Debt
Lord Higgins Excerpts(12 years, 6 months ago)
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Lord Sassoon
My Lords, I think we shall need a little longer on the latter part of the question. The noble Lord, Lord Bilimoria, raises an important point in that the first thing we have to do is to ensure that interest rates are kept low. I need hardly remind the House that 10-year interest rates, as of last night, were at almost record lows at 1.75%. We want to see the benefit of those low interest rates flow through to businesses, which is why, among other things, we have the national loan guarantee scheme. In the time of the noble Lord, Lord Barnett, there was not 3% inflation but it peaked at 26.9% and interest rates were more than 10%. That is why I know he is sympathetic to the challenge we have and why my right honourable friend the Chancellor is doing such a fantastic job in these difficult headwinds.
Lord Eatwell
My Lords, yesterday’s government announcement on VAT will add £110 million to the annual deficit and hence cumulatively to the public debt. Will the Minister explain to the House why the announcement on VAT was not first made in Parliament, in compliance with the Ministerial Code? Will he also tell us what alternative ways of spending the £110 million of petty cash were considered? Does VAT now apply to humble pie?
Lord Sassoon
My Lords, I am glad that in the space of three minutes the party opposite’s definition of petty cash has come down from £1 billion to £110 million. On a number of issues, including the VAT changes, we said that we would consult. We have consulted and we have come up with what we believe is the right approach, having talked to a range of interested parties.
Lord Sassoon
My Lords, we are ranging a little widely at this point. My understanding is that discussions with the Welsh Assembly are going on. We intend to report back by the end of the year. A Barnett floor is one of the ideas that I know has been put forward, among others, and is subject to the discussions with the Welsh Assembly.
Lord Low of Dalston
In the debate on the Queen’s Speech, the noble Lord assured the noble Lord, Lord Skidelsky, that sustainable recovery was already under way, as he has again said this morning in response to the noble Lord, Lord Barnett. How does he reconcile that with the fact that we are actually plunging deeper into recession? Is this recession denial?
Lord Sassoon
My Lords, if one looks, for example, at job creation over the two years since the election, the private sector has created more than 600,000 jobs at a time when some 400,000 public sector jobs have been lost. The latest figures show that unemployment is at a seven-month low. Of course we would like to see growth sustained and at a higher level, but we should not run down the very considerable achievements of the private sector in generating jobs and exports in the economy.
Lord Higgins
My Lords, as we have been told time and again by the Opposition that the Government are cutting the deficit by too much and too fast, would it take much longer to reduce the deficit if we were to adopt the policy of the Opposition?
Queen’s Speech
Lord Higgins Excerpts(12 years, 6 months ago)
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Lord Higgins
My Lords, this Queen’s Speech has been debated against the background of the recent election results. It is true that all Governments have mid-term problems, but the recent ones seemed to be particularly obscure. Some were due to a degree of mismanagement and some to a high degree of bad luck. They also reflected contempt for Parliament by the Government in a number of respects. It was said that the Budget was bad; that was the general received view. In fact it was a perfectly reasonable Budget. What was true was that it appeared that the details were given to the press the day before—totally contrary to all the traditions of Parliament. Of course, that was the good news, so perhaps it was not surprising that the bad news got all the publicity the day after. I hope that those responsible were demoted or fired, or some other appropriate action was taken. Similar things happened with the Queen’s Speech. We must restore a situation in which important statements are made first to Parliament and not given to the press the day before, creating an anti-climax the day after.
There is also evidence of clear contempt in the programming of legislation in the other place. Perhaps my noble friend would like to speculate about how many Bills in the Queen’s Speech scheduled to be introduced in the other place will be programmed. That is an area where the Government are preventing the House of Commons doing its job. This is to be deplored. It is a fact that we have therefore carried a much heavier burden. This must stop. The practice was introduced by Tony Blair. We gave an assurance that we would not do it; and we are doing it. It must stop because the issues in the Queen’s Speech must be debated properly in both Houses of Parliament.
I will say a word about the amendment tabled by the noble Baroness opposite. It does not take sufficient account of the first six items in the Queen’s Speech, which all relate to what she complained about. It is also the case that the overall effect of the Government’s inheritance must be taken into account.
I will say a word or two about the fashionable item of the moment: growth, or stimulus. We should revert to the old-fashioned idea of demand management, with a clear statement by the Government on how they intend to proceed in stimulating demand so that we mop up excess capacity and, once we have got close to the limit we can reasonably achieve, increase demand in line with what we expect productive potential to be.
