Queen’s Speech

Lord Skidelsky Excerpts

Wednesday 16th May 2012 Lords Chamber

[Lord Skidelsky]

My Lords, Sigmund Freud identified a defence mechanism that he called denial, in which a person faced with a fact that is too uncomfortable to accept insists that it is not true, despite overwhelming evidence. A good example of denial is the Chancellor’s belief that austerity is a growth policy, despite the fact that the British economy is shrinking. Somewhat better than a state of denial is one that psychologists call cognitive dissonance, a condition of holding two contradictory beliefs at the same time. People in such a condition have a strong need to reduce the importance of one of the dissonant elements. This is more hopeful. If the Chancellor has moved from denial to cognitive dissonance, he may soon move from cognitive dissonance to the honest realisation that his policies have completely failed to revive the British economy.

He may also recognise that they are failing to solve the debt problem. Since the collateral for a country’s sovereign debt is the Government’s potential tax revenue, any policy which produces recession and unemployment automatically increases the deficit and thus adds to the debt. The national debt is projected to rise from 71% of GDP in 2010 to 84% in 2012 according to the IMF, and the deficit elimination programme stretches ever further into the future. That is the fruit of austerity. Earlier in the debate, the noble Lord, Lord Razzall, denied that austerity could be responsible for stagnation because most of the cuts are still to come. That is to miss the point. The real impact of austerity so far lies not in the actual money cuts but in the failure to uprate public spending in line with public sector salaries, which inevitably leads to job losses.

The Government still claim that the main blockage to British recovery is the eurozone financial crisis. We are being buffeted by the euro crisis, but the eurozone crisis is the inevitable result of the very policies championed by the British Chancellor at home. The only reason that austerity has not so far produced a financial crisis in this country is that behind our fiscal policy stands a central bank licensed to print money. This has been the main factor keeping the cost of British government borrowing so low. However, there is a limit to how much the central bank can do to maintain confidence if the debt continues to grow while the economy continues to shrink.

Beyond the cloisters of Whitehall, there has been a welcome change of mood music. More and more people—captains of industry no less, and not just Keynesian heretics like me—are saying that austerity is not enough. EU Commission President José Manuel Barroso talks of the need to relaunch growth in Europe. He and the new French President have endorsed a proposal to add €10 billion to the capital of the European Investment Bank. Growth is back on the agenda in Europe, but is it back on the agenda in this country despite the opening remark in the Queen’s Speech?

What would a growth policy need to be? Conventional wisdom has it that the only way to get growth is to cut taxes and red tape and get the unemployed on their bikes. I am all in favour of good supply side policies, but what the Government fail to grasp is that we have a massive problem of insufficient demand. The actual output of the economy is well below its potential output. Recovery from a slump is not just a matter of making better use of existing resources; it is about bringing into use potential resources which stand idle for lack of demand. This was the great lesson taught by Lord Keynes, a lesson which seems to have been entirely forgotten by the first-class brains in the Treasury.

If we see the problem in this way, the question of government borrowing assumes a different aspect. At present, the Government are borrowing billions of pounds a year to keep people idle. Would it not be far better to use that borrowed money to put them to work building homes, repairing creaking infrastructure and promoting the low-carbon energy economy we all want? After all, if the Government have to borrow vast sums of money—and they have to because they allowed the economy to shrink so much—why not at least borrow to create assets rather than borrow to destroy them? The longer you allow workers and plants to stay idle, the more potential output you are destroying day by day, week by week, until, in the end, the potential output of the economy will shrink to the level of its actual output. I have a question for the Minister. Does he really believe that if the public sector sheds 50% of its jobs, those dismissed workers will straight away find employment in the private sector? If not, the austerity policy is simply adding to the dole queues. That is the charge that he must face and refute if he can.

Even in Whitehall, things are stirring. The Queen’s Speech promises a Bill to set up a green investment bank to invest in the low-carbon economy. I congratulate the Business Secretary Vince Cable on his persistence in pressing the case for the green bank against Treasury objections. However, I wish Ministers would think along bolder lines. The bank’s capitalisation is too small—only £3 billion—and it will not be allowed to borrow until April 2015, subject to public sector net debt falling as a percentage of GDP, a prospect that currently looks extremely unlikely.

