Welfare Benefits Up-rating Bill

Lord Forsyth of Drumlean Excerpts

Tuesday 19th March 2013 Lords Chamber

[Lord Low of Dalston]

My Lords, I have put my name to this amendment and will briefly signify my support. There is not a lot that I can add to the comprehensive account given by the noble Lord, Lord McKenzie. The only point I would stress was made by somebody on television last night—that we now live in an environment where inflation is considerably higher than we were used to in the first decade of this century. We understand that the new Governor of the Bank of England advocates that the inflation target should be allowed to float free. We are in an environment where inflation is set to hover around 3.5% or higher with no prospect of it reducing. In these circumstances, to cap the increase in benefits at 1% is simply unjustifiable. I support the amendment moved so comprehensively by the noble Lord.

[Lord Forsyth of Drumlean]

My Lords, there is no one in this Chamber who would not like to see support for those on low incomes and families to be increased. What was striking when the noble Lord proposed this amendment was that, apart from a vague suggestion that it might be possible to find the money by pursuing tax evaders, there was no indication of where the £3 billion needed to provide uprating in line with inflation—assuming the Government’s forecasts are correct—could be found. That is deeply irresponsible and it is particularly irresponsible of an Opposition who will not say what they would do in government. In other words, while it is not their responsibility, their line is “You should spend the money”, but when it might be their responsibility, they are not prepared to say what they would do. That is completely dishonest politics.

We have a dangerous position in our country, partly caused by the present Government constantly harping on about how they have reduced the deficit by a quarter. According to a poll carried out by ITN and a separate poll by the Centre for Policy Studies, which may not be quite so objective, when asked the question, “Do you think by the end of this Parliament the national debt will have gone up by £600 billion, be just the same, or will have gone down by £600 billion?” only 6% got the answer correct: that it will have gone up by £600 billion. So here we are, living in a country where we have to make difficult decisions—this Bill is an example of having to make difficult decisions—and where the vast majority of people believe that the Government are cutting debt, when in fact all the Government are doing is reducing the amount by which the debt is increasing. I will wager that when we have a debate at the end of this Parliament and come the next election, the Opposition will pursue the same kind of irresponsible tactics which we see in this amendment. They will say, “The Government were elected to reduce the debt, but the debt has gone up by 50%. If we had been in government, it would have been different”. That is the politics of it.

Let us look at it from the point of view of people on low incomes—working or non-working—faced with inflation. If we follow the prescriptions contained in this amendment, the consequence will be that the pound will sink still further. The consequence of the pound sinking still further is that the energy and fuel costs that the noble Lord, Lord McKenzie, spoke of will go up. So how does it help people who are struggling to say “Your benefits will go up by inflation” if at the same time you pursue policies which will result in higher inflation and higher debt and leave an even bigger problem to solve at the end of the day, which will be solved on the backs of the poor?

The noble Lord said that the Government are handing out a tax-free benefit to the very rich. I remind him that when his party were in government, people on very high incomes were paying less in marginal rates of tax than they are now. I also remind him that the effect of cutting the top rate of tax from 50% to 45% will be, as has been proved over and over again in countries around the globe, that the revenue to the Treasury will go up. Although the noble Lord and his party quite rightly point to the excesses in the City arising from bonuses, and so on, they seem to forget that 52% of those obscene bonuses come back in tax and national insurance. Actually, it is more, because there is an employers’ contribution of 12%, so 64% of those bonuses come back to the Treasury in revenues.

The name of the game here is to increase revenues to the Treasury. Then we will be in a position to do something about welfare. We are now in this difficult position and my noble friend is having to take this painful legislation through the House. The Opposition should recognise that that is a consequence of their period in government. The noble Baroness shakes her head. While they were in government, welfare benefits went up by 60% in real terms.

[Baroness Hollis of Heigham]

To pensioners.

[Lord Forsyth of Drumlean]

Yes, the noble Baroness, Lady Hollis, makes the point that a large percentage went to pensioners, but I do not hear from the opposition Front Bench a cry that we should cut the benefits to pensioners to avoid this position. The very fact that she says that from a sedentary position indicates that she accepts that.

Whatever the merits of how the money was distributed, it went up by 60%. One pound in every £4 which this Government are spending—by the way, that is money which we have not got because we are having to borrow £150 billion every year to make that expenditure—is going to welfare. To argue that it is not necessary to constrain welfare expenditure in those circumstances is, frankly, totally irresponsible. It is the worst kind of politics.

The noble Lord seeks to present people on this side of the House as uncaring and unconcerned about the poor whereas, actually, if you are concerned about people who are hard up, you want to make sure that the costs of living for them and the stoppages in their pay packet are reduced to as low a level as possible. If we follow those prescriptions of continuing to spend money we have not got, of continuing to pay more in welfare than people are gaining in increased incomes in the private sector, that is the road to Carey Street and to undermining our whole welfare system of support.

The truth is that while Labour was in office, it was paying tax credits to people on up to £50,000 a year. It was a policy deliberately designed to create a client state, and it was a policy funded on the back of a bubble created by holding down interest rates. It was irresponsible economics and it was irresponsible public expenditure. A responsible Government, faced with the windfall tax revenues that they had, would have put some aside for a rainy day. Now we find ourselves with a huge, exploded welfare budget and difficult decisions that need to be taken.

I hope that the House will reject the amendment which, while we all appreciate the sentiment, would actually do down those who are hardest up in our society and having the most difficulty. The noble Baroness shakes her head. It is the consequence of spending money which we did not have.

[Lord Harris of Haringey]

My Lords, I hesitate to give the noble Lord a lesson in economics, but the problem that the Government currently face is a complete absence of growth. Further cuts in welfare benefits will make that worse. One thing that you can say for certain is that the people on the lowest incomes will spend that money and that that money will then feed into the economy, therefore doing something about the growth problem that the Government have exacerbated by what they have done in the past few years.

[Lord Forsyth of Drumlean]

I do not think that was a lesson in economics but a lesson in magic. If that is the case, why do we not just double welfare benefits? People will spend even more, the economy will grow and everything will be fine. The noble Lord nods his head in agreement. As an individual or as a household, you cannot continue to spend more than you earn without getting into the kind of problems that we have seen among people who have taken out payday loans.

This is the payday loan approach to government. You have a big debt, so you take out another one. You pay a higher rate of interest on it but you hope that somehow you will be able to pay it back. In the end you are able to pay only the interest. At the moment the Government are printing money to fund their expenditure requirements. That is quantitative easing. In 1997 the Bank of England held no government bonds. Now it holds 27% of the entire bonds in issue. When interest rates rise, those bonds will fall in value. How will the difference in value be made up? That will be a cost for the taxpayer. Our level of borrowing now, which will have gone up by 50% by the end of this Parliament, will have to be financed and that will come out of the future welfare budget.

The noble Lord is describing a way of robbing our children of their living standards and creating a bigger problem for the next generation to meet the needs of those who are most vulnerable. This is a way of making it more expensive to create the safety net that we all support. This is not a lesson in economics but in the kind of fantasy approach to politics that got us into this position in the first place. That is why the Government are right to persevere with this legislation. Indeed, they have been very reasonable in their approach. They have tried to protect the most vulnerable and have agreed to increase welfare payments by 1%. This is extraordinary, given that we have an economy that is not growing at all.

[Lord Harris of Haringey]

Exactly.

[Lord Forsyth of Drumlean]

The noble Lord seems to think that the reason why the economy is not growing is that the state is not large enough. How big does he want to the state to be? It is already taking nearly 50% of everything created by the Government and spending it, and that is not enough because they have to borrow on top of that.

If levels of taxation are high, which they are, and levels of regulation are high, we will not get the growth that is required. We need to constrain public expenditure to make room for the private sector to create wealth. Once we have a bigger cake, everyone can have a bigger slice, but if we try to proceed in this way we will end up with a smaller cake and those dependent on welfare benefits will be cruelly cheated. They will find their living standards destroyed by inflation, higher costs and the inability of the Government to finance the kind of programmes that Members opposite are prepared to say now that they would support, although they are not prepared to say so at a general election.

[Lord King of Bridgwater]

My Lords, I agree with a particular point that my noble friend has made and would like to add that the Bill has come forward on an especially interesting day. I refer to Cyprus. The warning is on the packet. There has been a certain amount of calm around, as though we had come through all our problems and were moving steadily forward into calm waters, and as though the eurozone was secure. The financial markets, with the euro increasing in value, may have had that illusion. However, it has all been blown away. I have not heard any recent news; I do not know whether there has been a decision yet about what Cyprus will do. We should remember that, at the moment, there is a very real risk. Clearly, people have been caught in Cyprus. If Portugal, Spain and Italy decide that this will be the European practice, people there may find that their savings and funds in their banks are not as secure as they had been assured they were. After all, everyone thought that there was a clear undertaking that below a certain level, around €100,000, their own bank accounts were at no risk. If that changes, we face a very serious situation.

There is complacency around, as I picked up from an article today by the chief economist of HSBC, as though with just a bit of going forward and a bit more luck we will be back on the old growth train and in the business that we were in before. What has been exposed is that over many years we have been living on borrowed money, on a construction boom in the financial services area and on public expenditure. Now that those have to be constrained, suddenly people are turning around and saying, “How, as a country, are we going to earn our living in future?”. We are finding that we have slipped in the leagues. In one of our most successful areas of overseas earnings, defence expenditure, we have now slipped a place and China has overtaken us. China is now taking away a number of the markets that our manufacturers used to serve extremely well. It is said that we hope to sell Typhoon to Oman, the UAE and one or two other countries, but the point has been made that its successor will be made in America, and that will be the end of one of our most successful overseas earnings. When you see where we earn our living in the world, we are not in a happy place.

That is why I very much agree with my noble friend Lord Forsyth. All of us in this House would like to say, “Let’s increase benefits. Let’s deal with all the hard cases and see how we can give people more money”. Look at the situation in Ireland, where benefits have been cut by, I think, 10%. There has been talk of cuts today but in fact we are taking about how big an increase the Government should impose, not an absolute cut in the amount. Other countries in Europe are cutting by 6%, 10% or 12% the actual amount that people are getting—what hardship that must represent.

This is not a pleasant speech to make. It is much more popular to say, “Let’s have some more benefit”. I say this against a background of a new situation that has suddenly come upon us: if this House—the unelected House of Lords—decides today to cut right through one of the decisions made as part of the prudent financial planning to find our way out of the problems that we are in, and if that triggers a loss of credibility in our national approach and the Government’s approach to tackling those serious problems, it will really be a problem for people on benefits if there is a run and we then find that the low interest rates that the Government have enjoyed for their substantial borrowing no longer apply.

I agree with my noble friend on this point. There is an illusion that somehow we are reducing our debt. We are not; we are reducing the rate at which the debt is increasing. One of the blessings that we have had is that at least we have been able to borrow at an extremely low rate because we had some credibility. If the House of Lords today kicks away one of the planks that help to shore up the credibility of a Government who have a plan to try to deal with our problems, and if those international interest rates are then demanded of the Government and the country when we try to borrow money, the problems that we will incur for all our people could be vastly greater. Look at the tragedies that exist now, such as the unemployment rates in Spain, which is 50% in certain age groups.

We have held things together so that we have a lower unemployment rate than the eurozone countries. There is so much that we have to hang on to. This is a dangerous time. I say seriously to your Lordships: do not tamper at this stage with this very difficult situation, at a time when we are least able to face it and when it could quite seriously endanger our whole economic structure. I do not think that people understand what a mess the world is in at present. There is a huge amount of complacency around. We are not by any means out of the woods yet, and it is our duty to ensure that we hold firm.

I intend to support my right honourable friend Iain Duncan Smith, whose commitment to this area I think we all admire enormously. He is doing the best that he can. He is agreeing to an increase in benefits for the most deserving people in this country, but not as large an increase as they might have hoped to see. That is the only realistic approach that can be taken at this time.

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[Lord McKenzie of Luton]

My Lords, of course we are aware of what is going on in Europe, and I shall come on to issues of borrowing in a moment. We are talking here about an amount that is less than 0.1% of total government expenditure. The noble Lord cannot seriously be arguing that taking our position rather than that of the Government would bring the whole edifice crashing down. That simply does not reflect reality.

The problem that the Government have is that because they have failed to deliver growth in the economy there is a real risk—this is what is happening—that their austerity programme is making debt worse. This was again a point made in a very powerful article last week in the FT.

We have heard a great deal about the Labour Government’s record. When the Labour Government left office the economy was growing again and it was the austerity measures which choked off that growth. As to the Labour Government’s record on debt, before the international crisis hit, our debt levels were the second lowest in the G7, lower than when we came into office in 1997, I believe.

