seek to provide an appropriately increased level of voltage. I hope that they will commend themselves to your Lordships’ House.

In terms of total separation and a reversion to Glass-Steagall, our view is very straightforward. If ring-fencing were to prove ineffective, the only proper and democratic way to introduce full separation would be to return to Parliament with new primary legislation. However, given that it is a separate policy—not the same policy with a bit tacked on—we do not believe that the proposals in the Bill will be a failure. It would not be sensible to legislate for a failure that we do not think will happen; if we did that with every bit of legislation, the statute book would be many times its current length.

The noble Baroness, Lady Kramer, asked whether the Government had gone further than the PCBS on competition. It is a small thing, but we have recommended that the PRA and FCA review barriers to entry in a shorter time—the commission said two years; we have said 18 months—and that they publish annual statistics on the authorisation process so that we can see how things are going. The noble Baroness asked about game-changers in retail banking. The truth is that there will be no game-changer, but a series of small steps. The one step that will help is the seven-day switching service, which will be introduced in September and to which a number of noble Lords referred.

The noble Baroness also asked who will buy bail-in bonds. The Government have consulted on that; feedback suggested that there should be demand for bail-in debt instruments of the type that the ICB said banks should issue. Therefore we do not share her concern that there will be no effective demand for that.

The noble Lord, Lord Lawson, made a very eloquent argument for breaking up RBS into the good bank and bad bank. He knows that there will be a government response to that suggestion in the near future. He asked also about proprietary trading and believes that that is a bad idea. We believe that the ring-fencing method is superior to the Volcker-type rule in respect of prop trading and do not see a compelling case for a ban on prop trading in addition to the ring-fence. I can confirm that a difficulty in which an investment bank found itself would not threaten a high street bank. In terms of where funds can flow, it is a one-way valve: there would be no possibility of funding going from a ring-fenced bank back to an investment bank.

The noble Lord, Lord Flight, asked about the mis-selling of CDOs where that was being done, as I understand it, by foreign banks in this country. I can confirm that UK regulators could take action against any firm for mis-selling in the UK, including, obviously, foreign firms that were based here.

The noble Earl, Lord Caithness, talked about banks owning your money. He proposed what is essentially the same as full reserve banking and limited reserve banking, as it is known in the trade. The ICB has considered that issue and rejected the approach that he suggested.

The noble Lord, Lord Sharkey, asked whether the Government had gone soft on payday loan regulation: no, they have not. The FCA will be bringing forward proposals about how it intends to regulate the sector early in the autumn, which means that regulators are not waiting until next April to start to have impact. On central counter-parties, the noble Earl said that perhaps this is not the right Bill, and he is correct. The Financial Services Act 2012 extended the resolution powers in the Banking Act 2009 to systemically important investment firms, CCPs or group companies. Those powers will commence when secondary legislation has been laid in the autumn.

The noble Lord, Lord Northbrook, said that the SIs do not allow ring-fenced banks to provide export finance to SMEs. That is not the case. They can support UK businesses trading internationally. Obviously that is a very important issue for many small businesses.

I am extremely grateful to the noble Lord, Lord Tunnicliffe, for the constructive approach he took to the way we deal with this. I completely accept that we are asking noble Lords to work very hard over a relatively short space of time looking at a lot of new material. From the Government’s point of view, we will be making available all amendments and secondary legislation the moment we have them, and we are very keen that the House has the full opportunity to give all the proposals, not just those already in the Bill but those that will be coming forward, the maximum possible considered scrutiny.

Bank of England: National Debt

Lord Eatwell Excerpts

Monday 24th June 2013 Lords Chamber

[Lord Newby]

My Lords, at Question Time with less than three minutes to go, I cannot give a very detailed description. The key point is that the Monetary Policy Committee is committed to working with the Debt Management Office to make sure that, as and when the present situation is unwound, that takes place in an orderly manner so that we do not have undue volatility in the market.

[Lord Eatwell]

My Lords, what contingency has the Treasury made for repaying to the Bank of England the revenues it currently receives should the Bank incur a loss on its bond holdings?

Taxation: Income Tax

Lord Eatwell Excerpts

Monday 24th June 2013 Lords Chamber

[Lord Newby]

My Lords, I think that the conclusion I draw is that the Government always have a tricky task in maximising tax revenues, particularly at a time of austerity and when people are looking for tax changes to be fair. In that context, at the same time as the Government reduced this tax rate they introduced changes to stamp duty land tax and anti-avoidance measures on residential property which will raise several times the amount of tax lost from reducing the 50p band.

[Lord Eatwell]

My Lords, the noble Lord has introduced the issue of avoidance. What is the Treasury’s estimate of the loss of revenue due to bonuses and other payments being held back after the Chancellor provided his friends with such an easy means of tax avoidance by pre-announcing their top-rate tax cut?

[Lord Newby]

My Lords, there is an awful lot of hype about what may or may not be achieved by reducing or retaining the higher rate of tax. HMRC produced its report on the matter last year and estimated that, in the short term, the cost to the Exchequer was £100 million. It said that the “direct yield” from the higher rate,

“might fall over time toward or beyond zero”.

Queen’s Speech

Lord Eatwell Excerpts

Monday 13th May 2013 Lords Chamber

[Lord Eatwell]

My Lords, I am most grateful to the noble Lord, Lord Deighton, for introducing this part of the debate on the gracious Speech. If only all the good news that he spoke of had some connection with economic reality.

Like all noble Lords, I look forward to the maiden speech of the noble Baroness, Lady Lane-Fox. Many noble Lords may not know that she is an accomplished actress. It was surely no accident that one of her most successful roles was as Miranda in “The Tempest”, since Miranda famously hails:

“O brave new world,

That has such people in’t!”.

The noble Baroness has been a major force in guiding this country into that brave new world of information technology and is one of the most remarkable people in it. We are all delighted to see her in this House.

The whole House is keenly aware that the central issue facing Britain today is economic failure: no growth for two years, output still 2.5% below the level of four years ago, 1 million young people unemployed, productivity well below the level of 2008, the banking system still unreformed, and a government deficit that has not fallen significantly for two years—the worst economic performance of any G7 economy other than Italy.

Given the seriousness of our economic problems, it has been widely remarked upon that there are no Treasury measures in the gracious Speech other than the welcome national insurance contributions Bill and the banking Bill carried over from the previous Session. However, there should be no surprise at this inaction. It is the very essence of the Government’s strategy that the Treasury has a very limited role other than the maintenance of austerity. Activism is to be left to others. That is made abundantly clear in the recent most valuable outline of the Government’s economic policy that accompanied the Chancellor’s letter defining the remit of the Financial Policy Committee. It was echoed by the noble Lord, Lord Deighton, today, but he left out one bit. The letter declares:

“The Government’s economic strategy consists of four key pillars: monetary activism and credit easing, stimulating demand, maintaining price stability and supporting the flow of credit in the economy”.

