Euro Area Crisis Update (EUC Report)

Lord Maclennan of Rogart Excerpts

Wednesday 23rd July 2014 Lords Chamber

[Lord Maclennan of Rogart (LD)]

My Lords, this report is helpful and I am glad to acknowledge that the committee proposes to continue reviewing these developments every six months. I think that will be exceedingly important.

There have been some positive developments, which have flowed largely from the European Central Bank. That is acknowledged by, among others who gave evidence to the committee, Sir Jon Cunliffe of the Bank of England, who noted that the redenomination of currencies was now very unlikely. However, as the noble Lord, Lord Harrison, said, we cannot take anything for granted, and we must watch very carefully. As the report suggests, and the Minister who replied to the report agreed, we must maintain and develop constructive relationships with the euro group and the ECB.

Will the Minister tell the House how that process is being maintained, particularly as we in this country appear to be the odd man out, seeking special deals for Britain without allies or even being particularly specific about what these deals are? It is quite clear that the United Kingdom must support our EU partners on the path towards greater integration of the euro area, but there is of course a risk, if that goes ahead, that we shall find ourselves increasingly isolated as a country and decreasingly influential in decision-making. I entirely endorse the view of the committee that we should be looking to strengthen the role of the City of London as the banking centre for Europe. However, if we remain completely at arm’s length from these developments, that will be an increasingly difficult project.

In their letter of reply to the committee, the Government suggested that we should,

“tackle unsustainable levels of debt, reform labour markets, and support business creation and innovation”.

It would be helpful if the Minister could indicate how these steps are to be taken. With banks currently withholding loans and, as Sir Jon Cunliffe said, with cross-country lending diminishing, that seems quite difficult. The Government should make it clear that they do not intend to limit cross-border immigration of skilled workers as part of the European Union’s so-called reforms. We need these developments if we are to have new business creation and innovation. Without them, there will be particular difficulties for small and medium-sized enterprises.

We look forward to hearing what the comprehensive assessment process of the European Central Bank will reveal. It is a difficult exercise for it because if it reveals too many banks being in difficulties, that could actually not strengthen the system, although we were very happy to hear from Mario Draghi as long ago as June 2012 that the bank would do anything to safeguard the future of the euro. It would be interesting to know what the Government are doing in the negotiations that they are participating in with the euro group to ensure that new arrangements work for those outside the euro area. I do not hear much about that specifically, but it would be helpful to know.

The noble Lord, Lord Harrison, spoke about the deflationary spiral. It seems that that is not an imminent threat but it is something that we have to watch. I would also be interested to know how the Government view that and what they are saying about the austerity programmes that could induce such a spiral.

This is a factually interesting report with interesting evidence from witnesses, but we need more particular replies from the Government. They are generally supportive of the report, but they have not given much indication of how they intend to proceed.

Genuine Economic and Monetary Union (EUC Report)

Lord Maclennan of Rogart Excerpts

Wednesday 2nd July 2014 Grand Committee

[Lord Maclennan of Rogart (LD)]

My Lords, I, too, begin by indicating the value of the report and the work of the committee chaired by the noble Lord, Lord Harrison. The report is a useful gathering together of evidence from experienced people. Its conclusions seem to me to merit our support.

A strong and prosperous Europe and a strong and prosperous eurozone are in the interests of all members of the European Union. It is necessary for the Government to indicate as clearly as they can how they would engage with the strengthening of the eurozone. The long-term goals of fiscal transfers and, possibly, debt mutualisation—they may be unrealisable in the short term—have been envisaged and mentioned in the report, but they are not seen as immediate solutions. However, there are ways in which we, as a country with an extraordinarily strong banking system in the City, could give further support to the recovery of the eurozone. To my mind, that would be to the benefit of the City and the country more generally.

One witness strikingly described the process as,

“the euro continuing as an injured patient with a massive sticking plaster in the form of bailouts”.

That was an entertaining image but there is a degree of truth in it. I hope that, in coming back into the discussions about the future of Europe, the Government will seek to engage with their partners in the eurozone and seek ways of assisting the process of banking union. I strongly agree with the report that supervision and becoming a lender of last resort are compatible. The structures of these different organisations are well set out in the report, which describes how they can be both separate and together in making their respective decisions.

The noble Lord, Lord Liddle, made an important remark about will. The will to sustain the eurozone probably was best expressed by the president of the bank, Mario Draghi. He said that the bank would do “whatever it takes” to save the euro. That certainly had an immediate effect of calming the markets. It also made other countries feel less excluded from the discussions and more able to put forward recommendations. The bank has acted wisely in a number of respects—for example, in purchasing sovereign bonds not directly from the sovereign states but on the open market. That has done quite a lot to stabilise the situation.

I hope that the Government will respond to the committee’s recommendation that it may be ill advised to assert that:

“Banking Union is the sole province of the single currency for all time”,

and that participation could mean,

“further promoting and shaping the Single Market in Financial Services and the UK’s position within it”.

At the beginning, a number of proposals were put forward on outright monetary transactions which do not seem to have yielded anything very noticeable as of yet. None the less, they are still an instrument that is perfectly sensible to use.

The single resolution mechanism, by which the predicaments of those who are extremely tested could be resolved, has not come forward sufficiently developed to be enlisted in the battle against the collapse of southern states. However, the UK Government should, I believe, shape their arguments in terms of ensuring the overall stability and efficiency of the EU markets. That practical reform would give the Government much more influence in the direction of the single market than the sort of postures taken over the past few weeks in respect of the nomination of the President of the Commission. Deposit insurance is another method of supporting the banking system that, as yet, has not come to fruition. None the less, it could be of assistance.