A practical man would ask what such a bank would invest in, and why, if there are so many investment opportunities around, they are going begging. There are two answers to the second question. First, there are large-scale projects in which the private sector will never invest on its own because the private rate of return is too distant, too modest and too uncertain. That means that, however great the social benefits, the investments will not be made except by the Government or with a government guarantee or subsidy. Most of a country’s transport infrastructure falls into this category. Secondly, there is an additional motive for an active investment policy when business confidence is shattered, as it now is. The corporate sector is sitting on almost £800 billion of cash—more than 50% of GDP. This is because when confidence in the future is low, almost all investment seems riskier for both lenders and borrowers.

Finally, what would a green investment bank invest in? It would obviously invest in carbon-reduction activities. Incidentally, the mandate of the European Investment Bank is wider than this because it includes among its objects the promotion of growth and employment potential. Whatever the bank’s scope, it is crucial that it gets a clear mandate, so that the private sector can plan its investment against a stable policy environment.

Many of us will have pet schemes to bring to the table. For example, there is the proposal of the Institute of Civil Engineers to establish regional water-transfer networks via new and existing canal systems. The Scottish Federation of Housing Associations has argued for preventive spending on social housing. Will not the Chancellor understand that we need preventive spending rather than spending prevention? The sooner that the Prime Minister and the Chancellor start investing in Britain, the better. If they continue in the spirit of denial, they will be swept from the seats of power, as Governments have been all over Europe—and they will deserve to be.

--- Later in debate ---

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, we have had a wide-ranging and, as ever, insightful debate. I am particularly pleased to have heard the maiden speeches of the right reverend Prelate the Bishop of Durham and my noble friend Lord Ashton of Hyde. I know that the House will look forward to their future contributions if they are anything like as good as their contributions to this debate.

We have an unusual but, we have been reminded, not unprecedented amendment in the name of the noble Baroness, Lady Royall of Blaisdon. While I will respond to as many of the specific points raised in the debate as I can, I will therefore spend the bulk of my time explaining why the House should emphatically reject her somewhat misplaced amendment, which I ask her to withdraw once she has heard what I have to say. Having heard the masterly speech by my noble friend Lord Bates, I rather thought that the noble Baroness might have been minded to withdraw her amendment immediately, but I will have another go.

I welcome this opportunity to reinforce the Government’s commitment to securing our economic recovery and our determination to promote growth, create jobs, and return our country to prosperity. It is not an easy task. It is clear that your Lordships understand the difficult challenge we face to overcome the crippling legacy that was left to us by the previous Government, which included a decade of unbalanced growth that left the UK the most indebted country in the world, resulted in the most highly leveraged financial system of any major economy and meant that the UK entered the crisis with the highest structural deficit in the G7.

All that meant that when we got hit, we got hit the hardest. Our recession was among the deepest and our deficit was among the largest, which means that our challenge to deliver a sustainable recovery is among the greatest. The Government have a strategy to rid the economy of the burden of the debt left by the previous Government and to secure our stability at a time of ongoing European instability, as my noble friend Lord Higgins and other noble Lords reminded us. Our strategy puts private sector enterprise, ambition and innovation at the heart of our recovery. It has delivered over 630,000 new private sector jobs since we came into government, which is one and a half times the number of public sector jobs that have been lost.

Let me remind noble Lords that the Government came to office inheriting the largest peacetime deficit the country has ever faced and the largest forecast deficit in the G20, larger than that of many of those countries mired in the sovereign debt storm in the euro area. Two years ago, UK government bond yields were roughly equal to those in Spain and Italy. Because we took tough decisions to tackle the deficit, our rates have now fallen to near-record lows of less than 2%, while those in Spain and Italy have risen to well over 5%, a point made forcefully by my noble friend Lord MacGregor of Pulham Market. Record low interest rates help businesses to secure affordable loans, families to pay mortgages and the Government to finance the debt mountain with which we have been lumbered.

The solution to debt is not more debt. I do not need to take on the noble Lord, Lord Skidelsky, on this. The noble Lord, Lord Desai, and my noble friend Lady Wheatcroft have already done that for me. However, as my noble friend Lady Noakes pointed out, the Opposition would have us pile on yet more debt, suffer higher interest rates and place a bigger squeeze on families and living standards. Indeed, even this afternoon, the noble Baroness, Lady Royall of Blaisdon, advocated more government borrowing. Let me explain to the House that even a 1% rise in effective mortgage rates would add £12 billion a year to household mortgage payments—around £1,000 on a typical £100,000 mortgage. We should make no mistake: it is the poorest and most disadvantaged, not the wealthiest, who are hit the hardest when a country loses control of its finances.

