Autumn Budget Forecast

Lord Myners Excerpts

Tuesday 29th November 2011 Lords Chamber

[Lord Myners]

My Lords, the Minister must be delighted that he is the first Minister to be able to take advantage of this new procedural protocol so that he does not have to repeat the dire message that we received in the other place earlier today. Twelve months ago, when my noble friend Lady Kennedy of The Shaws introduced the debate on the Autumn Statement, he beguiled us with visions of sunlit uplands, growth, prosperity, low inflation and a resurgence in private investment. I fear that he would be deeply embarrassed and would squirm if he reread the words he used 12 months ago in the light of the Chancellor’s Statement today.

The Autumn Statement metamorphosed from a mid-year review of where we are with the economy into a Budget as it became clear that the growth and fiscal targets set by the Government are going to be missed by a country mile. The OBR has now reduced its forecast economic growth for this year, next year and the year after on no fewer than four occasions as a consequence of government policy.

Remember why we were invited to sign up to the agenda of unprecedented austerity. Cutting public expenditure, we were told, would free up resource for private sector expansion, the economy would spring back to life, unemployment would fall and inflation would subside. In fact, as we were told by the Chancellor today, what we are getting is lower growth and record unemployment: a 17-year peak for unemployment; a million young people out of work; female unemployment at the highest level since 1988; and the International Labour Organisation is forecasting that unemployment will increase by another 500,000 to 2.8 million. Inflation is way outside the target, more than double the rate of any of our major competitor countries. So much for the sunlit uplands that the Minister told us to expect 12 months ago.

The OBR tells us in paragraph 1.11 that the economy was in fact growing more strongly in 2009 and early 2010 than previous figures suggested. The policies pursued by my right honourable friend Mr Alistair Darling were working and government borrowing was coming down: it was £25 billion less in 2009-10 than forecast originally in the Budget for that year. The economy was growing, the deficit was falling, as we knew it had to do. We all know what has happened since: the economy has flatlined; growth has been lower than in any of the 27 EU countries over the last 12 months, except Cyprus, Portugal and Greece. The deficit is growing, not falling, and the Chancellor is now forecasting additional borrowings of £150 billion over the OBR fiscal period. Compared with the forecast he made 12 months ago, the borrowing figure has increased by £150 billion. This is the consequence of failure, not of success. We are having the pain but there is no sign of the gain.

There is no sign of a let-up: the OBR forecasts a surge in unemployment and makes two very vital points. First, the OBR now believes that the productive capacity in the economy has been permanently diminished and hence the structural element of the deficit is even higher. Secondly, the OBR and the Bank of England are unable to account for a marked decline in productivity. Yet the Government have no policies to address this decline in structural capacity and productivity. The Government and the Treasury in particular are suffering from collective cognitive dissonance. The Prime Minister told us a fortnight ago that getting the deficit down is,

“proving harder than anyone envisaged”.

Correct, Prime Minister, because the policies your Government are pursuing are actually causing the deficit to increase. The deficit is a consequence of lack of growth, not the cause.

The second area of cognitive dissonance relates to the sources of growth. Growth can be achieved from household consumption, but we know, and the OBR confirms, that that is falling as increased job uncertainty and a squeeze on real incomes—a squeeze that the OBR describes today as a post-war record—are having a severe impact on consumer confidence. The Government are clearly trying to take demand out of the economy. Large companies are sitting on cash and not investing because of the uncertainty. Small and medium-sized businesses cannot get credit to expand, and we are lecturing other countries to adopt the same austerity policies. From where is the demand going to come to increase economic growth? Is the Minister not familiar with John Maynard Keynes’s paradox of thrift? Where is the growth going to come from?

The third area of cognitive dissonance is along the lines of, “It’s all Europe’s fault”. Europe is no doubt very significant and we will be discussing this in Grand Committee on Thursday, but noble Lords should be clear that the economic slowdown in this country is primarily a result of a decline in domestic demand. In fact, the OBR and ONS data show that economic growth in the first nine months of this year, inasmuch as there has been any, has come from exports. Exports to Europe are up 17 per cent over the last nine months. It is domestic demand that is down; it is domestic demand that is forcing up the deficit and forcing up unemployment. Of course, as noble Lords will know, the flatlining of economic growth in the United Kingdom preceded the euro crisis by at least nine months.

This is the context, therefore, for an emergency Budget that has done nothing to add to aggregate demand and places a further squeeze on real incomes, particularly on those on middle incomes or those who are now increasingly fearful of losing employment.

I will look at a few items in the Chancellor’s Statement, and allow other Members of the House to bring up other issues. I shall start with credit easing. On the Andrew Marr programme on Sunday, the Chancellor said the Government would be lending to SMEs. Now it sounds as though it is more like an interest rate subsidy or that we will be lending to the banks to lend to SMEs. Can the Minister tell us when the policy changed? It cannot be that the Chancellor did not know his own policy, yet he very clearly said on the Andrew Marr programme that the Government would be lending to SMEs. Why did the policy change over a matter of three days? How will it work in practice? How much will it cost? Where do the skills lie in Government to evaluate risk?

It is clear that the Governor of the Bank of England wants nothing to do with credit easing. How will credit easing be co-ordinated with quantitative easing, and who will make the credit judgments? What assumptions have the Government made about the probability of default and loss in the event of default as a consequence of credit easing? There is absolutely nothing on this in the Chancellor’s autumn Statement. Has credit easing actually been approved by the Permanent Secretary? Does it pass the tests for value for money? How much will the banks benefit? My sneaking suspicion is that this is another back-hander to the banks, something that the banks will benefit from more than SMEs. We have the abject failure of Project Merlin as evidence of the ability of the banks to constantly outwit this Government.

Much was made in the leaks over the weekend about infrastructure expenditure: an extra £5 billion. I am not going to look a gift horse in the mouth—this is a good move—but let us put it in context. This Government cut public expenditure investment by £50 billion a year ago. It is now increasing it by £5 billion over a four-year period: £1 billion per annum is going to be spent by the Government on additional infrastructure expenditure out of total government expenditure during that period of about £2.8 trillion. Mr Fallon said on “Newsnight” last night that pension fund participation in this programme was guaranteed. I invite the Minister to name some of the projects where agreements have been reached, to tell us what the pay arrangements are or the tolls that will be charged.