All that is the responsibility of the Bank of England. The letter continues with,

“deficit reduction, returning the public finances to a sustainable position and ensuring … fiscal credibility”—

austerity—

“reform of the financial system, improving the regulatory framework to reduce risks to the taxpayer and build the resilience of the system”,

which refers to the banking Bill, of which there will be more later,

“and a comprehensive package of structural reforms, rebalancing and strengthening the economy for the future, including an ambitious housing package and programme of infrastructure investment”.

All this is predominantly farmed out to other departments.

Those are the pillars on which the Government’s entire strategy is built. It is worth considering just how sound these pillars really are. First, on monetary activism, there certainly has been plenty of activity—from quantitative easing and Merlin to the Funding for Lending scheme and now Funding for Lending mark 2. The difficulty with all that activism is that when there is a lack of demand, it is very difficult for monetary policy to achieve any traction, so QE2 follows QE1 and there is no noticeable effect on lending. Funding for lending offers banks cheap funds to lend at highly profitable rates, but there is no noticeable increase in lending. Now we have Funding for Lending 2, and without any prospect of sustained growth of demand the result will be the same—no noticeable increase in lending. It is no wonder that in his letter defining its remit, the Chancellor appeals rather plaintively that the FPC,

“takes into account, and gives due weight to, the impact of its actions on the near-term economic recovery”.

In other words, “give me financial stability, but not yet”.

What all that activism has achieved is a serious distortion of the monetary system. The rock-bottom interest rates of which the Chancellor is so proud have put pension funds under severe strain, and pensioners have no chance of buying a worthwhile annuity. The excess liquidity, unused for real investment, is funding a bubble in the stock market that bears no relation to Britain’s real economic condition. The conclusion is that monetary activism may help growth a little bit but fundamentally does not work. That is one pillar gone.

Of the next pillar, reform of the banking system, the key reform is of course the banking Bill. But which banking Bill, the watered-down version of the Vickers proposals favoured by the Treasury or the beefed-up banking Bill proposed by the Parliamentary Commission on Banking Standards? The banking Bill has already passed through Committee in another place, where any amendments related to the serious criticisms of the Bill in the Parliamentary Commission on Banking Standards’ report, published on 11 March, were resolutely voted down by the Government.

A further report by the commission is due at some time in the next four weeks or so. Will the Minister tell the House how the Government intend to deal with the arguments of these two reports? Will the Government recommit the Bill in another place? If not, how are the commission’s proposals to be dealt with in this House, or has the lobbying by the banks secured the Government’s commitment to ignore the commission’s arguments? Conclusion: the banking reform Bill is decidedly shaky.

I turn to the,

“ambitious housing package and programme of infrastructure investment”,

which the Chancellor claims are at the heart of his comprehensive package of structural reforms. These were referred to by the noble Lord, Lord Deighton. We certainly need an ambitious housing package. No peacetime Government since the 1920s have presided over fewer housing completions than this Government have in the past two years. The situation is getting worse. Housing starts fell by 11% last year to below 100,000, while house prices, particularly in London and the south-east, spiralled out of the reach of young people attempting to buy a first home.

So what do the Government do? Unbelievably, they increase the affordable homes guarantee programme that applies to the existing housing stock as well as new build, giving their own special twist to the housing price spiral. This British version of Fannie Mae should be focused on new build. That is what is needed. Even this bit of economic activism on housing is a bit too much for the Treasury’s do-nothing sensibilities. The decision whether the guarantee scheme is to continue in three years’ time is to be handed over to unelected officials at the Bank of England.

What of the programme of infrastructure investment? We were told in the Budget that the Government are planning a £3 billion boost in two years’ time. I ask the Minister why, when infrastructure projects are notoriously slow to get started, work cannot begin now. The Government are committed to borrowing the money in two years’ time, so why not borrow it today? Is the postponement not entirely due to the Government’s attempt to massage a falling trend in the deficit, however slight?

As to the railways, the welcome paving legislation for HS2 proposed in the gracious Speech heralds a change of heart from the more than £1.25 billion cut in railway investment in the last spending review. The planned increased of £9.2 billion for five years from next year is clearly needed and welcome, but will the Minister tell us how it is to be funded? How much of it is to be paid for by an increase in Network Rail’s debt and how much by yet more inflation-busting increases in rail fares? Conclusion: the infrastructure pillar may be in place at some time or other in the future but certainly not today.

Finally, I turn to the fourth pillar of the Government’s economic strategy: austerity, to ensure that,

“fiscal credibility underpins low long-term interest rates”.

As all noble Lords will be well aware, there is a growing international consensus among all serious commentators on economic policy that austerity strategies have failed. The academic work purported to validate the austerity policy has been demonstrated to be seriously flawed. As for Britain, Olivier Blanchard, the chief economist of the IMF, has said that the country is “playing with fire” if it allows stagnation to continue.

As your Lordships are well aware, in 2010 the coalition’s austerity transformed Britain’s growth rate from a steady 2% a year into an equally steady 0% a year, with little prospect of returning to 2% in the near future. The level of output remains stubbornly below the level of output obtained in 2008, while other countries have at least recovered from the worst ravages of the global financial crisis. What is the Government’s justification for clinging to this failed doctrine? The Treasury argues over and over again that any change to the strategy it has followed for the past three years will damage the Government’s credibility in the financial markets, and that the subsequent increase in long-term interest rates would outweigh any benefits from cutting taxes or increasing spending. Since this is the only shred of justification for sticking to the failed austerity policy, it is worth examining for a moment.

First, with whom are the Government seeking credibility? The answer is: the markets. Who are they? What they are not is some single malevolent force tying George Osborne’s hands behind his back as he pleads to be set free to stimulate growth. In fact, the markets comprise millions of individual traders who pore over their computer screens trying to guess how the markets will move in the next month, week or even the next few seconds, and trying to make a secure return. In other words, they are trying to guess what everyone else in the market will do in response, for example, to announcements by firms or Governments, to the release of economic data or to research reports. This is not easy, but it is made much easier if an authoritative source makes statements that every trader believes all the other traders will accept. We have had a striking example of this in the eurozone, where Mario Draghi’s statement that the ECB would do everything necessary to defend the euro convinced each trader that all the other traders would take Draghi at his word. Accordingly, the markets all moved together in exactly the way in which Mr Draghi wanted. Authoritative statements can move markets, so if all the traders are convinced that any relaxation of austerity will result in higher interest rates in the UK, it will.