[Lord Forsyth of Drumlean]

I am following the noble Lord’s argument very carefully. If he is saying that we can get growth again by spending money uprating benefits in line with inflation, why will he not therefore make the commitment that a Labour Government would do that?

[Lord McKenzie of Luton]

My Lords, I make the commitment that we should review on the usual basis at each uprating period. No Government or Opposition immediately prior to a general election are going to pre-empt the programme they would have. The noble Lord knows that full well. He is making a silly political point.

There is a real risk that by cutting back you make the debt situation worse. It depends upon the multiplier. There have been some recent studies which suggest that it is made worse because the multiplier effect would mean that if you did not cut back you could create growth greater than the saving you are seeking to make. We shall hear from the Chancellor tomorrow about his view on borrowing for capital spend, for example. The relative merits of that depend upon the multiplier effect.

Ultimately, the argument in favour of the Government’s Bill as it stands is that it is locking in an unknown. You cannot know in year two or indeed the next year what the rate of inflation will be and you cannot know, therefore, the extent of the cut you are visiting on the poorest people in our country. That is what we object to in this Bill.

We could go on for ever in an economic debate, but I think it is time to test the opinion of the House.

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[Lord Forsyth of Drumlean]

My Lords, this amendment is simply a variation on the previous amendment. In the previous debate, we went through the arguments for why it is economically impossible to sustain inflation-related increases. I do not propose to repeat the arguments, but this amendment would result in exactly the same position, given that the exceptions proposed by the right reverend Prelate constitute a large part of the Bill. It is just a way of saying that, if one was going to make the same savings, one would have to make bigger reductions in the increases for everyone else, or else one would have to find the money. Once again, the right reverend Prelate did not tell us where the money would come from.

[Baroness Hollis of Heigham]

He did, actually.

[Lord Forsyth of Drumlean]

I am happy to give way to him if he wants to explain where the money would come from, but I suspect not. A large part of his flock of the clergy will be recipients of benefits because of the wages that they are paid by the Church of England. Everyone is in the same boat here. The noble Baroness, Lady Sherlock, argues that somehow it is possible to find money which we have not got and that she is proud to support the amendment because of the reduction in the top rate of tax paid by those who she describes as millionaires. I remind her that those people are paying 5% more in tax than they did under her Government. I also remind her that the effect of cutting those high rates of tax has been to increase revenue and therefore to make it possible to do more in that respect.

Surely, by now, we have learnt that lesson. It is a cheap political argument to say that it is possible to create money out of thin air and that this Government want to protect the rich at the expense of the poor. If we want to help the poor, we have to get the economy growing again. The noble Baroness says that the economy is not growing because of this Government. The economy is not growing because of the burden of debt which she and her fellow members of the Labour Party ran up.

[Lord McKenzie of Luton]

The noble Lord keeps going on about debt. Is it not right that, because of the failures of the noble Lord’s Government, the lack of growth has meant that borrowing is now about £200 billion more than they planned when they came into being?

[Lord Forsyth of Drumlean]

I am utterly amazed by the noble Lord. He is now criticising us for spending £200 billion more than we planned, when part of that money is being used to provide the 1% uplift in benefits. Talk about wanting to have it both ways. On the one hand, he is criticising the Government for not borrowing enough, but now he is criticising the Government for borrowing more than we planned. The reason why we are having to borrow more than we planned is because of all the commitments made by the previous Government without a clue as to how they would fund them. That includes commitments on welfare. Welfare spending accounts for £1 in every £4 that the Government spend.

On the basis of the noble Lord’s criticism that we are spending £200 billion more, that would mean that £50 billion is going on welfare. In all the time that I have been involved in both Houses of Parliament, I have never seen a more irresponsible Opposition. It is not good enough for the right reverend Prelate to come to tell us that we need to do more to help working families with young children without explaining from where the money is to come or addressing the main problem.

[Lord Griffiths of Burry Port]

My Lords, I have taken no part in this debate so far. Has the noble Lord not suggested somewhere where the money can come from; namely, that people like us could pay it? If children would benefit I am prepared to pay it. Is he and are we?

[Lord Forsyth of Drumlean]

My Lords, I am grateful to the noble Lord, Lord Griffiths of Burry Port. I did not think that he was a bishop and I was addressing my remarks to the Bishops’ Bench, but I say to him that the burden of tax has gone up substantially, and the reductions in government expenditure have so far been quite limited. We are discussing not a cut in government expenditure but limiting the increase in government expenditure to 1%.

I have had several goes at persuading the right reverend Prelate to indicate where the money for his proposal might come from. One possibility might be for people to put wages up. If the Church of England were to put up its clergy’s wages, less would be claimed in benefits and more would be available for others, but that is not a practical proposition for the church because the church, like the Government, is faced with a financial crisis and has to live within its means. What is good for the church is good for the Government and is good for particular families.

The most irresponsible part of the arguments that have come from the Bishops’ Bench this afternoon is about what happens if inflation is allowed to let rip. I fear that that may be about to happen as we continue to print money and borrow. As the noble Lord, Lord McKenzie, pointed out, we are borrowing far more than we planned to meet our commitments and to be fair to the most vulnerable. What happens when inflation takes off? I remember the 1970s, when inflation was running at very high levels, at 20% and more, and interest rates were at 15% and more. Who suffered? Children, the poorest and families suffered. There is nothing Governments can do to protect them once inflation takes off.

We do not want to go back to that kind of society. It tried to cope with inflation by protecting people through indexation, but it was unable to keep up with it and the result was, as the then Labour Prime Minister put it so eloquently:

“Inflation is the father and mother of unemployment”.

Jim Callaghan said:

“We used to think that you could spend your way out of a recession, and now we know that you cannot”.

Those words were said as the Labour Government left in 1979, leaving another Tory Government to clean up the mess, just as we are doing now.

The right reverend Prelate’s amendment of course carries great emotional impact. We would all like to see working families with children have a higher standard of living, but the way to do that is to create the wealth that enables us to support those families and enables them to get the levels of income and employment that they need. You do not do it by shaving the edges of the currency, allowing inflation to take off and committing those families’ children as adults to a debt burden that, frankly, will be impossible to pay off. They would be paying the interest for the rest of their lives, and that would disadvantage their children. In rejecting this amendment, as I hope she will, my noble friend is speaking not just for our children but for our grandchildren, who are entitled to expect responsible government in these straitened times.

[Lord Bates]

My Lords, I support what my noble friend Lord Forsyth said. When the right reverend Prelate comes to respond to the debate, I would be grateful if he would comment on the following point. He made great play, and I do not underestimate this, of the effect and impact of limiting the uprating of child benefit and child benefits generally to 1%. According to Appendix 3 of the helpful Library note on the Bill, regarding the child tax credit element, in 2011-12 the child element of child tax credit increased by 11.1%, a significant sum. That followed significant increases of 13% in 2008-09 and 12.5% in 2004-05. If one is to argue that limiting that increase now to 1% would have a significant effect, if you take it as a snapshot, that may be the case, but if one looks over time, one has to factor in those significantly higher-than-inflation increases that have occurred in the child tax credit element in the past.

One of the problems with trading figures with regard to child poverty is that you get some curious results. One of the most notable is that in 2010 there were 300,000 fewer people in poverty because the recession had caused the median income to drop—in other words, children were said to have been pulled out of poverty not because anything had changed in their lives but because the rest of society had got poorer. We have to be clear about what we are arguing for when we talk about the interests of children, which of course should be paramount.

I turn again to a theme in the debate on the previous amendment: one cannot just take this in isolation. One needs to look at what the Prime Minister has announced today on childcare, for example, which will make a significant difference to people by enabling them to move into employment. One needs to look at the pupil premium or the raising of tax thresholds, which means that someone on the minimum wage has seen their tax bill halved under this Government. One has to look at these things in the round. Unlike the Opposition, we have ring-fenced the budget for the National Health Service, on which people significantly depend. Again, in the round, we need to get this absolutely correct.

I will react to the charge that somehow there is an easy pot at the other end of the income scale to be tapped into. As a result of this Government’s actions, the richest pay more tax on capital gains, more stamp duty on their homes and more tax on their pensions and are less able to evade tax than was the case before. These factors need to be borne in mind in the broad reach of these changes that I know when taken in cold, clinical isolation, one year at a time, without reference to trends over time, may allow one to draw one conclusion but should be placed in the proper context. I seem to recall from my youth the good theological concept of placing individual verses in context in order to understand their meaning, and one might think it was a good idea to place this one measure in the broader context in order to understand what the Government are doing to bring people out of child poverty, which we accept is significant. Other measures, such as limiting the proposed increases in fuel duty—another factor that has a big impact on the poorest in society, particularly those with families—and caps on rail fares and on council tax, all seek to address the issues.

We also need to recognise that child poverty has a wider set of causes than cash payment alone, and in many ways, we are focusing here on cash payment on its own. We need to place in context the fact that the children’s opportunities and their likelihood of being in poverty are affected primarily by the extent to which they live in a workless household. Therefore, all our efforts to get people into work should be welcome.

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[Lord Forsyth of Drumlean]

I am most grateful to the right reverend Prelate. My criticism was that he did not say which of these he wanted to do. If the church’s position is that it wants to tax winter fuel benefits, please say so and say that the money from that could be used for this purpose. As for increasing taxes on pension contributions, he may not have noticed but the Government have already done that.

[Baroness Hollis of Heigham]

My Lords, I would have thought that the right reverend Prelate’s point was that we are facing political choices, not ones of financial necessity. We can make choices here and we are choosing instead to go after poor children.

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[Lord Kirkwood of Kirkhope]

My Lords, my Amendments 4 and 9 in this group take us into much lighter territory. I hope that the noble Lord, Lord Forsyth of Drumlean, will understand and relax, because the purpose of the amendments is not to attack the savings which it is the principal purpose of the Bill to achieve but only to protect the position of benefit recipients should the Office for Budget Responsibility’s estimates for inflation be exceeded by 3%, which is the figure that I have chosen for the purposes of the amendments.

The amendments are different from those which have gone before because, apart from anything else, they are much less susceptible to attack on grounds of financial privilege. A problem that I had with some of the earlier amendments, and I share some of the analysis, was that they were prone to attack on those grounds. I think that those of us who participated in consideration during the passage of the Welfare Reform Act last year felt that financial privilege was being used rather rashly in the other place, but the purpose of this House is to persuade the House of Commons perhaps to think again about some of the legislation that comes to us.

Amendment 4 would simply disapply the 1% limit on benefit uprating in the event of inflation reaching 3%. I would be interested in the view on this of the noble Lord, Lord Forsyth, because he knows a lot more about it than do. Judging where inflation will come out in September 2013 and September 2014 is an inexact science. We will learn tomorrow what the Office for Budget Responsibility and the Chancellor think about the situation, but the two years covered in the Bill, September 2013-14 and September 2014-15, are considered to be facing inflation increases of 2.6% and 2.2% respectively. The purpose of the amendment is to ask what happens if those estimates are wrong. They are forecasts; they are not scientifically worked through. We have therefore to ask ourselves what we do as a legislature if inflation reaches 3%.

Change in the real-terms value of benefits is very sensitive to inflationary increases. I have said that the Office for Budget Responsibility’s baseline is 2.6% for September 2013 and 2.2% for September 2014. That reduces the real value of benefits by 4% and produces a saving of £3 billion; that is already agreed and is in the Bill. However, checking Library figures, I am advised that if inflation exceeds Office for Budget Responsibility estimates by 1% in the two years covered by the Bill, it will reduce the real value of benefits in the hands of claimants by 6% and result in a windfall saving to the Treasury not of £3 billion, which is what the deficit reduction programme is looking for, but of £5.1 billion. You can multiply the figures. If the OBR baseline is exceeded by 2%, that reduces the real value of benefits by 8% and produces a windfall saving for the Treasury of £7.2 billion. I have no way of knowing whether any of that will happen. All I seek with this amendment is to ask what the Government will do if it does.

The financial context is slightly worrying and has been getting worse since the coalition Government promulgated this policy some months ago. We will learn more about this in the Budget tomorrow. The Budget may well be—and some of us will argue that it should be—looking to promote growth and loosen some of the constraints on inflation that the Bank of England’s Monetary Policy Committee is required to oversee. However, we have a Bank Governor-designate in Mr Mark Carney, who comes with a reputation of being prepared to live with higher levels of inflation. If that happens, then the 3% figure in the amendment may well be breached sooner rather than later. In some of the earlier debates the noble Lord, Lord McKenzie, rightly adverted to the fact that the markets are already pricing in higher inflation in the short term over the two years that the Bill covers.