There is an intrinsic problem in stimulating growth by cutting the deficit and using fiscal means to stimulate that growth. The burden has been placed much more on monetary policy, which concerns me. Gordon Brown was criticised on many fronts, but not for the fact that monetary policy was handed over to the Bank of England. In fact, it was not monetary policy for many years, but an interest-rate policy. Certainly we have now virtually exhausted the possibilities of using lower interest rates to stimulate growth.
I am also concerned that more and more of the burden of economic policy has been placed on the Bank of England. There is a case here. In the course of introducing its monetary measures, the Bank must take into account the overall situation on unemployment, growth and everything else. The Treasury has very nearly abdicated the day-to-day running—and perhaps the longer-term running—of the economy to the Bank. We must consider, particularly given the additional burdens that we are now going to place on the Bank, whether that is the right way of proceeding. Perhaps the Treasury should reassert its authority.
Having said that, and given that we have to rely on monetary rather than fiscal measures to support growth, I welcome the introduction of quantitative easing. It has been a help to stimulating growth in the economy. However, the method employed is open to increasing doubt. My noble friend Lord MacGregor admirably set out the effect that it has had on companies’ private insurance and pension schemes. It is a very serious matter, which he spelt out very lucidly. Should we adopt other means of increasing the money supply? We could abandon the traditional fully funded rule by not funding the whole of the deficit. Part of the problem with the present system is that money goes to the banks, which hang on to a great deal of it instead of lending it to people who then invest it. We should perhaps consider other more direct means of stimulating growth by means of the money supply. Indeed, since we are clearly printing money, we could simply print the money and give it to whatever suitably investment-prone institution is likely to use it.
I turn finally to the question of the eurozone and in particular Greece. We have a situation where Greece has a debt problem and an exchange rate problem. The eurozone authorities are concentrating on the debt problem. They can go on bailing out Greece with the debt problem until Kingdom come, German generosity runs out or alternatively the streets of Athens go up in flames. This is an immensely depressing situation. But they have to face the fact that no amount of bailout in the foreseeable future will restore Greece to a competitive situation. The only way to cure the exchange rate problem is for the exchange rate to change by Greece leaving the eurozone.
One particular point has only become apparent in the light of various statements made by the different multi-political parties in Greece and the argument, “Oh well. Don't let’s bother with austerity: the eurozone will bail us out just the same”. The left wing parties are putting that forward and it may turn out to be right. But we also have to take into account the real dangers to the banking system as far as this is concerned. I will conclude in one moment. Paradoxically, the right answer in this respect may be to bail out Greece on the condition that it leaves the eurozone, because that will mitigate the otherwise disastrous effects on the international banking system. Again, we have underestimated the technical problems of all this. They are very great indeed but alas I do not have time to spell them out.
Economy: Budget Statement
Lord Higgins Excerpts(12 years, 8 months ago)
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Lord Higgins
My Lords, this is an excellent and imaginative Budget and I strongly support all of what is in it, but it is singularly unfortunate that the presentation should have been spoilt by what seems to me to be a disregard for the convention that Parliament—that is to say, the House of Commons—should be the first to be told what is in the Budget and its details. It is a long time since Hugh Dalton resigned simply because he spoke to a journalist on his way into the Chamber to announce his Budget, but none the less, I believe that the convention remains extremely important—not least because of the dangers that arise with market-sensitive information in the Budget. In that context, I was worried by the front page of the Financial Times yesterday, which states:
“Mr Osborne will confirm that he is cutting the top rate of income tax from 50p to 45p, but the wealthy will be hit by a punitive array of higher levies on the purchase of expensive homes and a crackdown on avoidance schemes.
The chancellor will introduce a 7 per cent stamp duty rate on sales of property costing more than £2 million—according to officials involved in the Budget”.
That is a very worrying statement indeed. We must not allow this kind of thing to happen. I do not know whether my noble friend would care to comment on that.
The other thing is that clearly, in public relations terms, it was a disaster. Almost everything was released in advance, except for the proposals on pensions, so almost every front page this morning carries scathing remarks about pensions although, as my noble friend just said, pensioners have in fact been hit less than other taxpayers. Those headlines are misleading, but that is a worrying development.
On the specific proposals, I am very pleased to see the rise in the tax threshold which will take people completely out of tax, which is always a great advantage if it is possible. I believe that we must move more in that direction. Equally, I believe that the cut in corporation tax is very important if we are to get growth. It certainly makes us competitive with our European partners.
I am also pleased about what the Chancellor did not do. He did not, as the Labour Party had been suggesting, cut the basic rate of VAT. It is true that it has gone up, since I introduced VAT through the House of Commons at 10 per cent, to 20 per cent, but none the less, it seems to me that the present rate is necessary. I am particularly glad that the Chancellor went out of his way to reaffirm the present structure of VAT, which gives zero rating to those items most important in the household budget, something which no other VAT in Europe does. All of that is very good news.
