Financial Stability: Private Equity Firms

Lord Londesborough Excerpts

Wednesday 13th December 2023 Lords Chamber

[Baroness Vere of Norbiton (Con)]

My Lords, there are £250 billion of private equity assets under management in the UK, versus £10.3 trillion of total assets under management. It is a smaller part of the financial system. The noble Lord is not right to say that it is unregulated: UK private equity managers are regulated under the alternative investment fund managers regime. They must also comply with the senior managers and certification regime.

[Lord Londesborough (CB)]

My Lords, I declare my interests as set out in the register. It is hardly surprising that private equity is struggling to do deals and sell its portfolio companies in a climate of high interest rates and low growth. In fact, it is zero growth, as October’s dismal GDP figures show that we have seen no growth at all in the last quarter. In view of capital’s recent flight to quality, does the Minister agree that our lack of an economic growth strategy is the biggest drag on private equity in this country?

[Baroness Vere of Norbiton (Con)]

I do not agree with the noble Lord. As he will have seen in the Autumn Statement, the Chancellor set out significant tax cuts to encourage growth. That is where we are focusing our firepower at the moment.

Autumn Statement 2023

Lord Londesborough Excerpts

Wednesday 29th November 2023 Lords Chamber

[Lord Londesborough (CB)]

My Lords, just two weeks ago during the debate in this place on the King’s Speech, I admitted to being baffled by the Prime Minister’s comments in his introduction. He talked about a “vibrant economy”, which had “turned the comer” and was making investors excited. I should declare that I am an investor in British SMEs, so I was somewhat concerned, rather than excited, to see that the Chancellor appears to have been drinking from the same bottle of Kool-Aid.

In his introduction to the Autumn Statement, the Chancellor says that he is delivering

“the biggest business tax cut in modern British history”

backing

“British business with 110 growth measures”.—[Official Report, Commons, 22/11/23; cols. 325-36.]

He said that we sit in “Europe’s most innovative economy”, which is soon to become an “AI powerhouse”.

That is mouth-watering stuff but, before I rush to invest, let me indulge in some due diligence with the help of the OBR. First, GDP growth of 0.6% this year will accelerate to only 0.7% next year. The tax burden will continue to rise over the next five years to 38% of GDP, the highest rate in modern history, and our interest payments on debt will grow to £122 billion per annum. That is triple what it was a few years ago, raising questions around debt sustainability. Your Lordships may well ask how 110 growth measures deliver so little growth. Is the OBR being excessively pessimistic? Apparently, it is not; the Bank of England is forecasting 0.1% growth next year and just 0.2% in 2025, and most independent forecasters are more bearish than the OBR.

Whichever forecast we take, the problem remains: there is virtually no growth momentum in the economy. As we know, that so-called fiscal headroom to usher in £20 billion of tax cuts was driven by inflation. That is fiscal drag, not economic growth, and it is set to continue. That is why we are heading for the highest tax burden in 70 years: it is a percentage of something that has ceased to grow. Our GDP is stuck at around £2.3 trillion, which is not sufficient to finance public services for an ageing and increasingly unfit population of 67 million, let alone to invest in the nation’s infrastructure.

The Chancellor is rightly concerned about our low productivity, especially in the public sector, yet there is little in this Statement to address that, bar reducing the size of the Civil Service. If we are serious about the “long term”, which is an expression that the Prime Minister and the Chancellor keep harping on about, we need relentless focus on our productivity, which continues to lag behind France, Germany and the US by disturbing margins.

This is not just about pushing up low levels of business investment or providing tax breaks, such as full expensing—welcome though those measures are. Ask employers around this country what the biggest block to productivity is and they will tell you that it is the workforce, not just the supply of labour but the calibre. We need a long-term qualitative approach to improving worker productivity. That involves skills, training and proper levels of investment in education, yet our education budget is not even keeping pace with inflation. In fact, we will pay more interest on our debt this year than we will spend on the Department for Education’s entire budget.

We are still waiting for per-pupil funding to return to 2010 levels, in real terms—a pledge, incidentally, that Rishi Sunak made several years ago as Chancellor. We now have 9 million adults in England who have low basic literacy and numeracy skills. That is a huge productivity blocker in itself.