Credibility is potentially a vice tightening its grip around the heart of the British economy, but what do the clowns at the Treasury do about it? They do everything they can to reinforce those traders’ beliefs. They turn potential into reality and they cry from the rooftops that the markets will tighten the austerity vice because it is the only justification they have left of a failed policy, and the danger for Britain is that anyone will believe them. At the same time, they falsify the arguments for abandoning austerity. No one is expecting George Osborne to take himself off to the Tower of London, crying out to the world, “I was wrong”—although when thinking about it, that is not quite such a bad idea. What we all hope for is a steady and carefully staged change of emphasis. Bring forward that increase in infrastructure spending; why postpone it for two years? A British investment added to a strengthened banking Bill, a jobs guarantee for the long-term unemployed, a real new-build housing programme, and, to improve the existing housing stock, a reduction in VAT on home repairs, maintenance and improvements—none of these requires a fanfare announcement; all they need is real activism from a do-nothing Treasury.

What is left of the four pillars?

[Lord Forsyth of Drumlean]

My Lords, I have much sympathy with what the noble Lord says about clarity. Can he tell us by how much the Opposition would wish to increase borrowing in order to deliver the programme he has just outlined?

[Lord Eatwell]

Gross borrowing could be increased so that net borrowing would fall. That is our strategy.

Again, what is left of these four pillars is something that the Opposition perhaps do not understand. The noble Lord, Lord Deighton, who has a good economics degree, understands it very well. What is left of the four pillars of the Government’s strategy? Monetary activism that does not work, a banking Bill that fails to reform the banks in the way that Britain needs, an infrastructure policy that recedes into the distant future, and a housing policy that does precious little for the new build that homebuyers and the construction industry desperately need. Last, but by no means least, there is an austerity policy that fails to cut the deficit but is very successful in cutting real incomes. Those are the four pillars, but what this Queen’s Speech reveals is that the Government’s economic policy does not have a leg to stand on.

--- Later in debate ---

[Lord Forsyth of Drumlean]

My Lords, it is a great pleasure to follow the right reverend Prelate, who is absolutely right to warn us of the considerable dangers of unmanageable debt both in households—private debt—and in government. We are heading for a doubling of our national debt by the end of this Parliament to about £1.5 trillion to £1.6 trillion. For the life of me, I do not know how it is possible to pay back that kind of money. We are passing on to the next generation a terrific burden, one that is tough enough already with interest rates that are well below historical norms. They will certainly go up, and with them will go the cost and burden of servicing the debt. I have considerable respect for the noble Lord, Lord Eatwell, but when I asked him by how much the Opposition wish to increase that debt still further, he did not really give me an answer. He told me that the Opposition did not understand this. I think that he meant the Government, but he may have been listening to the interview that his leader gave on the “Today” programme, which certainly gave the impression that the Opposition did not understand it.

[Lord Eatwell]

I am grateful to the noble Lord for correcting any verbal infelicities that may have occurred. I wonder if he has noticed that the significant government cuts in expenditure have not resulted in a falling deficit for the past two years. In the same way, an expenditure programme targeted on worthwhile activities that stimulated a flow of tax returns would result in a reduction in the deficit. One other small point: when he says that there is a burden on our children from this debt, I wonder if he ever thinks about who we owe the debt to. The answer is that one group of our children owes it to another group of our children. Collectively, there is no burden.

[Lord Forsyth of Drumlean]

That is all right, then; we will just write it off, there will be no problem and the world will continue to treat the pound in the same way. One of the extraordinary things is that although the pound has sunk significantly on the markets relative to other currencies, we are still not able to increase our exports and improve our productivity. As the noble Lord, Lord Empey, said, the key to this is being able to sell goods and services to a global marketplace competitively. Unless we can increase our revenue, we will not pay back the debt or, more importantly, provide the public services that the right reverend Prelate rightly emphasised as being of importance. The issue for us is how we do that.

The gracious Speech is a bit disappointing in the vision stakes. It is a list of Bills. One of the things that I have learnt in almost 30 years of being associated with Parliament is that legislation is seldom the answer to any problem, and usually creates considerably more. The idea that we should address every problem by thinking of a Bill or a new regulation comes out of this gracious Speech. To be fair, many people have said that they thought that the Speech was a bit thin, and in some regards it was. Perhaps it was modesty on the part of my noble friend, but I do not know why Her Majesty did not refer in the gracious Speech to the fantastic success that we had last summer with the Olympics, when Britain was advertised across the world as a competitive, successful and enterprising nation that was proud of its young people. My noble friend Lord Deighton played his part in ensuring that the Games were an enormous success, along with my noble friends Lord Coe and Lord Moynihan. Perhaps we could have done with a touch of levity in the Speech: I was itching to know whether Her Majesty had any further plans for appearing in Bond movies, for example.

I think that we have to go back to 1946 for the last time that there was a proposal to amend a Motion on the gracious Speech, which is happening in the other place. That amendment arises, again, because of the issues that the noble Lord, Lord Empey, pointed to—because Banquo’s ghost continues to haunt us. I cannot believe that it is now so many years since we discussed the Maastricht treaty yet I find myself mouthing the same arguments now to colleagues as appeared then.

I want to touch on the central themes of the gracious Speech. We have to improve Britain’s economic competitiveness and get Britain working and our economy growing again by investment in infrastructure.

I have to say to my noble friend Lord Deighton, who is a very clever chap, that whatever one’s views on the high-speed train—I have views that I had better not repeat because I want to be supportive of the Government—the immediate need is for jobs now. In roads and transport, we want people out fixing the holes in the road that are there today. We need more activity now in order to create employment. It is no good dreaming up fantastic, high-profile, wonderful schemes that will take place in 25 years’ time. We may not be around to see the benefits of those projects.

Similarly, there is talk of wanting another Bill to reduce regulation. Why do you need legislation to get rid of legislation? I should declare an interest as chairman of a small business that my daughter runs selling handbags—which are very good, by the way. Small businesses are not allowed any rates relief while they are setting up and before they start trading. Rates are a huge burden, particularly on the retail sector. They are competing with companies, such as Amazon, that pay no corporation tax or rates because, thanks to the splendid efforts of many entrepreneurs—not least the noble Baroness, Lady Lane-Fox, whose speech we very much look forward to hearing this afternoon—they are using cyberspace and are therefore able to escape taxation. Their competitors on the high street in bricks and mortar are faced with a burden of rates that they must pay regardless of whether they are profitable. It is no good saying that we are reducing the burden of corporation tax because you pay corporation tax only if you are making a profit, and our high streets are bleeding. We need to look at the burden of business rates and shift it in a direction that takes account of the needs of entrepreneurs and people starting up, particularly in retail.

