EU: Budget Report

Debate between Lord Layard and Baroness Noakes

Thursday 25th April 2013 Lords Chamber

[Baroness Noakes]

I am very pleased to learn that. I think that backs up my case for the repeal of Section 5 as having no meaning whatever. In addition to repealing Section 5, I hope that the Government will, as part of their current review of EU competences, also look carefully at whether the economic policy articles of the EU treaty, which are basically the source of the documents that we are reviewing today, have any real meaning for the UK. I believe that we should be seeking to disapply those articles as part of our membership renegotiation. Some of those articles talk about the co-ordination of economic policies, but it is clear that the context for them is economic and monetary union, which has no relevance to us. For example, the convergence reporting included in the first Motion would be fine if we were preparing to join the euro, but we are not and I sincerely hope that we will not.

The noble Lord, Lord Harrison, taunted us a little by saying that we would not qualify anyway. I would point out to him that most of the current members of the eurozone do not qualify at the moment, so I do not think that is a particularly good argument. In any event, we are not going to join the euro, so why are we bothering to submit information that we call a convergence programme? Under Article 126, member states have to avoid excessive deficits and submit to monitoring by the Commission, but under the existing UK protocol we are not subject to any sanctions whatever for non-compliance. There is no point in submitting information that simply allows Brussels pen-pushers to find things to do during the day.

Frankly, our economic policy is none of the EU’s business. We should stop this charade of pretending that the eurozone architecture has some meaning for us. The economic challenges for the UK have nothing to do with our convergence with the rest of the EU or whether our economy complies with eurozone rules. To that end, I find it difficult to support the sentiments behind the second of the Minister’s Motions, which are predicated on the relevance of the reporting and surveillance regimes set up under the European semester. These may well be relevant to the eurozone—I have no real view on that—but I am clear that they are not relevant to us. Of course the UK has an interest in the economic health of countries within the EU and we have an interest in the stability of the eurozone, or at least in the avoidance of a disorderly break-up of the eurozone. However, our interest derives from the fact that European countries are our trading partners and not from our membership of the EU. We are always interested in the economic status of countries with which we trade, whether they are in the EU or not.

I agree with the noble Lord, Lord Eatwell, on the importance of the UK being competitive in export markets on a global basis. However, we should remember that European countries account for a minority and a diminishing proportion of our external trade. If we knock out the Rotterdam-Antwerp effect, we probably export less than 40% of our exports to EU countries at the moment, and that 40% really only represents five countries that are important to us. Furthermore, we have a substantial trade deficit with EU countries— £46 billion in the latest statistics—and the growth prospects for the EU are at best weak.

The rest of the world is much more important to the UK both in terms of the proportion of our exports and the fact that we have a trade surplus. Since growth prospects for rest of the world are distinctly more promising than for the EU, our focus should be on looking not at what the EU is doing but at what is happening in the rest of the world. The IMF forecasts for 2014 show the emerging economies powering ahead at a little short of 6%, the US—a major trading partner for us—at 3%, but the poor old EU struggling along at around 1%. I think that that puts today’s Motions in context.

The second Motion before us invites the House to support the five priorities which are set out in the EU’s 2013 Annual Growth Survey, which the Government say are in line with their own growth agenda. In line with my earlier comments, I do not much care whether our economic policies are in line with the EU’s priorities but I do care whether our policies will deliver growth and success in the UK economy. Today’s GDP statistics, which have already been referred to, are encouraging but clearly we still have a long way to go.

Your Lordships’ House had an opportunity to debate the Budget Statement last month. I regret that I was unable to take part in that debate. I have no intention of wearying the House with the speech that I would have made had I been able to attend but, in concluding, I will just reflect on one aspect of the Chancellor’s policies to support the economic growth which we so desperately need. That concerns taxation, an area in which the EU’s policies are simply not relevant to us. In introducing the debate last month, my noble friend Lord Deighton said:

“I believe that this Government have got the tax mood music just right. Lower tax rates for companies and individuals are essential for a successful enterprise economy”.—[Official Report, 21/3/13; col. 689.]

