Financial Services and Markets Bill

Debate between Lord Forsyth of Drumlean and Lord Eatwell

Report stage
Thursday 8th June 2023 Lords Chamber

[Lord Forsyth of Drumlean (Con)]

My Lords, I find myself in the very odd position of having to say that the Government have handled Committee stage consideration of the Bill brilliantly. The Minister listened to a lot of quite robust criticism of the Bill, some of it from me, on the issue of accountability. It is fair to say that, across all sides of the Committee, there was a feeling that it was essential that there be proper accountability and scrutiny, given that we are, in effect, giving the regulators all our financial services legislation. She spent a great deal of time talking to all noble Lords in Committee and listening to those concerns. I therefore support the government amendments and thank her and her colleagues for the brilliant way in which they responded to what was a very robust Committee.

[Lord Eatwell (Lab)]

My Lords, there is a certain amount of confusion about the competitiveness objective and it is important to clarify it in discussion on Report. To illustrate this point, we have to understand that London is a rather peculiar financial centre, because it has a very limited hinterland of domestic savings. It is unlike the United States, where New York has a huge hinterland of domestic savings. It is therefore necessary for London to attract savings and funding from around the world, and it does that brilliantly well.

An important component of that is that London is seen as a well-regulated and efficiently regulated centre. The primary objectives set out in FSMA of maintaining market confidence, financial stability, public awareness, protection of consumers and the reduction of financial crimes are competitiveness goals in and of themselves. They make London more competitive and are a crucial component of the success of London at attracting funds from around the world.

The competitiveness objective that was introduced as a subsidiary objective is rather different, because there competitiveness means being allowed to take more risk. As everyone knows, in financial affairs the balance of risk and return is one of the key elements in making sensible decisions. This is true as much in regulation as it is in the operation of financial services business. It is particularly true in regulation when it applies to systemic risks, which only the regulator can understand and deal with.

It is therefore important that we do not overegg the competitiveness objective. It is important—it has introduced an important element in discussing the relationship between risk and return—but we should recognise that the primary objectives are the key to London’s competitiveness as a financial centre.

Financial Services and Markets Bill

Debate between Lord Forsyth of Drumlean and Lord Eatwell

Report stage
Tuesday 6th June 2023 Lords Chamber

[Lord Forsyth of Drumlean (Con)]

My Lords, it is late, so I will not repeat the arguments which have been made by the noble Lord, Lord Tyrie, and the noble Baroness, Lady Kramer. The amendment seems to be a very sensible measure, and if my noble friend cannot accept it, the noble Lord suggested a compromise of at least consulting on this. However, I am not sure that many people would say that this was not a sensible proposal. The amendment has certainly been very carefully drafted. We are on Report, and I have some sympathy with my noble friend on the Front Bench being faced with this, but it merits very serious consideration and would be very much welcomed in the City.

[Lord Eatwell (Lab)]

My Lords, I apologise for missing the introduction from the noble Lord, Lord Tyrie; I was caught out by the Whips’ rearrangement of business. Fortunately, I read his pamphlet on this matter, so I have a good idea what he said.

Queen’s Speech

Debate between Lord Forsyth of Drumlean and Lord Eatwell

Monday 13th May 2013 Lords Chamber

[Lord Eatwell]

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

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

“O brave new world,

That has such people in’t!”.

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

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

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

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

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

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

austerity—

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

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

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

All this is predominantly farmed out to other departments.

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

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

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

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

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

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

I turn to the,

“ambitious housing package and programme of infrastructure investment”,

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

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

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

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

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

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

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

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

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

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

What is left of the four pillars?

[Lord Forsyth of Drumlean]

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

[Lord Eatwell]

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

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

--- Later in debate ---

[Lord Forsyth of Drumlean]

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

[Lord Eatwell]

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

[Lord Forsyth of Drumlean]

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

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

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

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

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

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

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

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

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

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

Economy: Growth

Debate between Lord Forsyth of Drumlean and Lord Eatwell

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.