The gracious Speech also refers to our commitment to encourage people to save for their pensions, but why do my noble friend and his colleagues in the Treasury continue to interfere and change the rules that apply to pension schemes? Raids started with Mr Gordon Brown’s on dividend tax relief. Then we had A-day; rules were going to be set in stone and people could rely on them, but in every Budget and finance Bill we have another nibble at the rules on pension saving. Why does that matter? People might say that it affects only the very wealthy who have built up very large pension pots. It matters because it undermines confidence in a long-term saving vehicle in a country that needs more long-term saving. Then you have the Government, who say that they are holding down interest rates because of their control on public expenditure—which, incidentally, is going up in cash terms—and who are funding their own borrowing by quantitative easing and creating, through quantitative easing, an artificially low interest rate. You then have the contributions that employers and companies must make to company pension schemes determined by the gilt yield. The result is that billions of pounds that would otherwise be going into growth and investment to create jobs for the future are going into pension funds, whence they will never come out because the assessed liabilities of those pension funds have been exaggerated by the Government’s quantitative easing policy. Far from quantitative easing helping, it is causing enormous damage and sucking productive funds out of the economy, from the private sector, which would otherwise be invested in job creation.

There is also the commitment to supporting the union, which, of course, I very much endorse, but if people are being asked to vote in a national referendum about Scotland’s continued place in the United Kingdom, which is in the interests of Scotland and the rest of the United Kingdom, we need to sort out the issues that remain unresolved from devolution and, in particular, the role of Scottish MPs voting at Westminster on devolved matters: the so-called West Lothian question. People voting in the referendum need to know what they are voting for. The Government simply cannot continue to run away from the West Lothian question. They need to say what the arrangements will be in future.

Similarly, if we are to continue with a devolved Parliament, we need a system of funding that is fair to Wales, England and the rest. Barnett is certainly not that. Repeated reports, including one from the House’s own committee that was set up for the purpose, have drawn attention to the unfairness of Barnett. The Government simply cannot say that they are concentrating on reducing the deficit and are therefore not doing anything about Barnett. That is a non-sequitur. There is no relationship between these two arguments.

On what is going on at the other end of the Building in respect of Europe, it seems that the central theme of the gracious Speech is our country being competitive and creating those jobs and opportunities that the noble Lord, Lord Empey, talked about. That depends on our looking outwards and recognising what is going on in Europe. It is not a matter of our leaving Europe; the rest of Europe is leaving us. It is going off on this madcap scheme to have a single currency. There seems to be no price that it is not prepared to pay in terms of the misery being created, particularly in the southern European states. They have unemployment among young people of 60%—more than half their youngsters unemployed. That is not only an outrage but simply unsustainable. The rest of Europe is determined that no sacrifice is too great for the sake of this project.

EU: Budget Report

Lord Eatwell Excerpts

Thursday 25th April 2013 Lords Chamber

I reiterate that the convergence programme contains no new information, only information that has previously been presented to Parliament, information from the OBR’s economic and fiscal outlook and from the Budget which sets out the Government’s strategy to return the UK to sustainable growth. I commend the Motion to the House.

[Lord Eatwell]

My Lords, as the noble Lord, Lord Newby, made clear, the Government are required by the European Communities (Amendment) Act 1993 to submit an assessment of the UK’s convergence programme towards the economic structure of the eurozone. This requirement is perhaps more apt this year than in past years. On the broadest economic assessment, the Government’s convergence programme has been a great success: the eurozone is stagnant and so is the UK. Despite the welcome announcement of some growth in the past quarter, overall performance for the past six months has been growth of nil, and output is still 2.6% below the 1998 peak. Things have come to a pretty pass when growth of 0.6% per year is a cause for celebration. The Chancellor’s statement that this demonstrates that the UK is healing is surely delusional.

Moreover, the second Motion before us commends the Government’s economic stance to the European Union member states, declaring that they should,

“continue on the path of growth-friendly fiscal consolidation”—

I repeat: growth-friendly fiscal consolidation—in the week in which, as a result of UK-style austerity policies being implemented in the eurozone, even German industrial growth has shuddered to a halt. We know that the eurozone is stagnant and that the outcome of the Government’s policies has been to condemn Britain to the same fate. We have, indeed, converged. Therefore, the fundamental question raised by the Budget report and the OBR’s economic and fiscal outlook is whether growth-friendly fiscal consolidation is an economic oxymoron. Will the austerity policies advocated so consistently by this Government result in persistent stagnation, or will they restore the sustained economic growth of over 2% a year that this country desperately needs?

A casual reading of the OBR outlook would suggest that growth will be restored. After all, on page 8, it is argued:

“We expect the economy to grow by 2.3 per cent in 2015, 2.7 per cent in 2016 and 2.8 per cent in 2017”.

That all sounds pretty good, but a more careful reading of the report reveals a disturbing aspect of these predictions. On page 39, the OBR states:

“Our forecasts for medium-term growth are shaped by our estimate of the amount of spare capacity in the economy, and the speed with which it seems likely to be absorbed”.

It then lets the cat out of the bag by stating that,

“the output gap is assumed to narrow at a relatively gradual rate over the medium term”—

I repeat: assumed. In other words, the OBR has no causal explanation of the determination of the growth rates predicted in the medium term. It is merely assumed that by some unspecified mechanism the economy will return to a medium-term growth path when things get back to normal.

Once we realise that this future growth is assumed to happen, the OBR’s forecast for the future path of government borrowing is cast in an entirely new light. The fall in the deficit that is predicted from 2014 onwards is, the OBR makes clear, a function of the assumed increase in revenues consequent upon the assumed reappearance of economic growth. It is revenues that do all the heavy lifting, but those revenues are predicated on the assumption that the economy will return to medium-term growth. It is just an assumption; there is no evidence, no theory or causal explanation.

Once these characteristics of the OBR’s methodology are taken on board, a fundamental question mark is raised over the foundations of the Government’s economic policy, which is set out with admirable clarity on page 1 of the Budget report. They are:

“fiscal responsibility to deal with our debts with a credible deficit reduction plan … monetary activism to support demand … and … supply-side reform to help businesses create jobs”.

Those are the three components of what might be called the austerity strategy. Fundamental questions that are raised from this outline are: does fiscal consolidation cut the deficit, or does it simply cut growth, with little or no impact on the deficit? Is monetary activism an effective means of supporting demand? Are the Government implementing the supply-side reforms that will deliver lasting prosperity? I will deal with these questions in turn.

