EU: Budget Report

Debate between Lord Marlesford and Lord Hollick

Thursday 25th April 2013 Lords Chamber

[Lord Hollick]

I am not talking about figures; I am talking about the importance of using the public finances to invest in growth. That is what we need. Without growth, we simply will not be able to repair the public finances.

[Lord Marlesford]

My Lords, I strongly support the fundamental economic strategy of my right honourable friend the Chancellor. On the other hand, I am not wholly happy with the way in which he has been attempting to carry it out. The objectives are right but the methods are rather questionable.

First, he has sought to reduce the deficit, and particularly government spending in many areas, which I support. There is no doubt at all that the expenditure on the whole welfare area has been wildly out of control, and it absolutely has to be gripped. Equally, there is no doubt that growth will come from actual economic activity on the ground.

Much of the problem is caused by the behaviour of the banks. I give credit to Alistair Darling for the way in which he handled the crisis. The mistake was then to use, or to expect to be able to use, the banks as a means of generating growth in the economy through quantitative easing. Far from lending the money that they had been supplied, they used it to reinforce their extremely fragile balance sheets, so QE did not achieve the objectives that the then Chancellor hoped for. The Chancellor should probably have abandoned at a much earlier stage what was effectively his support of the banks and their balance sheets. Their behaviour in the past few years since the crisis has been lamentable. It has been as unethical, selfish and greedy as ever, and it has been incompetent.

With regard to the stimulation of the economy, the time has come for more direct government expenditure on our infrastructure. There are masses of things that can be done. I am of course not talking about nonsenses such as £30 billion on HS2, which is wildly outside any parameter of time and is most unlikely to produce any useful return for the taxpayer or the nation. I am talking about things such as housing, road construction and the maintenance of our national infrastructure, because that is true investment. Giving banks more money through quantitative easing to restore their balance sheets is not true investment.

The Chancellor’s tax policies in one important area have been unwise. I am talking about the petrol tax. The Chancellor has already forgone some £1.5 billion of revenue by not increasing the petrol tax as planned. The extraordinary thing to me is that the petrol tax figure that we are talking about is always about 3p per litre, and that alone costs £500 billion a year, yet the price of petrol at the pump varies by more than that. The price at the pump basically goes up and down according to the price of oil. The Chancellor has made a huge mistake in effectively wasting the opportunity cost of the petrol tax. I hope that as soon as the time is appropriate he will go back and change that particular policy.

I agree with the noble Lord, Lord Harrison—I sit under his distinguished chairmanship on Sub-Committee A of the European Union Select Committee—that the single market in Europe is very important and should be enhanced and nurtured. However, I do not believe that, for strategic planning, Britain can rely on Europe for the future. Europe is in a frightful mess. People say that 40% of our exports go to Europe; that may be. What we should be doing is switching our effort into markets where we can compete and which are expanding, such as Asia, the United States and Latin America, and not pinning our hopes on Europe, because in Europe there is very little hope. My worry is that the European Commission has proved itself to be incompetent in offering advice to member states on how to run their economies. During the euro crisis, it came to the realisation—very late, but in a big way—that it had been a great mistake to confuse the toxic debt of banks with the toxicity of sovereign debt, and decided that they should not be confused.

Let us consider what happened with Cyprus. The European Commission, having made the mistake with the wretched Irish, the Spaniards and the Greeks of making them take the bank debt on to the government books, the very next thing was what happened in Cyprus. That is an example of unparalleled incompetence. What happened was that the Cyprus Government came forward with a plan to rescue their banking sector. Of course, they would come forward with whatever they thought suited themselves and their friends, perhaps including the Russian oligarchs. The plan that they came forward with involved raiding the balances of deposits in banks. It had been for some while a crucial component of confidence in the banking system throughout the EU that deposits in individual regulated lending institutions—banks, primarily—were underwritten up to €100,000. My criticism is that the attempt to sweep that aside so that the small depositors in Cyprus would pay their share—although I could quite see the Cypriots putting that forward—was signed off by the troika of the European Commission, the European Central Bank and, just to remind the noble Lord, Lord Layard, who is so keen on it,the IMF. Those three signed off on a policy that will for many decades, I suspect, put a deep suspicion in people’s minds about lending to banks. The United States has a much prouder record of protecting depositors in banks. I believe that one of the roles of the state is always to protect small depositors in a financial system.

That was a very depressing example, and one reason why I am rather gloomy about Europe being able to work out under the semester what its progress is to be. It is still wrestling with the crucial question, which applies primarily to the euro area, of whether there can or should be mutualisation of debt. Is it possible to have a Eurobond, a bond issued by the European Central Bank, to fund individual countries’ Governments and is underwritten centrally? For how much can this be done? We are not even clear what the total sovereign debt of the euro area is at the moment. It is very doubtful whether this Eurobond will work. There is a thought about having two sorts of bonds: a blue bond, an ECB-guaranteed bond for national Governments, and a red bond, which national Governments would issue. This strikes me as a very questionable approach. What is it trying to achieve?