Economy: Growth

Lord Newby Excerpts

Thursday 16th May 2013 Lords Chamber

[Lord Newby]

My Lords, I thank the noble Lord, Lord Soley, for initiating this debate because he asks the single most important question facing the country: how do we get more growth? He and the noble Lord, Lord Davies, have a relatively straightforward answer. Sadly, we believe that it is the wrong answer. Their answer is to borrow more. It was not the answer of the previous Labour Government. The Fiscal Responsibility Act required the Government to have halved the deficit by the financial year 2013-14. I am not sure whether the Labour Party has finally and formally renounced that legislation, but that was the course that it set.

The noble Lord, Lord Soley, points out that we had 225% of GDP borrowing after the Second World War, but I should have thought that he could see that the circumstances at the end of the Second World War were so fundamentally different in almost every respect from those of today that that is not a useful analogy.

There are a number of reasons for getting the deficit down. In my view, the most clearly demonstrable one is that a higher deficit and an incredible fiscal consolidation programme would undoubtedly lead to higher interest rates. Why is it that at the end of last week the UK was paying 1.84% on its debt, the US was paying 1.86%, Italy was paying 3.89%, and Spain 4.25%? The answer is: because this country has a credible economic policy in which the markets believe. Without that, there is no reason why our interest rates could not rise by 1% or 2%. Bear in mind that a 1% increase in interest rates means that a mortgage payer with a £100,000 mortgage is paying out an extra £1,000 per year, leaving aside the additional costs to industry and the additional billions of pounds extra that the Government will be paying to service their debts.

When the Government came in, national debt was running at 11.2% of GDP. That was possible in a crisis. I do not think anybody believes that such a level of national debt, which seems to be the level that the Opposition are talking about—we still have national debt running at more than 7%—is sustainable. The noble Lord, Lord Soley, talked about Keynes. People disagree about Keynes, but I am pretty certain that he never advocated sustained levels of borrowing over a long period. He knew, as everyone else knows, that although such a thing is possible, and desirable, over a short period, it is not possible in the long term.

Today, in part, we have been discussing another of Keynes’s aphorisms, which is hugely important at the point at which we find ourselves in the economic cycle: his emphasis on the role played by “animal spirits”, to use his phrase, on investment decisions and a whole raft of economic decisions. Indeed, that was the burden of the speech by my noble friend Lord Bates. At this juncture, the turn in the cycle that we are clearly seeing will accelerate because the view of people in the markets—“animal spirits”: what people are saying to each other—is changing positively.

I would like to address specifically several of the points made by the noble Lord, Lord Soley, about the components of growth. Indeed, most of these features have been about one or more components of the growth picture. I start with infrastructure, where there was widespread agreement that more needed to be done. Last year, according to the World Economic Forum, the overall quality of our infrastructure was 24th in the world. We do not believe that this is good enough, which is why we are investing more in transport infrastructure in this Parliament than was the case under the previous one. Our railways are seeing the largest programme of investment since the Victorian era. Incidentally, I am pleased to see, as I am sure the noble Lord, Lord Soley, is, that the amount of freight carried on the railways is going up significantly, which reverses a very long-term trend and is very welcome.

Total public and private investment in infrastructure between 2010 and 2012, at £33 billion per year, is higher than that of the final five years of the previous Government. At Budget 2013, the Chancellor unveiled an increase in capital spending plans by £3 billion per year from 2015-16. That is in addition to the £5.5 billion of investment in infrastructure announced in last year’s Autumn Statement. This included £1.5 billion for the road network.

The noble Lord, Lord Soley, and my noble colleague Lady Kramer talked about airports, which is clearly a significant component of the nation’s infrastructure. I do not believe that there is total agreement that we need to have a major national airport hub in this country, but the Government believe that it is a requirement. As noble Lords know, the Airports Commission, headed by Sir Howard Davies, is looking at airport capacity in the short and the long term. We are looking forward to seeing his interim report later in the year. In the mean time, Heathrow has spent £1 billion upgrading and Gatwick is spending £1.2 billion, so it is not as though our airports are atrophying. We know that it is a long-term issue and has been a long-term problem with no consensus within or between parties, but that is what the Davies commission is looking at.

The noble Lord, Lord Soley, talked about housing, which again is a long-term challenge. All parties have taken their eye off that issue over the past decade as house prices have risen inexorably and the proportion of the population owning their own homes has risen. There are three components to improving the stock and appropriateness of housebuilding. First, we have to make it easier to build houses. Secondly, we have to help to supply more houses. Thirdly, we have to make sure that there are no artificial restraints on demand for housing.

We believe that the National Planning Policy Framework, which we published in March 2010, has had some effect in a positive direction. The proportion of planning applications being approved is at a 10-year high, a significant proportion of which are around housing. As for building more houses, we already have an £11 billion commitment in the spending review. The Budget 2013 announced a housing package totalling £5.4 billion, including the Help to Buy and mortgage guarantee schemes. There is a lot of activity on that front. However, I agree with most noble Lords that we have to do more, and we are actively attempting to do so in three strands: to make it easier to get planning, to help have more finance to build houses, and to make it easier for people to afford a mortgage.

The international component of our economic activity is clearly crucial. To rebalance the economy, we need to export more. Last week’s evidence of a narrowing of our trade deficit is a positive sign that UK exporters have faced significant challenges in recent years. Yesterday’s data confirmed that the recession in the euro area, which is our most important export market, continued in the first quarter of this year. Therefore, as the noble Lord, Lord Marland, explained, we are right to be looking more widely.