Financial Services Bill

Debate between Lord Forsyth of Drumlean and Lord Eatwell

Monday 11th June 2012 Lords Chamber

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for introducing this important Bill. Its importance can hardly be in doubt, given the core dilemma presented by the place of financial services in the British economy. On the one hand, Britain is a world leader in financial services and a considerable measure of our future prosperity depends on that industry. On the other hand, as we have seen, it is the industry that has greater potential than any other to inflict severe damage on Britain’s economy. The goal of regulation is to secure the benefits while minimising the costs and to achieve that in a manner that passes the tests of accountability, clarity, efficiency and transparency. Regrettably, the Bill fails all those four tests.

It certainly fails the test of clarity, being both complex and incomplete. The Bill is unnecessarily complicated because, instead of drafting a new template for the financial services industry, superseding all past relevant Acts and incorporating the new banking Bill that is yet to be published enacting the Vickers proposals, the Government have constructed a dog’s breakfast of amendments to earlier legislation.

Last week, noble Lords were no doubt surprised to receive a passionate entreaty from the Treasury Committee of the other place insisting that the Bill had been cobbled together with undue haste and had not received adequate consideration—in the case of some clauses, no consideration at all—and providing a checklist of serious failings in the legislation as currently drafted. From these Benches, I can assure the Treasury Committee that its despairing plea will not go unanswered. We intend to devote just as long as it takes to sort out this flawed Bill and thank goodness that the procedures of this House will allow us to do so. I am sure that all sides of the House will support this commitment, since this is essentially a non-partisan Bill. We all have a strong vested interest in getting it right. I hope that the Government will approach our deliberations in that spirit, although their negative performance in the other place was not encouraging.

The noble Lord, Lord Sassoon, referred to the regulatory failures that have been all too evident in the financial crisis. That there were serious failures is beyond doubt—most notably in the operation of the tripartite memorandum of understanding. But these were less failures of structure and more failures of the then conventional wisdom with respect to regulatory theory and practice. As the Joint Committee on the Bill noted:

“Successful regulation depends more on the regulatory culture, focus and philosophy than on structure”.

That point was made even more forcefully by Mr. Alan Greenspan in his evidence to the US House of Representatives in October 2008. Referring to the intellectual framework that guided the regulatory stance of the Federal Reserve System, Mr. Greenspan said:

“This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year”.

That was as true of the thinking of British institutions as it was of the United States.

In this context it is worth remembering why the tripartite system was created in the first place. One of the key reasons was that the Bank of England had proved to be such a fallible regulator. The cases of Johnson Matthey, BCCI and Barings come to mind. In the latter instance, the Bank’s performance was so bad that the Board of Banking Supervision was moved to comment that it would be a good idea if the Bank of England understood the products that it was supposed to be regulating.

Nonetheless, on the basis of what we have all learnt over the past four years, the fundamental thinking behind the reforms set out in this Bill is clearly well-founded, even if the execution falls a little short. The key thing that we learnt was that focusing on the stability of individual institutions, however large—so-called microprudential regulation—is not enough. The whole is bigger than the sum of the parts; systemic risk is all pervasive and by its very nature cannot be managed by individual firms. Hence the need for macroprudential regulation, spelt out so clearly in the FSA’s Turner review. But macroprudential regulation poses major new challenges to economic and financial policy-making. It will necessarily involve measures that cross what has previously been deemed to be the boundary between actions that might reasonably be left to unelected officials and actions that are necessarily the province of politically accountable decision-makers.

The essence of the macroprudential structures as set out in this Bill is that the Treasury cannot be trusted. Just as it was feared that the Treasury might approach the setting of interest rates with an inappropriate eye to political advantage, and hence the Bank of England was given control over interest rates, so now it is feared that the Treasury will fail to take away the punch bowl of loose credit in order to reap the short-term political benefits of a debt-fuelled boom. Accordingly, the Bank of England is given, via the new Financial Policy Committee, virtually autonomous control over a variety of instruments to manage the supply of, and perhaps later the demand for, credit. In addition, microprudential regulation is also taken into the Bank, in the form of the Prudential Regulation Authority.

This agglomeration of powers in the Bank of England poses two vital questions. Is the governance of the Bank of England such as to result in accountable, clear, efficient and transparent utilisation of these extraordinary powers? Equally, does the relationship between the Bank of England and the Treasury, as set out in the Bill, meet the test of these four principles? The answer given by the Treasury Committee to both of these questions is a resounding no. We on this side broadly agree with the Treasury Committee, though we differ in some details. We certainly agree that the governance of the Bank should not be a matter for the Bank itself. Our major disagreement with the Treasury Committee’s proposals is that they do not go far enough.

