Queen's Speech

Lord Myners Excerpts

Wednesday 2nd June 2010 Lords Chamber

[Lord Myners]

My Lords, I begin by congratulating the noble Baroness, Lady Wilcox, on her appointment to government. This must be the first time in many decades—possibly ever—that part of the debate on the humble Address has been led by two people of Cornwall. I also compliment the noble Lord, Lord Henley, on his return to the government Benches.

This will be my last contribution from the Opposition Front Bench, as I move to the Back Benches to make room for colleagues more skilled in the art of politics and opposition. I should therefore like to use the occasion to express my appreciation to the noble Baroness, Lady Noakes, for the detailed focus she brought to shadowing me when I was in government. I should also like to record my thanks to the noble Lord, Lord Newby, who introduced great vision and wisdom to our debates. And of course I should like to register my most sincere gratitude to my noble friends for their patience and support over 18 months. Finally, like others, I look forward to welcoming Sir James Sassoon to the House and to the Benches opposite. His experience of the real world will be indispensible to his new colleagues.

I will focus my remarks today on matters relating to the economy, public finances and the financial sector, because everything else depends upon this. My colleague, my noble friend Lord Young of Norwood Green, will also speak to these subjects and other matters in his closing speech.

The Labour Party lost the general election. We need to reflect on the reasons for our failure and develop a set of coherent proposals which will appeal to the aspirations of the broader electorate. We should be proud of many of our achievements while in Government, but we need to recognise that jobs cannot be created by interminable meetings in the COBRA war room. Government needs to work with the grain of the private sector, creating a pro-enterprise context with the right incentives and rewards for success.

We now need to focus on the challenges and responsibilities of effective opposition. We will not oppose for the sake of it; nor should we oppose proposals from the Government which we would have made had we been re-elected. For instance, I do not see why we should take issue with the intention behind the Equitable Life Payments Scheme Bill or the Terrorist Asset-Freezing Bill, although we will of course scrutinise the detail.

We will be vigilant in our analysis of and response to government proposals which we judge to be unfair, damaging to essential public services or injurious to jobs and business. We are told that the Government's legislative programme will be based on the principles of freedom, fairness and responsibility. The Queen's Speech tells us nothing about how the new Government will resolve the inevitable tensions between those fine words. We will be testing the Government against those principles. The Queen’s Speech is where the “dignified” part of the constitution passes to the “efficient”. The Government have been clear that in their view, to cite the coalition document,

“The deficit reduction programme takes precedence over any of the other measures”.

The Opposition do not dissent from the view that there needs to be a clear path to sustainable government funding, including a significant reduction in the public sector deficit, but we question the timing and pace of the deficit reduction programme. The risks of moving too soon or too late are not symmetrical. Over-hasty action will push the economy back into recession and a ballooning rather than a contracting of the deficit. That was the view of the Liberal Democrats until three weeks ago.

The economy is showing signs of recovery from the global recession, supported by the previous Government’s stimulus package, but private sector consumption and investment are still too anaemic, in my judgment, to make up for a very sharp fiscal tightening. The output gap, or excess capacity, is already in excess of 5 per cent of GDP. Any contraction in aggregate demand will be reflected in increased unemployment, loss of people's homes and business failure.

It has been entirely right and proper in the circumstances that the Government continued to support economic activity through a targeted programme of expenditure designed to protect the most vulnerable and facilitate the return to growth. This should continue until the private sector demand and investment process recovers. Our action in that respect in 2008-09 achieved a considerable measure of success, particularly compared with the experience of Tory recessions in the 1980s and 1990s. The strategy that we followed was sensible and well within the Government’s financing capabilities. Real yields on gilts are below 1 per cent, and nominal yields are below 3.5 per cent. The ratio of gross debt to gross domestic product is below that of all our major competitors, and still below the long-term average for the UK. The average maturity of our debt is more than 14 years. The private sector is currently running a surplus that represents nearly nine-tenths of the fiscal deficit. We must not lose sight of the interaction between the private and public sectors in terms of deficits and surpluses.

