Finance (No. 3) Bill

Lord Forsyth of Drumlean Excerpts

Monday 18th July 2011 Lords Chamber

[Lord Myners]

My Lords, the Minister has treated us to a rich helping of palilalian piffle when it comes to the performance of the economy. His speech would be a comedy if the underlying story were not a tragedy. At least we know that the Minister is not guilty of being involved in disguised remuneration because, as we well know, he is not being remunerated at all.

Let us remind ourselves of the economic facts. In the period 1997 to 2007—for 10 years—the UK recorded the highest GDP per capita growth in the G7 countries. This was achieved against a background of low inflation and the period described by the governor of the Bank of England as the NICE decade—non-inflationary consistent expansion. Public sector net debt had fallen from 42.5 per cent of GDP in 1997 to 36.5 per cent in 2007—the second lowest level in the G7. The Conservative Opposition had committed to match Labour’s expenditure plans.

In 2007 the world was hit by a global financial crisis. The Labour party has expressed its regret that financial sector regulation was not as effective as it should have been and that that was a contributory factor to the crisis. Alistair Darling took the right decisions as a consequence of the crisis and he implemented them successfully. The financial system was stabilised under the Chancellor’s direction. Appropriate stimulus action was taken. Unemployment was lower than would otherwise have been the case, as were business failures and repossessions. The Chancellor introduced a strong framework for fiscal stabilisation going forward. I pay great tribute to Alistair Darling whom I think history will judge to be one of the great Chancellors, given the extraordinarily difficult global circumstances with which he had to deal. Last spring, after a very tough time for the economy we were turning the corner. The economy was growing. Over the second and third quarters of 2010, growth was 1.8 per cent—ahead of the USA and ahead of the EU average. Inflation remained low and unemployment was steadily coming down.

What has happened since the election? The economy has stopped growing. The Minister refers to growth but the facts are that since the Government came to power the UK’s growth record is 21st out of the 24 countries in the EU. The OBR has had to revise down its growth forecast on four separate occasions since it was established. We are the only major economy in the world that is not growing. On 26 July the Office for National Statistics will produce its initial estimates for second quarter GDP. I believe that these may well show that we are back into a recession. Inflation continues to be running at well over double the targeted level. The Minister last week completely failed to answer a question from my noble friend Lord Eatwell to explain why, if inflation was due to global circumstances, the UK was experiencing such a poor inflation record compared with other EU nations and the United States. The OBR is now forecasting that the combined effect of very low growth—if any growth at all—and inflation running well above target is that borrowing will be £46 billion above the level that the OBR expected at the time of last autumn’s spending review. I am confident that that figure will increase further when we see the second and third quarter GDP figures for 2011.

This is the context in which this House looks at the Finance Bill, described by the Chancellor of the Exchequer in his Budget speech as the “march of the makers”. The march of the myth makers, I would suggest. It is the myth around expansionary fiscal contraction, taking demand out of the economy when the economy is already suffering from underused capacity, particularly in the labour market. In the first quarter of 2011, UK GDP was much the same as it had been in the third quarter of 2010, but worse, it was still 4 per cent below the level before the global financial crisis and 11 per cent below the level that it would have been, had we extrapolated economic performance in 2007 through and beyond the financial crisis.

The Government’s response to that horrendous decline in achieved economic output is to announce a succession of policy initiatives that will have the effect of taking demand out of the economy. The Budget had nothing to offer. Growth has been hit and we are now teetering on the verge of recession. We already are in recession in terms of domestic demand. Household income is falling. Indeed, it is falling to the lowest levels in relative terms for 20 years. Real incomes fell last year for the first time since 1981. This is the background of economic achievement for which the Minister invites us to express our appreciation. Consumer confidence has slumped—I will revert to the critical issue of confidence in a moment. Business investment and confidence have also collapsed. Insolvencies are increasing. Banks are not lending. The Merlin agreement, which the Minister trumpeted, is a worthless piece of paper, as the noble Lord, Lord Oakeshott, described it. Merlin has no teeth. It does not even require the individual banks that have signed it to commit to individual lending figures. It is an aggregate figure—not an individual bank-by-bank figure. The ICB, so worthily established by this Government, has nothing to say about promoting greater competition in an oligopolistic domestic banking market.

Why is confidence so important? Notwithstanding the Government’s remonstrations about a debt-fuelled economy, the OBR assumes that household debt will increase further. At the moment, household debt is 165 per cent of GDP. The OBR assumes that it will rise to 175 per cent by 2015. That compares with 114 per cent 10 years ago. But that will not happen, and Ministers must know that that is the case. Households will not borrow more unless they are compelled by dire financial circumstances to do so involuntarily. We must remember that interest rates have yet to normalise. It is not surprising that the Bank of England warns of the consequences of rising interest rates and points to a very delicate situation for some banks if their customers are obliged to pay the sort of interest rates that would be more consistent with a rate of inflation of 4.2 per cent. Nor will the corporate sector financial surplus reduce, which is another key assumption of the Government and the OBR because why would companies run down their corporate financial surplus when the economy is experiencing such an abundance of unused capacity and declining demand?