I draw the Minister’s attention to a statement issued by the National Association of Pension Funds this afternoon, which said,

“there are no plans or details on the table yet”.

Quite frankly, this does not cut the mustard. I remind the House that in this autumn Statement, the Government have said they will cut investment by public funds by the following amounts over the next four years: £2.4 billion, £3.2 billion, £2.5 billion, £2 billion, £2.4 billion and £4.1 billion. Those are the real numbers, not the figments of imagination that we got out of the proposals for infrastructure investment. Nor does the Treasury seem to have given any thought to how these funds would displace funds that otherwise would have been used to support new private sector investment.

I will also say a little about the bank levy. Project Merlin has clearly failed. The Governor of the Bank of England has said that lending to SMEs has contracted—not increased, contracted—by £5 billion over the last 12 months. Does the Minister agree with that number? What assumption have the Government made about how the bank levy will operate in the future? Will it be passed on to customers? Let us remember that the Government are not increasing the total tax paid by banks; they are merely adjusting the rate. This Government do not believe that the banks can pay any more tax but are planning to increase the tax on women and families by £1.3 billion a year through adjustments to the family tax credit. This is contemptible, verging on the wicked.

On spending cuts, the Chancellor says that he has been able to meet his moveable fiscal rules because he will cut spending by an additional £8.3 billion in 2015-16 and £15.1 billion in 2016-17. But other than the cut in the family tax credit, he says nothing about where these cuts will come from. Can the Minister tell us what will be cut?

In conclusion, plan A is no longer credible. It is no longer responsible, respectable or worthy of being taken seriously by anyone. These plans today have been hastily cobbled together. They do not come even close to passing the tests for a plan for growth. The Budget was described by the Chancellor as a march of the manufacturers. Today, we have had a march of the myth-makers. The Government have killed confidence in the economy. Labour’s five-point plan is practicable, fundable and implementable, and worthy of implementation compared with the dross that we have had in the autumn Statement today.

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[Lord Sassoon]

That was reported in the press. If the noble Lord would like to deny it, he is at liberty to do so.

[Lord Myners]

I think that that borders on an accusation of treachery and that the noble Lord owes me an apology. What I said was that it would not surprise me, in the circumstances, if the board of HSBC felt that it had to consider matters of location, which is exactly what it confirmed it was doing when it gave evidence to the Treasury Select Committee. To suggest in some way that I am guilty of some form of treachery is a monstrous suggestion, which I hope that the Minister will withdraw.

[Lord Sassoon]

The noble Lord, Lord Myners, mentions treachery, which never passed my lips. He was reported as saying that he suggested that HSBC should be moving its retail bank to Paris. If in fact that was not the advice he was giving, I am very glad that he has now clarified that.

This Government are making sure that we deal with the legacy of our predecessors—of his Government —and return our economy to sustainable growth. That means sticking to our deficit plan to keep interest rates as low as possible, which is what was at the heart of my right honourable friend’s Statement this afternoon.

Sovereign Credit Ratings: EUC Report

Lord Myners Excerpts

Tuesday 15th November 2011 Lords Chamber

[Lord Myners]

My Lords, I congratulate my noble friend Lord Harrison and his committee on the excellent work that they have done on this issue. They have produced a flawlessly argued case which, on the whole, the Government have very sensibly accepted in their written response. I share with the noble Baroness, Lady Noakes, a great interest in how the Minister will respond to what the Government have said.

I am delighted to see the Minister here as I was a little worried that the noble Lord may himself have been downgraded. The appointment of the noble Lord, Lord Green of Hurstpierpoint, as a member of the Treasury team was relayed to us in a press release issued very quietly by the Treasury and was not given a lot of publicity. He is to give advice to the Chancellor on issues relating to banking, which seems to me to be the job that the noble Lord, Lord Sassoon, was doing. I am delighted to see that the noble Lord, Lord Sassoon, is here and that he has not been downgraded, which would have been a great disappointment to me and to other Members of the House. It would be interesting to know why his advice on banking is not sufficient for the Chancellor, and why the Chancellor now needs the noble Lord, Lord Green, to be a member of the Treasury team.

As the noble Baroness, Lady Noakes, said, credit rating agencies have, to some extent, been used as scapegoats by those who should have taken responsibility for policy errors but instead sought to deflect the blame on to others. The credit rating agencies clearly played a lamentable role in the rating of SIVs, CDOs and other packaged products. They engaged in misdirected behaviour, employed flawed processes and had a business model based on suspect economics: the issuer pays protocol. Some would say, in respect of sovereign debt, that the case is not proven as to whether the rating agencies also had a role in triggering some element of the sovereign crisis. I am more inclined to give the rating agencies the benefit of the doubt and to say that they did not play any significant part in causing the sovereign crisis.

Here I disagree with paragraph 22 of the committee’s report, which says that credit rating agencies play a role in determining the cost to governments of borrowing. They simply do not. The realistic situation of the borrowing nation’s capacity to pay determines the price it pays for credit. The thermometer does not trigger the fever. The credit rating agencies measure the likelihood of repayment. They certainly do not have any impact on the cost of credit. Again, at the risk of giving even more credit to the noble Baroness, Lady Noakes, she was absolutely right in pointing to the case of France, where the credit rating agencies may say one thing about the rating of that country but the pricing of its debt in the markets says something rather different in terms of differentiation between France and Germany, the quality of covenant and the capacity to honour debt obligations.

The reality is that credit rating agencies are a lagging indicator rather than a leading one. They tend to verify the market’s judgment rather than to lead it. We should not be terribly surprised by that. My experience is that, on the whole, credit rating agencies employ rather average people. They are given extraordinary status by Mr Peston and others on television when they talk about changes in rating, but quite frankly, if you are good at the job, you work in an investment bank, a bank or a hedge fund; you do not work for Fitch, Standard & Poor’s or Moody’s. On the whole, these are at best average folk. They express opinions. Their opinions are worth little more than many other opinions—certainly a lot less than those of people who make decisions with real money or authoritative commentators such as Mr Martin Wolf in the Financial Times and others. In many ways, these credit rating agencies are of little consequence at all. We should probably not spend too much time on them, except that they tend to be taken rather seriously by the media and—more importantly—regulators.