Fiscal tightening will work only if it coincides with a robust private sector recovery. If that is not the case, the Government's action will drive the economy back into recession with an increasing public sector deficit. In such circumstances, dogma and intransigence will be pursued at very real cost to people's lives. Recovery cannot be taken for granted, particularly if the public and private sectors here and overseas are engaged in simultaneous and unco-ordinated balance sheet adjustments. It is incumbent on the new Government in this respect to follow the lead set by their predecessor in shaping and influencing international co-operation on economic management. The new Chancellor will have his first test this weekend at the G20 meeting. We look forward to receiving his report.

I referred earlier to the position that Liberal Democrats took during the election campaign on the need to eschew early or harsh spending cuts. Mr Nick Clegg, the Deputy Prime Minister, justified his change of position in supporting George Osborne's spending cuts, having opposed them during the election, by saying on the “Andrew Marr Show” on BBC1 on Sunday 23 May:

“I don’t think anybody could have anticipated quite how sharply the economic conditions in the Euro zone would have deteriorated, and the need to show that we are getting to grips with this”

the deficit—

“suddenly becomes much greater”.

I look forward to hearing the views of the noble Lords, Lord Desai and Lord Skidelsky, on this arrant nonsense. European economies—our principal export market—are weakening. Gilt yields have fallen, signalling a sense of heightened anxiety about growth and risk, as further evidenced by increased risk tendencies within the banking sector. Sterling is strengthening, yet our Deputy Prime Minister now believes that these circumstances justify the introduction of measures that will weaken demand and that are likely to be harsh and regressive in their impact on our economy and society.

The coalition Government need to spell out those parts of the economy that they have identified as the engines for growth in 2010-11. What will act as a catalyst for an improvement in the private sector? What will improve demand and investment when so many countries are in retrenchment? The Minister talked about a balanced economy. How do the Government intend to balance the economy? What do they intend to suppress in economic activity? What activities do the Government wish to see diminish in importance in our economy? It is certainly most odd that in these circumstances Mr Osborne should have chosen last week to give high priority to reducing business support schemes and that Mr Cable should have failed to make the case for business. Perhaps Mr Cable has concluded that he is powerless to challenge Mr Osborne.

The Minister referred to wasteful expenditure. We are all in favour of cutting waste, but cancelling 10,000 university places is not cutting waste; it is cutting our capacity for the future. Cancelling 40,000 jobs for young people under the Future Jobs Fund is not cutting waste; it is blighting prospects. Cutting child trust funds is hitting the poorest and has no impact on public expenditure, as the assets within those funds have to be retained within the banking system.

The noble Lord, Lord De Mauley, last week failed to provide any credible answers to questions from my noble friends Lord Eatwell and Lord Kinnock on the impact of the Government’s announcement on unemployment, business failures and the cost of breaking long-term contracts. The noble Lord said that today’s debate would afford ample opportunity for answers to those questions. I heard not a single answer from the Minister to those questions. It is my sincere hope that Ministers will provide answers in the closing speech or by letter to those participating in this debate. I have no doubt that the answers exist within the Treasury, although they were clearly not shared with the noble Lord, Lord De Mauley, ahead of last week’s debate. When I sat on the Benches opposite, I made real efforts in my closing speeches to answer questions raised in debate, and when I was unable to do so, I tried to answer them as fully as possible in correspondence with noble Lords who participated in the debate. If I was slow in replying, I could always rely on the noble Lord, Lord Marlesford, to chase me. I hope that Ministers participating in this debate will respect the House by following the same practice.

A core element in the Government’s legislative programme is the establishment of the Office for Budget Responsibility to provide confidence in the management of public finances. We must wait to see whether this is a triumph of spin over substance. The independence and credibility of the OBR is hardly helped by the suggestion that it will be able to provide independent and credible economic forecasts ahead of the Budget in three weeks’ time. The OBR’s wish to accommodate the Chancellor by agreeing to such a rushed piece of analysis does not auger well. I do not have concerns about or issues of principle with the OBR. It could possibly be a useful addition to transparency and accountability, although the IMF’s cool reaction to the proposal suggests that we should not raise our hopes. But I have questions of detail to which I seek answers. How will the OBR be staffed? Will it have its own independent forecasters, or will it rely on Treasury officials? What resources will be allocated to the OBR, and will they be determined by the Chancellor? What savings in Treasury costs will arrive with the establishment of the OBR? How much time will it have to review Budget proposals before it publishes its commentary on them on 22 June? Sir Alan Budd appears well qualified to chair the OBR, but he is a political appointee, made while the Tories were in opposition in 2009. Will OBR appointments be in accordance with best practice and in open competition, without ministerial or special adviser involvement? How much will Sir Alan and his colleagues be paid? Sir Alan has recently worked for a well-known hedge fund and speculator. Has he now terminated all links with this group, which is led by a well-known Tory donor, or is there an arrangement for him to return to the group on completing his appointment at the OBR? I ask the same question about Mr Geoffrey Dicks and Novus Capital. When did Sir Alan and Mr Dicks last advise their clients and associates on public finance issues? Have they had any contact with these firms since the election?

