Budget Statement

Lord Palumbo of Southwark Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Palumbo of Southwark (LD)]

My Lords, there is a scene in Quentin Tarantino’s film “Pulp Fiction” in which the heroine collapses into a drugs overdose. Dramatic action is needed, so the hero stabs her heart with an adrenaline shot. Between 1986 and 2008, the banking system overdosed. Bankers were out of control; politicians failed to regulate the system. The result, as your Lordships know, was a financial heart attack. Since then, the system has had continuous doses of adrenaline to its heart via quantitative easing.

Recent economic data appear to show a recovery. As we have heard, the economy is growing, the deficit is down, inflation is improving and employment is rising. We seem to be on the road to recovery, but the recovery is modest relative to the amount of financial medicine which has been administered. GDP is still 1% lower than at its pre-crisis peak. Five years into the recoveries of the 1980s and 1990s, it had risen by 15% and 19%. We also now have the new phenomenon of underemployment, and wages continue to fall year on year. As a result, household debt remains high and money lenders are busy.

In other words, the financial adrenaline has not really worked as expected. Although progress has been made, the patient is not yet out of the recovery room. Why? As several noble Lords have already so eloquently explained, people seem frightened to invest long-term or in improving productivity. Exports are poor. Instead, money has gone on consumption: share buybacks and housing. As a result, those markets have inflated and housing is now unaffordable in certain parts of London. The situation is compounded by interest rates at 0.5%. In contrast, the recoveries of the 1980s and 1990s started with average rates of 9% and 13% respectively. A low base rate is another form of emergency medicine. Like quantitative easing, it cannot be sustained. At some stage, rates will have to normalise. What will happen to mortgage holders and small businesses then?

As your Lordships know, economics is both art and science; there are many views. Some believe that we are now in a phase of stagnation similar to that suffered by Japan over the past 25 years—the Japanification of the UK. As a businessman trained to look at the downside, it may be worth briefly exploring that scenario. The intersection where politics meets economics provides a good starting point. How does the way we conduct politics affect the economic decisions that we take?

I have three points for your Lordships’ consideration. First, there is the difficulty that politicians face in speaking plainly about the choices before us. That is because the short-term demands of modern democratic politics outweigh the need to plan long-term in economics. Political careers are short; economic issues are not. Secondly, I would cite the adversarial nature of our politics. PMQs makes for good viewing but it is unclear exactly what it achieves. We have seen how political rancour in the United States has threatened economic stability. The third issue is the lack of expertise in certain areas within the system and the political difficulty of hiring high-level professionals on private-sector-type pay packages.

I believe that voters sense those issues, particularly the tension between the promises that politicians make and their ability to deliver. It is perhaps this which accounts for the disquiet with certain aspects of our system.

There are no easy answers. However, in the event of a stagnation, it may be necessary to reconsider the way that we conduct our politics. I wonder whether a policy of “hiring the best” might lead to big changes in procurement, infrastructure, reform of our tax code and bringing housing development forward. I know that reform of the confrontational political system is anathema to many—but perhaps a circular debating Chamber would lead to a more thoughtful exchange. Would a modernised form of royal commission help solve the great imponderables of the long-term future of the NHS and of the welfare and pensions systems? What of other benefits in this redrawn landscape, such as the extinction of political cliché? Imagine our world free of the words “change”, “fairness” and “one nation”.

Another film by Quentin Tarantino depicts people adapting to their circumstances in times of war. That is what our leaders did a century ago to fight the Great War. Perhaps the battlefield ahead is economic, not military. In that event, we may need to reshape our politics to meet this challenge.