We need to understand the way in which the credit rating agencies are hardwired at the moment into regulatory architecture and find a way to eliminate the central role that they play. In that respect, we should strongly support international efforts to reduce the role of credit rating agencies in helping to determine risk-weighted assets and other important calculations that feed into Basel and other capital requirements. Unfortunately, the role of the credit rating agencies is rather helped in this respect by their standing in America, under the SEC regulations, as nationally recognised agencies or quasi-regulatory authorities. This is a deep lacuna. I urge the Financial Policy Committee of the Bank of England to look at the role of credit rating agencies and see whether we can find a way of taking them out of the central role that they currently play.

The implementation of the credit rating agency directive will be in the hands of the European Securities and Markets Authority—ESMA. This has only recently been established but is an important agency because it will exercise direct regulatory authority. I hope the Minister will correct me if I am wrong here, but I believe that ESMA has the power to overrule national regulatory agencies. In other words, the FSA is subordinate to ESMA and could not, if it wished to, introduce higher standards. ESMA has been clear that it intends to ensure that its rules are enforced uniformly across the EU and in so doing will limit the ability of individual countries to require additional measures. Mr Steven Maijoor, the chair of ESMA, was quoted in the Financial Times recently as saying that,

“we are moving toward common supervisory standards”.

The regulations will not be based on the UK’s “comply or explain”. They will be enforced on all national regulatory agencies by ESMA. I would welcome an assurance from the Minister that he will stand up for self-determination of regulation in the UK and not allow us to be steamrollered by ESMA or any other part of the European regulatory architecture.

We saw some very flawed thinking from the European Commission on credit rating agencies—that there should be a government-sponsored CRA, the banning of the publication of ratings, and the pre-approval of methodology, which implies again some process by which these become nationally recognised outcomes rather than the opinions of rather average people. I worry very much about Mr Barnier. I met Mr Barnier when he was a Minister. He came to see us at the Treasury. He came down the corridor and I was watching him. I am a great fan of art and I was rather impressed that he stopped to look at every painting. I thought this is a man with whom I share a common interest—until I realised he was actually looking at his reflection in the glass on every painting, and adjusting his hair or his toupee. This to me is a man whom we should treat with a very long spoon. I hope the Minister will take due care in working with Mr Barnier because we have been forewarned that this man intends to seek even more powers than those he announced today. He said he wants to return to the issue of censoring rating agencies. I sincerely hope that the Government and the Opposition would have no part in endorsing such an activity.

The Financial Secretary to the Treasury—it is not the noble Lord, Lord Sassoon, but Mr Hoban—said in his letter to the noble Lord, Lord Roper, on 28 September that he would be reporting back to us on the work of the Financial Stability Board on rating agencies,

“which was due to report in mid September”.

He actually wrote the letter on 28 September, but I am accustomed to how timing and seasons change when Ministers come to author letters. I would be interested to know whether this reply has been produced and whether the Minister can tell us what the FSB has decided on credit rating agencies.

Finally, as my time expires, I regard the CRAs as just another of those innocent fools and victims who played a part in the financial crisis. Your Lordships have already had an excellent committee report on the auditors. We have now had a report on the credit rating agencies. I think attention should now be turned to the benefit consultants and, finally, to those rascals who decide whether a credit event has been caused in the credit default swaps. Plenty for the Minister to do even though he is now job-sharing with the noble Lord, Lord Green of Hurstpierpoint.

Al-Qaida (Asset-Freezing) Regulations 2011

Lord Myners Excerpts

Wednesday 9th November 2011 Grand Committee

[Baroness Kramer]

My Lords, I have no objection to the regulations and I will take only a few moments of the Committee's time to seek clarification on a couple of points. From the perspective of my colleagues, it is clearly necessary to tackle not only terror but the funding of terror. This legislation is part of that overall approach. We are pleased to see the strengthening of due process and the sunset clauses that are part of the regulations.

I will ask a couple of very small questions. Will the Minister clarify that no practical implications of any significance will follow from separating the al-Qaeda regulations from those applying to the Taliban? Is this just a measure to fall into line with EU and UN resolutions? In moving from the umbrella of one set of regulations to the umbrella of another, will the process be seamless? Is there any possibility of a slip between the two? Obviously, we would not wish to see such an opportunity exploited.

My second question is perhaps of more interest to the wider community. Will the Minister give us some reassurance that these regulations will not put an additional burden on ordinary people? He will be very aware that the combination of anti-money laundering and anti-terror legislation has put a significant burden of cost on both individuals and businesses, not least when it comes to the long delays in fund transfers that the banks explain by saying that it is necessary for them to go through security procedures and checks, during which time the banks seem to hold on to the money and benefit from the interest rather than either party to the transaction. One must live with measures such as that, but we would all find it unfortunate to see any increase in the burden. I would appreciate reassurance on those points, but we support the regulations.

[Lord Myners]

My Lords, like the noble Baroness, Lady Kramer, I have no issues of principle with this legislation. However, I would like the Minister's help on a couple of issues. The Explanatory Memorandum states that policy in the area of sanctions needs to be effective, proportionate and dissuasive. I would like the Minister to address Regulation 14(1)(a) and (b) and say whether the levels at which the penalties are set can truly be described as “dissuasive”. Given the consequences of terrorist action, the proposed penalties appear to be quite modest. I would also like the Minister to explain the level 5 standard referred to in Regulation 14(2).

I would also like to know—this is a very important issue—why a proposed breach of Regulation 8(3) by a financial institution does not incur a criminal penalty. Why are financial institutions exempted from criminal penalties while individuals are subject to them?

I turn to Regulation 9(4)(b). Can the Minister explain the criteria employed by HMT in determining an appropriate publicity strategy, and how the licences will be publicised under the regulations—specifically, where and when?