It is fair that we tackle our debts today so that we do not burden our children tomorrow. We should also ensure that we can continue—which we can—to provide high-quality public services and support to those who need it most, and provide those public services partly though refreshed local government, as my noble friend Lord Tope reminded us a short while ago.

We cannot and will not be complacent about tackling the deficit. We are sticking to our plans. Her Majesty’s gracious Speech reaffirmed that commitment. We will not jeopardise the fiscal credibility that is critical to delivering a sustainable recovery. It is only by securing a sustainable private sector recovery that we can help to restore and improve living standards, support families and get people back into work. That is why this Government have set out ambitious plans to unleash private sector growth right across the UK. Those plans include more than 250 wide-ranging and ambitious economic reforms to lift the dead hand of the previous Government’s legacy from our businesses and entrepreneurs.

We are reducing corporation tax to 22% by 2014; cutting an uncompetitive and ineffective top rate of income tax; slashing the red tape that continues to suffocate our most entrepreneurial start-ups; overhauling our cumbersome planning rules to embed a presumption in favour of sustainable development; and setting out plans for some £250 billion of infrastructure investment, including the new green investment bank with an initial capitalisation of £3 billion. In answer to my noble friend Lady Kramer, I say that we want to get that £3 billion into real investment as soon as the large projects will permit. As my noble friend Lady Randerson said, the green investment bank is already in business; it is actively considering the first 20 proposals. Beyond that, we are helping to tackle underinvestment in renewable energy as a precursor to comprehensive electricity market reform through the energy Bill, and helping to attract the £110 billion of investment that we need in the next decade to deliver secure, low-carbon energy across the UK. That was a point made very clearly by my noble friends Lord Crickhowell, Lord Selborne and Lord Freeman. The noble Lord, Lord Rowe-Beddoe, pointed out one very challenging but potentially significant opportunity in delivering that ambition.

The Government are ensuring that our businesses have access to finance by securing £190 billion of new lending to UK companies in 2011 and providing SMEs with access to cheaper loans through the new national loan guarantee scheme. My noble friend Lord Northbrook questioned whether it was up and running. Indeed it is, as evidenced by the fact that Barclays and Lloyds have already issued bonds linked to the loans in the scheme.

As my noble friend Lord Caithness noted, securing a more resilient and sustainable financial sector through the banking reform Bill is another priority. It is a measure which, as my noble friend Lady Wilcox said earlier, will complete its passage in this Parliament. We also will increase the opportunities for businesses to capitalise on non-bank lending channels.

Across government, we are matching the endeavour of our businesses to restore growth across the UK. Through the enterprise and regulatory reform Bill, we are driving through regulatory reform, streamlining employment tribunals, boosting research and development through the catapult scheme, as the noble Lord, Lord Broers, reminded us, making it easier to do business and giving employers more confidence.

[Lord Skidelsky]

How long does the Minister think that it will be before sustainable recovery happens?

[Lord Sassoon]

My Lords, it is already in progress. The fact that, in the two years that this Government have been in office, the private sector has created twice the number of jobs that have come out of the public sector is clear evidence of that. Today, we have the numbers that show unemployment is at its lowest level in seven months. It is much higher than we would like but it is reducing. These and other evidence which noble Lords have given in the debate shows that, while there is a lot more to do, in the face of these huge headwinds from the eurozone and elsewhere sustainable recovery is under way.

One of the biggest challenges to make sure that that recovery is sustained is regulation. My noble friends Lord Ashton of Hyde, Lord Lucas and Lady Noakes, and the noble Earl, Lord Lytton, all pointed to some big challenges on the regulatory agenda. We will not shy away from them.

In my noble friend Lord Patten’s discussion of regulation, he referred to the fennel on the brochure that the Government put out. I am sorry that I have not been able to determine whether they were British or foreign fennel but, either way, making sure that they are supplied through the supermarkets on proper terms is something which the new grocery adjudicator will bring.

In the enterprise area, I can assure my noble friend Lord Tugendhat that, again, as my noble friend Lady Wilcox explained in her speech, we will introduce provisions on directors’ pay in the enterprise Bill. In another important area of enterprise, I can assure my noble friend Lord Lexden that the ministerial working group on Northern Ireland is making good progress and will report this summer.