As a legislature, we now face an increasing risk of inflation for these two financial years; I put it no higher than that. We very much need to take that into account. The CPI calculation of inflation is a national figure, worked out with average figures on a statistical basis, but someone said to me the other day that childcare costs have gone up 6%, as anybody who has studied the incidence of rising costs on low-income families will know. That is a long way in excess of the general CPI rates that we face, as with food prices, rents and energy prices, particularly for the low-income families that I am concerned about.

I am grateful to my noble friend for the considerable discussion that we had about this. He was generous in considering what I said, but it would be helpful if the House knew what the Government would do if the 3% inflation figure was breached. I am reasonably content that there are overriding powers in the Social Security Acts, but I do not think there are in the Tax Credits Acts; I might be wrong about that. What happens if something untoward happens to inflation and we end up in the 2014 and 2015 fiscal years with something unexpected suddenly coming over the horizon? Surely some of these reductions in the value of benefits that I have alluded to would be quite unconscionable as a windfall increase to the Treasury’s coffers in a way that is not intended, as I understand it, but may well happen by mistake?

[Lord Forsyth of Drumlean]

I have looked carefully at my noble friend’s amendment and listened to his speech with care, but he does not provide the remedy in the amendment. It simply says that the uprating limited to 1% is cancelled if inflation reaches 3%. Would he indicate why he chose 3% and what the remedy would be? If he specifies a remedy, then we are back into the argument about cost.

[Lord Kirkwood of Kirkhope]

The remedy would simply be that if 3% was breached, then the clauses in the Bill fall and there would be the default position of an annual uprating process. It would be at the Secretary of State’s discretion with the usual provisions of Section 150 of the Social Security Administration Act 1992. It would be taken year by year and would say that inflation was forging ahead in an unforeseen way. For myself, I would listen to an argument that said that we should stick to 1% on costs shown in those circumstances, but if 3% was breached we would go back to the status quo. That does not have a cost at all.

The noble Lord, Lord Forsyth, and I have been doing government uprating statements for 30 years together and I have never known a Government not get an uprating statement that they wanted if they had a majority. That is what I think would happen in these circumstances. However, the Secretary of State would be obliged to come back and say to both Houses that the circumstances were not what he had anticipated or what the Office of Budget Responsibility had calculated and that therefore there would be a chance for reconsideration. That is all I ask.

In fact, Clause 1(5) and Clause 2(4) of the Bill give the Treasury power to protect itself from the downside. These clauses say that if inflation falls below 1% it will not admit the full 1% uprating and will reserve the right to adjust it. Yet there is no limit to which the Treasury will allow inflation to increase before it comes back and argues its case in Parliament one way or the other. There is a 50:50 chance of this happening. I believe in my heart of hearts that the Government would respond to that. I do not believe it would be at all conscionable to leave 3.5% or 4% inflation with these 1% caps for the two years in this Bill.

We need more than that. We need some inflation-proofing and protection for recipients of benefits in the two years covered by the Bill if inflation races ahead. That is the burden of the argument. It is no more and no less than that. I do not think that it would be attacked on the grounds of financial privilege. It has no direct effect, as I see it, on deficit reduction. I am content that the Government get £3 billion in savings, but not content that they get £5 billion or £7 billion, because that is not what the Bill is designed to do. I argue in this amendment that there is no protection in particular for low-income families. I hope that my noble friend will give me some reassurance about what the Government will do in these eventualities. If he is not prepared to accept this amendment, I may well be tempted to test the opinion of the House. I beg to move.

--- Later in debate ---

[Baroness Masham of Ilton]

My Lords, I have my name to Amendment 12. I support what my noble friend Lady Morgan of Drefelin said.

The Bill could see vulnerable cancer patients and other seriously ill patients losing out on almost £500 per year if inflation rises. That is a great deal of money for people who are not working and who are ill. I hope that the Minister will give some hope that those vulnerable people will not suffer and that he will support this helpful amendment.

[Lord Forsyth of Drumlean]

My Lords—

[Lord Foulkes of Cumnock]

Oh!

[Lord Forsyth of Drumlean]

The noble Lord, Lord Foulkes, normally cheers when I get up to speak, but not on this occasion, perhaps because we have found something to disagree on.

I must congratulate my noble friend Lord Kirkwood on this very ingenious amendment. I suspect that he started from a position opposed to the Government’s proposals, knowing his long and distinguished record in supporting people on low incomes. I am sure that he would have preferred that the status quo had a rival—

[Lord Kirkwood of Kirkhope]

Since the noble Lord asked, let me tell him. I am looking him straight in the eye. I have voted for the Government all through this afternoon against my better judgment, but I say this to him: if any further cuts are introduced by the coalition Government for the rest of this Parliament, he can forget any support coming from my direction for the next two years.

[Lord Forsyth of Drumlean]

The noble Lord and I both have our crosses to bear in the coalition. I am grateful for his confirmation that he does not support the principle. This is just a very clever device to try to get us back to where we started from without making a commitment to spend money. The amendment states that the provisions in the Bill which limit the benefit increases to 1% can be set aside if inflation reaches 3%. That is for very good reasons. The noble Lord argues the case about people on low incomes and the effects of inflation. The noble Baronesses, Lady Morgan and Lady Masham, in their amendment, have highlighted the desperate impact that inflation has on cancer patients who are not working.

The best way to protect those people is to ensure that inflation does not rise to 3%. The idea that it is inevitable that inflation will rise to 3% is deeply damaging.

If the noble Lord, Lord Foulkes, wishes to interrupt, I will be happy to give way, but otherwise I would be grateful if he did not make remarks from a sedentary position, which is distracting me from my argument—which of course, was his intention.

The best way to protect people is not to have inflation. One thing that sets inflation running uncontrollably is people’s expectations of inflation. When the noble Lord makes a speech saying, “I think that inflation is going to be more than 3%”, people hear that and think, in their wage negotiations, “Lord Kirkwood says that it will be more than 3%; the Government say that it will be two and a bit per cent”. Expectations drive the inflation rate, and inflation is devastating for the poorest in our society and for people on fixed incomes.

Therefore, we need to follow a policy that will limit the possibility of large increases in inflation. That is where we have a problem. To do that, we must show that we have control of public expenditure and have plans in place that can be relied on.

If the amendment were accepted, anyone looking at the Government’s plans for financial responsibility over the next two years would say, “They have marked down that social security and benefit payments will be this, but, of course, because of Lord Kirkwood’s amendment we cannot rely on that because if inflation is above that figure, the Secretary of State will need to take a decision”. They will note that he will be taking a decision in the run-up to an election and will therefore draw conclusions about what the pressures on the Secretary of State might be.

The amendment drives a coach and horses through the Government’s finances for anyone looking at whether they can rely on the Government delivering.

[Baroness Hollis of Heigham]

Can the noble Lord help me? Is he arguing that the best way to protect people against inflation is to have no protection against inflation?

[Lord Forsyth of Drumlean]

Yes, got it in one. The one thing that we learnt in the 1970s was that indexation, like other palliatives, is absolutely disastrous, because it sets the ball rolling, which gets faster and faster with people chasing inflation. Of course that is exactly what I am arguing.

[Baroness Hollis of Heigham]

If the noble Lord follows that argument through, is he therefore saying that, should inflation happen, that is just tough luck, and the poor cannot not have the possibility of any protection from the Secretary of State doing what he would now do, which is to consider all the options in the circumstances?

[Lord Forsyth of Drumlean]

I have the highest regard and respect for the noble Baroness, Lady Hollis. She knows more about social security and understands the issues better than anyone else. I wish that she was on the Front Bench. If she was, she would be putting forward alternative proposals that might be more attractive and meet some of the points that are being considered, but she is not on the Front Bench and there are no alternative proposals.

We have to contain public expenditure not to within our means, because we are spending more than our means; the noble Lord, Lord McKenzie, pointed out that the Government are already borrowing and spending £200 billion more than was planned. I am simply arguing that if we continue like this the pound will continue to sink. The cost of energy, which, as the noble Lord, Lord Kirkwood pointed out, is a major cost for families, will go up. He supports windmills and other forms of energy generation that are the most expensive known to the planet and which are put on people’s bills without their knowledge as a tax and add to the pressure on these families. That is another example of where, if he is worried about poor households, he should abandon his attachment to windmills and other things that are raising energy costs and adding to inflation. The name of the game is to contain inflation by not having daft policies such as windmills and other energy policies. It is to act in a responsible way so that people will not decide that they do not wish to buy government debt, which is already a problem, and will not result in further pressure on the exchange rates.

I am sympathetic to the points that the noble Lord, Lord Kirkwood, has made and with which the noble Baronesses, Lady Morgan and Lady Masham, are concerned in respect of the people who are affected. The problem is that the remedy that they propose would make things much worse. It is not a good place to be. We would prefer not to have started from here, but it was Mr Gordon Brown who put us in this position, ably assisted by the noble Baroness, and we must sort this mess out. Clever as it is, this amendment is a smart attempt to get round the basic purpose of the Bill, which is fundamental to protecting people on low incomes.

[Lord Bates]

I support the noble Lord, Lord Forsyth, but I want to go one step further. He has dealt incredibly effectively with the measured arguments put forward by my noble friend Lord Kirkwood in Amendment 9, but it does not quite hit the interesting amendment in the names of the noble Baronesses, Lady Morgan and Lady Masham. I want to make a couple of points drawn from the Office for Budget Responsibility report looking at this Bill and the impact assessment.

Front and foremost are two things. The first is the control of inflation and the second is the creation of employment. They will help the poor more than anything else. If we fail to tackle the debt, the cost of borrowing will rise, as my noble friend Lord Forsyth has said. If the cost of borrowing rises, inflation will rise on the back of it. Therefore it follows that tackling the deficit is the best thing that can be done to help the poor. In table 2 on page 6 of its forecast, the OBR estimates that inflation will be: 2.6% in 2013-14; 2.2% in 2014-15; 2% in 2015-16; and 2% in 2016-17 and thereafter. It is clearly assessing that the culmination of the effect of these and other measures being taken is to move us towards a situation in which inflation is on a steadily downward course. That is the OBR’s assessment, which was used as the basis of the 2012 Autumn Budget Statement. As noble Lords have said, we will find out tomorrow where we stand vis-à-vis that.

Other elements need to be taken into account. We have the Low Pay Commission’s report coming up shortly. The Low Pay Commission provides a report that influences the minimum wage. The report was submitted at the end of February. I do not know whether my noble friends on the Front Bench have had sight of that recommendation, but it, too, provides a lock. Despite in previous incarnations being against the minimum wage, the Government have said that they support the minimum wage and have always accepted the recommendations of the Low Pay Commission to increase income as a result. Taking that together with the changes to universal credit that are deemed to be providing additional benefits to people estimated at £168 a month for 3 million families and the likely increase in tax thresholds and their impact on the salaries and incomes of the poorest in our society, it seems fair and reasonable, as the noble Baronesses, Lady Morgan and Lady Masham, have suggested, periodically to undertake a review. Post-implementation reviews normally take place three to five years after implementation.

We are talking about some of the most vulnerable. I believe that the position affecting the poorest in our society will not be as great as some people anticipate and that the situation with the combination of policies that I have outlined will lead to an increase, but as we are not having the annual uprating review, some periodic review of how this is working against projections of inflation and of the impact on the poorest in society would be sensible. I encourage my noble friends on the Front Bench to support it if possible. Should such a review take place, it should not need focus on the one narrow measure that has been the theme of this debate but should assess the wider impact on the poorest in society, taking into account the other measures—the pupil premium, NHS, the lid on fuel increases, the increase in personal allowances, the increase in the national minimum wage et cetera—which we are talking about. With that, I support the noble Baroness, but I am afraid not my noble friend Lord Kirkwood.

--- Later in debate ---

[Lord McKenzie of Luton]

My Lords, let me make it clear that we support each of these amendments. The request in the amendment in the name of the noble Baronesses, Lady Morgan of Drefelin and Lady Masham of Ilton, that there should be a review seems modest and straightforward. If the Government should seek to resist that, or a reasonable and clear alternative, I would be amazed.

The case is the same with the amendment of the noble Lord, Lord Kirkwood. As I understand the proposition, he is saying that should in any year the current expectations of inflation be in excess of 3%, which we currently expect to be the case, the 1% automatic uprating would not apply and there has to be an annual assessment, as happens at the moment. That assessment might lead to a 1% uprating, or to some other form of uprating, but there would not be the automatic application of 1%. Who knows what will happen to inflation? I do not predict that there will be a surge in inflation but, if there were to be, is any level of real cut in the standard of living of poor people acceptable to the Government? Is that what they are saying? They would be if they rejected this amendment.

[Lord Forsyth of Drumlean]

Would the noble Lord apply the same principle to pay in the public sector?