Under Regulation 20(1), how many licences are currently issued under Regulation 7 of the Al-Qaida and Taliban (Asset-Freezing) Regulations 2010, and how many have been issued under the 2010 regulations since they were passed by Parliament?

Finally, it would be helpful if the Minister would confirm that legal aid will be made available to individuals who are subject to freezing orders. The consequences of these freezing orders are draconian and chilling. It is incumbent upon us to ensure that anyone threatened with the consequences of having their assets frozen has access to appropriate legal advice. Will the Minister confirm that that will continue to qualify for legal aid?

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[Lord Sassoon]

My Lords, I thank noble Lords very much for this focused short debate and for a number of questions which are absolutely to the point. Even though the noble and learned Lord says that his question is tangential, I do not think that it is at all. It goes to the heart of the UK’s concerns to make sure that when the UN did its review of the regime leading up to June 2011 we made sure that there were additional proper protections. I might come back to that in a minute.

I am grateful that all noble Lords recognise the importance of these regulations but it is equally clear that we should get the details right.

In answer to my noble friend Lady Kramer’s questions, I can certainly reassure her that absolutely nothing will slip through the gaps; there is nothing separating the old and the new regimes. We are putting in place something that ensures that there is a seamless continuation from the old combined resolution regime into the two separate regimes.

On whether there will be any additional burdens on ordinary people, I shall expand that to ordinary people and small businesses because it is important that small businesses do not have any additional burdens placed on them. Consistent with my previous answer, there should be no substantially changed burdens from the previous regimes. In fact, there has been some rationalisation of the drafting of the regulations in the process of coming forward with this new regulation. We continue to have a dialogue with representatives of small firms. I can reassure my noble friend on that. She also asked about the burden on people. It mainly will ensure that private individuals, who are in any way conceivably connected to this regime, have legitimate payments flowing to them. I believe that the regime will continue to ensure that that is the case.

I wondered why the noble Lord, Lord Myners, was writing away so furiously and I now understand that he was setting an exam paper for me.

[Lord Myners]

Pass.

Economy: Monetary and Fiscal Policy

Lord Myners Excerpts

Tuesday 8th November 2011 Lords Chamber

[Lord Sassoon]

My Lords, it is completely the case that the Chancellor of the Exchequer sets the inflation target for the MPC. I am sure my noble friend is not suggesting that we should go back on the previous Government’s decision, which I applaud, to give the Bank of England independence in this area. Monetary policy should be the first line of defence in the face of economic shocks.

[Lord Myners]

My Lords, monetary policy should be the first line of defence against the ravages of inflation. I put it to the Minister that the Government's fiscal policy, draconian as it is, is forcing the Bank of England to adopt a highly accommodative monetary policy with a disregard for the inflationary consequences, as is evidenced in the Bank's quarterly report in its failure to achieve any of its inflationary objectives over the past five years.

[Lord Sassoon]

My Lords, I am sorry that the noble Lord, Lord Barnett, is not here, because we have not had anything from his quote book for quite a time. I offer the noble Lord, Lord Myners, this from another place on 23 November 1978, when the noble Lord, Lord Barnett, was asking for cross-party support on inflation. He said:

“I had hoped to have the support of the Opposition instead of the carping criticism that we receive constantly … We intend to make our counter-inflation policy work”.—[Official Report, Commons, 23/11/78; col. 1468.]

Well, as it was in 1978, it is now. We should let the Bank of England get on with it.

Devolved Administrations: Financial Flexibility

Lord Myners Excerpts

Tuesday 8th November 2011 Lords Chamber

[Lord Sassoon]

My Lords, what I said was that there was no consensus. Of course there is plenty of research but there is no consensus, and that is what is needed in this area.

[Lord Myners]

My Lords, the Minister brings considerable private sector expertise to his role, including at Union Bank of Switzerland. Can the noble Lord tell the House whether in his private sector experience he has ever come across a situation where companies say that if you do not spend the money, it will be taken away from you? What prudence does that encourage?

[Lord Sassoon]

My Lords, I believe that it was under the previous Government in 2006—the noble Lord will remember this better than me—that the health service overspent its budget and reserve by £182 million, and the previous Government stopped the EYF system. So I really do not think that we need lectures about me and my experience; it was the noble Lord’s Government who stopped it.

Financial Services and Markets Act 2000 (Exemption) (Amendment No. 2) Order 2011

Lord Myners Excerpts

Monday 31st October 2011 Lords Chamber

[Lord Sassoon]

This instrument deals with the basic decision, announced jointly by the noble Lord’s Government and the Department of Enterprise, Trade and Investment in Northern Ireland, that regulation, which is the subject of this instrument, should pass from the DETI to the FSA. That is what this does. It does not relate to any matters other than that. The decision had already been taken in advance of the consultation the noble Lord is questioning.

[Lord Myners]

My Lords, the Minister used the word “discussion” to describe Grand Committee on 17 October. That is rather stretching the definition of that word. It was a tetchy performance by the Minister, who was clearly deeply embarrassed that a consultation which had been initiated in March 2010 and completed several months ago—indeed, before the summer break—was actually published only on the morning of Grand Committee, and no efforts were made at all to ensure that those noble Lords who take an interest in Treasury Affairs were aware of the existence of this document before we discussed the order.

Economy: Inflation and Unemployment

Lord Myners Excerpts

Thursday 27th October 2011 Lords Chamber

[Lord Sassoon]

My Lords, the critical point is that, as my noble friend knows, the target for the Bank of England is a medium-term target. The Bank of England is wholly transparent about the situation in its quarterly inflation reports. In the latest reports, it has set out what the pressures have been on inflation in recent quarters and where they will be in the immediate future. Some of those pressures naturally come out of the figures over the next six months. It is quite right that the Governor and the MPC have and are committed to that target. It is important to realise that it is a medium-term target, and their judgment is that it is more likely that inflation will undershoot rather than exceed 2 per cent in the medium term. Indeed, that judgment is supported by the great majority of independent forecasts that I have seen.

