UK Economy: Growth, Inflation and Productivity

Lord Griffiths of Fforestfach Excerpts

Thursday 29th June 2023 Lords Chamber

[Lord Griffiths of Fforestfach (Con)]

My Lords, I thank the noble Lord, Lord Eatwell, for securing this debate. I will focus on one item: inflation. When I saw the breadth of this debate, I suspected that we would discuss different things at different times, which we are.

The noble Lord, Lord Eatwell, made some very good points about the relationship between investment, productivity and growth, but the one word I never heard in his speech was “money”. Perhaps that reflects Cambridge economics. There was no mention of it, and yet, as we just heard, we have a central bank that has a target for inflation and uses the instruments at its disposal to control the stock of money, among other things. Inflation is very important to growth because it invariably creates changes in interest rates, tax rates, spending rates and so on, and because of the turbulence that it provides, which is a disincentive to investment—and that business investment is key to growth.

If we do not tackle inflation, I am afraid that we will live with the current stagflation that we are experiencing of high inflation and very low growth. The Bank of England is responsible for a 2% inflation target and, as we just heard, inflation is between 7% and 8%. The Bank has not had an easy task over the last few years. We have had Covid, Ukraine, and half a million people aged between 50 and 65 leaving the labour force as inactive. In addition, like the Bank of England, other central banks forecast that inflation would be transient, and independent forecasters predicted the same thing. But the one equally great shock that the Bank failed to mention was the increase in the stock of money.

Until 2020, the increase in the stock of money—broad money—had been 2% for a number of years. In 2021 it jumped to over 10% and in 2022 it gradually came down, although it was still very high. The shock we have had from this has been enormous. The same effect was felt in the US, Germany and other countries, as we have seen. There was a monetary expansion on the back of Covid in particular—a tremendous increase in public spending to deal with Covid in 2020-21, which was at the heart of money supply creation.

You do not have to be a monetarist or an ideologue to believe that money matters. One problem we have with the Bank of England at present is that the Monetary Policy Committee seems to feel that it can analyse the problems we have without reference to money.

What should we now do to bring down inflation? It is not something I like saying but, first, interest rates must be raised to a level which reduces overall spending so that inflation will come down. Since December 2021, the Bank has consistently raised rates. However, the Bank rate is only 5%, and the rate of inflation is 7%. That means that real interest rates are minus 2%.

I bring your Lordships’ attention to the following. When Roy Jenkins in the late 1960s had to deal with relatively modest inflation, he raised the interest rate to 8%. When Tony Barber in 1973 raised the interest rate in order to deal with excess money, he raised it to 13%. Healey in 1976 raised it to 15%, Geoffrey Howe in 1979 to 17% and John Major in 1989 to 10%. Therefore, the terrible news is that every other inflation we have had in the post-Second World War years in this country saw interest rates go into double figures, except for under Roy Jenkins.

Secondly, although I sincerely hope that we do not have to go into double figures, 5% is certainly not enough. I think the Governor of the Bank of England said that yesterday in a meeting in Switzerland, and certainly the Bank for International Settlements has said something very similar.

Thirdly, the Chancellor should stick to a 2% price inflation target; fourthly, if the Treasury wants to help borrowers, it should really deal with it through fiscal policy; and fifthly, reflating the economy is at present out of the question. The Government have taken very tough measures, and we should be supporting them in a very difficult economic climate.

Budget Statement

Lord Griffiths of Fforestfach Excerpts

Thursday 16th March 2023 Lords Chamber

[Lord Griffiths of Fforestfach (Con)]

My Lords, it is a great pleasure to follow my noble friend Lord Skidelsky. He is always amusing and intellectually challenging and we once again benefited from some of the things he said.

Before I start my speech, I have to congratulate my noble friend Lady Moyo on a terrific maiden speech. Some years ago, she and I worked in the same investment bank in the City of London. She came to see me one day out of frustration because they had put restrictions on what she could do and I said to her, “Dambisa, there is only one thing to do: just leave the place and go and do it because your genius will always be rebuked because of the culture of this institution.” I never thought at that time that I would be here congratulating her in your Lordships’ House on that terrific speech. She mentioned her career in her speech. She brings weight to this House which makes this House such an important part of our Parliament.