I hope that the Government will also do their best to assist the bank with its comprehensive assessments of the banking system, its supervisory risk assessment, its asset quality review and its stress tests. All of these seem sensible means of reassuring the banking system. We ourselves have not been immune from the troubles that have afflicted other countries.

Notice also has to be taken of the evidence that was given to the committee about the lack of sufficient fiscal backstops to plug any gaps in the bank balance sheets exposed by the review. I hope that that, again, will be something that we can open up and show that there is a will to help.

The report has been produced at a difficult time for the European Union. Although the process has not been completed, as outlined on different sides by the Commission, by the bank and by Governments, I none the less think that the report was very timely. It has given us guidance and indicators as to how to proceed. We want to hear from the Government about their willingness and commitment to strengthen the eurozone. Some of the Ministers who gave evidence recognised that that was necessary for British industry. When they talk about the objective of the single market, they are also speaking of the need for that. I hope that my noble friend Lord Newby will be able to give us some reassurances about the Government’s position and not simply cast discredit on the steps that have been taken.

Pre-emption of Parliament: Constitution Committee Report

Lord Maclennan of Rogart Excerpts

Thursday 6th February 2014 Grand Committee

[Lord Maclennan of Rogart (LD)]

My Lords, I should like to congratulate the noble Baroness, Lady Jay, and the committee on producing what I believe to be a notable constitutional report. The response of the Government seems to have recognised its significance although, as the noble Baroness, Lady Jay, said, it was somewhat terse. What is required is a clear statement from the Government not just about pre-emptive public expenditure but about pre-emptive action that bypasses Parliament. They have indicated that they will set out their pre-emptive public expenditure rules in their text, Managing Public Money, and refer to it in the Cabinet Manual, but that does not go quite far enough. The Public Bodies Act has been mentioned several times in the course of this short debate, and I agree with all the points that have been made about that.

It is exceedingly important that Parliament and the Executive are open with each other and that they come together when there is a need for pre-emptive action, make that need explicit and clear and seek to justify it. There is a good deal of uncertainty in the law about the Crown’s common-law powers.

It is fair to argue that if we had to have the Executive enabled by legislation to do absolutely everything, that would impose a huge burden on Parliament and simply not make sense, but with government as immensely powerful as it now is, we have to have a better dialogue. That is what I am so grateful to the committee for having opened up. I believe that we will see real progress and that the power of Parliament to comment on executive action will be enormously enhanced by the recognition of that problem.

EU: UK Membership

Lord Maclennan of Rogart Excerpts

Thursday 24th October 2013 Lords Chamber

[Lord Maclennan of Rogart (LD)]

I begin by congratulating my noble friend Lord Wrigglesworth, who has been a colleague and a friend for many years. He has brought to the debate personal experience of great weight and knowledge from industry and from his part of the country where he has striven so hard to make that region more prosperous. I would also like to thank my noble friend Lord Shipley for procuring this important debate which will put on record opinions and facts which will be of great importance if the country is to make a balanced decision about the future of our relationship with the European Union.

Some of the remarks made in opposition to our membership, particularly by the noble Baroness, Lady Noakes, overlooked some facts that others have raised. In particular, the noble Baroness spoke a great deal about the burden of regulation. I recognise that it is difficult to measure the impact of this, but the OECD has produced tables—a little out of date—which show that the burden of regulation in the product market of selected countries puts the United Kingdom at the top of the list of those which are least restrictive. It was even ahead of the United States of America and way ahead of Australia, New Zealand, Poland and Greece.

Our access to trade is not belittled by our membership of the European Union, as I think the noble Baroness implied. The focus of our trade is, rightly, with the 500 million consumers—rich consumers, by and large —in the European Union. This is a highly competitive market which also improves the quality of our production. Access to other countries is greatly assisted by the work of the European Union in opening trade to no fewer than 37 economies around the world, including South Korea, Singapore, South Africa and Mexico. The recent green trade deal with Canada is likely to see British exports increase by an estimated 29%.

Our country could not expect to have such a high rating in attracting inward investment if we were not members of the European Union. I have seen figures which suggest that we are the third largest recipient of direct foreign investment after China and the United States of America and that the stock of inward investment is equal to half the United Kingdom’s GDP.

I have seen in a report from TheCityUK that 60% of decision-makers specifically cited access to EU markets as a core reason for choosing the United Kingdom over other financial centres. Japan in particular—already mentioned by a number of contributors to this debate—has invested huge amounts of money in this country and created 130,000 jobs. The Japanese Government have been very outspoken and clear about why they are doing this, and we would withdraw from Europe at our peril.

I have to say that the alternatives that have been alluded to, particularly in relation to Norway and Switzerland, would certainly not be attractive in that we would be without influence over decision-making and would have to observe regulations and rules. Switzerland does not even have direct access to the financial markets. The arguments for our remaining in the European Union for economic reasons are overwhelming and I hope that this message gets across to the wider electorate. The figures mentioned by the noble Baroness, Lady Donaghy, about the CBI’s views are telling. At the Glasgow conference the Institute of Directors produced figures showing that 80% of its members were also of the opinion that we should remain within the European Union. That did not mean, however, that there should not be changes and, no doubt, progressive Governments will seek change.

European Union Committee: Multiannual Financial Framework

Lord Maclennan of Rogart Excerpts

Tuesday 19th June 2012 Grand Committee

[Lord Maclennan of Rogart]

My Lords, I currently have the honour to serve on the sub-committee chaired by the noble Lord, Lord Carter of Coles, the fourth sub-committee of the Select Committee upon which I have served. However, I do not propose to follow him on the subjects that he has been talking about today. The report is very timely and we need more time to consider what an appropriate budget for the European Union should be, in very changed circumstances from those in which the Commission began its deliberations.