Critically, we will expect the legislation that establishes the OBR to make it clear that this body should be independent of the Treasury, fully accountable to Parliament, and transparent in its processes—including publishing minutes, as we did in respect of the Council for Financial Stability. The key word in the OBR’s title is “responsibility”. Let there be no doubt that the Chancellor must continue to take responsibility for tax and spending decisions. He cannot evade them or use the OBR, or Mr Danny Alexander, as a human shield. Sir Alan will need to be careful not to be drawn into politics.

The OBR has little time to prepare its economic forecast and review the proposals that the Chancellor will announce to the other place on 22 June. It is clear that we will see draconian cuts in expenditure that will include the front-line provision of critical services. Taxes, particularly VAT, will also rise. Tax bands will be frozen and benefits cancelled or reduced. Anticipation of these cuts is already sapping consumer confidence, and businesses are placing new investment on hold until they see how bad things are going to be.

We can, however, take some encouragement from the moderating influence of the Liberal Democrats, who are deeply embedded behind lines in the coalition, as already evidenced in the cancellation of plans for raising the threshold for inheritance tax and in the proposed changes to capital gains taxes to bring them closer to the income tax rates. We congratulate the Liberal Democrats on their influence on the Conservative Party in this respect. Raising tax thresholds and the capital gains tax rate is a well argued Liberal Democrat priority, although I note for the House that in previous Budgets we judged it important when in government to encourage capital investment and business creation through low rates of taxation on capital gains. I look forward to hearing the Government’s explanation of their thinking behind increasing capital gains tax rates. The Liberal Democrats made great play in their election pitch about closing tax loopholes and frustrating tax avoidance, particularly in the banking sector. Will Ministers confirm that this is a high-priority action for the new Government and let the House know the actions that they are taking?

Let me now spend a moment on the banking sector. I sense that the European banking sector is moving towards a very difficult space, with heightened risk manifesting itself in wider credit spreads and a reluctance to do business with an increasing number of professional counterparties. This is similar to, although not as extreme as, the conditions that prevailed in 2008. This new Government must now exercise great care if we are to avoid a further banking crisis. The Government have proposed establishing an independent commission to investigate the complex issues of separating retail and investment banking. I wonder whether Ministers can cite a single example of this factor having a bearing on the failure of any UK banking institution, and I look forward to the answer from the noble Lord, Lord Henley, to that question.

From my experience, the failures of RBS and others were down to poor credit judgment, poor management and poor governance. Universal banking was not a causative factor. Yet the establishment of this commission is causing the banking sector considerable alarm, as is Ministers’ talk of the Government forcing banks to lend regardless of their commercial judgments of risk. The uncertainty that is being created is leading banks to review their lending commitments until the Government are clear about their intentions. This contraction of credit is another force that pushes the economy back towards recession. Will Ministers tell us when we can expect a comprehensive statement on this commission, and their policy thinking behind obliging banks to lend?

It is unfortunate that the uncertainty created by the new commission must now mean that the Government are not in a position to realise the full value of the investment taxpayers have made in Lloyds Banking Group and RBS. The taxpayer currently has a substantial gain from the aggregate interventions made by the Treasury and the Bank of England in 2008-09—something well in excess of £10 billion of gain as a consequence of well structured programmes of intervention and support. UK Financial Investments had well developed plans to work towards sales, which I imagine must now be postponed while this review is carried out, with the risk that the opportunity for gain will pass.