I am delighted to take part in this debate. One reason is that I think that it is an honest Budget by an honest Chancellor. I say that because on the one hand, the rate of inflation is coming down, the debt-to-income ratio is coming down and the growth rate is going up to 2%. On the other hand, the rate of productivity growth is clearly not what the Chancellor ideally wants, the tax take is up from 33% before Covid to 37.7%, the standard of living has been falling for two years and, as my noble friend Lord Willetts mentioned, it will be 18 years before it gets back to the same level it was. Although we say inflation is coming down, it is still very high. I think the Chancellor had very little room to manoeuvre in this Budget—that is what has come out to me from this debate—but I think he has put the economy in the right direction because he has faced up to reality. There are no unfunded tax cuts here. He is not gambling with public expenditure, the borrowing requirement, the deficit and so on.

There are three reasons why I am excited about the Budget. First, it is a Budget for growth. Never again can people accuse the Prime Minister or the Chancellor of not having some framework for growth. In his speech, the Chancellor said this sentence which I think is very important:

“Not just the growth that comes when you emerge from a downturn, but long-term, sustainable, healthy growth”.—[Official Report, Commons, 15/3/23; col. 833.]


As you look back over the last 50 years in the UK, you see exactly that emergence from a recession, then you have a period of growth but it blows up. That is exactly what happened in the Barber boom in the early 1970s. It happened with Denis Healey in the mid-1970s. It actually happened with Nigel Lawson in the late 1990s, when inflation had got down to 3% after Geoffrey Howe’s tough Budget. When the Prime Minister at the time left government in 1990, the rate of inflation was 9%.

I do not want to go through the litany of things in this Budget—full expensing, new investment zones, nuclear energy, pharma and so on—but I would like to mention, which others have referred to, that getting the over-50s and people suffering from disability and long-term sickness back into work is very important.

One issue I have a slight problem with is childcare. I believe in childcare—we used it when our children were very small—but my noble friend Lord Willetts, for example, referred to these measures as radical. When I listened to the Budget speech, I thought to myself, “Do I want my great-grandchildren to be away from their home and parents from eight o’clock in the morning till 6 o’clock every day, five days a week?” I recognise that there is a demand for it, but the sheer scale of what is being introduced needs thought and debate before we rush headlong into it.

To meet the objection that the noble Lord, Lord Eatwell, made in a powerful speech, there is the embryo of a medium-term financial strategy here.

My second point is about something absolutely crucial that the Chancellor said in his speech and has said on a number of occasions. He is committed to reducing inflation to 2% a year. We know from the cost of living crisis the damage inflation does, especially to the most vulnerable in our society, who have the fewest options when their standard of living is threatened. We have heard of the problems for business—the uncertainty it creates over cost and pricing power; over what the central bank or the Government will do; over what will happen to wages, given the strikes—the resulting distrust in society and, in turn, the social conflict.

Some quite respected academics and commentators have proposed to raise the rate of inflation from 2% to 4%—which, in my judgment, would be a disaster, because as inflation rises so volatility and instability rise with it—or to move from an inflation target to money income because that gives you greater flexibility. Indeed, Andy Haldane has proposed to drop the target completely, as far as I can see. Reducing inflation, with a fixed target of 2%, is actually the bedrock of policy and is very important. One should add that inflation is actually a tax. Therefore, reducing the rate of inflation reduces tax, and this could be considered a tax-cutting Budget. The Chancellor never referred to it as such, but inflation is an onerous tax. It taxes not only people with money holdings but savings and pensioners in the private sector.

Thirdly, I support the Budget but I was always impressed by a maxim that President Reagan used to use when dealing with the Soviets: trust but verify. I raise this issue not because I do not trust the OBR but simply because I am ignorant of exactly what is happening. As I read this Budget, and having listened to the speech and so on, it is intimately bound up with and depends critically on the OBR’s numbers. But we know that OBR forecasts have not worked out. It has made mistakes, some of them pretty bad. What kind of model did it use in arriving at the numbers it generated? Was it the new Keynesian model which others were using, and who predicted that inflation was simply transitory? What about the unforeseen events—pandemics, wars, financial instability—which the noble Lord, Lord O’Neill, referred to? We had our own problems with the LDC and the pension funds, some time ago. At least two significant cryptocurrency operations in the States have gone, as has Silicon Valley Bank. Credit Suisse has had its problems for a long time in terms of compliance and so on, but one gets the feeling that more credit is being expended in the international financial system than one is happy with.

Yet the OBR is very confident. Inflation last October was 11%; it is coming down, in the last quarter of this year, to 2.9%. There is no recession in the UK and unemployment will rise only sightly, to less than 150,000. We need to be able to shed more light on this, and I hope we can do that as the discussion goes on.

I started by saying that I really do have confidence in the Chancellor, and I am sure he is a person of prudence. Frankly, I congratulate him on a good Budget in difficult circumstances, and I hope it will be the first of many.