Spring Budget 2024
Lord Tugendhat Excerpts(1 month, 1 week ago)
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Lord Tugendhat (Con)
My Lords, in his great novel Anna Karenina, Tolstoy remarked that:
“Happy families are all alike; every unhappy family is unhappy in its own way”.
How true that is of the situation in Europe today. Whether one looks at the Netherlands, Germany, France or Sweden, one sees Governments and society coping with severe problems, economic and social, that are very similar to our own. I make that point because there is a tendency in this country, which has been reflected during this debate, to assume that the problems with which we are confronted are somehow unique to us and the result of particular British circumstances. That is why my noble friends Lord Lamont and Lady Lawlor, and the noble Lord, Lord Macpherson, were right to draw attention to how, in a variety of areas, the British economy has outperformed forecasts and performed better against other countries than many people suppose. I agree very much with the points that they made and will not repeat them.
In the short time available to me at the end of a long debate, I had intended to make only three points. Before I make them, I would like to refer to something which my noble friend Lord Horam said when he was talking about GDP per head and GDP itself. He linked what he was saying to the very considerable rise in equality in this country and the effect that this has had on people’s attitudes to their own position, as well as to politics in general.
I turn to my three points. First, I congratulate the Government on shifting the balance of benefits in favour of those of working age and away from pensioners. Pensioners have done very well in recent years, as I and many other Members of this House know from our own experience. However, as my noble friend Lord Lamont said, there is a great need to encourage more people back into work. Making work pay is an important part of doing that. It is an important carrot; sticks are needed as well, but it is a very desirable policy change to promote work in this way. An additional advantage is that, if we could encourage more people back to work, we would have less need of immigration in order to fill so many of our public services, especially the NHS.
My second point is to congratulate the Government on the £3.4 billion that has gone to the NHS, specifically to improve productivity. I spent some years as chairman of the Imperial College Healthcare NHS Trust. Although it was some time ago, I can see how important this initiative by the Chancellor is. The effects of digitising operating theatre processes could be dramatic— the same number of consultants could do an extra 20,000 operations a year. This is exactly the sort of initiative that the NHS needs, and it provides a precedent for other public services.
Having praised the Government on two points, I am afraid that my third point is to criticise. In the defence debate last September, I called for a start to be made in increasing defence expenditure. Since then, the world has become a good deal more dangerous, as a result of events in the Middle East. In their rhetoric, the Government recognise the change that has taken place and continue, quite rightly, to send considerable quantities of military equipment to Ukraine. They are quite right to do that, but the effect is to deny our own forces that equipment. It will take a long time to fill the gaps. The Government talk a great deal in other circumstances about the increased dangers in the world, but they are not putting their money where their mouth is. An ambition to increase defence spending to 2.5% when economic circumstances permit is all very well, but, unfortunately, the dangers to this country do not follow the same rhythm as our economic circumstances. I regret that the Government did not take advantage of this Budget to take a first step towards increasing our defence expenditure.
The fact that the Secretary of State for Defence cannot even fly anywhere near the Russian border because his aeroplane does not have the right kind of equipment to prevent the Russians interfering with it is one example of the situation that we are in. The embarrassments that are being caused by our aircraft carrier are another. I very much regret that the Government did not take a first step. I hope that my noble friend the Minister can say something about that in her wind-up.
Autumn Statement 2023
Lord Tugendhat Excerpts(5 months ago)
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Lord Tugendhat (Con)
My Lords, like other noble Lords, I welcome my noble friend to her new position, and I am also very pleased at the Chancellor’s decision on full expensing. When he introduced that measure earlier—I cannot remember exactly when—I argued that it would be fully effective only if it was made permanent, and I am delighted that it has been. It is the single best way to encourage capital investment available to him at the present time.
I also welcome the cut in national insurance payments, for precisely the reasons set out by the noble Lord, Lord Macpherson. There is one other thing I welcome very much. As a former chairman of the Imperial College Healthcare NHS Trust, I welcome the Chancellor’s imaginative decision to award it, along with Imperial College, £5 million to establish an Alexander Fleming centre to mark the centenary of the invention of penicillin at St Mary’s Hospital in Paddington. This sort of gesture is modest in financial terms but makes, I think, a big impression on those involved. It is a particularly welcome one on this occasion.