--- Later in debate ---

[Lord Eatwell]

My Lords, I can maybe help the noble Baroness by confessing, “It was me that done it”. The objective at the time was to urge the then Government of John Major—Sir John Major as he is now—to make a report on the convergence procedure. The first time the debate took place, they elected not to do that but simply to send in the Budget report instead. I complained mightily, but of course to no avail. All Governments since then have taken this cop-out of simply sending off the Budget report instead of issuing a proper report on convergence.

--- Later in debate ---

[Lord Newby]

My Lords, I thank all noble Lords who have taken part in today’s debate. As the noble Lord, Lord Davies, said, we have covered everything, from macroeconomic theory to House of Lords procedure, and I will do my best to respond to as many of the issues raised as I can.

I will start with the noble Lords, Lord Eatwell and Lord Barnett, who both discussed growth, and in particular the growth forecast. The noble Lord, Lord Eatwell, suggested that the growth forecasts were wrong for theoretical reasons and because the assumptions that were made might be unsustainable. The noble Lord, Lord, Barnett, had a more fundamental problem, which was that he does not believe any growth forecasts, almost by definition. We see in today’s figures, with the 0.3% increase in GDP in the first quarter, that, as they say, if present trends continue the OBR will have got it wrong again. This time, however, it will have got it wrong on the downside instead of the upside. I hope we will not be too unhappy in those circumstances if they perhaps do not get it right. I agree with the noble Lord, Lord Barnett, that growth figures, or indeed any forecasts for five years ahead, have to be treated with a very large pinch of salt. However, there are only two alternatives. Either you do your best and work on the best that you can do, or you throw your hands up in horror. On balance, the Government prefer to do the former.

I will deal with a core assertion of the noble Lord, Lord Eatwell, that everything was fine in 2010, the economy was growing by 2%, and that if only the policies that were in operation then had been carried on, growth would have continued and possibly increased. In 2009-10 the borrowing was £158.9 billion, some 11.2% of GDP. At the time, my colleagues and I supported that borrowing on the basis that the Government were dealing with what Vince Cable called “a massive heart attack” to the economy, and so this had to be dealt with by very significant public expenditure to prevent a total collapse, and in particular, to shore up the banks. What I cannot accept is that that level of borrowing was sustainable in the medium term, and neither could Alistair Darling. A number of noble Lords have spoken in support of Alistair Darling’s economic policies, but remember that they were in two parts. There was a high level of immediate expenditure, but we passed a Bill that would have required by law the Labour Government, had they been re-elected, to halve the deficit by the current financial year. Does anybody believe that if Mr Darling had been in power, he could have continued putting money into the economy at anything like the rate he did in 2009-10 if he wanted to meet that outcome? It is inherently implausible. The question that was being debated as we reached the election in 2010 was not whether there would have to be reductions in public expenditure, but purely about their scale and size. Therefore, the suggestion that all was well in 2010 and that we could have continued with high levels of growth by pushing public sector borrowing along at an unsustainable level does not hold up.

[Lord Eatwell]

My Lords, the noble Lord has rather ably misrepresented what I said. I said that the economy was growing at 2%, which it was, and that the 2% growth would lead to a fall in the deficit, which it did. I did not say that at the time there was a need to increase the deficit. What happened was the destruction of business confidence by the foolish remarks of the new Chancellor of the Exchequer—the comparisons with Greece and so on—that led to a collapse in private sector investment and growth.

[Lord Newby]

My Lords, businessmen take some notice of politicians, but they do not make investment decisions purely—or even largely—on what politicians say. They look around the market and see what is happening elsewhere in the world. The speech of the noble Lord, Lord Eatwell, was notable in a number of respects. One was that although he used the word “Europe” in his first and last sentences, he did not refer at all to the crisis in the eurozone and to the fact, supported by the OBR, that one of the greatest problems and brakes on growth in the UK has been what happened to the eurozone. It is a crisis in which we had no part and that we were obviously unable to deal with. The eurozone countries are dealing with it themselves.

I will move to an area where I have a greater degree of agreement with the noble Lord, Lord Eatwell. It is the importance now of infrastructure expenditure as a source of growth going forward. There are two elements that are linked but separate. One is non-housing infrastructure and the other is housing infrastructure. On non-housing infrastructure, as the noble Lord will be aware, the Government have made available up to £40 billion of guarantees to enable private sector investment in key infrastructure. He will have seen that the policy bore fruit yesterday with the announcement that the Drax power station is using the facility to enable it to invest £75 million in upgrading the station. We hope and expect that this will be the first of many such deals.

Housing is a major problem. It was a major problem during the previous Parliament and remains so, to the extent that the demand for new housing is increasing by about 250,000 units a year. Nothing like that amount of housing has been built for many years. The Government are attempting to deal with this with a three-pronged approach. First, we will make it easier to get planning permission for new housing development. Secondly, we will increase demand. This is why we are supporting first-time buyers and others who want to take out mortgages in circumstances where the banks are requiring prohibitively large deposits from most people. Thirdly, we will improve the supply of housing. That is why, in addition to the £40 billion guarantee for other infrastructure, we have in place a £10 billion guarantee programme for housing.

There remains a major problem with getting the banks involved in funding developers, particularly small developers, and I am engaged in discussions with the BBA to see whether we can help. However, in terms of government support for new investment, both for housing and general infrastructure, which the noble Lord, Lord McFall, suggested we should be doing, I remind him that we have established the Green Investment Bank. We are also establishing a small business bank. This is a degree of banking activism that was absent during the time of the previous Government.

Public Service Pensions Bill

Lord Eatwell Excerpts

Wednesday 24th April 2013 Lords Chamber

[Lord Newby]

My Lords, as the House is aware, the Government accepted on Monday the substance of the amendment of the noble Lord, Lord Eatwell. I said we would make some small, technical changes to ensure that it works as intended. The government Motion before us makes all those necessary tweaks, while upholding the principles of the policy in full.

I briefly explain the reasons why the tweaks were necessary. The Government’s redrafted Motion seeks to address some inadvertent consequences that could arise from accepting the amendment that the House approved as it stood on Monday. First, the names of the workforces were not quite right. We have corrected this to ensure they are consistent with other statutory references to these groups of public servants. Secondly, there was the potential for confusion about the role of the Secretary of State for Defence, who is included in the general term Secretary of State. The noble Lord’s amendment implied that he would carry out any review of the terms and conditions of these workforces in conjunction with himself. That has now been corrected. I suspect that the original wording sought to ensure that the Treasury and the MoD worked together on the review; I can confirm that that is the intention.