At the other end of the spectrum, 40% of our graduates are leaving university unable to find graduate-level employment, while saddled with an average £40,000 debt that they will struggle ever to repay. That is a damaging mismatch of skills and vacancies, and a terrible waste of talent and money. We need to address it.

As for skills and training, the Chancellor is stumping up a derisory £50 million over the next two years to increase the number of apprentices in engineering and “other key growth sectors”. To put that in perspective, it is less in annual terms than the wage bill of a second- tier football club such as Norwich City—no disrespect to the Canaries.

I find myself, for the fourth time in my relatively short career in this place, urging the Government to set up a permanent productivity council, headed not by politicians but by leading practitioners from both the private and public sectors, to address the long-term challenges of generating real economic growth. I would appreciate the Minister’s response to this suggestion, for we are in desperate need of a long-term plan for the economy and to generate a growth culture. This Autumn Statement, like its predecessors, simply misses the mark.

King’s Speech

Lord Londesborough Excerpts

Monday 13th November 2023 Lords Chamber

[Lord Londesborough (CB)]

My Lords, I will focus on the economy, in light of the Prime Minister’s rather baffling introduction to the King's Speech where he states that “Our vibrant economy”, which has “turned the corner”, makes investors

“excited about what the UK has to offer”.

As an entrepreneur and investor in SMEs—I declare my interests as set out in the register—I must beg to differ. Our economy is flatlining. GDP is stuck at around £2.3 trillion and has barely moved in the last three years, whatever ONS revisions the Government cling to, and the outlook is for minimal growth.

Our GDP generates some £900 billion in tax receipts for the Government, which, for an ageing nation of 67 million people and a finite workforce, is simply not enough to run public services and invest in infrastructure—HS2 being a case in point—let alone meet the unknown costs of achieving net zero. Our tax burden is now at the highest level since the Second World War, but tax receipts remain arguably some £100 billion per annum short of the nation’s needs. There is no scope for increasing taxes, and the costs of servicing our national debt are spiralling.

The only way out of this is to generate real economic growth—to be specific, 2% to 3% annual GDP growth over a period of five years. Overall, that would add about £250 billion to economic output and, crucially, generate an additional £100 billion per annum in tax receipts. That is the big picture, so let us have an honest appraisal of our economy—or, as the noble Lord, Lord Bridges, put it, full disclosure—identify the opportunities, set out ambitious targets and be fully accountable for them; in other words, take an enterprising approach. That requires a laser-like focus on boosting labour productivity—output per hour—which is fundamental to achieving sustainable growth.

We keep referring to the productivity puzzle but do little to solve it. When the Prime Minister claims that our economy is recovering at a faster rate than France and Germany, he misses the point entirely. Our productivity lags significantly behind those two countries and has done so for decades. I suggest that we cut the hubris and perhaps learn from our neighbours—and learn also from leaders in the private sector who champion the productivity of their workforces. They talk a language we rarely hear in Parliament: that of performance culture. They focus on the critical areas that turn the productivity dial: recruitment, training, incentivisation on performance, management and leadership. We are deep in the fourth hour of this debate and I am the 37th to speak, but no one has mentioned even one of those items.

I have time to touch on only one of those areas: management. We have 8 million managers in the UK workforce, yet 70% of them are deemed accidental managers, having received no proper training to develop the skills required to lead their teams effectively and productively. That begs the uncomfortable question: are we a nation of poor managers?

Take football’s Premier League, which has become very big business. How many of the clubs finishing in the top three places over each of the last 20 years have been led by an English manager? The answer is zero—not one. In the other major leagues of France, Italy, Germany and Spain, those nations’ managers have accounted for more than 30 of the top three places over those 20 years. In that time, not a single British manager has led a top-three club in any one of those countries. Is that a trivial, anecdotal example? No, it is symptomatic of a country that invests too little in its human capital—in education, training, skills and management in both public and private sectors. This is hugely important for productivity but gets far too little attention. Can the Minister say what plans the Government have to develop a coherent plan and strategy for workforce productivity, and when will we see it?

Bank of England: Interest Rate Policy

Lord Londesborough Excerpts

Wednesday 12th July 2023 Lords Chamber

[Baroness Penn (Con)]

While the Government do not recognise the picture that the noble Baroness has painted, we are looking carefully at the data and ensuring that competition is working properly. That is why my right honourable friend the Chancellor met the major regulators last week or the week before, I believe, and agreed a plan of action in each of those areas to ensure that consumers are getting a fair deal.