[Lord McKenzie of Luton]

We are talking about specific provisions in the Bill about the uprating of benefits. The noble Lord has worked quite hard to differentiate himself from the noble Lord, Lord Kirkwood, and his amendments. The suggestion that somehow having this provision in the Bill will fuel wage inflation across the land, fuel expectations up and down the country and bring the economy to a halt is, frankly, frivolous and a nonsense. The noble Lord knows that full well. He is an experienced parliamentarian and an able debater, but I do not believe that he did himself justice in the way he sought to pick away at the noble Lord’s amendment.

[Lord Forsyth of Drumlean]

I was asking the noble Lord a straightforward question. He is enunciating the principle that if inflation were at 3% or more, it would be necessary to abandon a position that held the increase in benefits to 1%. I am simply saying that if that is the Opposition’s view, is it also their view in respect of public sector pay? If inflation turned out to be much higher, would the same apply to people working in the public sector? If not, why not?

[Lord McKenzie of Luton]

My Lords, we are debating a different Bill. If the noble Lord wants to debate a proposition about public sector pay, let us have some propositions and we can consider that. The noble Lord knows full well that he is trying to lead the Opposition in a particular direction.

I come back to the point that the amendment of the noble Lord, Lord Kirkwood, is very straightforward. It just says that an automatic 1% uprating would not apply automatically if inflation reached a certain level. That seems entirely unobjectionable and I cannot see why the Government cannot accept it. If the Government do not accept it, they have to say what level of inflation, what level of real decrease in people’s circumstances, they would find acceptable, because that would be the consequence of rejecting the amendment. This is a very modest proposition. I really am surprised at the trouble that the Government are having with accepting it. I would hope at least that the noble Lord’s colleagues would stick with him on this issue as the arguments that we have heard against it are quite spurious.

Inequality: Income and Wealth

Lord Forsyth of Drumlean Excerpts

Monday 11th March 2013 Lords Chamber

[Lord Deighton]

With respect to the 1% of the top taxpayers, the first point I would make is that actually they are responsible for paying 24% of income tax. The top 10% pay just under 50% of income tax—I think it is 44%—so their contribution to our revenues is the greatest in proportion. As for the development of inequality since this Government came into office, the commonly accepted measures of income inequality have in fact decreased.

[Lord Forsyth of Drumlean]

My Lords, will my noble friend confirm that the substantial increase in the capital gains tax levied, which was forced through the coalition by the Liberals, has led to a dramatic reduction in the revenue from capital gains tax?

[Lord Deighton]

I thank my noble friend for that question. I am not aware of the initial revenue yields. I asked the department earlier, and it said that it did not break it down that way. My noble friend clearly alludes to the importance in tax management of understanding the ultimate yield on a tax, rather than simply assuming that when tax rates are changed people will continue to behave the same.

Taxation: Income Tax

Lord Forsyth of Drumlean Excerpts

Wednesday 6th March 2013 Lords Chamber

[Lord Newby]

My Lords, the living wage is one component in supporting the poor, and the Government have made it clear that they encourage people to use it. However, for many people who are poor the key thing is to get into work and, having got into work, to work the number of hours that are compatible with the family circumstances in which they find themselves. Particularly via the universal credit, we are taking steps to make sure that work always pays and that people are indeed encouraged to take up the maximum number of hours that are appropriate for them.

[Lord Forsyth of Drumlean]

My Lords, while congratulating the Government on raising the threshold at which people pay income tax—an ideal which was first put forward by my noble friend Lord Saatchi—perhaps I may just ask whether they have any plans to raise the threshold at which people pay national insurance. Many of the people to whom the noble Lord, Lord Greaves, referred are still paying national insurance at very high rates, and national insurance is a tax. Would we not be wise to merge national insurance and income tax so that people realise just how much is being taken out of their pay packets?

[Lord Newby]

My Lords, the Government do not have any plans to raise the threshold for national insurance simply because—as noble Lords will be aware—to do so would be extremely expensive. The Government looked at merging national insurance and income tax but have decided that they will not take that consideration any further forward for the course of this Parliament.

EU: Eurozone Financial Transaction Tax

Lord Forsyth of Drumlean Excerpts

Tuesday 5th March 2013 Lords Chamber

[Lord Newby]

My Lords, as I said in my original Answer, we are fully engaged in discussions going forward. If the FTT is introduced, it will have a number of impacts on the UK. The Government are in the process of assessing what those impacts might be.

[Lord Forsyth of Drumlean]

My Lords, can my noble friend tell us how much the European Commission expects the tax to raise? Will it not be pensioners and consumers who have to pay it?

[Lord Newby]

My Lords, the estimate that the Commission has produced is that the tax would raise €35 billion. It would not be raised from all financial institutions across the EU; it would be raised only from those established in countries which levy the tax. A tax such as this, which covers things like shares, trickles down through multifarious channels but, obviously, at the end of the day, a very large number of people end up paying a small amount towards it.

Economy: Rating Agencies

Lord Forsyth of Drumlean Excerpts

Wednesday 27th February 2013 Lords Chamber

[Lord Deighton]

I thank the noble Lord for those observations, which contain several of different questions. If you review Moody’s analysis of the UK economy you could not see a stronger recommendation of the Government’s policy of fiscal consolidation. I commend it to everybody as background to policy and why it is the appropriate one in these circumstances.

On the specific question about the impact of currency movements on the exposure of various lenders, my experience in those markets tells me that lenders manage their currency exposures very effectively and that the currency devaluation should not increase those particular exposures.

[Lord Forsyth of Drumlean]

Will my noble friend confirm that it is the same rating agencies that are apparently of such concern to the Opposition which told us that the junk collections of mortgages, which in part caused the financial crisis, were AAA-rated? Should we not look at what is happening in the real economy rather than at what rating agencies are saying about it? Is it not true that my right honourable friend the Chancellor of the Exchequer is presiding over a remarkable situation, given the shambles that he inherited from the previous Government?

[Lord Deighton]

As always, I thank my noble friend for his important observations. There are, again, several issues in there. First, he is absolutely right—Moody’s refers to this—that two things have caused this downgrade. The first is the sluggish growth of the global economy, which has slowed down the British economy; and the second is the very high levels of public and domestic debt, and the difficulty in driving those down.

On the second point, with respect to the credibility of the rating agencies, there are some very important issues surrounding that, particularly when one discusses complex securities such as the ones that we had in the mortgage-backed market. Frankly, with respect to the sovereign market, all the information used to determine credit assessments is perfectly visible to everyone, which is why the markets’ reaction to the downgrade on Friday was so measured.

Welfare Benefits Up-rating Bill

Lord Forsyth of Drumlean Excerpts

Monday 25th February 2013 Lords Chamber

[Baroness Afshar]

My Lords, I speak on behalf of the minorities and the moral economy of kin. For minorities who have been in this country for a very long time, it is the family who has given support and sustenance to those who are unemployed and suffering. That is normally done by people who are employed but in marginal jobs—hand-based employment such as catering—essentially by stretching the resources of the family unit in order to include the extended family.

Unfortunately, with the kind of cuts proposed at this stage, the extended resources of the family will no longer be able to help. My fear is that those of the younger generation who are likely to be serving in the restaurant with their dads or working with their mums by knitting or producing shirts and so on will now join the ranks of disaffected young people, and then be branded as home-made terrorists. It is a dangerous precedent. We really need to nurture the moral economy of kin because it is these families who offer support, but on this kind of income and with these kinds of cuts they will simply be unable to do so.

[Lord Forsyth of Drumlean]

My Lords, perhaps I may pick up on some points made by the noble Lord, Lord McKenzie. I have the highest respect for the noble Lord, Lord Low, and nothing would give me greater pleasure than to vote for the amendment. There is a problem, however, in that we cannot afford to vote for the amendment. The noble Baroness who has just spoken talked about cuts. We are not talking about cuts but about not having increases. It is true that there might be cuts because of inflation, but if we go down the road proposed by the noble Lord, Lord McKenzie, inflation will be even higher and the cuts will be more severe. It was Lord Callaghan who pointed out, as a Labour Prime Minister in the 1970s—sometimes I feel that we have gone back to the 1970s; even the Daleks made an appearance in Westminster last week—that inflation is the father and mother of unemployment.

It is really quite extraordinary for the noble Lord, Lord McKenzie, to make so much of the rating agency’s downrating of the UK from AAA status. I do not know whether he has read what the rating agency had to say about why that downrating was being made. It was because the agency believed that the Government would not be able to meet the targets that they had set, and which the Opposition are constantly urging us to abandon. The noble Lord talked about the impact of the sliding pound and of inflation, which is a consequence of not meeting these targets. On the idea that finding money out of thin air will not hurt the poorest hardest in the long term, because of the inflation that would be created and the impact it would have on the pound, the hard reality is that we simply cannot afford to do what the noble Lord, Lord Low, would ask of us.

It is the cheapest of cheap politics to keep going on about millionaires being given a subsidy. First, that assumes that the state is entitled to their money and that it can spend that money better than they can; and, secondly, that if they spend it by investing or buying goods it will not generate wealth and prosperity in the economy, while somehow a state bureaucracy involved in spending money and taking it by force through an Administration will get better value and growth. That is a delusion which we happily abandoned in the 1970s when we abandoned rates of income tax at 98% and discovered that the consequence of cutting taxes to 40% was that the rich ended up paying a higher proportion of tax than in the past. Already we are seeing that the proportion of tax paid by the very rich is falling and the proportion paid by the poorest is rising. That is not as a consequence of the recent measures made by my right honourable friend the Chancellor in his Budget but as a consequence of the politically inspired 50% tax, which the previous Government introduced as some kind of political gesture to try to create division between the parties.

We can all make speeches saying that we would like to have more money available for those who are poorest but if we were to follow the prescriptions of the noble Lord, Lord McKenzie, and his party—in so far as we can work out what their prescriptions are—the effect would be higher inflation, higher interest rates and higher unemployment, with those who are poorest in our country being the most disadvantaged. It would not be the rich or the people in the public sector but those who are unemployed, while the prospects for new jobs would be reduced.

I say to my noble friend that she is right to press ahead and, I hope, to reject this amendment. It is not because we do not care about those who are most vulnerable in our society but precisely because we do that we want an economic policy that will deliver the wealth that is necessary to pay the bills. The truth is that we are in this mess because the previous Labour Government spent money on welfare that was based on an unsustainable bubble. That is why we now have the problem. It is very regrettable that noble Lords opposite should seek to make party politics out of this issue while not acknowledging the very heavy burden of responsibility they carry for having brought this situation about and the real courage being shown by my right honourable friend the Secretary of State in bringing forward this Bill. It is trying to bring into effect a welfare system that will be within our means and will recognise the need to encourage those who have the greatest need.

[Baroness Meacher]

It is very fashionable to blame the previous Government for our predicament but does the noble Lord accept that the banks have to carry perhaps 90% of the burden of responsibility, and that the banking crisis started in the United States—not even in this country? In fact, if there was a weakness, it was in the degree of regulation. My understanding is that the previous Conservative Administration opposed even the level of regulation that this country had. This is therefore not a party political issue; it is about banking, and this country has been deeply wounded by the banking crisis.

The other question for the noble Lord is whether he accepts, as Lord Maynard Keynes argued rather powerfully, that if you are in a terrible state of recession the best way to get yourself out of it is to generate growth. That means that you should not be withdrawing demand from the economy in this incredibly irresponsible way. What the Government are doing is very worrying.

[Lord Forsyth of Drumlean]

I am most grateful to the noble Baroness. I disagree with the idea that leaving money, as Gladstone would have put it, to fructify in the pockets of the people is withdrawing money from the economy, and that somehow the state would spend that money more effectively.

As to her particular question about whether I accept that all this difficulty was caused by the banking crisis, no, I do not. I think that the banking crisis was caused by the monetary policy being pursued by the previous Government by targeting inflation. The noble Baroness seems surprised by this, but the fundamental causes of the financial crisis were the huge financial surpluses that were being built up—I hesitate to stray too far from the amendment—in China and the Middle East, which kept interest rates low, and an inflation-targeting policy being pursued by the Bank of England that meant that they were very low interest rates. As a result, the banks tried to go for yield. The banks were certainly at fault in devising packages that they thought would reduce risk and give a higher return, and it is certainly true that regulators such as the FSA should have been on to this.

However, the fundamental point is that while Labour were in charge they did nothing about that; indeed, they revelled in it. We were told that they had abolished boom and bust, and that they had come up with a new paradigm. That is why that Labour Government, even at the height of the boom, with huge revenues coming in and house prices and asset prices going through the roof, did nothing except collect the tax. Instead of putting the tax away for a rainy day, what did they do? They spent it on welfare that they could not afford, and when the boom collapsed there was a sudden gap in the market that my right honourable friend is now having to deal with. So let us not rewrite history here; let the Labour Party take responsibility for what it did in government.