We are debating the effect of the Budget on the economy. The reality is that the effect of the Budget on the economy will be virtually nil. It is a fiscal-neutral Budget. This is a micro tax-managing Budget—in many admirable ways—not in any way a major macroeconomic management Budget. Therefore, the reality is that the weight of economic management has been shifted from fiscal management, from the Budget, on to monetary policy. There has been a very big change in that.
I originally deplored the fact that what was called the Monetary Policy Committee was not a monetary policy committee at all, it was an interest rate committee. It went on for years and years fiddling around with one particular interest rate, rather than being concerned with the supply of money. One worry has been that monetary policy in the sense of control of supply has, until recently and the advent of quantitative easing, been virtually ignored. We now have quantitative easing. Throughout, I have come out strongly in favour of it. Given the other restraints, given the level of interest rates, it seems to me that that must be the right approach.
I was therefore delighted to see a beautifully written article—I could not possibly have written it anywhere near as well—by Mr Martin Wolf in the Financial Times of 15 March. It said absolutely everything which ought to be argued on quantitative easing. He poses two particular questions: first, is it effective and, secondly, is it dangerous? As the OBR report states, it remains to be seen whether this round of quantitative easing is as effective as the previous one, but it has certainly assisted in the growth of the economy. That is something which we should all welcome. The risks depend on inflation, but we have to take that in the context of the general state of the economy. The OBR report contains fascinating passages on that. In a section on monetary policy, it specifically points out that we must be very careful in that regard, but one has to take into account on the inflation risk the level of excess capacity in the economy. The OBR proposes, and I am sure it is right, that we should gradually increase the level of demand through monetary means until we have mopped up a large part of that excess capacity, particularly in terms of unemployment. It is none the less very important, to the point where it does become an inflation risk, that other action should be taken.
In that context, I have some queries about the way in which quantitative easing is being operated. It is undoubtedly having adverse effects, particularly on pension funds, as lower interest rates affect the pension funds’ ability to fund future pensions. Perhaps at some stage we should ask whether quantitative easing as currently operated is the right way of increasing the money supply. There might be other effective methods that do not have the adverse effects to which I referred. As we are, let us make no bones about it, printing money, dare I say that it might even be a good idea simply to print it and distribute it on an equitable basis across the population? We have, after all, an election coming up fairly soon.
Be that as it may, I think that there is some confusion about the way in which quantitative easing is operating. It is not in the least bit clear whether the Bank’s purchase of gilts from the market is the right way to do it. The tendency is for the banks to use the money to build up their balance sheets rather than to extend it in loans to small or other businesses. None the less, it is not at all clear what the Bank is going to do with these gilt-edged securities. Will it hold them in reserve until such time as the economy starts to overheat and it needs to take the opposite action from that which it is taking at present, or should it simply cancel the gilts in its portfolio? I have searched in vain throughout the mass of documentation to find out what, in pure book-keeping terms, is really happening with this operation in relation to the Debt Management Office and so on. Perhaps we should look at that in order to illuminate what is really going on.
Overall, this is an excellent Budget. I believe that it does as much as possible in the circumstances to help particular individuals and, on the economy, to increase our competitiveness abroad. Europe is still a terrible risk. At least it has dealt with the debt problem for the moment. However, it has totally failed so far to deal with the exchange rate problem in the European Union. That is certainly a big risk, which we face.
Lord Sassoon
My Lords, I welcome the debate that we have had today and the valuable contributions that have been made, including particularly those from noble Lords in all parts of the House who have drawn attention to the many initiatives in the Budget that I did not have time to highlight in my opening speech. I am grateful for the opportunity to reply to as many of the points raised as I can, but I will not have the time to reply to everything—there have been a lot of questions.
I reiterate this Government’s number one economic priority: tackling the record peacetime deficit that we inherited from the previous Government and restoring economic stability. We will stick to our deficit reduction plans; I assure my noble friend Lord Flight of that. I noted the contributions from a number of Peers—the first was probably from the right reverend Prelate the Bishop of Chichester—acknowledging the need for a fiscally neutral Budget at this time. As my noble friend Lord Higgins pointed out, a combination of tight fiscal policy and loose monetary policy is the balance that we are taking forward. I assure my noble friend that the Bank’s holding of gilts under quantitative easing is completely transparent; it is updated day by day on the Bank’s website and the position will be unwound in due course.