[Lord Londesborough (CB)]

My Lords, on the subject of talking too much, as the noble Lord, Lord Rooker, has just raised, how helpful was it when the Prime Minister at the beginning of this year set a personal pledge to halve inflation from 10% to 5% when the Bank of England was forecasting 3.9% and holding a target of 2%? What does that do for the credibility and independence of the central bank?

[Baroness Penn (Con)]

My Lords, the Government have always been clear that we want to halve inflation by the end of this year on the path to delivering the 2% target to which the noble Lord referred. The primary driver for that is action by the MPC, which the Government support, but it is also important that the Government make sure that fiscal policy acts in support of monetary policy and that we take action in the short term to bring down inflation; for example, through the energy price guarantee. It is important too that we take action on some of the longer-term drivers of inflation; for example, through improving energy security and supply and tackling things, such as labour supply, which are part of the drivers of where we are today.

UK Economy: Growth, Inflation and Productivity

Lord Londesborough Excerpts

Thursday 29th June 2023 Lords Chamber

[Lord Londesborough (CB)]

My Lords, I too thank the noble Lord, Lord Eatwell, for bringing such a timely debate to this House. It is timely because the twin evils of stagflation—rising prices and low growth—sharpen the need for higher productivity while presenting formidable challenges.

Many businesses in the UK are currently financing wage inflation of 7% to 8% but seeing no growth in output or sales. When that happens, profitability heads south, resulting in diminished appetite for businesses to invest. Chronic underinvestment, both public and private, has become a constant drag on our productivity.

As we have heard, low productivity growth has been with us since the 2008 financial crisis. In fact, over the decade leading to the pandemic, GDP grew on average by an underwhelming 1.8%. But look under the bonnet and we see that 1.2% of that growth came from working longer hours, only 0.5% from capital investment and just 0.1% from innovation and better working practices.

I find that last figure extraordinary when we reflect on the innovation we have all witnessed as consumers and in our professional lives since 2010: the digital revolution, e-commerce, online payments, videoconferencing, automation, online education and, of course, working from home. Although many of these innovations appeared to be transformative, the productivity needle has barely moved. Now the great hope is AI, but the danger is that we witness a new era of automation but, like before, see no net growth in aggregate terms.

I will focus on human capital—the workforce. During the last decade, the UK created over 3 million new jobs and, with the help of immigration, we were able to fill those roles and generate modest economic growth. The problem was that growth came from employing more people, often in low-skill jobs, and making people work longer hours. As an example, in 2019, the average German worked 1,380 hours a year, but the UK average was 1,537 hours. Yet Germany’s output per hour was 10% higher than here. Over the border in France, it was a staggering 18% higher.

We need a qualitative approach to growing the economy. Frankly, there is no choice: we now have a shrinking workforce alongside an ageing population, with record numbers of long-term sick. The demographic and health trends alone tell us that we are running out of road in terms of capacity for working longer hours and adding yet more workers. That model is no longer sustainable.

Let us focus for a moment on the term “working smarter”. Here, I fall back on my own experience as an entrepreneur and employer of 300 staff, with 40 nationalities working across five different continents in the area of online media. Over 30 years, we learned that the most important factors behind our growth were: recruiting and retaining high-calibre staff; skills and training; management, in particular; and proper incentivisation—working smarter, not harder, in a competitive environment, and competition is good.

The Chartered Management Institute makes a telling point. It estimates that there are 8 million managers across the UK’s 32 million workforce, yet 70% of them are “accidental managers”—managers who have received no proper training from their employer to develop the skills required to lead in an effective, productive manner.

Let me quote the recent survey from SEMA, whose members stated that the top three blockers of productivity all related to lack of skills both within their organisations and nationally. It sounds obvious that recruiting the right people to the right job is crucial, but currently 30% of the workforce is overqualified for their job, while barely one-third of jobs in the UK require higher education qualifications, which is one of the lowest rates in the OECD. This is not consistent with the oft-stated aim of achieving a high-wage, high-growth economy.