The fact is that under both Governments we have been living beyond our means. We have been spending about 10% more than we earn, and we have been saving nothing. We need to save 10%. The consequence of that is that our living standards will fall unless we are able to create growth, and you do not create growth with the state taking more and more from the productive part of the private sector. According to the OECD, close to 50% of our GDP is being spent by the Government. We used to define communist countries as those where more than 50% of the state’s production was spent by the Government.

I say to my noble friend on the Front Bench that this is not an easy amendment to oppose—of course it is not—but she is absolutely right to do so because it is in the long-term interests of the most vulnerable people in our country that we stick to this policy and do not go further down the road that has brought us to this mess. If we travel down that road, it will mean that the hardship endured by the most vulnerable will be all the greater.

[Baroness Lister of Burtersett]

My Lords, I had not planned to speak to these amendments but I have been stung into doing so by the remarks of the noble Lord, Lord Forsyth. I am going to keep my powder dry for later amendments. First, he started by saying that this is not a cut. Of course it is. He then had to concede that if you do not uprate benefits in line with inflation, you are cutting benefits. Do not tell the mother who has to struggle that this is not a cut—it is.

Secondly, the noble Lord said that we cannot afford to uprate benefits in line with inflation. This is about choices—particularly, as the right reverend Prelate the Bishop of Leicester made clear at Second Reading, moral choices. We can afford to protect people living in poverty from inflation.

I will not make the contrast with millionaires because the noble Lord said that it was a cheap contrast. I will simply make the contrast with a policy of which the coalition Government are very proud—that of uprating tax allowances by more than inflation. As Gingerbread, I think, pointed out to us, this is the least effective way of targeting resources on people in poverty. A much more effective way of helping them is by inflation-proofing their benefits. There is a choice. The choice was made to increase tax allowances by more than inflation, which is of no help to people too poor to pay tax, including people in work too poor to pay tax; of minimal help to people on means-tested benefits, because they lose some of it; and of greatest help to higher-rate taxpayers. That was a choice. It was believed to be all right because we could afford it, but we cannot afford this.

[Lord Forsyth of Drumlean]

Is the noble Baroness not leaving out an important ingredient? The reason why that choice is made is because by cutting the tax burden and encouraging people to save to invest and to work harder you create the wealth that is needed to create the welfare state. That is the difference. The noble Baroness seems to think that it is a fixed cake and that whatever happens it is impossible to increase the size of the cake and thereby make more money available for those in greatest need.

[Baroness Lister of Burtersett]

I do not want to get into a great debate about the economics of this, but are people in low-paid work who are getting tax credits not contributing to the wealth of the country in the same way? They are affected just as much as people on so-called welfare, which I prefer to call social security. The economic case was made by the noble Lord, Lord Low, and the noble Baroness, Lady Meacher. This is not about the state taking money out of the productive economy and somehow filing it away somewhere; this is about the state redistributing money to people who are more likely to spend it and to spend it in local communities, thereby helping to boost economic growth at the time we need it. I do not believe there is an economic case. I do not accept the crocodile tears that are being shed by someone who is prepared to support a Bill that will hurt people in poverty the most.

--- Later in debate ---

[Lord Newby]

My Lords, we and the noble Lord will simply have to agree to differ on that. The noble Lord, Lord McKenzie, repeated some of the arguments made about millionaires and the huge tax boost that they allegedly got. He did not mention that the Budget changes announced last year affecting millionaires and those on very substantial means would generate five times as much income as the 45p tax rate. It is simply untrue to claim that the Budget measures last year mean that millionaires as a group are paying, and will be paying, less tax this year and next than they have in the past. Equally, it is simplistic and false to argue that there is a sort of mechanical problem with HMRC, or an inability of HMRC to collect money from millionaires. Millionaires are extremely clever at avoiding tax. All the evidence from the Office for Budget Responsibility and the work that it did demonstrates why the 50p tax rate simply would not generate anything like the amount of money that was originally envisaged. Indeed, it said that it was quite possible that the 50p tax rate would mean less money being collected than would otherwise be the case.

[Lord Forsyth of Drumlean]

I am most grateful to my noble friend. Have we not had a spectacular example this very day of how cutting taxes can result in huge increases in revenue? The Chancellor’s decision to reverse his plan to increase the tax on the oil industry has resulted in the £25 billion of investment reported today, with huge implications for future revenue and employment.

[Lord Newby]

My Lords, that is an extremely good point. It demonstrates that there is no simplistic relationship between tax rates and the amount of tax collected. In some cases there is and in some there is not. The trick of government is to understand the difference between the two. Frankly, I do not believe that the Opposition have reached that point.

The noble Lord also talked about tax avoidance and conflated wealthy people avoiding tax and the situation relating to Starbucks. On the question of Starbucks and profit shifting, the Government, along with the French and Germans, have started a process with the OECD—something that the previous Government never did—to change the basic global accounting rules so that we can get to the bottom of corporations that are shifting their profits to low-tax jurisdictions. This holds the prospect of being successful in the medium term, but whatever it does it will have no impact on the effectiveness of the Government’s treatment of individuals. As we have debated many times in recent months at Question Time, the new focus that HMRC is putting on going after people who are avoiding and evading tax is generating many billions of pounds more in income. While the previous Government cut the number of HMRC people working on compliance by 10,000, this Government have already increased it by 2,500 and will increase it further.

I was very taken by the comments of the noble Baroness, Lady Afshar, on extended families. In the past year, employment has increased by more than 500,000 and I am unaware of any differential effect on the minority ethnic communities such that small firms in those communities have been shedding jobs disproportionately. Perhaps they have, but I have not seen any evidence. One of the more welcome developments of the past year, which has surprised a lot of commentators, is that hundreds of thousands more people are in work, and this increase in employment has taken place disproportionately in regions other than London and the south-east. There has been a slight rebalancing of employment prospects, and regions such as Yorkshire and the Humber, which I know, have done remarkably well in difficult economic times. I completely support the noble Baroness’s view about the moral economy of kin, but I question whether what has happened in recent months has undermined it to the extent that she suggested.

Finally, the noble Lord, Lord Bach, implied—very gently; I know that he did not really mean it—that the Government might have influenced what amendments were considered to be in scope of the Bill. He knows, as we all know, that the Government have no power to determine what is in scope of the Bill.

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[Lord Forsyth of Drumlean]

I am most grateful to the noble Lord. I am a bit puzzled because he said in answer to my noble friend Lord Bates that we were discussing the policies of this Government, not the last one. He is a little selective. However, given what he has described—an economy which is not growing at all—how on earth does he expect to fund the increase in benefits that he says he is in favour of? That is the crux of the matter. It is not about where we would like to be or how the world might be different, the fact is that the economy is not growing. If the economy is not growing, how is it possible to expand the welfare budget?

[Lord McKenzie of Luton]

I was talking about the last Labour Government in response to points that the noble Lord himself made earlier on. On growth, I would outline that there is one particular proposal that we in the Labour Party have been working on—the long-term jobs guarantee, and we have explained how it could be funded by, yes, restricting tax relief for the wealthiest in terms of pension contributions. It would get people into work, get them spending, and take them off benefits and welfare support. That is the way to do it. Perhaps I can turn this back to the noble Lord. The approach the Government have undertaken has simply failed to deliver growth; it is not happening. Everyone knows that and it does not need me to expound on it. The Government have failed to deliver.

It is because of that that we are challenging this burden of a real-terms cut. The noble Lord said that it is not a cut, but of course it is a cut in real terms because it is a cut in people’s living standards. It is also a cut that we do not know the magnitude of over the life of this Bill, which is why we object to it so strongly. We do not know what the rate of inflation is going to be in two years’ time. We can speculate on the impact of the downgrading of our credit rating, but getting growth in the economy and thus providing more employment is certainly more likely to impact in a positive way. That is what we would argue for and plan for. It is making the people at the bottom end of the income scale pay for the failure of this Government that we object to. This Bill is the wrong way to deal with benefits uprating. There is a tried and tested way that has operated for many years which is open to the Government rather than locking it down and forcing people into a real-terms cut in their living standards.

I suspect that we will have another round of this argument on Report because it is the fundamental part of our objection to the Bill, but in the mean time, I beg leave to withdraw the amendment.

Banking: LIBOR and EURIBOR

Lord Forsyth of Drumlean Excerpts

Tuesday 12th February 2013 Lords Chamber

[Lord Deighton]

With respect to the noble Lord’s question on whether the attempt was successful, I think that is actually the issue. The FSA’s review found that it was unclear whether the manipulation did result in a change of rates, so that is an open question. On the degree of co-operation shown by the firms under investigation, I understand that the firms were entirely co-operative. Of course, they are all under new management and, effectively, are the new brooms trying to sweep clean. I am afraid that I cannot layer together the timing of that co-operation vis-à-vis the application of the US penalties, but I am happy to look into that and get back to the noble Lord.

[Lord Forsyth of Drumlean]

Are the Government comfortable with very senior executives in the FSA, who are after all responsible for deciding those penalties, being able to move rapidly into employment with the banks at seven-figure salaries?

Government: Economic Policies

Lord Forsyth of Drumlean Excerpts

Wednesday 30th January 2013 Lords Chamber

[Lord Deighton]

I agree with the implicit statement of the noble Lord that the economy is taking a long time to recover. That is because of the depth of the problems that we confront and the global nature of the economic recession with which we are dealing. There is only one effective solution to that, which is to restore market credibility. The only way in which we can do that is to ensure that our finances are absolutely stable. The alternative strategy of borrowing more to increase demand has already been proven, given the state that we got into, not to work. You do not borrow your way out of a recession which is caused by a deficit created by borrowing too much.

[Lord Forsyth of Drumlean]

Will my noble friend confirm that the reason the Government are facing such terrible economic difficulties is because at the height of the boom created by Gordon Brown, that Government continued to borrow? As a measure of their economic competence, they sold gold at the bottom of the market, which is affectionately known in the City as the “Brown bottom”.

[Lord Deighton]

I thank my noble friend for that excellent contribution. I will not comment on the timing of selling the gold. Hitting a market high is tough to do. I will refer to what I would call the “scissors of doom”, which is the graph I was first shown when I entered the Treasury, which shows that between 2008 and 2010 spending was heading north at a rapid rate while receipts were heading south at an equally rapid rate, a situation that we are now trying to recover through this period of fiscal consolidation.

Economy: Growth

Lord Forsyth of Drumlean Excerpts

Tuesday 29th January 2013 Lords Chamber

[Lord Eatwell]

My Lords, it is a particular pleasure for me to welcome the noble Lord, Lord Deighton, to the Dispatch Box and to congratulate him on his appointment to the Treasury team. It is always a special delight to see one’s former pupils do so well. When I marked his economic essays back in the mid-1970s, I never imagined—nor do I suppose did he—that we would find ourselves in this situation. I think it is appropriate to report that his essays were typically examples of excellent economic analysis, and I hope and believe that he will put those skills to good use in re-educating the Treasury. It certainly needs it.

Today, he has been placed in an extraordinarily difficult position. It is rather difficult to defend the Government’s growth record when there is none—growth, that is. The latest figures are truly awful, with no growth at all in 2012, despite the heroic efforts of the noble Lord, Lord Deighton, and his team at the Olympics.

Taking the longer view, since the Government’s spending review in the fourth quarter of 2010, when it might be said that coalition policies replaced Labour policies, the UK economy has grown by just 0.4% over that entire period. Over the same period, the USA has grown by 4.2%, Germany by 3.6% and France by 1.5%. Accordingly, while the UK economy is now still over 3% below its pre-crisis peak, the USA is 2.5% above and Germany is 2% above.

The question before us today is: in the situation in which we find ourselves, what is to be done? How can we get Britain back on to a secure growth path? Should we follow the recommendations of the Chancellor of the Exchequer that we stick with austerity, accepting his declaration that “Britain is on the right path”? Let us call this plan A. Or should we adopt plan B, following the advice of Adam Posen, former member of the Monetary Policy Committee, and particularly of Olivier Blanchard, chief economist of the IMF, who said last week,

“if things look bad at the beginning of 2013—which they do—then there should be a reassessment of fiscal policy … We think that slower fiscal consolidation in some form may well be appropriate”.

That is the IMF view on Britain.

The answer to our question, “What do we do?”—the fundamental issue in this debate—rests on a consideration of three issues. First, how did the Government get into this mess and are they tackling it in the best way? Secondly, what is necessary to restore the UK economy to growth? Thirdly, what is there to prevent us following this path of restoration?