The current debt crisis could leave us with very different parameters. It seems somewhat artificial to contemplate total budgetary expenditure in such an uncertain situation. Priorities are expressed within the multiannual financial framework with which we can agree or disagree. Broadly, the committee is in agreement with most of the direction, although there is the very major issue of the common agricultural policy, on which I should declare an interest as a partner in a farming enterprise.

One of the conclusions referred to by our chairman, the noble Lord, Lord Boswell—and his presence and remarks are most welcome—was that the duration of the multiannual financial framework is too long. While that is an important view to express at this time, the uncertainties connected with the budget proposals are not conceivably going to be resolved before the end of this period. I strongly support the term of this framework being reduced from seven to five years.

There are other general principles to which we have drawn attention. I would mention the requirement for greater flexibility in spending, as between the different heads, with a controlled mechanism for moving funds towards the spelled-out objectives. With growth and competitiveness scarcely recognised as the principal targets of the Union within the ministerial councils—though I am happy to see that there is some movement in that direction—and against the backdrop of the debt crisis and the threat of contagion from Greece and Spain to other countries, we need to recognise that cohesion is vital. It is satisfactory that the largest head of expenditure is standing at a proposed 36.7% of the budgetary proposals. This is, however, only 1% more than in the current multiannual financial framework. One may wonder legitimately whether that shift of priorities is sufficient to deal with Europe’s situation. It is also welcome that among the categories of regions for assistance a new one has been proposed: the transition region. That is a move towards greater flexibility.

The principles of pan-European development and redistribution of finances seem not incompatible with each other. Both are legitimate and as the report indicates we should be moving gradually towards concentrating on poorer states in the long run, but if we are to avoid a fracturing of the European Union we must acknowledge that the stronger nations will have to help other nations to pull themselves up. These interests are inextricably bound together.

The position in Greece cannot be overlooked while we are considering these matters. I was very struck by an article in the Wall Street Journal at the weekend by five distinguished economists from academic backgrounds, some of them or most of them out of Greece, who advocated that Greece should be given help by the European Union to,

“achieve immediate structural reforms to radically improve the ease with which business can be conducted, and to reduce tax evasion, eradicate corruption in procurement and liberalize the labor and product markets. It must do all this while also ensuring supervision over Greece by competition authorities, improving efficiency in its justice system and health sector, and opening access to its artificially closed markets in transportation, pharmaceuticals and engineering, among others”.

It is to be hoped that with the formation of a Government in Greece, those matters will be addressed as a matter of urgency by the European Union partners. That brings me to something slightly outside of the framework of the report—that we require a forum for considering the debt crisis and matters such as the bank situation that does not simply involve the repetitive meeting of the Council, but continues and sits until these critical matters have been resolved. The process of Heads of Government getting together and lecturing each other from the sidelines or indicating to their domestic communities what they are not prepared to have makes diplomatic negotiation much more difficult. Consequently, I hope that our Government might contemplate suggesting that the eurozone crisis merits a continuity of consideration until resolved, and that we Britons should be involved in that process although not in the eurozone, because the Government have recognised that we are crucially affected by it and have the power to influence the outcomes through not only the decision-making process of the Union but the fact of our being a relatively strong country. We have to alter our institutional approach if we are going to deliver the sort of outcomes required.

I turn, briefly, to some of the particular headings of expenditure referred to in the MFF. On research, the 46% increase over present funding proposed of €80 billion is extremely welcome, not least because it will enable us, if we persist effectively, to improve capacity and the excellence of our work to enable us to increase. On education, the 70% increase proposed from the current MFF to €19 billion is also highly appropriate and crucial for long-term growth. I was distressed to see that the Minister described that increase as “unrealistic”.

Personal enthusiasm for the arts makes me welcome the indication that we are to see a 37% increase over the separate existing programmes for creative industries. As we know in this country, they too stimulate growth. Expenditure to acquaint our citizens with what is being done in the European Union is also of great importance, since there is a lack of understanding at large as to the beneficial effects that the EU can have on our place in the global economy.

There is another omission that is the responsibility of the Commission and which needs to be rectified in further meetings: how much of the budget is to be spent on the new European External Action Service and should it be ring-fenced? It would be interesting to know the Government’s view of that.

I conclude with a reference to a recommendation on the European Court from my former sub-committee, which was chaired by the noble Lord, Lord Bowness. Our view, which the whole committee accepted, is that, because of the greatly increased volume of work being done by the European Court of Justice, we cannot cap at the present level or reduce in any way the funding that is required to enable the Court to tackle these matters. It would have a devastating effect on the operation of the Union if we suffered the sort of delays in obtaining justice that are common in the European Court of Human Rights.

This is an important report and I hope that it will be noticed. I do not have much doubt that it will be. I have heard members of the European Commission referring to House of Lords reports as being among the best reports from the most distinguished think tanks of which they aware in Europe.

Euro Area Crisis: EUC Report

Lord Maclennan of Rogart Excerpts

Monday 21st May 2012 Lords Chamber

[Lord Maclennan of Rogart]

My Lords, it has been a privilege to serve on the Select Committee and to participate in at least some of its deliberations on this subject. I thank the noble Lords, Lord Harrison and Lord Roper, for presiding over those deliberations at a time of great sensitivity and urgency to deal with these matters. The Select Committee’s report was published in the aftermath of the Prime Minister’s walk-out from the December seminar. Although that diplomatic mistake has had the lingering effect of diminishing Britain’s influence on decision-making by the European Union, I do not wish to rake over the failure to disclose to the committee the interests that the Prime Minister was allegedly seeking to protect. Suffice it to say that the reasons subsequently advanced by the Chancellor of the Exchequer in his letter to the chairman of the Treasury Committee of the House of Commons were wholly unconvincing. As that letter makes clear, significant levies on the financial sector,

“are subject to unanimity under the EU treaty”.

