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?