Finally, there is the issue of commencement—the timeframe for when the Motion would come into force. The amendment of the noble Lord, Lord Eatwell, would have started the clock only after the entire Bill came into force, which would delay the review considerably. Instead, the Government’s Motion creates a specific deadline linked to the relevant clause of the Bill, a timescale which has been further clarified by the Economic Secretary in another place. I am also happy to confirm to noble Lords that the Government will commence the relevant sections promptly to ensure that the review takes place without further delay with a view to concluding and reporting within eight months.

My colleague the Economic Secretary has already committed in the other place that the Government will not be blind to the context in which the review will take place. The review of pension arrangements will take account of the wider pay and remuneration package of the forces involved.

The Government will now work closely with the relevant interested parties to pursue the appropriate way forward. Workforce representatives are some of the most important and interested parties, and so will be fully involved. I hope that noble Lords will agree that the Government have been very clear in their support for this review. We are now keen to get on with it and to establish the best way forward. On that basis and in this spirit, I urge noble Lords to support the Motion. I beg to move.

[Lord Eatwell]

My Lords, I am grateful for the corrections which the noble Lord has made to the amendment which I put down yesterday, and for the commitment that the review will be done within eight months. There was another change that he did not cover. The term of art, “statements of requirement”, which refers to the level of physical ability that the fire service and police must attain, was changed to “operational requirements”. What is the significance of that change?

[Lord Newby]

My Lords, I do not think that there is any significance in the change. As I said earlier, there has been no change of substance in the content of the Motion as it appears before your Lordships’ House from the amendment that the noble Lord moved on Monday, which was accepted by the House. I am 99% certain that that was the case. If I have misled him or the House, I will write immediately to correct it. I can assure the noble Lord that the aim and the intention is simply to have language that is clear, unambiguous and enables us to get on with it. I beg to move.

Public Service Pensions Bill

Lord Eatwell Excerpts

Tuesday 23rd April 2013 Lords Chamber

Moved by

[Lord Eatwell]

That this House do not insist on its Amendment 78, to which the Commons have disagreed for their Reason 78A, but do propose Amendment 78B in lieu.

78B:* After Clause 9, insert the following new Clause—
“Defence Fire and Rescue Service and Ministry of Defence Police Capability Review
(1) The Secretary of State, in conjunction with the Secretary of State for Defence, will, within six months of this Act coming into force, prepare and lay before both Houses of Parliament a report setting out the Government’s assessment of the impacts of this Act on current and future members of the Defence Fire and Rescue Service and current and future members of the Ministry of Defence Police nominated under section 1 of the Ministry of Defence Police Act 1987.
(2) A report under subsection (1) will include, but not be limited to, consideration of the following
(a) the impacts on the health and wellbeing of members of the Defence Fire and Rescue Service and members of the Ministry of Defence Police nominated under section 1 of the Ministry of Defence Police Act 1987;
(b) the ability of the Defence Fire and Rescue Service and members of the Ministry of Defence Police nominated under section 1 of the Ministry of Defence Police Act 1987 to meet the Ministry of Defence's statements of requirement of these personnel;
(c) the number of members of the Defence Fire and Rescue Service and members of the Ministry of Defence Police nominated under section 1 of the Ministry of Defence Police Act 1987 taking early retirement, the consequences of early retirement for those members and the costs to the taxpayer of such members taking early retirement.”

[Lord Eatwell]

My Lords, I beg to move the manuscript amendment on the Marshalled List. We were told last night—that is to say, at the last minute—that the Government intended to assert financial privilege over our attempt to achieve fairness for the members of the Defence Fire and Rescue Service and the Ministry of Defence Police. We have learnt that the Government know they have lost the argument when they assert financial privilege. However, it is worth examining what this financial privilege is being asserted over. The noble Lord quoted the possible cost to the Government as £10 million. We had the opportunity to take actuarial advice overnight and the figure is a maximum of £2 million. So the Government are asserting financial privilege over the magnificent sum of £2 million per year and are using that argument to prevent the debate on your Lordships’ amendments, which would have achieved fairness for Ministry of Defence firefighters and police by equalising their retirement age with those of other police and fire services.

The amendment I have tabled requires a review of the impact of these measures on the Defence Fire and Rescue Service and Ministry of Defence Police. We want to know the impact on the health and well-being of these members, particularly because there is substantial evidence that the vast majority of members of the fire service and police are required to retire before the age of 60, because they can no longer meet the Ministry of Defence statements of requirements for these personnel. In effect, they are stood down for health reasons already. What is striking is that the Government have not taken the cost of people retiring early through ill health into account in their calculations of the overall impact. Indeed, the cost calculations are simplistic in the extreme.

The other area that we are particularly concerned about is whether early retirement due to inability to meet exacting standards is taken into account in considering the settled retirement age. The noble Lord again raised this issue of fixing the retirement age of this group of workers at 65 and not letting it creep up in future years, as anticipated in the Bill. I hope that the Government will dismiss these thoughts from their mind and instead concentrate on achieving fairness. I refer the noble Lord to the speech made by my noble friend Lord Hutton of Furness when we considered this matter on Report. He stated that,

“this is fundamentally a matter of fairness”.—[Official Report, 12/2/13; col. 570.]

As noble Lords may remember, my noble friend also pointed out that if he had known about this anomaly when he produced his report on public service pensions, he would have included the MoD firefighters and police within his general recommendations for those who would have a retirement age of 60. My noble friend Lord Hutton told us that this was simply a mistake on his part and that he wanted the House to have the opportunity to correct that mistake.

I am grateful to the Government for accepting our amendment and our request for a review of the circumstances of MoD firefighters and police, but I wonder if the noble Lord could answer a number of questions for me. For example, have the Government sought the views of the heads of the MoD fire service and police force? What do the heads of these services actually think about the Government’s proposal not to equalise the retirement age of their men and women to the retirement age of other police and firefighters?

Moreover, the noble Lord made quite a point about the difference in conditions of the pension scheme that the MoD police and fire services are currently in and the pension scheme to which they might transfer. He referred to the Civil Service Compensation Scheme, to which they have access. How many times in the past two years have MoD firefighters and police accessed this scheme? Why did they do so and what has been the outcome of their application?

In moving this amendment, I seek to give this House the opportunity to debate once again, on a report by the Government, this particular anomaly in the Public Service Pensions Bill. We wish to be clear on the impact on the health and well-being of members of the Defence Fire and Rescue Service and the Ministry of Defence Police. We wish to be clear on the circumstances under which the firefighters and police meet, or fail to meet, the Ministry of Defence’s statement of requirements for its personnel. We also want to be clear on the cost to the taxpayer of the early retirement which has become such a standard characteristic of service in these professions because of the failure, through advancing years—which I understand, as I am sure many of us do—of the firefighters and police to meet the requirements of service.