The Prime Minister was playing to a domestic gallery, not seeking to take forward the decisions that had been taken in principle by the October summit. It was a failure of the worst kind.

The Government’s response to the committee’s report has some positive proposals that I commend and welcome. In particular, the Government claim that they are “leading the growth agenda”. I think some of the remarks by the noble Lord, Lord Monks, about how we might lead it rather better should be taken on board by the Government. The answer to the report makes it clear that there are certain longer-term goals in respect of reforming the single market that could have a beneficial impact on our economy and some of those areas most under stress at this time. For example, in services there is huge overregulation in the domestic law of too many European Union countries, notably Germany. Digital union within the trade area is now likely to be achieved by 2015. That is a little way down the track, alas. The agenda also includes energy, which is a noticeably disrupted economy, with member countries taking very different views of it.

It is also good to notice in the Government’s reply support for a European research area and global openness via the EU free trade agreements with trading partners. These are positive. Although the December diversion from the urgent need to particularise and embed the principles agreed at the October meeting caused further delay in coming to grips with the euro area crisis, we are not alone in having been too tardy in responding. Indeed, the German and French attempt to water down the Basel III capital rules as they apply to Europe, even within the past month, must also be regretted. It seems clear that member countries of the Union have not faced up to the seriousness of the crisis in a coherent and constant way, with a direction set by their heads of government.

Major decisions are now required. One is on the Greek debt write-down. A second is on bank recapitalisation and the financing of the European Union rescue funds. These have been too long postponed. As the noble Lord, Lord Harrison, pointed out, the European Central Bank has been inventive in purchasing government bonds of euro area countries in financial distress from the secondary market; in coming together with the central banks from outside the area to help provide liquidity support; and in the long-term refinancing of operations—the LTRO—which provides 500 European banks with nearly €500 billion via three-year loans at very low interest rates. However, it is clear—particularly so because of the current Greek crisis—that this has not been enough.

It is worth noting in passing the evidence given to the committee by the former Prime Minister of Italy, Giuliano Amato, that although fully fledged Eurobonds were not part of Germany’s current thinking, mutually guaranteed project bonds for specific pan-EU projects, such as the development of the European power grid, should be given consideration. I should like to hear from the noble Lord, Lord Sassoon, when he winds up, whether the Government are giving serious consideration to that suggestion, which seems to be one that should be treated favourably.

Most commentators viewing the results of the Greek elections have considered that the Greek Government’s exit from the eurozone is now much more likely. The Greek opinion polls suggest that there is a growing recognition that the consequences for Greece would be disastrous. It is impossible to predict what may happen by 17 June. However, what is to be done now?

[Lord Radice]

My Lords, might the noble Lord also remark that well over 75% of Greeks who have been polled want Greece to stay in the eurozone?

[Lord Maclennan of Rogart]

I believe it is nearer 80%, which is an indication that the traditional parties might be worthy of greater support than Syriza, but it is not for us to comment on the internal politics that are leading up to the June elections in Greece.

I believe that it is not sensible to lecture Greece and still less sensible to lecture Germany from the sidelines about what they ought to do. Britain cannot take a holier-than-thou attitude. Some time ago, the Chancellor of the Exchequer spoke of the need for fiscal union, which we have heard repeated today even by the noble Baroness, Lady Noakes, to stimulate recovery and to make the eurozone a workable phenomenon. Others, including some German voices, have adumbrated steps towards banking and political union. But these, although sensible medium-term goals, will not be achievable in the amount of time available to set aside the crisis that faces us immediately.

Northern Europe is not ready to be tied to bailing out its southern neighbours, despite the probable adverse consequences, including slashed production in most European and many other countries. Nor could Germany take on the entire debts of the European region without calling into question its own credit worthiness. All EU Governments should be assembled in conference to work out an acceptable solution. Two-day meetings by heads of Government are not enough. Some 74% of the Greek Government debt is now held by Governments and the IMF, which poses a massive threat to taxpayers. There is no point in crying over spilt milk. Earlier restructuring would certainly have required more banks to be bailed out but that could have avoided the confidence-sapping sequence of crisis. Roughly €100 billion was paid to private creditors by the Greek Government before their bailout in February.

The European conference which I am proposing should aim further to write down Greek public sector debt, to fix a longer period in which to hit their fiscal target, to agree to second immediate expert personnel to work with the Greek Government and other Governments in difficulty, and to achieve delivery, including structural reform. There is also a need for liquidity support for solvent banks and Governments. The natural liquidity backstop is the ECB, which has been mentioned by speakers in this debate, including the noble Lord, Lord Monks. Lenders must be properly capitalised but that has been postponed time and again in the eurozone. The IMF considered that €200 billion was required last year but only €100 billion was agreed by the Governments.

The new European security mechanism would be a suitable institutional arrangement to sustain the illiquid Governments. The ESM could find itself short of funds, which might be overcome by allowing it to borrow from the ECB. That idea appears to be favoured by successive French Governments, including President Hollande. But insolvent Governments need to restructure their debts and illiquid Governments need credible plans to reduce theirs. There is also a need to introduce controlled resolution of undercapitalised banks. The stakes of shareholders have massively diminished in value. Bondholders could be bailed in to provide a buffer. Banks should be prepared to move to subscribing to such funds in due course.