So, first, how did we get into this mess? As the noble Lord said, the Government inherited the terrible economic consequences of the international financial crisis—everyone agrees about that. These consequences were and are particularly severe for a country as dependent on financial services as we are. But then the crucial question is: in the past two and a half years, have the coalition’s policies made things better or worse?

The previous Chancellor, my right honourable friend Alistair Darling, had been battling the crisis since 2008, and by the spring of 2010 he had succeeded in beginning to turn things around. Recovery was under way at a similar rate to that in the US and Germany, so that George Osborne inherited an economy growing at an annual rate in excess of 2%. He killed that recovery stone dead. He destroyed business confidence by preaching the coalition dogma of austerity and by foolish and demeaning comparisons with the plight of Greece and other eurozone countries without their own currency and exchange rate; he slashed public investment so that in the past three years the Government have spent £12.8 billion less in capital investment than Alistair Darling had planned; and, with savage glee, the coalition set about shrinking the state and impoverishing the poor. This is all justified in terms of the Tory manifesto commitment to eliminate the deficit in one Parliament—a commitment, by the way, which will not be kept, for the deficit is not falling.

Recent figures published by the Office for National Statistics show that public sector net borrowing in the first nine months of fiscal 2012-13 was about £107 billion compared with £99 billion in the same period last year—a rise of 7.3%. I repeat: the deficit is over 7% up on the equivalent period last year. So the answer to the first question is that the coalition inherited a very difficult but recovering economic situation and proceeded to make it much, much worse.

What should be done to turn the position around again and to set the economy on a new growth path or, to put the question in a more practical fashion, how can businesses be encouraged to invest? Firms invest because they are reasonably confident in the future demand for their products. Without demand, if they are shackled by a framework of fiscal discipline, as referred to by the noble Lord, it does not matter how much cheap money there is, as no one will invest. That is why monetary policy is not working. Interest rates can go no lower and the first positive announcement effect of quantitative easing has now worn off. Quantitative easing may be inflating asset prices and ruining pension funds but cheap money will not encourage investment when the Government are intent on slowing the growth of demand.

However, if there is a prospect of growing demand then, to invest, firms need finance and access to the very best skills and technologies to secure markets in a competitive world. Demand is the key to making all the measures that the noble Lord referred to as his fourth pillar work.

That is why my right honourable friend Ed Balls has proposed a temporary cut in VAT to boost family incomes, together with the boost to demand and capacity that would result from bringing forward infrastructure investment, including building thousands of affordable homes. Enhanced demand prospects would then be underpinned by a British investment bank to boost lending to small businesses, complementing fundamental regulatory reform of the banks. To sustain confidence there should be a compulsory jobs guarantee for the long-term unemployed and, further up the employment chain, investment in skills and in transformational science and technology. That is plan B.

Why cannot this be done? “Because”, cry the coalition, “it’s a policy for borrowing more when debt is the problem”, and we heard a similar statement from the noble Lord today. But hang on, at the moment, as we all know to our cost, spending cuts are resulting in a growing deficit. How can this be happening? The IMF has provided the answer and it, at least, has acknowledged its earlier mistaken commitment to austerity.

The answer lies in the relationship between changes in spending and the overall performance of the economy. This is measured by what, in the economics jargon that the noble Lord and I used to discuss, is called the multiplier. If a cut in government spending of, say, £2 billion results, for whatever reason, in a fall of output of just £1 billion, then the multiplier is a half. That is what the IMF believed the multiplier to be back in 2009. The share of taxes in output is about 40%, so if government spending is cut by £2 billion and output falls by £1 billion, tax revenues fall by about £400 million. The fall in tax revenues is much less than the cut in spending, and so the deficit falls by £1.6 billion. That was the policy that the Government thought they were implementing.

However, what if the multiplier happens to be bigger than that? Supposing that it is as large as 2.5, the cut in spending results in a fall in tax revenue of exactly the same amount. You can go on cutting taxes until the cows come home and there will be no change in the deficit at all. All that will happen is that the economy will be driven further and further into the mire of depression.

In acknowledging a previous error, the IMF estimated the multiplier to be a bit less than two, so a £2 billion cut in government spending will drive the economy down by about £4 billion and, when cuts in revenue are taken into account, the deficit will fall by only £400 million. Throw in a depressed European Union and you arrive at our current miserable situation: ever bigger cuts and a growing deficit. But the good news is that what goes down can also go up. What if government spending is increased by £2 billion and the multiplier, optimistically, is 2.5? The economy then grows by £5 billion and the increase in tax revenues pays for the extra spending; there is no extra borrowing at all. I repeat: increased spending results in no extra net borrowing. Plan B is a strategy to cut government spending. And there is more. The government cuts—particularly those disastrous cuts in government investment—not only reduce output now by cutting demand; as the OBR has pointed out, they also cut future output by reducing the real productive capacity of the economy.

[Lord Forsyth of Drumlean]

My Lords, I am a simple lad. Can the noble Lord tell me what the difference is between his party’s policy and that of the government Front Bench? He gave the figure of £2 billion as the extra borrowing and the extra expenditure that would be required. In quantitative terms, what separates the Opposition from the Government? How much money are we talking about?

[Lord Eatwell]

The figure of £2 billion was purely for illustrative purposes; it was a simple number. I thought that people could do the arithmetic in their heads. The issue is directly whether we continue with a policy of cutting government expenditure or whether we are committed to an increase in expenditure, particularly on infrastructure. Your Lordships will note that the noble Lord did not say that his infrastructure plans fell outside the tight vice of austerity policy. That vice must be unwound. That is what I am talking about today.

As I was saying, there is more to it than that. As the OBR has pointed out, government cuts in investment cut future output by reducing the real productive capacity of the economy. This long-term loss of output brings with it a long-term reduction in tax revenue, in addition to the medium-term effect that I have just outlined. In other words, the Government are not just failing to cut the deficit now; they are increasing deficits for years to come. By contrast, if the IMF is right, the measures proposed by my right honourable friend will be substantially self-financing in the medium term and will stimulate tax revenues in excess of spending in the longer term. This point has also been argued by the Harvard professor and former US Treasury Secretary, Larry Summers.

Before we sign up to plan B, however, another issue must be confronted. Today, any Government’s finances can be devastated by a loss of confidence in the international bond markets. The noble Lord referred to this. After a particularly violent example of sovereign bond market hysteria, James Carville, the political adviser to President Clinton, famously remarked,

“I used to think if there was reincarnation, I wanted to come back as the President or the Pope … But now I want to come back as the bond market. You can intimidate everybody”.

Well, the bond market certainly seems to have intimidated the coalition. Whenever its destructive policies are challenged, it argues that unless the vice on Britain is tightened, the financial markets will lose confidence, interest rates will rise and any prospect of recovery will be destroyed.

There are three things wrong with that argument. First, no one is suggesting a spending spree. Plan B is a cautious expansion to begin the task of building the foundations for growth. Secondly, it is austerity that is now undermining market confidence. All three of the main credit rating agencies—Standard & Poor’s, Moody’s and Fitch—have put Britain on “negative outlook”, citing concerns over the weak recovery and the public finances.

Thirdly, let us consider the experience of the United States, which lost its AAA rating last year. Would you rather have our AAA rating and zero growth or the lower US rating and 3% growth in the last quarter? I know which I would prefer.

The noble Lord, Lord Deighton, outlined in his speech a number of desirable measures that the Government can take to help to build productive capacity—the structural measures to which he devoted the majority of his speech. However, the Chancellor’s commitment to cutting demand and shrinking the state—less Bullingdon Club, more Tea Party—is eliminating any significant impact of those worthy measures. The Government’s attempt to stimulate growth has been a failure; the Government’s attempt to cut the deficit is a failure; and, if informed predictions are correct, even the Government’s attempts to preserve Britain’s AAA rating in the markets will prove to be a failure.

The coalition is now responsible for the longest slump in the British economy in the past century—longer than the great depression—yet last week George Osborne said something truly chilling. He said:

“We can either run away from these problems or we can confront them and I am determined to confront them”.

What is it in the word “failure” that George Osborne does not understand? For the sake of this country’s economy, it is time for him to run away. He is the living embodiment of plan A and must accept responsibility for its failure. Perhaps I may suggest that an excellent replacement as Chancellor would be my former pupil, the noble Lord, Lord Deighton.

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[Lord Forsyth of Drumlean]

My Lords, it is a pleasure to follow the noble Lord, Lord Mitchell. I just wonder whether he is a little overenthusiastic in his belief in the Government’s ability to pick winners, especially in the IT sector. As I recall, billions were lost in the health service and elsewhere through IT projects that were not properly sourced and not subject to the disciplines of the marketplace—projects that arise from people spending other people’s money. It is also a great pleasure to welcome the noble Lord, Lord Deighton, to the Front Bench.

I have been surprised that, so far in the debate, people have concentrated on the deficit rather than the debt. The noble Lord’s predecessor, the noble Lord, Lord Sassoon—whom we miss so much—was subject to regular questioning from me, asking why we continue to refer to reducing the deficit and not the debt, when, of course, the deficit is simply the rate at which the debt is increasing. I never got a satisfactory answer to that. Therefore I ask the noble Lord, in briefing himself into his department, to look at the ComRes ITV poll that was carried out just before Christmas—which may have got lost in the tinsel and bright lights of the Christmas period—where people were asked whether they thought that over the course of this Parliament the Government were going to increase the debt by £600 billion, reduce it by £600 billion, or leave it much as it is. Only 6% got the right answer, which is that the debt will increase by £600 billion. I regard that as a really serious problem, because if you are asking people in the country to make sacrifices and to realise that Governments face difficult choices, first you have to make them aware of the extent of the problem. I really do not think it helps for politicians—from whichever party—to shy away from explaining just how serious a problem we have.

The problem, in short, is that the state is growing and the economy is shrinking. The latest OECD figures show that state spending has now gone up to 49% of our GDP. That is an extraordinary amount. I used to define communist or socialist states as states where the Government spent 50% of the GDP. In the year 2000, when Gordon Brown was Chancellor of the Exchequer, the Government spent 37% of GDP. I am sorry that the noble Lord who said that it is ridiculous to talk about a massive Keynesian boom is not in his place, because I must point out that there has been an astronomical increase in the share of our GDP that is being spent by the Government. Out there in the country, real wages and living standards are falling. The first thing that we have to explain is that we have been living beyond our means. We have been spending about 10% more than we earn and we have been saving nothing. We need to save about 10%. Now 10 plus 10 is 20%, so to put that right, living standards are going to fall by 20% unless we can get growth. It should come as no surprise that this has come about.

The national debt is now 70% and rising. It rose by £15 billion last month alone. I know that we are all supposed to take the line that the Chancellor has cut the deficit by 25%, but the truth is that he met the target last year only by putting in Billy Bunter's postal order, which is the £3.5 billion that will come from the 4G spectrum sale—money that we do not have now and will come around only once—and by throwing in the proceeds from the interest on the bonds that have been purchased by the Bank of England printing money.

We are engaged in a completely new scheme of quantitative easing, which has been done on a stupendous scale. We are now relying on the interest on that money that we have created to say that we are closing the debt cycle. I am profoundly concerned by that. Every time I ask an economist or someone I respect about this, I find it very difficult to get the kind of reassurance to which the country is entitled.

On the Government's policy, if you ask a Minister what they think will happen to the growth in the economy in the next 12 months, they will say, “We are not responsible for that. We have an independent body called the OBR”. But the OBR has been consistently wrong in all its forecasts. My noble friend Lord Lamont said quite rightly that all forecasters are consistently wrong. But it is worrying to say the least that this independent body that Ministers now rely on has been so far off the mark.

The truth is that the Government are stuck in a Bermuda Triangle. We have low growth, which means that the Government cannot make cuts in spending, and we have high spending, which is preventing us from getting the growth that we need. People may have forgotten this, but much is due to the efforts that were made by my noble friends Lord Lamont and Lord Baker, my noble and learned friend Lord Howe and others in the 1980s in making supply-side reforms and changes to the trade union law; the changes to our labour market policies. That is why employment has not gone up in this dreadful recession. Workers are now able to make arrangements with their employers to be flexible in the teeth of economic adversity.

The Government have made some mistakes, and we should admit to those mistakes. The noble Lord, Lord Eatwell, sent me a note to say that he had to leave the Chamber so I know that he will read this in Hansard, but it was sheer bare-faced cheek for him to argue for capital expenditure, which is right, and against the Government’s capital expenditure cuts, when the mistake that the Government made was to implement Alistair Darling's cuts in capital expenditure but actually reduce what was planned by Alistair Darling. The point is well made. Capital spending is required and we need further supply-side changes.