[Lord Myners]

My Lords, the Question related to RPI and unemployment. I remind the Minister that RPI is at its highest level since June 1991 and unemployment is at its highest level since October 1994. The Governor of the Bank of England clearly feels that he has reached the end of the line in terms of monetary policy and inflation risk. What are the Government going to do to bring forward a credible, coherent and sustainable strategy for economic growth?

[Lord Sassoon]

First of all, as the noble Lord, Lord Myners, knows, the Governor of the Bank of England has set out very clearly his and the MPC’s analysis of the inflation situation and of their reasons for increasing by £75 billion the asset purchase scheme, so I am not going to answer for them. On unemployment, I would point out that in the second quarter of 2011 the internationally comparable employment rate for the UK was 69.4 per cent. That was the fourth highest employment rate in the G7, behind Canada, Germany and Japan and ahead of, among others, the US. We also had the seventh highest employment rate in the European Union in the second quarter. Of course we would wish to see growth increased, but we have to have sustainable growth. We should not put ourselves in the position of thinking that, on unemployment, we are out of line with our peer group. We are coming out of the deepest recession that we have known for many decades—and who caused that?

Financial Services and Markets Act 2000 (Exemption) (Amendment No. 2) Order 2011

Lord Myners Excerpts

Monday 17th October 2011 Grand Committee

[Lord Newby]

My Lords, there seems to be a muddle over the consultation. The Explanatory Memorandum said that the summary of responses to the March 2010 consultation will be published shortly. I think the Minister said that it was published today. I do not know when the March 2010 consultation formally finished, but it was presumably quite a long time ago. It is indeed unsatisfactory that we do not have the results of that consultation.

However, I think it is appropriate to look at what the order says. It is an extraordinarily short order, and it says nothing, as the Minister said, about the detail of how this change will be effected. All it says is that the change will be effected and that Northern Irish credit unions will be brought under the ambit of the FSA. I do not know, but I would be surprised if there was a single, solitary soul in Northern Ireland who would oppose that change, particularly if they look at what has been happening south of the border in recent weeks. Only a couple of weeks ago, the Irish Finance Minister was called upon to inject €1 billion into the credit union sector south of the border, because many of those credit unions—and we are talking about a sector that is as predominant as it is north of the border—found themselves, as a result of rising unemployment and declining income, in some difficulties. Of the 407 credit unions in the Republic of Ireland, some 79 are now in need of this injection of capital. It seems likely not only that that will need to happen but that there will have to be some consolidation in the sector and smaller credit unions will need to merge.

My question to the Minister is, in a completely different sense to that of the noble Lord, Lord Eatwell, why it has taken the Government so long to bring this legislation forward, given that the majority of the population of Northern Ireland would be affected if their credit union got into difficulty. Even if we approve this order in due course, it does not come into effect until 31 March next year. My question to the Minister was going to be, and remains, whether he has any evidence that the travails that afflict the Republic of Ireland credit union sector are spreading north. Does he envisage that any individual credit unions north of the border will get into difficulties over the coming weeks and months? In the absence of any covering FSA jurisdiction, what would the Government’s response be were they to find themselves in the same position of the Government south of the border, where a significant number—in their case about 15 per cent of credit unions—required short-term capital support?

[Lord Myners]

My Lords, I broadly welcome the intention of this order, but I find myself wanting to ask the Minister why it has taken such a long time to bring it forward when it was self-evident that it was necessary and had been agreed by the previous Government and endorsed by the coalition parties when previously discussed. It seems lamentable that the Government have allowed the situation to go on for as long as it has without taking any necessary action.

When it comes to this particular order, we do not have sight of the evidence that we were assured would be available to us in informing our discussion and agreement. What harm would be done if the Government withdrew the order and brought it back after we have had an opportunity to consider the evidence that is so clearly necessary to inform our decision on this matter? It simply cannot be acceptable that the evidence has been published only this morning. As far as I am aware, no effort has been made to make it available to those who are likely to attend this session and discuss this matter. That is an inexcusable failure by the Minister and the Treasury, for which the Minister owes us a full and proper account. The right approach would be to withdraw this order until we have had adequate opportunity to discuss the evidence.

In the mean time, I support the question that the noble Lord, Lord Newby, asked. Can the Minister give us clarity, given that the Government have been so slow in bringing this matter forward, as to the position of people with accounts and business relationships with Northern Ireland credit unions that have experienced difficulty? Do the Government stand behind them until such time as the Financial Services Compensation Scheme becomes an eligible right of those with relationships with credit unions? Will the Minister also assure us that to the best of the knowledge of the Treasury and the FSA credit unions are not currently offering products in Northern Ireland to which they are not entitled by virtue of their authorities? The Minister at the end of his speech listed some of the products that credit unions would be able to offer once this order was implemented, but which they are not currently able to.

Finally—I ask this having dealt with these matters myself—can the Minister tell us whether any further action is intended with respect of the failure of the Presbyterian Mutual Society, and in particular the directors?

[Lord Sassoon]

My Lords, notwithstanding the welcome rare appearance of the noble Lord, Lord Myners, as a former Treasury Minister in this Committee, it is a bit rich of the Opposition to talk about delay in this order. The Northern Ireland credit unions were left out of FSA regulation from the time that the Financial Services and Markets Act was enacted in 2000 until the previous Government left office 18 months ago. So for members of the Opposition to talk about the delay of this Government in not getting the order through earlier while on the other hand asking for evidence of a decision that they had taken before the election—seemingly without waiting for the evidence that they are now asking for—is indeed a bit rich. If noble Lords on the other side really want to persist with this line, this order will not get through, as it has to in the next few days and weeks, in order to give the people of Northern Ireland proper protection of their money in mutuals from the proposed transfer date to FSA regulation of March 2012.

What does the noble Lord, Lord Eatwell, who has come along with all kinds of clever procedural tricks this afternoon, have to say to the people of Northern Ireland if he is to deprive them yet further of proper protection under the Financial Services Compensation scheme? We need to get this order through if the people of Northern Ireland are to be protected from March of next year.

[Lord Eatwell]

My Lords, to refer to the fact that the Government have apparently published only this morning the evidence of the consultation and the raising of the objection of not having had access to it as a clever procedural trick is an abuse of language.