It is expected that the EU Commission will produce its own proposals in June; they should be fed into the proposed standing conference of member states. Unless member countries of the European Union come together with appropriate expert support on a continuing basis, there is a grave danger that a Greek exit, leading to their Government’s default; contagious runs on banks in other countries; exchange controls being imposed; the new currency being devalued; and hyper-inflation being experienced in some countries and deflation in others, will be a highly predictable consequence. We know that Argentina and Iceland managed to turn themselves around, but such chaos as I have described in the euro area, the second largest economy in the world, with the largest banking system, needs to be treated as the paramount challenge to western democracies since the 1930s.

Scotland Bill

Lord Maclennan of Rogart Excerpts

Wednesday 28th March 2012 Lords Chamber

[Lord Maclennan of Rogart]

If the noble Lord does not get the response that he is seeking and he is right in divining that others are seeking, then he should not rely on his intuition about coalition around his point. I think he can have the assurance that a number of noble Lords on these Benches are of the same mind as he is.

[Lord Browne of Ladyton]

I am extremely grateful to the noble Lord for his contribution. I know where the key to success in a vote in this House lies: it is on those Benches. I am fortified in my resolve to try to improve this legislation.

The noble and learned Lord, Lord Wallace of Tankerness, will confirm that at all stages of this process I have endeavoured to be constructive and helpful. This provision has to be improved, although not necessarily directly in the way I have proposed. I am happy to be flexible but my suggestion passes my only test: it improves the ability of the Bill to contribute to the betterment of the Scottish people while, at the same time, strengthening the union. It gives us an argument that is owned across the union which we can deploy in the future.

I say to the noble Lord, Lord Lyell, that, as far as the amendment is concerned, this parrot is very much alive; this parrot is not no more and it is not deceased. It may not fly today, but it is very much alive.

I gave the Minister advice about Scottish football on a previous occasion. He scorned it, and he got himself into an argument in the House about Scottish football which he could have avoided. I give him this advice now: do not tempt the noble Lord, Lord Forsyth, to go away and come up with better criteria. I am almost certain that we will return to this issue at Third Reading. I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Forsyth of Drumlean]

My Lords, I do not want to speak at length as I spoke about this in Committee, but I will make a couple of points. I agree with everything that my noble friend Lord Lang has said about this apart from one thing. I am not sure that I would have pressed for a needs-based system to replace Barnett. Indeed, the briefing I got from the Treasury officials was, “Whatever you do, do not agree to a needs-based assessment”. In those days, they said that it would cost us £2.5 billion off the block. Given the evidence we had in the Barnett committee—which, incidentally, was unanimous—we were lucky to have on the committee the noble Baroness, Lady Hollis, who understands the needs-basis system that is applied in local government in other parts of the public service.

If my noble friend Lord Steel is right, the Barnett formula will be replaced by a new one which will be called the cold Steel formula. That is because, if my noble friend has his way, there would have to be huge reductions in the Scottish budget. The idea that by 2016 Scotland can be responsible for raising all the income it spends would mean catastrophic reductions in expenditure or huge increases in tax. This is not alarmist: the figures are all there in the report; the work has been done by people such as Professor Bell at Stirling University.

For historical reasons, Scotland is probably funded to the extent of about £4.5 billion more than it would be on a needs basis. It is not sustainable to argue against the needs-based system for funding the Scottish Parliament when the Scottish Executive distribute the bulk of the money they receive to local government and the health boards using a needs-basis system of funding. The idea that this is somehow alien to Scotland is wrong.

We have a huge political problem in that the overfunding is probably of the order of £4.5 billion. My noble friend Lord Sassoon said earlier that the product of putting 10p on income tax in Scotland would raise about £4.5 billion. So we are talking about the equivalent of half the income from the basic rate and 10p of the income from the higher rates being the additional grant that Scotland enjoys over and above that which would be provided on a needs basis. This is why the amendment of the noble Lord, Lord Barnett, is so important and why, I regret to say, the report produced by this House under the excellent chairmanship of the noble Lord, Lord Richard, has not been implemented and why it needs to be implemented.

If we are going to make this change, it will need to be phased in over a long period. That was the key recommendation of the committee. We need consensus and agreement on this. It is no good this Government or another Government saying, “This is what needs to be done” because everyone will say that they have done it for political reasons. We need an independent and objective group of people to look at the issue and make recommendations, which we then need to implement over time.

It is particularly—I keep saying this—irresponsible to introduce a system of funding which relies on putting up tax while not dealing with the underlying problem. We are heading for a train crash. We will reach a position where the Scottish Parliament will say, “Well, you can raise income tax if you want to spend more”, while they find not only their baseline for income tax but the whole of the element of the block grant which relates to Barnett disappearing as the pressure for moving to a needs-based system of funding becomes impossible.

There is one element of the Calman commission which all the enthusiasts for its recommendations conveniently forget to notice; that is, the recommendation —my noble and learned friend Lord Wallace will remember it well—which acknowledges that this issue of funding will have to be addressed and that we will have to move, in time, to a formula based on needs. That is one of the points made in the Calman commission report. The noble Lord, Lord Barnett, is saying, “Look, accept this amendment and set up the commission. It will take two or three years to work out the methodology and to get agreement on it. Get consensus and then, if the noble Lord, Lord Steel, wants to get to a position where the Scottish Parliament raises all its own revenue, recognise that it will take 20 years if it is not to result in a huge gradient between Scotland and England and huge damage to our public services”.

Who is going to make capital out of that situation and who is going to get the blame? It will be meat and drink, even if Alex Salmond loses his referendum. If you have just won the referendum for the union but then whip away the money and introduce a tax-raising power that makes Scots pay more tax than others, do we really believe that will settle this constitutional question once and for all?