Expansionary fiscal contraction assumes that a tight fiscal policy can lead to looser monetary policy and stimulate private investment and consumption. It is a form of the Ricardian equivalence in which almost no one believes. There can be no crowding out of private sector demand by the Government if demand is too low. The Government’s Budget strategy is simply not working. The economy is clearly not springing to life on a wave of confidence on the back of the picture painted by the Government. Monetary policy is already too loose and will have to be tightened fairly soon. The economy is stagnating but the Government propose a reduction in real government consumption, at constant market prices, of 10 per cent between now and 2015. This is a dangerous nonsense.

It was for many a forgettable Budget, an exercise in sleight of hand, but it was not forgettable if you are on a low income because you are going to be hit proportionately more than those on higher incomes. It was not a forgettable Budget if you are young and unemployed—a cohort of the economy and society that is increasing dramatically. It was not a forgettable Budget if you are female, experiencing the highest rates of female unemployment for 15 years. It was not a forgettable Budget if you are trying to buy a house or even keep your existing one. It was not a forgettable Budget if you are eking out an income from your savings when they are being reduced in real value by loose monetary policy. It was not a forgettable Budget if you are a small company seeking support from the banks. It was not a forgettable Budget if you care about the environment, because everything that was said about a green government policy was reversed in this Budget. It was not a forgettable Budget if you are a charity because of the reduced incentives to which you are now entitled as a result of tax adjustments.

The consequence of this is that we are facing the weakest economic recovery from a recession since the 1920s—the weakest economic recovery from a recession for 90 years. We are the only major economy in the world not experiencing economic growth. Regrettably, the Chancellor of the Exchequer has talked himself into a corner with irresponsible speeches about national bankruptcy and misleading references to “maxing out”—a horrible phrase which I am sure an Old Pauline should not use—the nation’s credit card. The Chancellor has talked us into this recession. As John Maynard Keynes wrote in the Times in May 1933, in words that are as apposite now as they were then:

“Unfortunately the more pessimistic the chancellor’s policy, the more likely it is that pessimistic anticipations will be realised”.

What should be done? First, Labour should acknowledge that its management of the economy during the middle part of the first decade of this millennium was not as good as it should have been. In particular, we ran a deficit while the economy was already running at full capacity and we failed to acknowledge the narrowing of the fiscal base. I have said this before and I will continue to say it because I believe it is important that we admit, with the benefit of hindsight, that mistakes were made. The economy is now in need of acute help. There should be a temporary cut in VAT. We should bring forward capital investment. Now is the right time, when there is excess capacity, to spend on government capital projects, including, in particular, social housing. We should take action to get credit flowing. I notice that the noble Baroness, Lady Noakes, has joined the board of Royal Bank of Scotland. When I sat where the Minister is sitting, I was regularly chastised by the noble Lord, Lord Noakes, who I see in his place, and the noble Baroness, Lady Noakes. I am sorry, I meant the noble Lord, Lord Newby. I made this mistake when I was a Minister and I have now done it again. I apologise to both the noble Lord and the noble Baroness. The noble Lord, Lord Newby, and the noble Baroness, Lady Noakes, both used to chide me about my inability to get the banks to lend. I ask the Minister the same question: what are you doing, Minister, because bank lending to SMEs is declining? Bank lending for housing and domestic mortgages is at a 10-year low. The Minister shakes his head, but I encourage him to become the master of his brief, be on top of the facts and realise that lending to UK SME companies is continuing to decline.

As I said, the Chancellor has left himself with no options. There would be no place to which he could turn in terms of a policy adjustment without damage to his reputation and the need to admit that Alistair Darling was correct in his fiscal judgment. The price the nation pays for the Chancellor’s and the Minister’s pride is that we are pushed back towards recession.

[Lord Forsyth of Drumlean]

My Lords—

[Lord Myners]

I had almost finished, but I am very happy to give way.

[Lord Forsyth of Drumlean]

Before the noble Lord sits down, there have been many glowing references to Alistair Darling and how wonderful he was as Chancellor, but no references at all to Gordon Brown. Was that a coincidence?

[Lord Myners]

We are time limited in this debate. In closing, I say how much I look forward to hearing the maiden speech of the noble Lord, Lord Magan of Castletown, who will no doubt enrich the House with his knowledge of banking both in the United Kingdom and in Ireland, where the noble Lord had a number of important banking roles. I also look forward to the contribution from the noble Lord, Lord MacGregor of Pulham Market. I congratulate his committee on its extremely good work. Finally, I express my appreciation to the Minister for his apology to my noble friend Lord Barnett.