[Baroness Harris of Richmond]

My Lords, I had not necessarily intended to participate in this debate, knowing that the noble Lord, Lord Eatwell, had put down an amendment which I wholeheartedly approve and agree to. I am very pleased that the Government have decided to accept it, especially after all the work that was done in trying to persuade them about the Ministry of Defence fire service and the Ministry of Defence police. I emphasise this point because it is tantamount to having made them accept that this really must be looked at again, and I think it was the work that was done in Committee in this House that made this happen. Like the noble Lord, Lord Eatwell, I was surprised to find that financial privilege had been put forward as the reason not to accept something a little stronger. So I can assure my noble friend the Minister that during the year that this amendment will be looked at, mulled over and digested, we will be looking very carefully to see the progress that is made and to make sure, through questions and other means, that we keep the Government’s feet to the fire.

Banking: Quantitative Easing

Lord Eatwell Excerpts

Wednesday 27th March 2013 Lords Chamber

[Lord Newby]

My Lords, we need to pursue more than one course at the same time. The Green Investment Bank and the new business bank are one way forward; further innovation by the MPC is another. We need the full range of tools at our disposal to promote growth.

[Lord Eatwell]

My Lords, given that interest rates have been at record lows for three years and that liquidity is high, with no notable impact on the overall rate of growth, will the Minister tell us exactly what the mechanism is by which this greater monetary activism will stimulate growth?

Budget Statement

Lord Eatwell Excerpts

Thursday 21st March 2013 Lords Chamber

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for introducing this debate on the Budget Statement. He demonstrated that it was not a boring Budget. Indeed, the Budget was—let us say—revelatory. It revealed that, try as you might, you cannot spin economic failure.

Two weeks ago the Prime Minister declared that,

“there are signs that our plan is beginning to work”.

The reality is that the economy is stuck in recession—or as near recession as makes no difference. Just three months ago the OBR, an organisation that always looks on the brighter side of life, was forecasting growth of more than 1% this year. Now it has had to face up to reality and halve its growth forecast.

The Budget Statement also revealed that austerity does not cut deficits. Despite all the Government’s efforts, the deficit is not falling. Taking out special measures, in 2012 it was £121 billion; in 2013, £120.9 billion—a lot of work must have gone into shaving off that £100 million—and in 2014, £199.8 billion, all within the slightest margin of error. The reason deficits are not falling is obvious to all: no growth in output means no growth in tax revenues and significant pressure on social spending.

There was one further major revelation. This Budget of no growth, stagnant deficit and falling living standards revealed that the Treasury has run out of ideas. It does not have a clue what to do next so it is handing economic policy over to the Bank of England in the hope that it might think of something, even though all the evidence at home and abroad suggests that monetary policy is ineffective in the face of prolonged recession.

The scale of our problems is indeed daunting. They will not be solved by a £3 billion infrastructure programme, postponed for two years. In his Budget speech, the Chancellor boasted that,

“we can provide the economy with the infrastructure it needs”.

The noble Lord has special responsibility for the infrastructure programme. Will he tell us how much was actually spent on infrastructure projects in 2012, and how much will actually be spent in 2013—not allocated, not “in the pipeline”, but actually spent? More generally, will he offer his diagnosis of why the Government’s infrastructure policy has so far failed so dismally?

The growth problem will not be solved by policies, postponed to 2014, designed to pump money into the housing market. The shared equity scheme will only partially offset the deep cuts in capital grants for social housing in the previous spending review, and the new mortgage guarantee, available for new-build and existing properties, is more likely to give a further twist to the house price spiral than provide the major new-build stimulus that the construction industry needs. Perhaps when the noble Lord sums up, he will tell us the Treasury’s estimate of the impact of the guarantee scheme on house prices, how much of the expenditure will be a dead weight loss—funding purchases that would have taken place anyway—and the Treasury’s estimate of the cost of this scheme.

The growth problem will not be solved by the cut in corporation tax to 20%, another measure postponed to 2015. As for business investment, the Government just do not seem to understand that the key stimulus to investment is the prospect of demand for the goods and services that the investment will produce. It does not matter how low taxes or interest rates are if investment does not result in a marketable product for which there is growing demand. Yet, as the Chancellor himself admitted, this Budget does nothing to stimulate overall demand in the economy. The OBR forecasts that real wages will fall in 2013 and not recover for two years thereafter. The continuing squeeze on households severely curtails the prospect of any growth in demand, a fact to which our increasingly devastated high streets are an eloquent testimony.

I return to corporation tax. The Chancellor boasted that “headline” UK corporation tax will be far lower than headline corporation tax in Germany or the United States. Did not this boast give him some food for thought? Has he not noticed that the US economy, despite political problems between President and Congress, has sustained its underlying dynamism through the crisis and has already grown to levels of output way above the pre-crisis peak, while UK output languishes 3% below the peak? Has he not noticed the superior industrial performance of Germany, even among the difficulties of the eurozone? Has he not thought to ask himself, “If their taxes are so much higher than ours, how come they are doing so much better than we are?”.

The British economy is in dire straits. What is needed right now is a radical policy of expanding demand, financial reform and investment in the well-springs of growth. In the housing market, the Chancellor has accepted the argument for a boost to demand. Why has he not followed the logic of his expansionist policies in housing and stimulated demand on a wider canvas by cutting VAT and channelling more funding to the poor, who possess the great economic virtue of spending every pound that they receive?

The financial services industry, the mother of the mess that we are in, remains unreformed. The banking Bill that will come before this House later in the year is all about protecting the banks from themselves. There is nothing in it about the sort of banks that we need for Britain’s future. We need a financial system that channels savings to industry, large and small; we need a financial system that understands the needs of local communities and local industry; and we need a supply-side policy that does not just hope that private finance will be seduced into investment in infrastructure, science and technology and skills but actually gets on with the job. In this country, we are blessed with some of the greatest science-based universities in the world, yet, with just a few notable exceptions, we are steadily losing world share in cutting-edge applications across all industries, large and small, traditional and novel. Reversing that downward trend will require a fundamental rethink of company structures, company finances, supply chains and incentives. We need to learn the lesson from the US, Germany and Scandinavia that partnership and a sense of purpose between government and private industry is the bedrock of sustained growth.