Nevertheless, we have a steady stream of noble Lords from the Benches opposite who still preach the idea of free spending with as much money as is out there, with no fiscal discipline. They do not seem to have learnt lessons. I am not surprised by the noble Lord, Lord Liddle, espousing that but I am a little surprised at the noble Lord, Lord Desai, saying that we should spend this £28 billion from the Royal Mail pension plan. We inherit £28 billion of assets but we inherit liabilities to the pensioners that are considerably higher than that. Is it really right that we should spend that money? No, we will not. As for suggestions that we might like to recook the books, I think that we had enough of cooking the books under the previous Government. We will not go there. As it happens, the noble Lord, Lord Desai, was doing what I had been doing a little earlier to look for the GDP number. I assure him that it is there in table D2 of the Red Book, but I agree that you have to look some way into the document.
We will stick to fiscal rectitude. Even if we were to decide to hand out vouchers, which we will not, I do not know how we would be assured about where they would be spent—we could not be sure that they would all be spent on goods produced in this country.
I was rather hoping to keep away from too much historical analysis of how we got to where we are, but perhaps I should be grateful to the noble Lord, Lord Eatwell, for drawing our attention to chart 1.5 of the Red Book. He seemed to suggest that it showed what a good job the previous Government did to keep the deficit under control. Perhaps he would like to look closer at that chart. It exposes to the full glare of daylight exactly what the previous Government were doing. It shows that the Labour Government continued to borrow £30 billion to £40 billion a year while the sun was shining. That illustrates precisely the nature of the structural problem that we inherited: running budget deficits year after year to create the illusion of growth until the credit card finally ran out. We will not go back to that.
Having talked about the basic stance of the Government, let me deal with the question of leaks, because it relates directly to the way that the previous Government used to conduct their business. As the Chancellor said in the Budget Statement, a Budget produced within a coalition is different. The days of the Chancellor coming up with a Budget in secret are—whatever we think about the rights and wrongs—gone. This was not a Conservative or a Liberal Democrat Budget, it was a coalition Budget, as we have heard from the broad agreement from coalition Peers this afternoon. As the noble Lord, Lord McFall of Alcluith, recognised, that makes this Budget different.
In the course of coalition Budget negotiations, various proposals were raised, discussed and debated. I come back to what we have been used to in previous years. It has been more widely debated than in previous years, when the Chancellor briefed the Prime Minister on what was in the Budget the day before, if the Prime Minister was lucky, and even more than in the dying days of the previous Government, when the Prime Minister told the Chancellor what should be in the Budget the night before. We do not need lessons from Members opposite on how to conduct ourselves in the run-up to a Budget.
Lord Higgins
That was not quite the point I was making. I understand about negotiations within the coalition, but it appears—for example, from the front page of the Financial Times—that officials told the Financial Times before the Budget was announced what was going to be in it. I believe that the House of Commons has the right to hear first.
Lord Sassoon
That issue has been the subject of an Urgent Question in another place this afternoon, and the Government have explained their position in an answer there.
I have said that we will stick to our fiscal position. That means that there continue to be tough choices to be made. Some of those tough choices have been highlighted this afternoon. I start with my noble friend Lord Newby, who gave a fair and good analysis of the issues about pensioners and the fair deal that they are getting. However, because the noble Lords, Lord McFall, Lord Myners and Lord Davies of Oldham, and others raised the issue, let me underline it again. The Government are committed to supporting pensioners. The IFS confirmed today that that is indeed the case. Pensioners will get the largest ever rise in the basic state pension this April to £107.45 a week. The Government are protecting pension benefits, including winter fuel payments, free prescriptions and eye tests, free bus travel, free TV licences and, of course, the triple lock on the basic state pension is being introduced. The single-tier state pension will be introduced and has been estimated to be likely to be £140 in current terms. I refute the suggestions that pensioners have been poorly treated. We are all in this together.
My noble friends Lord Fink and Lord Sheikh have quite properly raised the issue of tax transparency. I agree with them on the importance of the new annual statements, which will show everyone who pays tax what they are paying and where the money will be spent across the different categories of expenditure. I am sure that will raise a healthy debate.
On tax reform, I am very confused about where the Opposition stand on the 50p tax rate. Are they really still saying that the Chancellor of the Exchequer should justify the continuation of a tax that is shown to produce next to no revenue for the country and which materially affects our global competitiveness? The noble Lord, Lord Eatwell, quotes approvingly the Institute of Directors, but the main part of the institute’s statement after the Budget called for the tax rate to be reduced to 40p. Is that what the noble Lord, Lord Eatwell, wants? The noble Lord, Lord Wood of Anfield, who is not in his place at the moment, questioned whether the Government had been fully transparent on this. The forestalling number that he was looking for is set out in bold type on page 51 of the Red Book, a complete contrast to what the previous Government did in not even recognising that there was a forestalling problem. The tax raised less than a third of the estimates that they put out. I believe that they are in no position to question the basis on which we have looked at the evidence in coming forward with a 45p rate.