The thought that I want to leave with the Minister today is that the tax mood music is certainly making a better sound than we have heard for many years but it is not yet playing the tunes that make us dance for joy. We still have high rates of tax on individuals, including some very nasty marginal rates in the £110,000 to £120,000 range. The corporation tax destination rate of 20% is great by G20 standards, and was a really encouraging move in the Budget, but it is not a low rate when compared with the rest of the world. We do not compete only with the G20 when investment decisions are made. We need to be competitive in a much broader context and cannot be complacent on that. Low tax rates—both personal and corporate—are strongly correlated with economic growth and wealth creation, which increases tax revenues. High rates do the reverse. Our economy needs much bolder action and much more courage from the Government on tax.

[Lord Layard]

My Lords, I welcome this debate, which I think is more timely than on previous occasions when we have had this type of debate. Now even the IMF is beginning to question the Government’s strategy. Why is that? Because of the facts: we can see that the strategy is not working. However, as far as this side of the House is concerned, we have never believed that the strategy would work. We did not need to see the evidence that it was not working. We never thought it could because it was based on three major fallacies: a wrong diagnosis of the problem, which led to a faulty remedy and was linked to an absurd myth about the problems for future generations. These are three basic errors in thinking that have led to practical untold misery for millions of our people. I do not think we will get out of our present problems until we have a fundamental rethink on these three basic issues.

I will quickly go through them. First, what is the problem that caused the crisis? It was not, as is put about, the profligacy of the Government. I have been looking at the lovely Green Book that the Treasury produces and have found a really remarkable fact, which is that public sector net borrowing, cyclically adjusted, was lower at the beginning of the financial crisis than in the last year of John Major’s Government. That is a very important point. So we rule out government profligacy as the cause of the problem. The cause was the profligacy of the private sector banks. These banks imploded and that led to a collapse of private sector spending and a rise in private sector saving. That is what caused the recession but it is also what caused the government deficit.

I should like to be sure that we are all clear on the fundamental identity that every A-level student knows, which is that the budget deficit is automatically, at every moment in time, equal to the private sector saving plus the balance of payments deficit. The budget deficit can be reduced only if either private sector saving falls or the balance of payments improves. Nobody is expecting a big improvement in the balance of payments so the budget deficit can be improved only if there is a significant fall in private sector saving. That is the condition. Of course, that is also the condition for a reduction in unemployment. Both the things that we are worried about require a fall in private sector saving. That will simply not happen if the Government go on depressing the economy.

The only way forward now is less austerity, in order to get private spending going. In the conditions of a liquidity trap, this has to involve fiscal policy; it cannot be done by monetary policy alone. Of course, we have the proposal from Milton Friedman for dealing with the recession by an increase in government spending, financed by the central bank. This is the way we should be thinking today. The noble Lord, Lord Turner, has proposed it; various people have proposed it. This must be the way forward.

It should be explained to the public that the extra debt is not a debt owed by the Government to anybody; it is simply a debt of one bit of the Government to another bit, which they own. So there is no change in the debt held by the public. We really must consider going down this route. The only objection of any validity is that there would then be an increase in the base money, which, at some future point when people were less willing to hold base money, could lead to an inflation. Then, of course, either the Bank of England can sell some of the debt or, which has a lot to be said for it, the commercial banks can be required to hold more base money as their reserves, which would improve their liquidity and stability.

That brings me to the third error that is bedevilling this whole debate, which is that we cannot have this debt because it impoverishes future generations. You hear this every day on Radio 4. It is a complete misunderstanding because even the debt that is owed by the Government to the public is owed to the British public. If there is less austerity, this higher debt will have been bought out of higher income, so it will have added to the wealth of future generations. Of course, at the same time, it will have impoverished them because they will have to service the debt, but they will be paying themselves and there will be no net change in the wealth of future generations. This is a fundamental fallacy and we have to scotch it because it is intolerable that we should be depressing our economy, depressing business and causing mass employment because of simple fallacies that are being put about.

Existing policy is based on these three fallacies. Of course, it is also based on bad values. It is extraordinary to me that a Government would say that their overriding objective was to reduce the budget deficit. Surely that must be the means to some useful end. The useful end must be a better life for the people, in particular a higher level of employment. Is there any limit to employment caused by a higher level of debt? This has been a matter of controversy. The main research that claimed that there was a limit has now been discredited and it is quite clear that there is no simple limit to the debt that a country can sustain if it has its own independent central bank. It is absolute nonsense to point at any of the euro countries, which are not supported by an independent central bank, and say that we might have got into the same situation.