The noble Lord, Lord Barnett, took a large part of a year of my life when I sat on what was a very interesting and fascinating committee. In pressing this matter now, we should listen to this sage advice and not run away from it. The argument put forward by the Government that we cannot deal with Barnett because we are concentrating on budget deficit reduction is a non sequitur if ever there was one. What has dealing with the deficit got to do with putting in place arrangements for funding, not only for Scotland but Wales and Northern Ireland, that are fair to all?

That is the other aspect of this—Wales is suffering quite considerably as a result of the inequity of this formula. If we are to maintain the United Kingdom, which appears to be under great pressure and will be under even more severe pressure because of the economic circumstances in which we find ourselves, it is important that we have a baseline that is seen to be fair and cannot be challenged. There are arguments about marginal seats and all the rest but, broadly speaking, when we distribute money to local government, health and so on, we use a well trodden path of formulas based on need. The Barnett formula, if I may say so, was a fix that followed great anxiety about the SNP winning elections in Scotland. We have been going down this track of appeasing the nationalists in a haphazard and piecemeal way.

It is important, as the Government embark on the huge constitutional change that is contained in this Bill, that we understand the importance of the finance. When my noble friend Lord Steel says, “We will do this”, he is saying what many people in Scotland and endless editorials say—that we must have more powers for the Scottish Parliament. However, I do not think they have looked at the numbers. If you do an opinion poll and ask people whether they would like more powers for the Scottish Parliament, of course the overwhelming majority say yes. However, if you ask them whether they would like to see public services having less money, higher taxes in Scotland or a financial crisis in public services in Scotland, you get a very different answer. The noble Lord, Lord Barnett, in proposing this amendment, is giving us a pathway that, over the next 20 years, will avoid that kind of dysfunction and dislocation within the United Kingdom.

[Lord Maclennan of Rogart]

My Lords, I add my words in support of the general view expressed in this short debate that the time has come for the Government to make clear their attitude to Barnett. However, I do not agree with the proposed amendments, since they are insufficiently explicit about the process that would need to be established to implement the Richard report effectively and fairly. Amendments 30 and 31, which are grouped together, speak of assessing Scotland’s needs. However, if you are to implement the Richard report then you have to assess the needs of the whole of the United Kingdom. Setting up a commission to look solely at Scotland will not necessarily produce a proper outcome.

I would strongly recommend therefore that the Government come forward with their proposals and do not postpone until the Greek kalends grasping the important issue of fairness, which is exacerbating the bad feeling between the different nations of this country; and recognise that it will take some time to establish the fair basis for making these calculations. Consequently, I cannot support the amendments in the form in which they have been drafted, but none the less believe that, as a backdrop to the constitutional developments we are seeing, we need to know that the Government firmly intend to recognise the validity of the principles enunciated by the Richard report.

Scotland Bill

Lord Maclennan of Rogart Excerpts

Thursday 15th March 2012 Lords Chamber

[Lord Lyell]

My noble friend, who has far more experience of finance than I ever will have, mentioned Germany; I used to call it the Federal Republic of Germany. In 1983 I took a course in German at the Berlitz language school. I was given excellent advice on how to pay tax. Your Lordships may have heard me refer to this matter on Second Reading. I will quickly go through it again. For every €100 you paid in tax, the local tax office took €15 of that. For the noble and learned Lord, Lord Davidson, and me, the local tax office would probably be in Forfar or Dundee. The balance of €85 was split, with 50 per cent going to the state, which might be Baden-Wurttemberg, Bavaria or North Rhein-Westphalia, and 42.5 per cent going to the federal budget. My noble friend mentioned 30 per cent. I do not know how much of that would go to his Gemeinde—his local area—how much would go to the state, say Baden-Wurttemberg, and how much would go to the federal system. That is one example of how taxes are distributed.

My noble friend and the noble Lord, Lord Foulkes, are right to suggest giving the Scottish Parliament the power to raise taxes. However, the whole system should be looked at. As my noble friend Lord Forsyth has pointed out, we are planning what I call an asymmetric federal system. I am delighted to warn my noble friend on the Front Bench that we have hardly started to have a proper dig into the matter of who is a Scottish taxpayer. It is rather like a sort of dance that he goes on about; he talks about a close connection as if one is dancing with someone. When we consider who is a Scottish taxpayer, we should be aware that that will affect masses of English people, but we will come to that matter another day. In replying to my noble friend Lord Forsyth, will my noble friend the Minister take on board his idea that this Bill may go through but at least we can look at having a better tax system than that which is planned—certainly in the Bill before us—possibly on the lines of what happens in the Federal Republic of Germany or Switzerland? You can look at how this is done elsewhere, but what is proposed in the Bill is a mishmash that will provide eternal difficulty, eternal grounds for gripe, and screams of, “We are not satisfied”. There will be all this and more. There is a problem, and I hope that when the Minister winds up he can give me some reassurance and take on board the point made by my noble friend Lord Forsyth.

[Lord Maclennan of Rogart]

My Lords, I have listened to this debate with fascination and I agree with the basic view of the noble Lord, Lord Barnett, and my noble friend Lord Forsyth about the injustice and unfairness of the Barnett formula. The aspect of the amendment that I appreciate and support most is the notion of establishing a commission, but it should go wider than one that is charged with the task of looking at only Scottish needs—it should look at the needs of the United Kingdom as a whole. The amendment, in so far as it suggests that the first report should be completed by April 2015, is also sensible.

The general view is that the Barnett formula is unjust. This is becoming the backdrop to consideration of devolution in other parts of the United Kingdom. There is a serious risk that this will turn a large part of our population into a very angry opposition to devolution or any advance in self-government or self-taxation. This is not the right time to decide precisely how far these matters should go. Since the Calman commission reported, there has been a considerable widening of the debate due to the success of the Scottish National Party in the previous Scottish election. It may well be that many who would not have taken seriously what is now called devo-max will now take it more seriously. However these things need to be looked at in the round and I would not go down that line at this time.