My noble friend Lord Wolfson made the key point in this debate. You have to look at the return on the money, and, on the whole, Governments are not very good at picking winners. Therefore, to choose a well-known liberal's favourite phrase, if you leave the money in the pockets of the people to fructify, you will get far more growth and far more for your money than if it is decided by committees in Whitehall with one eye to the next election. An example of that is this high-speed train. The high-speed train is the ideal political project. It is absolutely fantastic. It enables a Government to say that they are spending a large amount on infrastructure. It has a visionary appeal about it. And, of course, the planning, the implementation and the execution are so far ahead, you do not have to spend a single penny on it. In doing so, it creates all kinds of difficulties for the local economy and the blighting of property and so on. I would rather see the money being spent now on improving our transport structure and looking, as my noble friend Lord Wolfson said, at issues like road pricing and others that will help to make the changes necessary to get our economy to grow.

Again and again we hear complaints from both sides of this House about the banks not lending money to small businesses. I want to ask my noble friend, who I know has a background in banking and will be turning a fresh eye to this matter: how are the banks supposed to lend money to small businesses when at the same time they are being asked to increase the amount of capital that they have in order to support the lending that they have got? How are the banks supposed to find the money to lend to new businesses when they are being asked at the same time not to foreclose on mortgages and to try and keep businesses going? How are the banks supposed to find the money when there are companies—many of them now—substantial public companies, zombie companies, that are simply kept alive by low interest rates and by the banks not wishing to consolidate the loans on their balance sheets.

Of course, we are very conscious of the banking crisis and the impact that it had on our economy, but are we now not in danger of fighting the last war? Should we not be adopting a counter-cyclical approach to the capital requirements on banks in order to solve the problem? Frankly, producing lots of government schemes is not the answer. Better to have banks making commercial decisions with the balance sheet flexibility to be able to lend to these small businesses. This was a point that my noble friend Lord Lamont touched upon in his excellent speech.

How are the banks supposed to operate when the regulators, as a regulatory requirement, are requiring them to take Government gilts? We all know what is going to happen to Government gilts as the interest rates go up and quantitative easing unwinds. What is going to happen then to the losses being made as a result?

The reason that we are becalmed as a country is because the tax burden has become unbearably high. I am not here making a plea on behalf of people who pay high marginal rates of tax. If you earn between £8,105 and £42,475, taking the income tax and the national insurance payments that you and your employer has to pay, it is no less than 40.25% of earnings. Is it any wonder that we see so many part-time jobs, not full-time jobs? The costs of labour are unbearably high because of the burden of taxation.

For those on the other side who say it is all about tax dodgers and finding rich people, the top 1% of taxpayers now provide 24% of all the income tax but only 10.8% of the income. That is why the tax burden is now hitting people on low incomes and hitting them hard.

Indeed, I had the pleasure of chairing the tax commission for the Chancellor while we were in opposition. I remember that we agreed that we needed lower, fairer, flatter, simpler taxes. What are we doing? According to the TaxPayers’ Alliance—an excellent body—we have created 299 separate tax increases and 119 reductions. Whatever happened to that great crusade to have a simpler, flatter, fairer tax system? I tell you this: if we do that, the revenues will go up and the deficit will go down.

I welcome the rise in thresholds. The Liberals claim the credit as their policy. I see my noble friend is nodding with enthusiasm. I refer him to the speeches made while we were on the Benches opposite by the noble Lord, Lord Saatchi. It was also one of our recommendations in the tax commission report in 2006. My cautious right honourable friend the Chancellor felt that our programme of tax changes, which would have amounted to £25 billion, was more than could possibly be afforded in a Parliament where borrowing now goes up by £15 billion every month.

On quantitative easing, I would like my noble friend to explain exactly how it will be unwound. The Bank of England made gains on the gilts which have been bought through this process of about £60 billion a year ago. What is the value today? What will happen when interest rates go up? How will that gap be closed?

My noble friend Lord Wolfson is a grand and successful retailer and I echo what he said about planning. Perhaps the House will allow me one indulgence. My eldest daughter has just started her own business and opened a shop on the King’s Road in the worst possible circumstances of recession. Kensington and Chelsea is a Tory council but it took eight weeks to give her planning permission to put her name above the door—eight weeks while she was unable to trade and while it charged her rates for the privilege of waiting on it to give planning permission. It should be utterly impossible to operate in this way in the difficult circumstances that we have in the marketplace now. We have heard from my noble friend Lord Wolfson of the experiences of big businesses. At least he will have some clever people in his department who will be able to take on the planners. If you are setting up your own business, there is only you. In all the speeches we make about deregulation and supply side reforms, let us get down to the detail that is preventing businesses expanding and growing.

I have said that the economy appears to be becalmed. If you are becalmed, you need a wind of change, and that will come from reducing costs to businesses and reducing costly regulation. I have some sympathy with what the noble Lord said about reducing the cost of national insurance. We should stop thinking of new schemes that make life more difficult for business, such as changing the rules on paternity leave or introducing 1% pension schemes. I read in today’s Times that all businesses are to be asked to produce information on the ethnicity of their employees when they want to be out there selling to customers and winning exports.

What is going on in this country when, since 2008, our currency has been depreciating and our exports have gone up by 1% while exports in Germany, France and Holland have gone up by 9%? What is going on? Why are we not more successful in our export efforts?

On energy costs, what are we thinking of? By adding to the cost of energy on business, all we are doing is importing carbon from China, and China is lending the money to enable us to run a deficit while our businesses are disadvantaged as a result.

[Lord Lea of Crondall]

The noble Lord mentioned that we are devaluing the pound but nothing is happening. Why is that? Does he think that devaluation no longer works?

[Lord Forsyth of Drumlean]

I have been saying for the past 15 minutes that we need to create an environment in which our businesses can go out and sell and are encouraged to do so. I was not making a particular point about devaluation: I was saying that we are more competitive as a result of the falling value of the pound relative to other currencies.

To conclude, my advice to my noble friend is to say to his right honourable friend the Chancellor of the Exchequer that no U-turn is necessary but a touch on the tiller is required.

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[Lord Lang of Monkton]

My Lords, it is a pleasure to follow the noble Lord, Lord Barnett, who has often been a distinguished participant in these economic debates, even though I certainly disagree with what seemed to be the central thrust of his argument today, as so often in the past. Like other noble friends, I welcome my noble friend Lord Deighton to the Front Bench and wish him all success. I thought his opening speech was crisp and lucid with a number of very good fours to the boundary.

Before I go further I should like to declare my interests as per the register, with particular reference to Marsh & McLennan Companies Inc, which has a subsidiary by the name of Mercer. Mercer is heavily involved in pensions and I hope to say a word about pensions in the course of my remarks. However, I have had no input from Mercer over this speech and indeed, it does not know that I am making it, which may cause it some concern.

My first point is that the whole debate of austerity versus growth is completely facile and futile. It is totally misguided. The distinction is spurious because austerity is fundamentally a growth policy. It is at the core of our economic management. Unless we reduce the deficit and tackle the debt, confidence will fall, interest rates will rise and the crisis that we have inherited and are emerging from will return.

Like my noble friend Lord Howell, I will not enter into the sterile argument on which the Opposition seem to be salivating about one quarter’s provisional figures on the deficit. For the past year we have been flat-lining—the figures add up to zero. They may be adjusted more favourably once the fourth quarter is studied further. However, it is perfectly normal, after a serious recession, that there is an early bounce back and then a period of flat-lining or even a further fall. It has gone on longer in this case because we inherited a bigger crisis. Our banks are constipated. The continuing euro crisis all last year affected both confidence and our markets. In passing, oil accounted for 0.2% of the deficit in the fourth quarter because production has been substantially lowered, mainly as a result of maintenance programmes which are now being completed. Therefore we may feel a compensating bounce back in the next and subsequent quarters.

I think that GDP is really only one measure of performance and not a particularly reliable one. Here I again agree with my noble friend Lord Howell. However, it is one on which there are grounds for cautious optimism. Some City forecasts expect growth of 1% this year, rising possibly to 1.5% towards the end of the year. That is slower than the United States but faster and higher than the eurozone. Employment, not much mentioned from the Benches opposite today, already gives grounds to support that theory. Indeed, even between September and November, in the fourth quarter, there was an increase of 113,000 jobs. Another indicator, the savings ratio, is now around 7.5% which is higher than at any time since 1997, so the private sector seems to support a tight fiscal policy, although ironically that may in fact slow growth a bit when coming from the private sector. However, with real disposable incomes up by more than 2%, there is now the beginning of empowerment of the housing sector and the private sector generally. The Funding for Lending scheme is widely supported by the banking sector. It is helping to reduce banks’ funding costs and in the past two or three months there has generally been a sharp rise in credit availability, not least with £50 billion worth of guarantees for infrastructure projects.

Standing firm on our deficit reduction targets is absolutely vital but as progress is made—it is already being made with the deficit down from more than 11% to less than 8%—gradually some leeway will emerge and gradually new policies will be developed. That is as it should be. It does not undermine plan A. It simply builds on the progress that plan A will be delivering. I particularly welcome the way in which my right honourable friend the Chancellor has advanced his policies in reducing corporation tax. At long last we are becoming competitive there and I think that will reap dramatic and relatively early benefits to us —the Laffer curve will kick in. There has been a massive rise in the tax threshold for the low-paid, taking 24 million people out of tax. That is a very valuable growth policy because the money released back into the private sector recycles very quickly.

The focus by many commentators on our austerity programme is actually somewhat misplaced. There is a view among commentators, including those of the IMF, that the impact of tax rises and spending cuts, necessary for other obvious reasons, does not impose a major drag on growth. Other factors do come into play. I believe that lack of credit and liquidity are very serious ones. They are the real problem. Banks, to a unique degree in the United Kingdom, were massively overleveraged and underregulated for the first decade of this century. That was the distinguishing feature of the United Kingdom’s crisis. As they struggle to retrench, their lending is paralysed. They have also neutralised any benefit that quantitative easing might have delivered because they hoard the resources that it has delivered to them instead of getting them out into the economy.

The World Economic Forum competitiveness table shows the United Kingdom climbing to eighth position from the 13th that it occupied under the previous Government. However, overall productivity has still not recovered fully from the decline of those years. In part, I think this is caused by the chilling effect of banks not feeling able to force the issue on their huge portfolios of exposed loans because to crystallise them would severely affect their own balance sheets, as my noble friend Lord Forsyth said. Therefore, those loans are stuck in damaged and unproductive companies instead of being directed to new, more viable growth opportunities. Lack of credit is still a huge brake on growth.

There is another serious problem that many companies face. Quantitative easing has driven down yields on gilts which company pension schemes are obliged to hold in substantial quantities. As a result, the Pension Insurance Corporation tells us that since quantitative easing began British companies have had to pump an extra £150 billion into their pension schemes, denying themselves the use of that money and, incidentally, denying the Treasury some £30 billion in lost taxes.

My noble friend spoke of the need for structural change to rebalance our economy and revive the manufacturing sector. I welcome that very much and have a suggestion to make in the field of pensions. I was glad to hear my right honourable friend the Chancellor say in the Autumn Statement that the Government are determined to ensure that defined pensions regulation does not act as a brake on investment and growth. That is a very welcome chink of light but I would like to hear what action is contemplated and when it may happen. I hope that, in winding up, my noble friend may be able to enlighten me.

While quantitative easing is one factor, and a significant one—I hope it will not be resumed—I believe that at the root of the problem was the stealth tax of 1997 that withdrew tax credits from pension schemes, estimated then at around £5 billion per annum. Just as sustained deficits lead to accumulating debt, this revenue raid has by now deprived the trustees of such schemes of some £100 billion of capital. Further imposts have resulted from the levies to the Pension Protection Fund and the introduction of more demanding projected solvency requirements in 2004. Pensions regulators have often obliged trustees against their better judgment to forgo equities in favour of bonds. This toxic cocktail was completed by the credit crunch recession, the lengthening of life expectancy and, as I have mentioned, the impact of quantitative easing on gilt yields, with all the implications for the discount factor in calculating future liabilities.

Most of the burden of meeting the funding demands has fallen on employers dealing with a legacy of departed former employees. If and when interest rates rise, part of those deficits will bounce back. However, at present, many companies, mainly SMEs in manufacturing, are being starved of working capital and the ability to invest by the overhanging shadow of inherited liabilities to their pension schemes. It is no wonder that so many defined benefit schemes have been closed to new entrants. With the dramatic decline in the manufacturing sector in past years, many firms have contracted and have often diversified into specialist sectors with smaller workforces. They have closed their pension schemes but still have the bloated burden of the past and face regulation and enforcement powers that are volatile, onerous and sometimes very damaging.