First, with respect to the governance of the Bank, the Government have responded to the evident lack of co-ordination in the crisis by designing a model of perfect co-ordination; namely, that one person should be responsible for everything. The Governor of the Bank of England will chair the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority, as well as being in overall charge of the Bank of England’s special resolution unit and its payment and clearing and settlement systems oversight department. When he or she has some spare time, this individual will also chair a number of important international committees. Even if it is possible to find the exceptional individual who can effectively take on all these tasks simultaneously, that person will be driven mad, for many of these activities will demand contradictory policies. Moreover, if ever there were a structure likely to result in the dangers of group think, this is it, since the group is a group of one.

Side by side with the inefficient, unaccountable and untransparent role of the governor is the now anomalous position of the court of the Bank. The Financial Policy Committee is to be a committee of the court. It is envisaged that primary responsibility for determining and keeping under review the strategy for achieving the financial stability objective will sit with the court, although the court will be required to consult the FPC and Treasury, and the FPC may at any time make recommendations to the court. On a moment’s reflection, it is clear that the court’s composition and powers are simply not up to the job.

In Grand Committee we will propose wide-ranging reform to the governance of the Bank of England to ensure that it has a structure of decision-making appropriate to the first half of the 21st century, rather than to 1694. In particular, we will require a more collegiate form of decision-making and propose measures to improve the accountability of what is, after all, a public institution. I was delighted to hear from the Minister that the Government are searching for good ideas in that area. I think that we have some.

Given that the governance of the Bank, as the Treasury Committee puts it, falls,

“well short of what would be expected in a modern institution, whether public or commercial”,

and that this is,

“especially important given that vitally important decisions made by the Bank’s executives, especially during times of financial instability, may not reasonably be made public and therefore be immediately available for scrutiny”,

the next question obviously arises. Are the powers of autonomous action endowed on the Financial Policy Committee and, accordingly, the Bank, appropriately balanced with the need for political oversight by the Treasury of the overall conduct of economic and financial policy? Does the Bill provide for sufficient parliamentary scrutiny to endow the FPC and the Bank with an appropriate level of legitimacy? Again, we believe that the Treasury Committee does not go far enough. The FPC is described by the Government as,

“a powerful new authority sitting at the apex of the regulatory architecture”.

The mechanisms to ensure democratic accountability of the FPC need to be commensurate with the strength of its powers.

The most important aspect of the relationship between the Bank and the Treasury is what should be done in a crisis. After all, it was in a crisis that the system failed. This is spelt out in Part 4 of the Bill and in the draft memorandum of understanding on crisis management. The draft memorandum of understanding, which, by the way, is in general far less clear than the old tripartite memorandum, at least makes clear that the Bank is the gatekeeper, defining when the Treasury may play a crisis management role. It is worth quoting the MoU. It states:

“The Bank has primary operational responsibility for financial crisis management. The Chancellor and the Treasury have sole responsibility for any decision involving public funds. When the Bank has formally notified the Treasury of a material risk to public funds, and either there is a serious threat to financial stability, or public funds are already committed by the Treasury to resolve or reduce such a serious threat and it would be in the public interest to do so, the Chancellor may use powers to direct the Bank. … Where the Bank is able to manage a financial crisis without public funds being put at risk, it will have autonomy in exercising its responsibilities”.

This is the most extraordinary nonsense, a fetishisation of the use of public funds. First, whatever is happening, the Treasury must wait for notification by the Bank of England before it can act. Given the Bank’s record on Northern Rock, that notification will come far too late. But secondly, and more seriously, households may be losing their savings, businesses may be collapsing, and economic activity may be in precipitate decline as the result of financial instability, but if there is no threat to public funds the Treasury is shut out of any active financial stability role until the governor invites it in.

This betrays a lack of understanding of the mutually reinforcing co-operative role that the Bank and the Treasury need to adopt to tackle macro-risk. This was put very clearly by Jacques De Larosière to the Economic Affairs Committee of your Lordships’ House three years ago. He said:

“Let us not hide ourselves from reality. Often ... fiscal policies can be part of systemic risk”.