Eurozone Crisis
Lord Higgins Excerpts(12 years, 10 months ago)
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Lord Sassoon
My Lords, first of all I welcome the compliment paid to my Answer by the noble Lord, Lord Barnett. He asked me a yes or no Question. I gave him a very full Answer and some extra things he did not ask about, so I am glad that he appreciates that. I am not going to speculate on our negotiating position because this is all very fast moving. All I can reiterate is that we are working very hard with our European partners to see a resolution of all aspects of the crisis. They have invited us to be at the table to discuss the arrangements that the eurozone countries are making among themselves and we are active and positive participants when we are invited to be there, as we are at those discussions.
Lord Higgins
My Lords, does the Minister agree that it is very much easier, technically, for a country to join the single currency than to leave it? Does he accept that the contingency plans which he mentioned—and which are welcome—need to be designed to ensure that, for anyone leaving, the process is completed as soon as possible? It is not just a question of having the notes and coins available but of having an extensive programme, including provision for exchange controls. I welcome my noble friend’s reply but stress that this is a very complex question.
Lord Sassoon
My noble friend makes some interesting and relevant points. I shall not speculate on what precise aspects the Government are looking at in their exercises but, as he points out, none of this, under a range of scenarios, would be at all simple.
Independent Commission on Banking
Lord Higgins Excerpts(12 years, 11 months ago)
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Lord Sassoon
My Lords, I can confirm to the noble Lord, Lord McFall of Alcluith, that the Joint Committee’s report, which was published only today, will be taken very seriously on governance and all the other matters that are contained in it. As to switching accounts, I hear what he says about number portability, which is not at all an easy issue, as he well knows. All I would say is that the ability for seven-day switching, including all direct debits, credits and standing orders—which we now have the banks’ agreement will be implemented by September 2013—is a significant advance that will help millions of consumers.
Lord Higgins
My Lords, the report by the ICB is very large, comprehensive and detailed. It says that it would be desirable for the Government to express a view on it as soon as possible, which they have done. However, the Statement appears also to include one or two items that—I think I am right in saying—are not in the report. In particular, I understood my noble friend to say that there would be a tightening up of the Basel proposals, or that the Government would propose that. Secondly, he said that there would be depositor preference, which does not appear in the report unless I am mistaken. Will that require primary legislation and, if so, when are we likely to have that? Overall, it seems that we have just had another Statement, which has become available only recently. When will we have an opportunity to debate it? We have not really had any opportunity to comment on it now, since it appeared only a few moments ago.
Finally, on timing, there are two things. I agree very much with my noble friend Lord Lawson about the timing of the legislation. The banks need to know what is in the legislation. We should get that through the House at the earliest possible moment. Saying that we will do it in the course of this Parliament means that it will take far too long. Waiting until 2019 for the overall implementation is absurd. To suppose that there will be no financial crisis that is related to these proposals until 2019 would be the height of optimism. We have to get it through before then.
Lord Sassoon
My Lords, on the tightening up of Basel III, as my noble friend puts it, the provisions around loss absorbency of 17 per cent and the bailing provisions are items that go beyond Basel. They are welcomed on a global basis. We now have to make sure that the way in which the EU implements Basel III is not only compatible with Basel III itself but allows the UK to go further for as long as the global community is entirely comfortable with that. Depositor preference requires primary legislation. In relation to primary legislation, discussion of all this and the process, the next major stage will be a White Paper, setting out in greater detail how the remaining important detailed matters will be handled in the draft legislation. The draft legislation will then come. I believe that there will be plenty of opportunity, in a staged way, for noble Lords to consider all the detail.
EU: Member States’ Budgets
Lord Higgins Excerpts(12 years, 12 months ago)
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Lord Sassoon
My Lords, I am not going to say who should be complaining about what. All I would say is that the eurozone has got itself into a position where it really needs to get on and strengthen its own governance arrangements. We will do everything to encourage it to do that but we, as the UK, have a particular position that we will also protect to make sure that Parliament is able to scrutinise our budget first.
Lord Higgins
My Lords, given the UK opt-out, is it the case that the final part of the noble Lord’s initial Question is not correct as far as UK is concerned?
Lord Sassoon
No, my Lords. I believe that the whole of my Answer was completely correct.
Autumn Budget Forecast
Lord Higgins Excerpts(12 years, 12 months ago)
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Lord Sassoon
My Lords, I am grateful to the noble Lord, Lord Empey, for drawing attention to this critical issue because it is potentially an important structural change in the economy. We want to make sure that in the labour markets in all the regions of the country there is no unfair competition or crowding out in any way of the ability of the private sector to hire people. Private sector pay has to be reflective of local market conditions where until now public sector pay has been set on a national basis. We have said that we will be asking the independent pay review bodies to consider how pay can be made more responsive to local labour market conditions, and they will report to us by July 2012.