I do not have time to elaborate more fully on this problem or to list some of the possible measures needed to mitigate this blight, but blight it is. I hope that the point has registered with my noble friend, and I am sure that it has. I am sure that he is already well aware of it and of the fact that things can be done. I hope at least that he may be able to assure the House that relief is at hand.

[Lord Forsyth of Drumlean]

I am most grateful to my noble friend for giving way. I wonder whether I might tempt him on this very important point concerning how quantitative easing has artificially lowered gilt yields, which are used to calculate the liabilities, and therefore businesses are having to contribute money. Would a simple change not be to take the yields on corporate bonds as the measure instead of gilt yields?

[Lord Lang of Monkton]

My noble friend is absolutely right. That is one of the possible solutions and I hope that it is being considered. Indeed, there are others as well. This blight engulfs companies large and small, damaging—even destroying—their balance sheets. However, the SMEs that form the core and future of our manufacturing industry are the least able to cope with it. Their working capital is diverted, new investment is forgone, innovation and new technology are unaffordable, productivity suffers, credit worthiness is damaged, jobs go and companies subside.

In my past ministerial career, I have always sought to attract inward investment to this country, which is still very important indeed for the future. However, to focus effort and resources on that, while failing at the same time to bring justified and much needed succour to our home-grown existing companies, is surely most unwise. Therefore, I welcome the chink of light that the Chancellor has given us. I hope that the door will be flung open wide and the light will shine more brightly very soon. To relieve the problem would be to reawaken an engine of growth.

--- Later in debate ---

[Lord Deighton]

My Lords, I thank all noble Lords for the serial welcome. It was very kind of noble Lords to recognise the extraordinary work that went on to deliver the Olympic and Paralympic Games in the summer. That was a big team effort. In fact, many of the team are distributed around this Chamber. I appreciate all those kind words and receive them on behalf of a magnificent national effort.

I shall clear up a few housekeeping points. My name is pronounced Deighton, as in height, if you want the precedent for the English pronunciation, not as in weight. Thank you for pointing that out. There was also a suggestion that it would be useful to spend as much time as possible in the Treasury. The arrangement with my right honourable friend the Chancellor is that I should concentrate my time at the Treasury, which is why I will be supported very closely by my noble friend Lord Newby in this Chamber.

I found the debate highly stimulating. I will be able to do my job better for having listened to all the contributions. I shall leave this debate feeling hugely positive, despite the many challenges that we face with our economy. I propose to make my comments not speaker by speaker but rather consistently against the most important themes in the debate. I shall begin with a review of what I think we heard about fiscal policy—the macroeconomic policy—and I shall then review monetary policy. I shall then talk about reform of the financial sector and finally I shall talk about the selection of things that we discussed that might generally fall into supply-side reforms, including all the discussion around infrastructure and capital projects. If I do not manage to address everybody’s points, I shall certainly write afterwards. I shall also try to focus my comments on what my noble friend Lady Kramer called “doing and delivering”. I think that is what I am here to do, so my focus will be on what we can accomplish rather than on the more esoteric elements of economic theory.

I thought there was a lot that was agreed on. The way I have always operated, particularly in business, is by finding the areas of collaboration and forging ahead on them rather than labouring on the areas of disagreement. However, with respect to fiscal policy, it seemed to me that there was one fundamental disagreement between us, at least in simple theory. I think it boiled down to a very simple question. Should we inject more demand into the economy to boost growth? It is a very fair question. It is quite extraordinary to me that nearly 40 years later we are still arguing about Keynesian economics, how effective monetary policy is and the size of the multiplier. I think that was in the first week. It also convinces me that I made the right choice not to be an academic economist. The debate does not seem to have moved on in those 40 years—we are still talking about the same things—so I am glad that I went out and did something, which I was probably better at because that was not going to work.

It all sounds very easy—we should just go out and borrow more, spend it, and hey presto everything is better. That feels an awful lot like the situation we found ourselves in between 2008 and 2010 when we overborrowed and overspent when the economy was right at the peak of its performance. There has been a lot of discussion about confidence. When deficit levels are at the levels they are, I do not think you reintroduce confidence into the economy by going back on a spending spree. It just does not make any sense to me. I have listened very carefully to what everybody is describing as plan B. I do not think plan B is a plausible alternative. How does it get financed? More borrowing. How does that stack up against the bond markets and interest rates? We have saved £33 billion by being able to borrow at lower rates than had been originally projected because of our success in winning the confidence of the markets. We do not want to lose that. It is absolutely critical.

It is also not entirely clear to me that there is such an enormous difference between us. We were unable to surface just how much extra money the alternative strategy would involve borrowing and whether that would make a huge difference. I was much more persuaded by the argument, which I think matches the analysis in the independent OBR, that the principal problem with demand has been external demand, particularly the reduction in demand in the EU. The right strategy in the long term, which is part of the supply-side solution—my noble friend Lord Howell was very clear about that—is all the work being done to switch our focus in markets to the rest of the world— the so-called BRIC economies—where growth is actually occurring.

We also had a lot of discussion around the capital budget and whether it had increased since the original plans of the previous Government. I do not really want to argue about too many statistics because we have had a lot thrown both ways. Essentially the plan we have now is about £10 billion more than the previous Government’s original plan.

I accept the points made by the noble Lord, Lord Barnett, about when the money is being spent but we have to understand that capital spending and infrastructure spending are not, as the noble Lord, Lord Howell, said, a tap you turn on and off. There are long lead times. There are even longer lead times if you want to do this properly. A lot of this capital spending is not a panacea to solve a very short-term problem. In fact, thinking of it that way could create all sorts of difficulties and much more focus should be on ensuring that the projects that are mid-way through their gestation are now delivered into the economy in the right way. They are the ones that are going to have the immediate impact.

My noble friend Lord Lamont mentioned his concern about inflation. That was certainly one of the problems in 2011. The rise in commodity prices pushed our own inflation rate up, I think, above 5%. That had a significant impact on the cost of living. However, all the forecasters are looking at inflation stabilising over 2013-14 down towards the Bank of England’s target rate.

We have all referred to external agencies as supporters of our own cases. One side can produce the economists—the IMF. The other side can produce the chief executive. I could give a quote from the OECD that this is the right plan and we should stick to fiscal stability. We are all capable of producing people to support either argument. It just is not possible to bless your own strategy with the utterings of an external economist.

The noble Lord, Lord Desai, gave a very eloquent exposition of the long-term issues underlying the problems in the economy. I am not going to repeat that. I do not think that anybody particularly disagreed with much of it. However, I have a growth mentality and one of the things that attracted me to join this Government was that the Prime Minister and the Chancellor were very clear in their mandate to me. They said, “We need to deliver growth in this economy. We will support you to get that done in whichever way you can”. They convinced me that they were as committed to performance excellence as any of the other high performing organisations I have worked in. That is really what got me interested in doing this job. I was also very interested in the noble Lord’s comments on welfare. An absolutely key criterion in any of this has to be fairness. We can all argue about marginal decisions but I assure noble Lords that in my work at the Treasury the distribution effects of what we do are absolutely at the top of the criteria for assessing which measures we take.

On monetary policy, I was delighted to hear what I thought was pretty universal agreement that Mark Carney’s appointment was a good thing, if only because it speaks so highly of my right honourable friend the Chancellor’s recruiting skills. I was also a product of that although I was much cheaper.

We had a very interesting discussion about the impact of quantitative easing. Clearly, the noble Lord, Lord Eatwell, is less convinced about its current efficacy but I think we are all interested in what the new regime will have by way of new ideas. However, we should all be extremely cautious before we suggest that ditching the inflation target is the obvious alternative thing to do. That is far from clear and is certainly not the Treasury’s position. In answer to the question asked by the noble Lord, Lord Davies, I think that the Bank of England is paying 0.5% on the commercial bank reserves held by the central bank.

On banking reform—

[Lord Forsyth of Drumlean]

I am most grateful to my noble friend. Before he leaves quantitative easing, will he answer the question that a number of us raised about what happens when you unwind it?

[Lord Deighton]

I thank my noble friend for reminding me about unwinding quantitative easing. In summary, the central scenario predicted by the OBR is that it is expected to make a profit over its lifetime as the scheme is wound down but, as always with these things, that depends on a number of assumptions about the future yield curve, the exit, the pace of that exit, bank rate policy at the time and, of course, any changes to the size. However, those are the variables that go into that decision.

I think that all those who spoke about banking reform agreed that it was important to develop financing, particularly for smaller businesses, and that the Funding for Lending scheme, although in its early days, was showing every sign of being a successful scheme, so we are delighted with that introduction.

On the broader question of structural and regulatory reform, I could not agree more with the comments of a number of my noble friends that although it is absolutely critical to ensure that we have more resilience in the banking system so that the same mistakes are not made again, we have to be extraordinarily careful—I think the timing of the introduction of some of the measures reflects that—that we do not overshoot and significantly damage the banking system which exists to provide finance to the real economy. In my own mind, the real issue with many of these institutions has less to do with capital or liquidity rules and much more to do with the culture of leadership and management in those firms. We are beginning to see some promising signs of improvement there.

As regards the supply side, we have had many interesting contributions on small and medium-sized enterprises. I apologise to the noble Lord, Lord Mitchell, for the SME labelling, and note the comments of the noble Lord, Lord Birt. The United Kingdom is an extraordinarily successful incubator for small businesses. I absolutely take on board what my noble friend Lady Kramer said about thinking small. Two days ago I attended a small business forum. Everybody there was very supportive of all the initiatives that are going on. The discussion was all about implementation and taking advantage of things that are happening.

We have had a number of contributions on planning. No one ever puts forward the case that there should be more red tape, so we are all heroes in terms of our desire to cut it out and to enable faster planning permissions. As I think I mentioned in my opening speech, we have already cut 1,500 pages of planning policy and have speeded up the rate of approval of planning applications. My personal approach to this will be to follow through some of our projects to see where there are barriers and to use those as pilots for seeing where there are thematic problems that are holding up our delivery in the broader economy.

My noble friend Lord Lang referred to the defined benefit pensions issue. Rather than going through the details in my response, I will write to him separately on that. On the question of industrial strategy, I have sat in a number of meetings with my colleagues in BIS and they are absolutely focused on picking out where this country has competitive advantage and reinforcing that advantage in every way the Government can.

There has been a lot of debate on the subject of infrastructure. I want to focus on the fact that our investment in infrastructure is not about pump-priming the short-term economy. It is about modernising and improving our economy so that, over the longer term, its productive capacity is significantly enhanced. If, in the short and medium terms, that has the extremely attractive by-product of generating a significant number of jobs and short-term growth, then that is a dream package. However, that is the way around we should refer to it. There was quite a lot of discussion about roads: the ones that we have announced and have not built yet. There are a very large number of roads that we are currently building that were announced the time before: those are the lag periods. I am very interested in looking at schemes which allow us to take a longer-term perspective on creating the right investment package to support them.

The noble Lord, Lord Mitchell, was rightly concerned about broadband rollout. I have been focused on that as part of our rural broadband rollout and the urban strategy. Last month, the Chancellor announced a further £50 million to help 12 more cities deliver their ambitions for superfast broadband and I am working closely with my colleagues in DCMS and Broadband Delivery UK as well as the Economic Affairs Committee to drive delivery of that important rollout.

I see the value of smaller infrastructure projects, particularly those in local areas. This is highly consistent with implementing the reforms contained in the report by my noble friend Lord Heseltine, No Stone Unturned. For example, we have already launched 27 schemes with local authorities to help deliver that.

Bank of England

Lord Forsyth of Drumlean Excerpts

Tuesday 22nd January 2013 Lords Chamber

[Lord Newby]

My Lords, the Government do not put the needs of the credit rating agencies first. The Government are seeking to promote growth within a stable framework while reducing the deficit. We do not know what the credit rating agencies are going to do, but I can assure the noble Lord that people in the Treasury are not spending every night awake worrying about them. They are expending their efforts on promoting growth on the basis of a reducing budget deficit and a credible long-term macroeconomic policy.

[Lord Forsyth of Drumlean]

My Lords, is it not obvious to everyone that inflation targeting has failed? The Bank of England has consistently failed to meet its inflation targets and we have zero growth in the economy. Would it not be sensible for the Government to listen to Mr Carney’s suggestions?

[Lord Newby]

My Lords, the Government will listen to Mr Carney’s suggestions. Mr Carney has said that he will not comment on the position in the UK until he arrives. His key speech on this issue was made in February last year before he was appointed. In that speech, he said among other things that,

“if nominal GDP targeting is not fully understood or credible, it can, in fact, be destabilizing”.

There is no quick and easy answer—