The point we are making is that the Government should take seriously the consultation with the people of Northern Ireland and make the results of the consultation available to the Opposition so that they can properly scrutinise and assess the impacts of the change. That is all that I asked for. I also pointed out that on 13 October the Merits Committee wrote to the Treasury requesting that the material be published, and it was not published until this morning.

As my noble friends and I have made clear, we are entirely supportive of this legislation. We want to get it through as soon as possible, but we want proper due process. This is an abuse of due process. I think it would be best if we let the Minister proceed with his Motion, because he is not interested in actually debating the issues.

[Lord Myners]

I would always defer to the advice and conclusion of my noble friend Lord Eatwell, but the petulant language used by the Minister is a sign of how rattled he is by this subject. I invite the Minister to clarify. He has said that if this order is not approved today it would deny the people of Northern Ireland certainty and protection in due course, with effect from the end of March next year. Can the Minister confirm that delaying the approval of this order for another week so that the necessary information can be reviewed by Parliament would mean that that certainty could not be delivered and that this is, therefore, the last chance for us to discuss it? In the absence of a clear answer I think that the should withdraw this order and re-present it to the Committee in a week or so.

--- Later in debate ---

[Lord Myners]

My Lords, it is an extraordinary protocol whereby the evidence will be given only if we ask for it, otherwise it will not be volunteered, which is what the Minister appears to be saying. However, I shall support the order on the basis of the assurances that the Minister has given that the evidence is strongly in support of it. I shall support the order also on the basis that the Minister has assured us that failure to approve it would therefore slow the four consequential negative orders and could lead to the FSA delaying by up to six months taking on the responsibilities contemplated by this order. If the Minister’s assurances on that point are not as clear as I interpret them, I would continue to be of the view that the right and proper process is for Parliament to have examined the evidence before reaching a decision. However, I believe that the Minister has given us a very clear indication that it is absolutely critical that the order be approved in the next few days or weeks—I hope that by “weeks” he does not mean several weeks, but a week or two at the maximum.

Motion agreed.

Banking: Quantitative Easing

Lord Myners Excerpts

Monday 10th October 2011 Lords Chamber

[Lord Sassoon]

I very much agree with my noble friend that the immediate priority is not so much consideration of the sale of the banks—UKFI will continue to monitor that closely—but to keep credit flowing. In relation to that, the Merlin agreement is critical. We treat the management of RBS and Lloyds on an arm’s-length basis, but we will ensure, as we have, that we have an agreement with all the major banks to increase lending on what it was last year and what it otherwise would have been. The third quarterly numbers will be released under the Merlin agreement shortly.

[Lord Myners]

My Lords, given that the Governor of the Bank of England has said that we are in the worst financial crisis since the 1930s and, conceivably, ever, how can it possibly be sensible for the Government to be actively seeking to sell the taxpayers’ interest in Northern Rock to City financial institutions?

[Lord Sassoon]

My Lords, we have a portfolio of banks which the Government either wholly or partly own. The Question was about Lloyds and RBS, but we also, as the noble Lord well knows, own Northern Rock and Bradford and Bingley. It is within the mandate of UKFI, which was set down by the previous Government, of whom the noble Lord was a member, to have responsibility to seek over time to realise value from the banks. That is precisely what it is exploring in the context of Northern Rock. It is following the noble Lord’s policy.

Finance (No. 3) Bill

Lord Myners Excerpts

Monday 18th July 2011 Lords Chamber

[Lord Myners]

My Lords, the Minister has treated us to a rich helping of palilalian piffle when it comes to the performance of the economy. His speech would be a comedy if the underlying story were not a tragedy. At least we know that the Minister is not guilty of being involved in disguised remuneration because, as we well know, he is not being remunerated at all.

Let us remind ourselves of the economic facts. In the period 1997 to 2007—for 10 years—the UK recorded the highest GDP per capita growth in the G7 countries. This was achieved against a background of low inflation and the period described by the governor of the Bank of England as the NICE decade—non-inflationary consistent expansion. Public sector net debt had fallen from 42.5 per cent of GDP in 1997 to 36.5 per cent in 2007—the second lowest level in the G7. The Conservative Opposition had committed to match Labour’s expenditure plans.

In 2007 the world was hit by a global financial crisis. The Labour party has expressed its regret that financial sector regulation was not as effective as it should have been and that that was a contributory factor to the crisis. Alistair Darling took the right decisions as a consequence of the crisis and he implemented them successfully. The financial system was stabilised under the Chancellor’s direction. Appropriate stimulus action was taken. Unemployment was lower than would otherwise have been the case, as were business failures and repossessions. The Chancellor introduced a strong framework for fiscal stabilisation going forward. I pay great tribute to Alistair Darling whom I think history will judge to be one of the great Chancellors, given the extraordinarily difficult global circumstances with which he had to deal. Last spring, after a very tough time for the economy we were turning the corner. The economy was growing. Over the second and third quarters of 2010, growth was 1.8 per cent—ahead of the USA and ahead of the EU average. Inflation remained low and unemployment was steadily coming down.

What has happened since the election? The economy has stopped growing. The Minister refers to growth but the facts are that since the Government came to power the UK’s growth record is 21st out of the 24 countries in the EU. The OBR has had to revise down its growth forecast on four separate occasions since it was established. We are the only major economy in the world that is not growing. On 26 July the Office for National Statistics will produce its initial estimates for second quarter GDP. I believe that these may well show that we are back into a recession. Inflation continues to be running at well over double the targeted level. The Minister last week completely failed to answer a question from my noble friend Lord Eatwell to explain why, if inflation was due to global circumstances, the UK was experiencing such a poor inflation record compared with other EU nations and the United States. The OBR is now forecasting that the combined effect of very low growth—if any growth at all—and inflation running well above target is that borrowing will be £46 billion above the level that the OBR expected at the time of last autumn’s spending review. I am confident that that figure will increase further when we see the second and third quarter GDP figures for 2011.