What is given out by public funds to all parts of the United Kingdom is a matter for the United Kingdom Government, and they do not need specifically to be empowered in the Bill to base their decisions on a needs assessment. As I understand it, the Barnett formula is not based in statute, and it would be perfectly possible for the Government of the day to advance a change. I say yes to a commission to enable us to make a decision, if appropriate, at the right time. When I say that the decision should be made by us, I mean the Government of the United Kingdom. The postponement of consideration of ways and means—the process for changing the allocation of public funds—has been delayed for too long. We have had all kinds of academic input into this discussion. The committee on which my noble friend Lord Forsyth served was absolutely clear on this, and there has been too much delay in taking this issue seriously and getting down to the small print. Only when we have that nexus of information are we going to be able to make a judgment—against the backdrop of what has been decided about tax—as to what would be the appropriate way to deal with the Scottish question.

[Lord O'Neill of Clackmannan]

My Lords, I am opposed to the amendment on the basis of the rather feeble argument of the doctrine of unripe time, which is always a favourite for people to hide behind. I say so because, as I said in my intervention on the noble Lord, Lord Forsyth, I do not think that the Scottish economy is sufficiently robust at the moment to have a dramatic ground shift in financing. We have to be far sharper and more accurate in our criticisms and attacks on the Salmond Administration and the consequences of their failure to protect Scotland from the worst aspects of the economic crisis that we are going through.

Secondly, on the suggestion in the amendment that we set up a commission, a considerable part of the speech of the noble Lord, Lord Forsyth, if not half, was certainly taken up by a paean of praise not only for the noble Lord, Lord Barnett, but for the Select Committee which the noble Lord set up here. I am not sure whether the commission will come up with anything very much different by way of information regarding the Barnett issue. In the first instance, to start talking about ending the Barnett formula is a bit premature; in the second instance, I do not really see that a commission is going to do much more than the Select Committee of which the noble Lord was a distinguished member.

The Barnett formula is not set in stone. Some of us are old enough to remember the Goschen formula, which was the predecessor of Barnett and which was a lot simpler to understand. As I recall, 11-80ths was the ratio and there was a needs resources element. The formula of the noble Lord, Lord Barnett, was probably too clever by half at the time and it certainly requires review 30-odd years on from its conception.

Even allowing for that, I think it is foolhardy at this stage to lay out a stall for devo-max. Discussion of devo-max is something that happens after a referendum on the question of separatism. Once the separatist cause has been defeated in a referendum, we can look the options and what Scotland actually wants. At the moment, there is an assumption that if we do not move quickly we will get hammered in a referendum and that the result could be anything up to 65:35. Personally, I think that if we had a referendum, we would have a very close run thing one way or the other. I would desperately hope that the unity of the kingdom was sustained, and would hope to play a small part in achieving that result. Let us not forget that less than half of the Scottish electorate voted in the elections last year, and 45 per cent of them voted nationalist. So we are talking about a separatist party enjoying 23 to 24 per cent of the votes of the Scottish electorate as a whole. I know that Governments get elected on low turnouts and less than 50 per cent shares, but for us to start developing a complete political construct to accommodate what might be a negotiating position once the fundamental question has been resolved one way or the other is a bit of a waste of time.

In a number of respects, the noble Lord, Lord Forsyth, and I are not that far away, but the implication of his remarks is that the commission would transform Barnett fairly quickly. I think that we must focus our attention on the inadequacies of the Salmond Administration and make sure that the money currently available to the Scottish Government is used more effectively for the Scottish people. Therefore, I do not think that we need to look at the formula in the way that he is suggesting, and we certainly do not need another talking shop. We have had one already and, no matter how distinguished the personnel involved in it were and no matter how good the information and evidence they produced, it did not have a great deal of effect. At present, it would be far more sensible for us to carry on with this muddled legislation—which nobody really likes but not many folk want to get rid of—and try to get it finished, not necessarily this evening but in the fullness of time.

--- Later in debate ---

[Lord Sewel]

My Lords, it is inevitable that this bit of our proceedings will be dominated by an argument not so much about a referendum but about fiscal autonomy and fiscal responsibility. I follow my noble friend only in the sense that I speak after him, not in the sense of following his arguments. He is a great and genuine supporter and exponent of fiscal autonomy. I am afraid that I am a total opponent of fiscal autonomy. A unitary system like ours has the great benefit of being able to move resources—public expenditure—around from richer areas to poorer areas. It so happens that that is a political objective, a political process that I am more than happy with. That is what we ought to be about: reducing inequalities.

The difficulty with fiscal autonomy is, in fact, that you lose that ability. It is not so much that you freeze inequalities; you are most likely going to make them worse. The rich areas will have a strong tax base, a relatively high tax take and very few deep-seated problems to deal with. The reverse will be the case for poorer areas. Their tax base will be fragile and they will have a low tax take, but they are faced with enormous social and economic problems. Only through a unitary system does—let us say it—the state have the power to move resources around to enable those inequalities to be lessened. That is an agenda that I wish to support. Fiscal autonomy leads us in completely the opposite direction.

[Lord Maclennan of Rogart]

My Lords, I thought that I was going to agree with the noble Lord, Lord Sewel, but I find that I take a third and different position from those advocated by the two noble Lords who preceded me. Like the noble Lord, Lord Foulkes of Cumnock, I am a federalist and I do not believe that federalism is to be identified with the unitary model that the noble Lord, Lord Sewel, recommended. However, we should look at different levels of taxation and at giving greater fiscal responsibility for the matters that have been devolved.