Lord Higgins
My Lords, I think that it is perhaps rather unfortunate that the Statement was not repeated today because it is very well worth repeating. It includes a remarkable number of individual proposals that are going to help the recovery without endangering the Chancellor’s overall objective of maintaining what I think has become known as plan A, which will result in the deficit being reduced. Is it not rather surprising that the shadow Chancellor in another place continues to say that the proposals of the Government are cutting too fast and too soon? We have seen how very difficult it is to make cuts quickly, and in fact that is one of the problems we have had to face.
In answer to the noble Lord, Lord Myners, saying just now that the Government’s proposals are not respectable, does my noble friend accept that the OECD—perhaps as respectable a body as one could possibly imagine—has warmly endorsed the overall drive of the Chancellor’s policy? Moreover, is it not clear, since we have the advantage of the IBR forecast taking into account what is in the autumn Statement rather than making a forecast based on not knowing what the effects of the Chancellor’s Statement would be, that what the Government have proposed in the autumn Statement will effectively bring matters back on course so that the plans that the Chancellor originally had will be fulfilled?
Having said that, there are some concerns about the situation with regard to monetary policy. Paragraph 3.53 in the forecast of the OBR is very strange. It is important that we should maintain growth in the money supply if we are to see recovery. Can my noble friend tell us what the situation is so far as the money supply is concerned?
Lord Sassoon
I am grateful to my noble friend Lord Higgins. I wondered whether we would get through this debate without mention of the money supply, but he has not disappointed me. We have had it as well. I agree absolutely with his analysis of the situation. As the OECD said yesterday, the UK’s consolidation programme strikes the right balance between addressing fiscal sustainability and preserving growth. I can also confirm what my noble friend says. The OBR analysis shows that we are on track to meet the fiscal mandate set out by the Chancellor last year. In respect of monetary easing, I can only draw my noble friend’s attention to the stance taken by the Bank of England with an additional £75 billion of asset purchases, which it believes is necessary in order to ensure that there is no undershoot of inflation, and the package of credit easing measures. The noble Lord, Lord Myners, did not seem to want to see it this way, but that package has been designed to complement the monetary easing with which the Bank of England is driving ahead.
Eurozone Crisis
Lord Higgins Excerpts(13 years ago)
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Lord Sassoon
First, it is probably not productive to rake over too much of the history of this. An awful lot of those who advocated the creation of the euro and the UK’s participation in it have been proved completely wrong by the way that events have unfolded over recent years. Therefore, arguing about whether competitiveness should have come before or after the creation of the euro is more for historians. That is why it was in my right honourable friend the Chancellor’s Statement that the competitiveness of the euro-periphery countries, vis-à-vis Germany as the benchmark of economic and industrial efficiency in Europe, is a critical issue that has to be addressed; and that the second dimension is the competitiveness of the EU as a whole in a global economy. I completely agree with the noble Lord that this has to be central to the solution going forward.
As to who should or should not be in the euro and what the size of it should be, that is for the euro to work out. The Government have no view on whether euro membership is inviolable. We simply say that that is a matter for the eurozone. What we want to see is these issues of competitiveness within and without the eurozone very high on the agenda. As far as dealing with internal competitiveness is concerned, that inevitably means a degree of closer fiscal co-ordination, the inevitability of transfer payments between members and all the logic that flows from that.
The competitiveness of the EU27 and the outward-facing euro are completely different matters that do not require similar questions of political union. We have a very good paradigm in which the EU27 can co-operate. It is just a matter of them focusing on the structural, market, competition and financial regulation issues, none of which requires any closer political union. They are technocratic, single-market trade and economic issues.
Lord Higgins
My Lords, I congratulate the Chancellor on the extremely active and skilful way in which he has defended British interests in the course of these very complex negotiations. As far as the possible costs of the operation are concerned, will my noble friend clarify the situation? Is he saying that under the arrangements that are now put forward there can be no cost to the UK taxpayer? It would seem to be true of the first part of the Statement. The position with regard to the IMF seems a little obscure because, if I understand it correctly, the Chancellor is saying that he is prepared to contribute more to the IMF but will not contribute if that money is going towards bailing out the eurozone or members of the eurozone. Will my noble friend say how that is to be achieved because, from my experience of the IMF, I am not at all clear?
As far as the banking side of things is concerned, my noble friend suggests that the Government may get involved in the process of recapitalisation if other methods do not succeed. Will he tell us what the likely or potential cost of that could be and, in particular, if we are going to contribute to the recapitalisation, is there any implication as far as ownership of the banks is concerned?