This is the context in which this House looks at the Finance Bill, described by the Chancellor of the Exchequer in his Budget speech as the “march of the makers”. The march of the myth makers, I would suggest. It is the myth around expansionary fiscal contraction, taking demand out of the economy when the economy is already suffering from underused capacity, particularly in the labour market. In the first quarter of 2011, UK GDP was much the same as it had been in the third quarter of 2010, but worse, it was still 4 per cent below the level before the global financial crisis and 11 per cent below the level that it would have been, had we extrapolated economic performance in 2007 through and beyond the financial crisis.

The Government’s response to that horrendous decline in achieved economic output is to announce a succession of policy initiatives that will have the effect of taking demand out of the economy. The Budget had nothing to offer. Growth has been hit and we are now teetering on the verge of recession. We already are in recession in terms of domestic demand. Household income is falling. Indeed, it is falling to the lowest levels in relative terms for 20 years. Real incomes fell last year for the first time since 1981. This is the background of economic achievement for which the Minister invites us to express our appreciation. Consumer confidence has slumped—I will revert to the critical issue of confidence in a moment. Business investment and confidence have also collapsed. Insolvencies are increasing. Banks are not lending. The Merlin agreement, which the Minister trumpeted, is a worthless piece of paper, as the noble Lord, Lord Oakeshott, described it. Merlin has no teeth. It does not even require the individual banks that have signed it to commit to individual lending figures. It is an aggregate figure—not an individual bank-by-bank figure. The ICB, so worthily established by this Government, has nothing to say about promoting greater competition in an oligopolistic domestic banking market.

Why is confidence so important? Notwithstanding the Government’s remonstrations about a debt-fuelled economy, the OBR assumes that household debt will increase further. At the moment, household debt is 165 per cent of GDP. The OBR assumes that it will rise to 175 per cent by 2015. That compares with 114 per cent 10 years ago. But that will not happen, and Ministers must know that that is the case. Households will not borrow more unless they are compelled by dire financial circumstances to do so involuntarily. We must remember that interest rates have yet to normalise. It is not surprising that the Bank of England warns of the consequences of rising interest rates and points to a very delicate situation for some banks if their customers are obliged to pay the sort of interest rates that would be more consistent with a rate of inflation of 4.2 per cent. Nor will the corporate sector financial surplus reduce, which is another key assumption of the Government and the OBR because why would companies run down their corporate financial surplus when the economy is experiencing such an abundance of unused capacity and declining demand?

Expansionary fiscal contraction assumes that a tight fiscal policy can lead to looser monetary policy and stimulate private investment and consumption. It is a form of the Ricardian equivalence in which almost no one believes. There can be no crowding out of private sector demand by the Government if demand is too low. The Government’s Budget strategy is simply not working. The economy is clearly not springing to life on a wave of confidence on the back of the picture painted by the Government. Monetary policy is already too loose and will have to be tightened fairly soon. The economy is stagnating but the Government propose a reduction in real government consumption, at constant market prices, of 10 per cent between now and 2015. This is a dangerous nonsense.

It was for many a forgettable Budget, an exercise in sleight of hand, but it was not forgettable if you are on a low income because you are going to be hit proportionately more than those on higher incomes. It was not a forgettable Budget if you are young and unemployed—a cohort of the economy and society that is increasing dramatically. It was not a forgettable Budget if you are female, experiencing the highest rates of female unemployment for 15 years. It was not a forgettable Budget if you are trying to buy a house or even keep your existing one. It was not a forgettable Budget if you are eking out an income from your savings when they are being reduced in real value by loose monetary policy. It was not a forgettable Budget if you are a small company seeking support from the banks. It was not a forgettable Budget if you care about the environment, because everything that was said about a green government policy was reversed in this Budget. It was not a forgettable Budget if you are a charity because of the reduced incentives to which you are now entitled as a result of tax adjustments.

The consequence of this is that we are facing the weakest economic recovery from a recession since the 1920s—the weakest economic recovery from a recession for 90 years. We are the only major economy in the world not experiencing economic growth. Regrettably, the Chancellor of the Exchequer has talked himself into a corner with irresponsible speeches about national bankruptcy and misleading references to “maxing out”—a horrible phrase which I am sure an Old Pauline should not use—the nation’s credit card. The Chancellor has talked us into this recession. As John Maynard Keynes wrote in the Times in May 1933, in words that are as apposite now as they were then:

“Unfortunately the more pessimistic the chancellor’s policy, the more likely it is that pessimistic anticipations will be realised”.

What should be done? First, Labour should acknowledge that its management of the economy during the middle part of the first decade of this millennium was not as good as it should have been. In particular, we ran a deficit while the economy was already running at full capacity and we failed to acknowledge the narrowing of the fiscal base. I have said this before and I will continue to say it because I believe it is important that we admit, with the benefit of hindsight, that mistakes were made. The economy is now in need of acute help. There should be a temporary cut in VAT. We should bring forward capital investment. Now is the right time, when there is excess capacity, to spend on government capital projects, including, in particular, social housing. We should take action to get credit flowing. I notice that the noble Baroness, Lady Noakes, has joined the board of Royal Bank of Scotland. When I sat where the Minister is sitting, I was regularly chastised by the noble Lord, Lord Noakes, who I see in his place, and the noble Baroness, Lady Noakes. I am sorry, I meant the noble Lord, Lord Newby. I made this mistake when I was a Minister and I have now done it again. I apologise to both the noble Lord and the noble Baroness. The noble Lord, Lord Newby, and the noble Baroness, Lady Noakes, both used to chide me about my inability to get the banks to lend. I ask the Minister the same question: what are you doing, Minister, because bank lending to SMEs is declining? Bank lending for housing and domestic mortgages is at a 10-year low. The Minister shakes his head, but I encourage him to become the master of his brief, be on top of the facts and realise that lending to UK SME companies is continuing to decline.

As I said, the Chancellor has left himself with no options. There would be no place to which he could turn in terms of a policy adjustment without damage to his reputation and the need to admit that Alistair Darling was correct in his fiscal judgment. The price the nation pays for the Chancellor’s and the Minister’s pride is that we are pushed back towards recession.

[Lord Forsyth of Drumlean]

My Lords—

[Lord Myners]

I had almost finished, but I am very happy to give way.