In the period 2009-12, our goods exports to China increased by 96%, to Brazil by 49%, to Russia by 133% and to India by 59%. Last year, while our exports to the rest of the EU fell by 2.5%, our exports to the rest of the world rose by 1.2%. While we look elsewhere, we should not forget that we are still exporting 42% of our goods and services to the eurozone. As we try to get more SMEs involved in exporting, many will go to the eurozone because it is so much easier for a whole raft of reasons. Getting on a plane or a train to get to a potential export market in an hour is very different from going to Brazil or China.

I have seen that with a small manufacturing company in West Yorkshire which exports mainly to Europe. Through its website, out of the blue it has had a couple of orders from Brazil for £25,000, which is pretty good for this company. The question is what it will do to capitalise on it. It has no idea who the people are who have asked for this export. The directors have had a long discussion about whether they should go to Brazil. Eventually, they decided that they would go but the cost, in time and money, meant that that was a very difficult decision. If that order had come in from Spain, they would have been off straightaway. Therefore, as we rightly put more emphasis on the rest of the world, we must not ignore the fact that the bulk of our exports are to the EU and will remain to the EU. The EU is where people dipping their toe in the export market will start.

Over the past year, we have increased UKTI’s budget by £70 million to help to deliver world-class services to move SMEs into exports and to focus our activities on the high-growth market. I hope noble Lords will feel that we are making a real impact in that crucial area.

My noble colleague Lady Kramer discussed the challenge of corporates paying the right amount of tax, an area on which we the Government have put a lot of additional emphasis. At the G8 meeting, we made clear that international tax avoidance and rebalancing the rules around taxation are our top priority. At the recent meeting of G8 Finance Ministers, which included George Osborne, it became clear that we had the support of all the leading countries to look at this. It is not something that we can do unilaterally. It has to be done on a global basis. I think that for the first time ever there is a global consensus that we have to do more around corporate tax avoidance.

In that respect, I should like briefly to mention the personal and corporate tax avoidance in tax havens where up to now there has been a huge degree of secrecy. There is a growing momentum of considerable proportions to open up data about people and companies that have set up entities, which until now have been secret, in the principal tax havens of the world. It is worth while looking at what has happened in the past year. Having signed an agreement on the automatic exchange of information with the US in September, we have done the same with the Isle of Man. In March, we reached agreement with Jersey and Guernsey. In April, France, Germany, Italy, Spain and the UK agreed to develop and pilot multilateral tax information exchanges. Also in April, we set out our priorities around tax transparencies for the May European Council. Most significantly of all, perhaps, within the past month the overseas territories have agreed to greater automatic information exchange with the UK. Here, we are talking about the Cayman Islands, the BVI and other places that have had a degree of secrecy which we believe is simply no longer acceptable.

The noble Lord, Lord Bhattacharyya, spoke with his unrivalled knowledge about the constraints on innovation and investment. I had a great deal of sympathy with much of what he said, particularly about supporting reshoring, which to a certain extent is happening anyway. However, as he suggested, I am sure that the Government should look at ways of doing more. I am particularly aware of an initiative that my noble friend Lord Alliance is heading up on the textile industry and which is bearing considerable fruit. His view is that the potential from reshoring textile manufacture, so that we can have the just-in-time manufacture of textiles in the UK, could be as much as 250,000 jobs in the north-west. This is potentially a huge thing.

I agree with the noble Lord, Lord Bhattacharyya, that we could be doing more. I was particularly interested in his suggestion of how we might use public procurement to help. We should look at that further, and I will discuss it with my colleague Vince Cable, because it seems an interesting idea. I say in passing that the suggestion that we should be emulating the Americans to increase car manufacturing here seems to ignore the fact that car manufacturing has increased here substantially, without government bailouts but with government support. That is because we have had fantastic investment by companies such as Tata, which have completely turned around iconic British brands by investing more than £100 million of their own money in innovation and investment. They are working very closely with the universities, possibly including the university of the noble Lord, Lord Bhattacharyya, and are placing their own research people in those universities. That has happened without direct government subsidy, on the American model, but because this is a good environment for that kind of activity.

We have a raft of initiatives on the table. There are the Catapult centres, whose work includes high-value manufacturing, initiatives on science and innovation and capital projects from the research partnerships fund. We have done a raft of things to help small businesses to generate capital and have access to it, from abolishing stamp duty on shares and expanding the small business research initiative to £100 million and having further funding committed via the new investment bank, which we are in the process of establishing.

For three-quarters of his speech, the noble Lord, Lord Bates, did a tremendous job in helping the movement of animal spirits in a positive direction. Then he slightly undermined that by saying that the figures on which we are placing a certain amount of hope are perhaps not worth the paper they are written on. I paraphrase slightly. However, I think we will have in the UK what has just happened in the US, where the basis of the GDP figures is being looked at. I believe this is the case, although it may not be on exactly the same basis as he wants. The sad thing is that if the consequence of that rebasing of GDP leads to GDP figures going down, everybody will say that this is the Government’s fault for being completely incompetent, while if it shows them going up, that will lead to everybody saying that they have been fiddled, so I do not place too much hope on that. A consistent series of figures is probably the best that can be done. Although it does not necessarily reach an absolutely precise representation of the truth, that is good enough.

[Lord Bates]

If the noble Lord will allow me, I just need to correct for the record that I did not say that the GDP figures were worthless. I never used that term. I simply queried the mix between the construction and service sectors—be it 5,000, 10,000 or 12,000—and whether that mix was under review in order to ensure that we are accurately reflecting the performance of the economy.

[Lord Newby]

I apologise to the noble Lord. As I was saying, I believe that the ONS is doing a pretty fundamental review of that at the moment.

The Government are under no illusions at all about the challenges ahead in respect of growth. Implementing our ambitious programme of reform and securing strong, sustainable growth will not be easy, but the Government will not deviate from their course. The prizes in the global economic race are great and we are determined to win more of them.