Finally, I shall pick up the point just made. At the end of the day, as far as I can see, none of these huge amounts of money being thrown around will make a significant difference to the competitiveness of, let us say, the Greeks. If the IMF is involved, then perhaps it will because it imposes very stringent conditions which, on the whole, have been enforced, but all this money is simply flowing around to bail out the Greeks. It is not making them more competitive. Indeed, is it not fairly apparent that the Greeks joined the eurozone at an exchange rate at which they were not competitive? As far as one can see, it is inconceivable that they will become competitive. These measures certainly do not do much to achieve that. In that case, are we simply delaying the day, sooner or later, when the Greeks have to leave the euro?
Lord Sassoon
My Lords, let me try again on the IMF because my right honourable friend and I seem to have failed so far to get this clear. I will have another go. There was a proposal under the previous Government, which was endorsed by this Government—and voted against by the Opposition in another place even though their party had previously put it forward—for the IMF to increase its resources to match the growth in the global economy. It has nothing to do directly with the eurozone but is to do with the size of the global economy and the IMF’s global mandate. We support that increase in resources.
I should say again that no member shareholder of the IMF has lost any money on the back of the IMF’s contribution to the many adjustment programmes that it has entered into for many years. In relation to Europe and the eurozone, the IMF is involved in the three eurozone programmes. We have no difficulty about the IMF being involved. That is what it is there to do, provided it is entering into adjustment programmes related to eurozone countries on the same basis as it has done to this point and as it would do with any other country. That is absolutely fine. However, the IMF should not contribute to some special eurozone fund—that is not what the IMF is there for—and I have no reason to believe it will do that. We certainly would not be part of any such special use of IMF resources.
It is not correct to say that there will be any UK contribution to the recapitalisation of the eurozone banks. If there is a contribution from the public sector, the taxpayers of Europe, it will come from those countries that have contributed to the ring-fenced fund, the EFSF, and the UK is not part of that fund. We have recapitalised our own banks. We are not contributing to the recapitalisation of the eurozone banks. I hope that that is also clear.
Greek competitiveness is addressed by the adjustment programme agreed with the EU and the IMF. The challenge is to make sure that, under the normal ongoing monitoring programme over the next few years, Greece is held to its commitments. But, critically, there are, in its adjustment programme on which its bailout package is conditional, all sorts of conditions aimed to increase Greek competitiveness.
Independent Commission on Banking
Lord Higgins Excerpts(13 years, 2 months ago)
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Lord Sassoon
I am grateful to the noble Lord, Lord Barnett, for welcoming the Statement. Clearly, there is a series of different sorts of recommendations in the report. Some of them relate to ring-fencing and the adequacy of capital, where the date of 2019 fits in with the move to implementation of Basel III. So there is a clear logic for making sure that the construct that we are putting in place here is targeted at the same date as the related international recommendations in the same area. On the other hand, of course there are recommendations in areas such as competition, connected, for example, with the ongoing disposal of Lloyds branches, where the timetable is rather different and where the commission, quite rightly, is looking to see action on a shorter timescale. We need to look at the pacing of some of the reforms in relation to 2019, that being the date of Basel III implementation, and others in relation to the individual merits of the case. That is the approach we will take.
Lord Higgins
This is certainly a massive and comprehensive report which is rightly welcomed by the Government. I have two questions. First, there is certainly a point of view which says that the right answer is to have complete separation of investment and retail banking. The commission has not come down in favour of that but in favour of ring-fencing. The danger is that there are loopholes in the ring-fence. Could my noble friend say in what circumstances resources might flow from one side of the ring-fence to the other, thereby continuing, albeit perhaps in a more limited form, the dangers which arise if there is a degree of connection between investment and retail banking?
Secondly, as far as timing is concerned, I understand the point my noble friend is making about Basel. However, it has also been suggested that, given the state of the economy, it would be dangerous to implement these changes too quickly, because it would inhibit the continued recovery. Would my noble friend agree that it is right to review that aspect of timing as we go along, and not set in concrete the idea that we should wait until 2019 before going ahead with the ring-fencing proposals?
Lord Sassoon
My Lords, I regret that I may fail to satisfy my noble friend Lord Higgins in my answers. On his first point about the design of the ring-fence, and whether there are loopholes, the commission has been quite clear in relation to one or two major structural elements of the ring-fence. It has recommended that discretion should be allowed to the banks as to whether the lending business to large industrial companies should be on one side of it or the other. That will be the first of a number of detailed issues that need to be looked at in the design work. I would not wish to pre-empt that work, other than noting that my noble friend’s question of loopholes and how they might come about will be, I am sure, very much in the minds of those doing the detailed work.