I hope, however, that we will not confuse the issue at this stage, before the federal option has been properly explored and ways of dividing tax-raising powers between the different levels of government adequately set out, so that people not only in Scotland but in Wales, Northern Ireland and England can grasp what this is about. We should include in our explanation details of the provision for the redistribution of the wealth of the United Kingdom to its constituent parts—not only to the four nations but to some of the regions of England, which seem to be doing rather badly out of the Barnett formula.

The timing of the referendum seems inappropriate. It turns not only on whether the earlier referendum gave the mandate to Parliament that the noble Lord, Lord Foulkes, has come round to thinking that it did. It seems to me that at the time—and I am basing my remarks entirely on memory—we were thinking about varying the rates of income tax and not about extending taxation. I was interested to listen to what the noble Lord, Lord Browne of Ladyton, said on that, and I dare say that he has done more historical research on the point than I have. It will be interesting to hear from the Minister, who I am sure will answer these questions, whether the noble Lord, Lord Browne, was right, and I hope that we can accept that there are more than two ways of imparting the responsibility for fiscal tax-raising. There is also a federal way. We should explore that, because it operates more fairly throughout the United Kingdom and will take care of the other countries, whose needs also need to be thought of in this context.

[Lord Forsyth of Drumlean]

My Lords, given the journey that we have embarked on, I suspect that the noble Lord may get his wish if we do not see the fragmentation of the United Kingdom. I have an abiding image in my head of the noble Lord, Lord Foulkes, sitting at 3 am in his underpants responding to these cybernats.

--- Later in debate ---

[Lord Wallace of Tankerness]

Picking up where the noble Lord, Lord Browne, left off, to be fair the noble Lord, Lord Foulkes, did say in moving his amendment that perhaps it was not necessarily one that he would wish to push. He recognised too that there would be some occasions when it would be appropriate for civil servants in the Scottish Government to engage in issues that were reserved. Indeed, the noble Lord, Lord Sewel, highlighted the fact that with Section 30 orders—one of the early ones was on railways—that sort of engagement would not be unreasonable on that basis.

Nevertheless, the noble Lord, Lord Foulkes, has generated a debate which I am sure will be noted beyond the walls of this Chamber. I echo what was said by the noble Lord, Lord Browne, and my noble friend Lord Forsyth, about the very high quality of the Civil Service, which I have experienced as a Minister in the Scottish and United Kingdom Governments. We now have a position whereby a statutory basis for management of the Civil Service was set out in the Constitutional Reform and Governance Act 2010, an important measure. Civil servants working for the Scottish Government and the Welsh Assembly Government are all part of the United Kingdom Civil Service, and, crucially, the Civil Service Code forms part of civil servants’ terms and conditions of service. The code sets out the core values of integrity, honesty, objectivity and impartiality, and the standards of behaviour expected of civil servants. As the noble Lord, Lord O’Neill, observed, the continuity that civil servants have been able to bring, not least in times of uncertainty following the election in 2010, has been quite remarkable, and one pays tribute to them for that.

It is the job of civil servants to support the elected Government of the day, and the Civil Service Code recognises the fact that civil servants working for the Scottish Government and the Welsh Assembly Government are required to support those Governments. As the noble Lord, Lord Sewel, said, in the area of devolution tensions are inevitable. Likewise, civil servants working for the United Kingdom Government are able to advise their Ministers on matters which are the responsibility of other Governments. It is important that civil servants recognise their obligations under the code and support their Ministers to the best of their ability, even in politically sensitive areas, when Administrations have different policies and different priorities. They must ensure that they remain politically neutral and avoid public advocacy of political views.

In the points made by the noble Lord, Lord Sewel, he grasped the sensitivity of this issue and raised some important points that will not be resolved in this debate or this Bill but are important and have to be considered. I was thinking of an example whereby the Scottish Government have executive devolution responsibilities for renewable energy. Likewise, matters of transmission charges are a responsibility for the UK Government. But it would be very awkward if not impossible for the Scottish Government to make decisions on renewable energy without having some advice and support from their civil servants about implications for transmission charges, so it is not always easy to disentangle respective responsibilities.

Comment has been made on various issues that have been highlighted publicly. The noble Lord, Lord O’Neill, asked about the present Cabinet Secretary, who has been fully cited on these issues and has recently visited Scotland. I am advised that he reiterated that it was appropriate for United Kingdom civil servants to work to support their Ministers in pursuing their objectives, even though that may mean in an era of devolution the pursuit of a different policy aim when Administrations have different objectives. It is important to reiterate once again that one great strength of the Civil Service, which has come through in this debate, is that both of these things—objective support for Ministers and political impartiality—should be taken seriously.

I do not intend to comment on the specific wording used by Sir Peter in his recent communications to staff. Whether or not a particular civil servant has acted in accordance with the code is not ultimately a matter for Ministers to determine; it is an internal issue for the Civil Service, and it would be improper for me to go over that line. What is essential is that civil servants support their Ministers firmly within the parameters set by the Civil Service Code.

[Lord Maclennan of Rogart]

Will the Minister consider whether the mode of investigation of alleged breaches of these codes of impartiality and independence could be improved? This is a continuing and growing anxiety across a wide spectrum of those involved in public affairs. Other professionals have modes of inquiry which enable the cases to be argued and a decision to be made. I think for example of the General Medical Council, which will decide whether or not there has been an impropriety. A purely hierarchical approach to the Civil Service on matters of this kind is not entirely adequate. We need to discuss, perhaps with the First Division Association, whether it would be encouraged to feel that its service would be greatly strengthened by there being such a procedure for looking at complaints which are made by affected members or the public generally.