The only sensible solution seems to be for a fundamental rewriting of Part 4 of the Bill to allow the Treasury to act when severe financial problems arise without the Bank acting as a gatekeeper. In 2008, the problem was not that the Treasury was too strong but that it was too weak. To ensure that the roles of the Bank and the Treasury are clear beyond all reasonable doubt and given that the MoU will evolve in the light of operational experience, the MoU itself must be the subject of enhanced parliamentary scrutiny. By the way, the definition in the Bill of the objectives of the Financial Policy Committee, with its peculiar emphasis on leverage, debt and credit growth in the UK, also betrays a worrying lack of understanding of the nature of systemic risk in a global financial system.

Many other aspects of the Bill require substantial revision by your Lordships’ House, ranging from procedures for consultation at all levels, the role of the tribunal in disciplinary cases, to the duty of care that retail financial institutions should exercise towards their customers, and the range of access to financial services and to the procedures for parliamentary scrutiny of the avalanche of secondary legislation that the Bill will stimulate. My noble friends and I are committed to playing a constructive part in that revision. However, at the core of the Bill—the core that we must get right—are the new procedures for macroprudential regulation. If an open and successful financial services industry is to be sustained, it is imperative that an accountable, clear, efficient and transparent mechanism for the management of systemic risk is established. Moreover, that mechanism must have as its ultimate objective the promotion of employment and growth in this country.

[Lord Forsyth of Drumlean]

The noble Lord has made a passionate and powerful speech about the importance of the Bill. Why have the Opposition agreed that it be referred to Grand Committee for its Committee stage?

Scotland Bill

Debate between Lord Forsyth of Drumlean and Lord Eatwell

Wednesday 28th March 2012 Lords Chamber

[Lord Forsyth of Drumlean]

My Lords, the amendment seeks to outlaw the practice, which my noble friend laid bare before us at an earlier stage of the Bill, whereby the Scottish Parliament is able to raise 10p in income tax but, if the tax base is narrowed, the Treasury sends it a cheque.

The current Budget, quite rightly, raised the threshold at which people pay income tax, which will be very beneficial to people in Scotland. If this system were in operation today, not only would everyone enjoy a lower tax on their income in Scotland but the Treasury would send a cheque for the equivalent amount in the reduction in the tax base to add to the block grant—which drives a coach and horses through the whole idea behind this Bill, of bringing accountability to the spending practices of the Scottish Parliament. It should not be compensated for a reduction in the tax base that arises from a reduction in income tax in the rest of the United Kingdom. It is an absurd proposal.

I am very nervous that my noble friend may accept this amendment, because it extends the powers of the Scottish Parliament very considerably, in a constructive way. I know my noble friend, at an earlier stage in the Bill, said that the Scottish Parliament cannot change the allowances, and therefore the reduction in revenue would be as a result of something that was done in the United Kingdom. The amendment provides for the Scottish Parliament to be able to change the allowances and gives it more power. I listened to the noble Lord, Lord Kerr, and can see the logic of that.

My noble friend may not like that at all, because it adds to the complexity of the devolution of income tax. I noticed he said earlier that the block grant would be about 60 per cent of the expenditure. We keep hearing that the Parliament will be raising 35 per cent of its own expenditure through tax—but that is a dishonest figure. The amount that will be raised by the 10p on income tax is about £4.5 billion. We are looking forward to discussing this later today, but it just so happens that when the Barnett committee, which was established as a result of the efforts of the noble Lord, Lord Barnett, looked at this, the estimates of the additional grant that Scotland had over and above what would be based on needs was about £4.5 billion. That is what 10p on income tax, broadly speaking, will raise. It is about 15 per cent of the block grant and it has all the problems that we have with local government finance, where a small increase in expenditure needs a large increase in income, because of the gearing effect. Therefore, it may be sensible to broaden the tax base, which is another reason for having additional sources of revenue other than income tax, such as the aggregates tax and so on and so forth. I can see myself being sucked into this process of additional tax-raising powers. It is the slippery slope that my noble friend Lord Lang referred to.

