Economy: Government Policies

Lord Higgins Excerpts

Thursday 24th March 2011 Lords Chamber

[Lord Higgins]

My Lords, I join those who congratulated my noble friend Lord Lawson on obtaining this debate, and particularly on his sense of timing. As he rightly says, we are able to debate in the context of the Budget, which we do not normally have the chance to do the day after the Budget has been delivered. I welcome what my noble friend Lord Lawson described as the “lollipops”. Given the context of a neutral Budget, the Chancellor has been very imaginative in that respect, particularly with regard to the proposals for charitable giving in relation to inheritance tax. That will be of great importance, particularly to the arts.

I also welcome very much the fact that we have suddenly reverted to a Red Book after years of glossy magazines—the printing of which costs huge sums of money—produced by the previous Government. I also welcome the analysis of the Office for Budget Responsibility. When we debated this with my noble friend on the Front Bench, no one mentioned that the OBR would need the full details of the Budget in advance of its being delivered. The traditional view in the Treasury was always that the overall picture ought to be confined to Treasury Ministers, the Permanent Secretary and, if he was lucky, the Prime Minister. There is no doubt that this arrangement increases the risk of leaks, which may of course be market-sensitive. None the less, the innovation of having these forecasts is a considerable advantage.

This debate is largely concerned with economic growth. There is dreadful confusion over what we mean by economic growth. We must make a distinction between a situation where there is excess capacity in the economy, as there is now as a result of recent crises, and the Government utilising that capacity, which in turn produces economic growth—a matter for demand management—and economic growth in the sense that we seek to increase the underlying productive potential of the economy. It is very important to keep the two separate. I have to say that the Red Book constantly confuses them. As far as the second situation—the underlying growth in potential for the economy—is concerned, the Chancellor has introduced several measures that will be very helpful.

I will say something about the other aspect: the extent to which the demand management of the economy enables us to utilise some of the resources that are being wasted at present. It is important to put this into context. I am particularly concerned about the lack of co-ordination between fiscal and monetary policy. Mr Gordon Brown did several things that we now see very clearly were mistakes, such as—certainly—his tax on pensions, which wrecked the previous system of defined benefit schemes in the private sector. Then there was the tripartite agreement, which everyone now agrees was a mistake.

His giving independence to the Bank of England has, on the whole, been reviewed as a good thing, but I have never taken the view that what he introduced was a good thing. It was not the case that he gave control over monetary policy to the Bank of England. He gave control of interest policy to the Bank of England and relied then on a single interest rate in the Bank of England, which was clearly inadequate as there are many different interest rates. The effect has been that until quite recently, with the introduction of so-called quantitative easing, the Bank of England has been concerned not with monetary policy, in the sense of the supply of money, but only with interest rate policy.

I am concerned by the Red Book’s executive summary. Under the heading “A Strong and Stable Economy”, it states:

“monetary policy will ensure price stability, and thereby support the wider economic stability”.

It is quite apparent, and has been for a considerable time, that the way that the Bank of England is handling these matters is not producing price stability. We are way above the target range. Therefore we need, at the very least, to revise the Bank of England’s terms of reference if we are to avoid that.

Secondly, I want to take up a particularly important point at the heart of the present political debate—whether the measures being taken to reduce the deficit are happening too fast. The leader of the Opposition in the House of Commons stressed this point very heavily indeed. He thought that the policy was too fast and too tough. One has only to look at the final page of the Red Book and the penultimate table, which includes the current forecast and takes into account all the Chancellor’s Budget proposals, to see that although it is true that cyclically adjusted net borrowing will reduce in percentage terms, that is the effect of the cycle. It is the effect of what I referred to earlier—taking measures that will enable you to mop up the productive capacity which at present is being wasted. However, in the March forecast and the absolute figures at the bottom line of the table, it is absolutely clear that net debt goes on increasing, despite the measures that the Chancellor has taken and despite the effect that the OBR thinks the cuts will have over the period until 2014-15.

Therefore, what the Chancellor is doing is the absolute minimum required to deal with the deficit. If one were to delay those measures as the Labour Party proposes—although we have no clear idea of what it is really proposing in that respect—we would find ourselves in a crucial situation that continues to deteriorate. If we were to delay more, the deficit would go on increasing for a very long time. It does that even on the Chancellor’s proposals. However, it would be far worse—and absolutely disastrous internationally in economic terms, as noble Lords have said—if we were not to go ahead on the basis that the Chancellor has outlined.