[Lord Forsyth of Drumlean]

Before the noble Lord sits down, there have been many glowing references to Alistair Darling and how wonderful he was as Chancellor, but no references at all to Gordon Brown. Was that a coincidence?

[Lord Myners]

We are time limited in this debate. In closing, I say how much I look forward to hearing the maiden speech of the noble Lord, Lord Magan of Castletown, who will no doubt enrich the House with his knowledge of banking both in the United Kingdom and in Ireland, where the noble Lord had a number of important banking roles. I also look forward to the contribution from the noble Lord, Lord MacGregor of Pulham Market. I congratulate his committee on its extremely good work. Finally, I express my appreciation to the Minister for his apology to my noble friend Lord Barnett.

--- Later in debate ---

[Lord Northbrook]

My Lords, it is interesting how the noble Lord, Lord Myners, praised Alistair Darling in his opening speech but not the previous Chancellor’s budget deficit expansion. I should like to remind the House that in an interview in August last year, he reflected that the Labour Government had abandoned fiscal responsibility; that Gordon Brown “grew to forget” the golden rule; that Labour ran large deficits in the middle part of the previous decade when the economy was clearly running at full capacity; that the party needed to come clean on what cuts it would make; and that it needed to prove once again that it is a credible party of economic management. The noble Lord criticised the current shadow Chancellor. He said:

“I don't agree with Ed Balls. I do think the Labour party has to wrestle with the fact that it tends to leave office with large deficits. And I think its licence to govern is … weakened in the future—if it could not produce credible arguments … that it is capable of sound economic management through the cycle”.

The country is still recovering from the debt binge.

Once again, we are assembled here to debate the Finance (No. 3) Bill, the majority of which I support. We are also grateful to the noble Lord, Lord MacGregor of Pulham Market, and his committee for their excellent report, which again generally speaks favourably of the Finance (No. 3) Bill. His report applauds the introduction of a new approach to tax policy-making by the coalition Government with the aim of bringing about a clearer, more stable and more predictable tax system. This approach seeks to produce better tax legislation and more effective scrutiny of tax changes. I agree with the report’s conclusion that this has produced a Bill, the content of which has generally reflected early and fuller consideration than in the past. The report quotes two good examples of this with which I fully concur—first, corporation tax reform and, secondly, the area of changes to pensions tax relief.

However, the report rightly is critical of two other areas where this new approach has not been adopted. There is disguised remuneration. The new provisions against tax avoidance in this area take up no fewer than 60 pages of new legislation. Surely this would not have been necessary had there been more consultation beforehand. Likewise came the change to the oil and gas tax regime by way of the supplementary charge. No consultation had been made with either industry. It was not until there was a great deal of criticism that exploration in these areas would be seriously affected that at the last minute the announcement was made of an extension to the ring-fence expenditure supplement, which has persuaded companies like Statoil to resume its drilling projects.

Before moving to considering the Finance (No. 3) Bill as a whole, I wish to congratulate the Chancellor on his vigorous approach in tackling the appalling legacy of the Budget deficit left to us by the Labour Government. This had to be the first economic priority after the election. His deficit reduction policies have been approved by a whole range of organisations, including the IMF, the European Commission, the OECD, the Fitch rating agency and Timothy Geithner, the US Treasury Secretary.

Looking at the Finance (No. 3) Bill in more detail, first, I shall focus on help for businesses. I welcome the reduction in corporation tax for large companies from April this year, the reforms to the foreign profits legislation, the announcement of new enterprise zones and the proposed low rate of corporation tax for offshore finance companies. That will all be good news for larger companies. Moreover, the Chancellor has dealt a very generous hand to VCTs and EIS investors, increasing the tax relief and the amount of investment while rightly warning against abuse of the rules. The slight improvement in the capital allowance regime for short-term assets is good news. Those positive aspects of the Budget far outweigh the negative ones for a few sectors of the economy. Terry Scuoler chief executive of the EEF, the manufacturers’ association, while praising the Budget in the main, said that,

“the significant rise in energy bills threatened by the Carbon Price Floor is unwelcome”.

For smaller unincorporated businesses, the news on the tax front is more mixed. They should benefit from easier planning laws. They should also be helped by the decision to support innovation and manufacturing, with an additional £100 million this year for new science facilities and an increase in the SME rate of research and development tax credit over the next few years. However, two areas are definitely not to their advantage. The 50p income tax rate needs to be reduced as soon as possible, and the Equalities Act could well cause problems in taking on staff.

Regulation is also a major area of difficulty which I shall examine in more detail. For those not familiar with it, a new Cabinet sub-committee called the Reducing Regulation Committee was established after the coalition came to power. The committee has to review the quality and robustness of regulatory proposals. Astonishingly, its second report, which covers the period between September and December 2010, concludes that more than 40 per cent of the regulatory proposals that it considered were not fit for purpose. The main failing was a failure to produce cost-benefit analyses of proposals. This all might sound rather esoteric but is very important. If regulations are being spewed out that do not make sense, it is a big hindrance, especially to smaller businesses which do not have the back-office ability to cope with them all.

Let me give another example of difficulties for a smaller business. A friend of mine who is involved in a growing smaller company has been given the opportunity to pay his tax in instalments. However, something has recently gone wrong with the Revenue’s computer system which means that he has been asked to pay all his tax at once. He rang up the local Revenue office, which is a nightmare process, and took more than an hour to get through to anyone sensible. He was then told that this was an administrative mistake and that he need not worry. I fear that this may have happened to a lot of small businesses. Has the Minister come across any other cases in this area?

Overall, I welcome the Finance (No. 3) Bill 2011. The Chancellor has a difficult hand to play and progress may appear to be uneven at times. But his message is clear: Britain is open for business and it has produced major incentives to companies and individuals to create wealth, which I believe is the right approach for the economy.

[Lord Myners]

The noble Lord listed a number of organisations which endorsed the Chancellor’s strategy. Can he remind the House whether any of those organisations were successful in forecasting the crisis that hit us in 2007, including the credit rating agencies to which he referred?

[Lord Northbrook]

I would have to refer back to the noble Lord on those matters.