All of this, to me and many others, provides further evidence of the need for the Government to set up a productivity commission with the private sector to produce a future workforce strategy and ensure that our immigration policy is aligned with that strategy. We need to raise our game in terms of recruitment, training, managing and incentivising performance—in other words, in developing a stakeholder and entrepreneurial culture in both the public sector and the private sector.

Autumn Statement 2022

Lord Londesborough Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Londesborough (CB)]

My Lords, it was only seven weeks ago that I and many other noble Lords here today spoke out against the so-called mini-Budget during the debate on the economy in this place. Well, much has changed since then, but it has left the new Government with little room for manoeuvre and an understandable fear of markets taking fright at any further signs of fiscal lunacy. Therefore, I will give credit where due to the Chancellor for crafting a relatively sensible and balanced Autumn Statement. The reaction from both debt and currency markets has been reassuring. That said, there is very little here for business, enterprise or innovation.

Most of us, if not all, are pro-growth and pro the causes of growth. Yet here we have a Conservative Government that have dropped the baton—scarred, no doubt, by Liz Truss’s “Growth, growth, growth” strategy. I apologise for adopting a cheap football analogy at this time in the evening, but a new manager has got rid of our dodgy keeper, stiffened the defence and central midfield but left us with a toothless attack and very little creativity. My focus will be on the attack—what businesses, and especially SMEs, need to help the UK become both productive and competitive. I refer your Lordships to my interests set out in the register, and I speak from my experience of both start-ups and scale-ups.

A quick word on the SME landscape: we keep hearing about the 5.5 million SMEs in the UK, but over 4 million of these employ no staff. We should focus on the 1.3 million businesses that employ between one and 50 staff, and generate £1.3 trillion in annual turnover, and on the equally important 35,000 businesses that employ between 50 and 250 staff, and generate a further £700 billion in revenues. These two groups alone now account for almost 50% of all private sector turnover in this country. They are the businesses that grow at the fastest rate and, crucially, show potential for further growth. We need a bottom-up strategy to support and galvanise these emerging businesses, rather than a top-down macro approach—the very opposite of trickle-down economics.

As we know, economic growth is, in essence, a function of the size of the economically active workforce and the productivity of that workforce. For the last three years, our workforce has been shrinking and demographic data suggests this trend will not be reversed. That leaves us with boosting productivity—the only way we will see a return to real growth.

Since 2010, the UK’s productivity as measured by GDP output per hour has grown by a miserly 4%, according to the OECD. To put this in context, France saw an 8% gain, Germany almost 10% and the US more than 10%, and even those are not great numbers. Why we are lagging behind is a complicated question, but the continued very weak levels of business investment are undoubtedly a major factor.

As the noble Lord, Lord Fox, and the noble Baroness, Lady Blackwood, pointed out, it was especially disappointing to see the Chancellor cut the R&D tax credits for SMEs, which will inevitably hit innovation and productivity, especially in loss-making start-ups. The Treasury is apparently concerned about growing taxpayer losses to fraud and spurious claims, but that reflects on poor oversight and execution of the programme rather than the actual impact of R&D on economic growth. I ask the Minister whether the Government have conducted any assessment of the impact on productivity from these R&D tax cuts. I thought the Government were pursuing an ambition to turn Britain into the “world’s next Silicon Valley” or “the Singapore of Europe”.

There was also very little for exporters in the Autumn Statement. Given weakening domestic demand, an export-led recovery may be the most realistic way of engineering our way out of recession. We still have a very competitive exchange rate: against the US dollar, sterling is close to $1.20, compared to $1.70 in 2015. That is a depreciation of some 30%. Remember what happened back in 1992 when we crashed out of the ERM: sterling lost 20% of its value, and our economy grew by an average 3% per annum over the rest of the decade, driven by booming exports. This spells an opportunity for boosting British exports across the Americas, Middle East and Asia, because we are price competitive once again.

What are the new Government’s plans to seize this opportunity? It is all the more urgent, as our exports to Europe have fallen by 15%, with thousands of SMEs, consumed by red tape, simply giving up selling to the EU—do not mention to them Boris Johnson’s oven-ready deal. I ask this question because, although Brexit will not be reversed, there is a clear need for closer trading relations with the EU. It makes commercial sense for both sides, whether we look at a new version of the Swiss, Norwegian or any other model. I understand that factions of the Tory party—notably the European Research Group—are resistant. But at a time of recession, can we really afford to play politics with our economy?