The purpose of this amendment is to deliver what all those advocates of this Bill, whom I have spent most of my life opposing, say that the Bill is about and to remove this extraordinary idea that Scotland should benefit both ways—and no self-respecting Scot would want this—by getting both the reduction in the tax and the additional grant. It is very straightforward and because the hour is late, I will not elaborate on it any further. I beg to move.

[Lord Eatwell]

My Lords, in the enforced absence of my noble and learned friend Lord Davidson, I rise with considerable trepidation to speak on these clauses. Having spent some time reading myself into the debates that your Lordships have had on this Bill, I cannot feel that they have been entirely enlightening.

With respect to the amendment proposed by the noble Lord, Lord Forsyth, I am afraid that he shot his own fox in his remarks, when he pointed out that by varying the tax base as well as tax rates he will increase enormously the complexity of any tax changes that might affect Scotland. On top of that, when you increase complexity you reduce transparency and accountability. To have proper accountability we need to have clarity. By changing both the tax base and tax rates or putting both into play, within a very short period of time we could have enormous complexity in the Scottish tax system relative to that in the reset of the United Kingdom. The notion of accountability would be lost.

[Lord Forsyth of Drumlean]

I am grateful to the noble Lord and I sympathise with him if he has had to read all our proceedings, but this is not my fox. I am opposed to having these tax powers for the very reason that, to make it work, it would be excessively complicated. It is the fox of his noble friend Lord Browne, not mine.

[Lord Eatwell]

By introducing tax allowances, the noble Lord seems to be adding to the creature to be chased.

I pose a couple of questions about this issue, which comes under the general heading of “no detriment”. As I understand it, the whole concept of no detriment is to require all government departments—and, in this case, the UK Government with respect to the devolved powers in Scotland—to take account in their decisions of any detriment that they might impose on the Scottish Parliament and its revenues.

As I understand it, any proposal of this sort would be intra-budget in the sense that it is within a budgetary year. In a letter from the noble Lord, Lord Sassoon, to the noble Lord, Lord Forsyth, dated 19 March, he stated that,

“it is highly unlikely that a UK Budget would announce a change in income tax policy to be implemented within the same fiscal year”.

I understand that he is referring to something within a budgetary period—in other words, not from one budget to the next, when the negotiated taxes, allowances and block grant are made clear—but to some amendment that takes place within a budgetary period. Perhaps he could clarify exactly what he meant by that part of his letter.

On another element of clarification, I turn to the Written Statement made by the noble and learned Lord, Lord Wallace, on the Scotland Bill, on 21 March, when he referred to the application of the model recommended to the Welsh Assembly in the Holtham report on the tax and budgetary arrangements between the UK and the Scottish Government. I would be grateful if he could clarify exactly what is meant by the Statement that it,

“will help protect the Scottish Government’s budget from wider macroeconomic shocks”.—[Official Report, 21/3/12; col. 62WS.]

Given that in the face of a macroeconomic shock any change is unlikely to be reflected in the tax base, because that takes so long to implement, what does this actually mean? Could he give us an example of how a macroeconomic shock would in some way lead to a change in the tax base affecting Scotland within a fiscal year? I am completely puzzled by that; it does not seem to make any sense at all.

There is one other area of puzzlement that I have with respect to this question, in the reference to the OBR, which appears in the amendment from the noble Lord, Lord Forsyth, and in government statements about the assessment of the impact of a change in taxation. In the report published on 21 March, the OBR said:

“We are therefore not able to produce a Scottish macroeconomic forecast to drive the Scottish tax forecast. Instead the methodologies we intend to use … are generally based on Scotland’s historic share of the relevant UK tax stream. We then generally assume that this share will be maintained at the recent average level in the future”.

However, if there is a change in allowances that assumption is invalidated, and therefore the OBR is not competent because it does not have the information it needs to perform the task which both the noble Lord, Lord Forsyth, and the Government wish it to perform.

In those circumstances the OBR says that, in due course and with a long lag, it can assess this. If the block grant is changed in the way that the Government have suggested, in response to a change in tax base—I agree with the Minister that that is how it should be done and not with the noble Lord, Lord Forsyth—and if the OBR finds that its preliminary assessment was misguided, will that be adjusted in future years or will we proceed with a methodology which the OBR admits is imperfect?