Finally in respect of banking, the new Government have talked of robust action on bonuses. Can Ministers explain what they have in mind and how their thinking in this area and their proposed actions differ from the actions of the previous Government? Are they considering the introduction of a special tax or a higher rate of corporation tax for those banks, or some direct involvement in decisions about remuneration? If they are going to do this for the banks, will they do it for insurance companies, hedge funds and others who compete with the banks? There is complete uncertainty here because of the lack of clarity about the Government’s intention. The time has passed for the Government to be vague about this. We need clear statements if uncertainty is to be addressed.

The Government are also proposing changes to the structure of banking supervision. Their thinking here is confused and the wisdom of making wholesale changes to the regulatory architecture must be very questionable at a time when the world’s banking system is showing loss of confidence. The Government talk about bringing forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation. When can we expect to see these proposals? Do they accord with the wishes and recommendations of the Bank of England? Does the Bank of England have the capability to perform these new roles or will people need to be recruited—possibly, ironically, from the FSA? When does oversight move to control? When does micro morph to macro?

In respect of macro-prudential regulation, will the Bank of England seek to influence market values of homes, property and businesses? Will it have powers to ration lending? How would those powers operate given the global nature of banking and financial markets? Will this macro-prudential regulation be co-ordinated with the work of the OBR? On these subjects, the Government are absolutely silent. How will the Bank manage the potential conflicts between its role in determining the price and availability of money, and its new responsibility for micro-regulation, where these two may move it in opposite directions? There is no clarity on these issues in the Government’s thinking at all. We look to the noble Lord, Lord Henley, to provide that clarity. I mentioned governance earlier. I hope that the new Government will continue to promote the cause of good governance and stewardship, and ensure that the UK continues to lead in this important area.

I have little time to comment on other matters in the Queen’s Speech, but I would express my general support for the intention to give all employees the right to request flexible working hours and the promotion of equal pay—two policies where the influence of the Liberal Democrats is again very clear. The same could be said for the enthusiasm with which the Government are proposing to focus on legislation to take action on climate change.

The Liberal Democrats endow the Government with a more caring complexion than would have been the case if the Conservatives had governed alone. The new Government are coming together impressively at ministerial level but the debate on the humble Address has already exposed Back-Bench tensions that will need to be managed.

For our part the Queen’s Speech contains a number of measures which we will wish to support, subject to detail. But there are other areas where thinking is simply flaky or reckless—areas where the interests of economic prosperity and stability are subserviated to dogma, blindness to risk and the hazards of foolish action. The Government can expect us to be unstinting in our opposition to such measures.

--- Later in debate ---

[Lord Henley]

That is a question that the noble Lord will have to put to the previous Government, who saw it rise to that level. I shall of course write to him in due course and, as I always do, put a copy of the letter in the Library.

The longer that we delay action on the deficit, the greater is the risk of that loss of market confidence. As I said, that would mean higher interest rates for all, stifling recovery and making challenges ahead even harder.

[Lord Myners]

I am grateful to the Minister for allowing me to ask just one small question. It is clear that the size of the deficit will be a function of the expected rate of economic recovery and growth; the two interplay. I believe that the Minister said that the OBR would make independent forecasts. Will he confirm that it will make economic forecasts as opposed to auditing or commenting on Treasury forecasts?

[Lord Henley]

The forecasts of the OBR, as I made clear, will be independent. It is for it to make those independent forecasts. I was trying to stress its independence. I shall write to the noble Lord on that in greater detail, but its independence was his principal concern. He will have a chance to see the first of those forecasts quite soon, as I understand that the first of them will be out before the Budget. If I am wrong about that, I shall let him know in due course.

One should also refer to the OECD’s recent economic report, which argues that a more rapid fiscal consolidation would help the recovery by leaving room for interest rates to remain lower for longer. That will support spending by households and by business. The importance of taking action this year is underlined by recent events in the eurozone. Failure to take action would put that recovery at risk.

I turn to questions asked about tax. Noble Lords mentioned CGT, income tax and tax avoidance—that was the noble Lord, Lord Oakeshott. We heard confessions from the noble Lord, Lord Desai, about his having to resign from the pre-1997 opposition Front Bench for his views about that. As I remember it—the noble Lord will no doubt correct me—he had to resign from the opposition Front Bench more than once.