The reaction from the Chancellor to these sorts of proposals is predictable. He said in his Budget speech that such ideas are from,

“people who seem to think that the way to borrow less is to borrow more”.—[Official Report, Commons, 20/3/13; col. 934.]

Has he not noticed that it is his policies that are leading to more borrowing and prolonged recession? Did he not read the OBR’s damning assessment of the Budget? It states:

“Given … the fact that the overall net effect of these changes is relatively small, we have not adjusted our overall GDP forecast”.

In other words, the Budget’s contribution to growth is nil and the Budget’s contribution to deficit reduction is nil.

The Prime Minister’s speech on the economy two weeks ago revealed him to be an economic fantasist. The Budget has told us even more about the Chancellor. He declared yesterday:

“We have got a plan to cut our structural deficit. Our … credibility comes from delivering that plan, not altering it with every forecast”.—[Official Report, Commons, 20/3/13; col. 934.]

He cannot admit that no growth and no cut to the deficit is not a forecast; it is reality. He cannot admit failure, face up to the real world and change course.

Albert Einstein defined insanity, as,

“doing the same thing over and over again and expecting different results”.

Well, the Chancellor is not mad—far from it. It is just that he has not a clue about what to do next, and he is willing to sacrifice the British economy on the altar of his own political career.

--- Later in debate ---

[Lord Higgins]

My Lords, myths can be important in politics, and there is now a pretty well established myth that last year’s Budget was a bad Budget. In reality, all the good news came out the day before Budget Day and therefore there was nothing left but criticism on Budget Day itself.

I am sorry that the Chancellor does not appear to have learnt the lesson from that. It is vital that we reassert the convention in Parliament that budgetary matters are first announced to the House of Commons. There are good reasons for that. Obviously it is the right of the House of Commons to receive the news first, but it also prevents the risk of market-sensitive information getting into the public domain and someone making a fortune out of it. I was therefore very concerned by the Evening Standard story last night. I have to say that, obviously in a post-Leveson mood, it made an abject apology in later editions for what was on the front page of the first edition, and that is to be welcomed. It emerged very clearly that it was in receipt of an embargoed copy of the speech. I believe that is totally wrong, not least because it discriminates between some journalists and others, and because it endangers the basic principle. I hope the Minister will give me an assurance that he will speak to his right honourable friend the Chancellor and ensure that that practice is abandoned forthwith and that the traditional view—which was exemplified by Hugh Dalton when he resigned as Chancellor when all he did was to have a quick word as he was going into the Chamber—will prevail.

[Lord Eatwell]

This side totally support the remarks just made by the noble Lord, Lord Higgins.

[Lord Higgins]

I am grateful to the noble Lord. I think it should be a unanimous view in Parliament.

I believe this is a very good Budget that does a considerable amount to encourage growth. I particularly welcome, first, the help-to-buy proposals, both of them, which will ensure that there is a higher degree of growth than there would otherwise be. The Minister, in a speech that gave the impression that he wrote it himself, rightly said that there are risks here. It is not clear, if one is going to give guarantees to homebuyers—if one is going to subsidise in this way—that they are really able to meet the responsibilities of taking out a mortgage. We do not want to go back to the disasters of Northern Rock and so on, of which many of us in this House bear the scars, but both schemes are very good and greatly to be welcomed.

I very much welcome the proposal about helping small businesses by removing what the Chancellor rightly described as the jobs tax. Many small businesses are reluctant to take on a few more employees because of the up-front costs. I am sure that the employment allowance will be of considerable help to the state of the economy.

I now turn to the main point with which we are all concerned: the deficit. The Minister referred to it. What was clear from the business about the AAA rating and so on is that we have to press ahead. It is very good news that the slogan that had been emerging, “We have cut the deficit by a quarter”, can now be changed to “We have cut the deficit to a third”, but it still means that we are continuing to borrow more at two-thirds of the rate that the previous, disastrous, Labour Government were maintaining. Therefore, we need to look very carefully at what is being said.

If I may make a rather semantic point, in his speech the Chancellor referred to “cutting borrowing”. He should, of course, have said, “We have been successful in cutting extra borrowing”. Total borrowing continues to go up, and that is of serious concern, not least in relation to monetary policy. It is very important that we look at the new relationship that appears to be developing with the Bank of England. I was always very sceptical of what was always hailed as Gordon Brown’s great achievement of giving independence to the Bank of England because it means that we are handing over more and more power to a small group of people who are totally unaccountable with regard to one of the two main levers of economic management. I hope that we can make progress on this.

On the proposals the Chancellor is making, we certainly need to look at the inflation target and at whether other considerations can be taken into account. Having said that, it would be helpful to move now from what was just an interest rate policy for many years after the Gordon Brown change to a policy that is concerned with controlling the money supply, which is what one really means by “a monetary policy”. I remain a strong supporter of quantitative easing despite the unfortunate side-effects, particularly on private sector pension schemes and so on. If one is not able to do anything because of the deficit problem on the fiscal side, we really must have an active monetary policy. In that context, greater co-ordination between the Treasury and new Bank governor will be of crucial importance. As I have said time and again, and I commend this to my noble friend on the Front Bench, it is absurd that the Treasury is working to one set of economic forecasts and the Bank of England to another. We should have a more unified policy on the link between the monetary and fiscal sides of economic management.

Overall, however, the Chancellor has done everything that could possibly have been done to be helpful, to stimulate growth and to ensure that we continue to do so. However, we must continue to do all that we can to cut the deficit. Immediately after the election and the formation of the coalition, I stressed how incredibly difficult this was going to be on both the tax and expenditure sides. I have been proved absolutely right. We have to go on in the same way. Labour still seems to be saying that we are cutting too much too soon. I am afraid that it is absolutely clear that we have not cut enough fast enough. We must therefore press ahead with that.

Bank of England: Monetary Policy

Lord Eatwell Excerpts

Tuesday 19th March 2013 Lords Chamber

[Lord Newby]

My Lords, again, that is a matter for the Bank of England. To the extent that the Chancellor—and the Treasury—wishes to change the way in which the Bank of England operates, he will have an opportunity tomorrow to set out what any changes might be.

[Lord Eatwell]

My Lords, from what the noble Lord has said, the Treasury has clearly been content with the policy pursued by the Monetary Policy Committee over the past three years. Is the noble Lord also content with the impact of that policy on pensioners’ annuities?

[Lord Newby]

My Lords, the Government’s view is that it is in the long-term interests of everybody, including pensioners and families, that we deal with the deficit and get growth going on a sustainable basis. In the short term, the Bank has taken the view that to keep within the inflation target and, subject to that, to support the economic policy of the Government, including their objectives for growth and employment, it should keep interest rates low.