On rural affairs, we are supporting growth across all parts of the UK. I can absolutely assure my noble friend Lord Gardiner of Kimble that we take these issues very seriously. We are committing £530 million for rural broadband deployment by 2015 and creating rural growth networks to help overcome barriers to growth, such as poor infrastructure and mobile networks. We are adopting the ecosystems approach, as my noble friend Lady Miller of Chilthorne Domer noted, and will introduce reforms in the water sector, as noted by my noble friend Lady Parminter and the noble Lord, Lord Whitty, although I note that we are urged onwards by my noble friend.

I heard very clearly what the right reverend Prelate the Bishop of Hereford said about the importance and difficulties of the agricultural sector, which was also referred to by my noble friend Lady Byford, who again linked it to the importance of the grocery adjudicator.

On transport, we are introducing a Bill by the end of 2013 to secure powers to construct and operate the next phase of the high-speed rail network from London to the West Midlands. I learnt quite a number of things in areas of transport of which I did not know the fine detail until this evening. My noble friend Lord Brougham and Vaux rightly pointed out the difficulties in motor insurance—and now I understand the role that telematics and number plate issues will have as Ministers work both on the cost of insurance and on driving out uninsured vehicles from our roads.

The noble Viscount, Lord Simon, reminded us about high-speed issues, and that is noted. My noble friend Lord Bradshaw again reminded us of some important issues in the rail freight area. My noble friend Lady Scott of Needham Market talked interestingly about the possibilities for the local enterprise partnerships to promote local roads. She got a little ahead of commitments in some areas that I could give, but she was rightly challenging and reminded us of what can and must be addressed.

The global market is changing. Unlike our predecessors, we will make sure that the UK is not cut adrift. Over the last year alone, the value of UK goods exports to India grew by 40% and to China by over 20%. As my noble friend Lord Razzall pointed out, in the first quarter of this year the UK exported more cars than it imported for the first time since 1976. That was driven by strong demand from the US, Russia and China. The opportunities of course flow in both directions. The UK is now the number one destination for inward investment from some of the world’s largest investors, including countries such as Kuwait and Qatar. The Tata-owned Jaguar Land Rover has already announced 1,000 jobs at Halewood and £1.5 billion of annual investment in new technologies and products. I was sorry to hear the noble Lord, Lord Davies of Oldham, running down the idea of foreign ownership in our car manufacturing and other areas, when we should be immensely grateful and very proud that we can attract this investment.

My noble friend Lady O’Cathain mentioned the revival of the steel industry. Just last month the Redcar steel works on Teesside kick-started steel production for the first time in two years on the back of investment from Thailand. That is what global investment is doing—securing local jobs.

So this is a comprehensive strategy to return the UK to prosperity. It will not be an easy task and I know that for many families these are tough times, an issue to which my noble friend Lord Shipley specifically referred. But we will not let our poorest and most vulnerable families bear the consequences of the Opposition’s failures when in government. That is why we secured the largest ever cash rise in the basic pension and uprated working age benefits by 5.2 %, protecting the real incomes of the poorest, and that is why we are increasing the personal allowance, reducing tax paid by the basic taxpayer by £350, lifting 2 million people out of tax altogether. It is why we are supporting our young people through the recovery. I agree very much with the noble Lord, Lord Borrie, on the importance of this. It is why we are providing more apprenticeship places than any previous Government. Four hundred and fifty thousand apprenticeships were started in 2010-11—a record in modern times. I am grateful to my noble friend Lord Addington for understanding that we are making progress in this area but that we need to address quality issues—it is not merely a numbers game. It is why we are launching a new £1 billion Youth Contract, supporting up to half a million young people into work, learning their trade, and equipping them for their future career. As John Cridland, Director-General of the CBI has said, it is a scheme that strikes at the “scourge of youth unemployment”.

In conclusion, this is a bold programme for economic reform. It is a vision to return the country to prosperity, tackling the crippling legacy of debt, restoring our competitiveness, boosting private sector growth, investing in our infrastructure and supporting families and young and vulnerable people as we recover from Labour’s economic disaster. As we have seen today, the Opposition have no credible response to the economic challenges that the country faces. Indeed, I have heard no response at all today. Whereas they borrowed their way into trouble, under the coalition we will earn our way out of it.