On the speed of implementation, I do think it is important—as it was with the Basel III work, and the European directive that flows with it—that the banking industry, taxpayers and all those who deal with the banks have a clear understanding of what the end position will be. There is a separate question as to what the appropriate implementation timetable will be. I am sure that the commissioners thought very carefully about this when they put forward the date of 2019. I repeat that—as my noble friend will know—it is the same date as the Basel implementation. I am sure they thought about that very hard.
Finance (No. 3) Bill
Lord Higgins Excerpts(13 years, 4 months ago)
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Lord Higgins
My Lords, we are really having two separate but related debates: on the one hand, on the report of the Finance Bill Sub-committee on the Budget of 2011—I congratulate my noble friend Lord MacGregor and his committee on what they have produced—and, on the other hand, more generalised debate about the state of the economy.
I begin by commenting on what is said in the report of my noble friend Lord MacGregor. It refers to a new approach to tax policy-making involving the tax consultation framework. The idea that this is new is rather surprising. It is a very long time since I was involved in producing a draft set of clauses on VAT legislation. The more we can have consultation in advance of the tax proposals, the better. The other aspect of this side of things is the question of how the proposals, when they arrive, are considered. I was tempted to go back into the archives and look at the first report from the Select Committee on Procedure (Finance) for the Session of 1982 to 1983, which it so happened I chaired. It had a distinguished membership, including Mr Enoch Powell. The proposals that it brought forward are still relevant and particularly in the context of my noble friend’s Bill. Perhaps his committee might like to look at this report, which I think is very valuable and still relevant to our situation.
We said that there should be a division in the Finance Bill and that there should be a taxes management Bill, which would be introduced at the beginning of the Session. This would involve the mass of technical—I am inclined to say—junk, which appears in this massive document that we have in front of us this evening. The actual Finance Bill would be as far as possible only concerned with tax rates and the management side of them. There is a strong case for this division and, as we went to suggest, for a separate Bill if a new tax were being introduced. But, the present arrangement that we have with Finance Bills so far as scrutiny is concerned is not satisfactory. Perhaps my noble friend could tell us how many of the clauses in the Finance Bill were debated in detail in the Commons; it would be interesting to know. With this legislation, the Commons does not have the longstop that your Lordships have of being able to look at it, which they have for other legislation.
I turn now to the other aspect of the matter. I am becoming increasingly heretical over the idea that the case for absolute minimum rates of interest has been made. We ought to consider the considerable disadvantages of a hyper-low interest situation. My former constituents in Worthing living on fixed incomes, having been prudent all their lives and having saved, are being devastated by the low interest rates which they can now get. It is a major disincentive to saving, which is very important in the present context, not least in relation to the extent to which there are bank deposits which might enable the banks to lend more.
On the other side of the argument, this does mean that we have a lower exchange rate than we would otherwise have. This may be important as far economic growth is concerned but people are also being misled into believing that this hyper-low interest rate policy will go on indefinitely. A large number of people are taking out mortgages and borrowing on the expectation that interest rates will not go up further. This policy is being sustained only because the Bank of England has effectively given up any prospect of using interest rates to control inflation. That cannot go on indefinitely. There is bound to be a significant increase in interest rates, which could have devastating consequences. I am very concerned about that.
More particularly—this will not be news to the usual suspects in this debate—I am concerned about the way in which the Bank of England is preoccupied with the price of money—that is to say interest rates, and not the quantity of money. Fascinatingly, having thought at the weekend of what I might say today, I suddenly found on my desk this morning a report by the Institute of Directors on the big picture and on whether we are we making a big mistake. It stresses the importance of the money supply. It also—and this is interesting politically—says:
“There is a real risk of economic weakness as a result of the money supply”—
it means the lack of money supply—
“is mistakenly attributed to the Spending Review and tight fiscal policy”.
I recommend this report to your Lordships. It even goes on to refer to the monetary equation MV=PT which the noble Lord and I had exchanges about when he was a Minister. That shows its credentials are good.
In any event, it points out about the level of increase in the money supply that:
“Broad money growth is now the lowest it has been on a sustained basis since modern statistics were first compiled in their present form in 1963”.
Since 1963, we have not had such a low level of monetary growth. Whether you are a Keynesian, a Friedmanite or whatever, it cannot be the case that if money supply is falling over a sustained period, we find ourselves getting economic growth. We must consider very strongly indeed the case for further increases in the money supply—for quantitative easing, which was rightly introduced at that time by the noble Lord opposite—against the background of such low interest rates that are failing to stimulate the economy. I fear that there is a lack of overall comprehension of policy because of the way that things have been divided between the OBR, the Bank of England and the Treasury and because of the Chancellor not taking an overall view of the picture.