I want to devote my speech mainly to talking about how public expenditure and taxation are discussed in relation to GDP and the implications for policy, whether under this Government or under another. As my noble friend Lord Frost indicated in his speech, it is constantly pointed out that they are at the highest levels since the post-war years, as if this was some sort of historical aberration and a bad thing that needs to be put right —they are in fact not out of line with other similar countries. I believe that the approach epitomised by my noble friend Lord Frost is very much the wrong one. They are at these levels because we are in a situation very similar to the post-war period, by which I mean that so many of the problems our country faces, like other similar economies, are big state problems. That is to say that they are problems that primarily require government action and government expenditure to be progressed, let alone resolved. Unless that action and expenditure are forthcoming, the private sector will not be able to function effectively.
These problems are well known to us all. They are the consequences of climate change; the impact of the ageing population on the NHS, social services and the public purse generally; the need to renew our crumbling infrastructure, as well as to prepare it for the digital age; the need to rebuild our defences; and the need to prevent public debt running out of control. To get a grip on this list requires the Government to spend money and to raise money. Nothing has done more damage to the present Government’s reputation than the widespread perception that this country is not working properly. That is because too often it is true. It is because the battle is being lost on too many of these problems that growth is held back and the country is not working as it should. It is not a case of having to choose between public and private: the private depends on the public.
I hope we can stop obsessing about the weight of the overall tax burden and the proportion of public expenditure to GDP. Instead, we need to consider far more carefully how to spread the tax burden fairly and how best to use it to encourage those economic and social projects and activities that will enable our country to be more competitive and a better place to live in. Some taxes certainly can be cut, but others must yield more.
Finally, a serious Government need also to be frank with the public about which public expenditure programmes outside the protected departments they intend to prioritise in the coming years and the costs involved. With an election looming within the next 12 months or so, this Autumn Statement does not do that, and nor does the Opposition’s response. A big test of whoever is in charge after the election will be the extent to which they are willing to be frank on these matters.
Budget Statement
Lord Tugendhat Excerpts(1 year, 1 month ago)
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Lord Tugendhat (Con)
My Lords, it gives me great pleasure to begin by congratulating the noble Baroness, Lady Moyo, on her notable maiden speech. The combination of her force and clarity made a great impression upon me and I look forward to hearing her apply those gifts on other subjects in the future.
As far as the Budget is concerned, I welcome it. I welcome its general direction, underlying philosophy and a number of its detailed proposals. However, I am going to deal with only a few. It is an extremely far-reaching speech, and I will just concentrate on a few points that I would particularly like to draw to the House’s attention.
In his speech, the Chancellor referred to something which happened before he stood up, which was the masterminding by the Government of the sale of the British arm of the Silicon Valley Bank to HSBC. It was rather overshadowed in the media by the dispute between Gary Lineker and the BBC, but it is a major coup on the part of the Government. Had the British end of the Silicon Valley Bank gone down, the crisis that would have overtaken the tech sector in this country would, as the noble Lord, Lord O’Neill, said, have created a very different atmosphere for this debate today.
The Government not only prevented a crisis, something for which they deserve a lot of marks, but did so without costing the taxpayer a penny, which has not always been the case in banking crises. The operation and the speed with which it was carried out bear eloquent testimony to what a good place Britain is in which to do business, especially for start-ups and scale-ups in exciting new areas such as tech and life sciences. I hope very much that foreign and British entrepreneurs will take note of that, and that those wondering whether to enlist in London or New York will also bear this event in mind.
Turning to what might be called the Chancellor’s micro-approach to achieving the macro-objective of improving the British economy, in the corporate sector I am sure that he is right to focus on incentivising investment rather than the headline rate of tax. This will do most to encourage established companies, in established areas such as infrastructure, and new companies in new sectors. However, it is important to remember how long projects take. Usually, they take a good deal longer than three years. Therefore, it is vital that the Chancellor fulfils his intention to make full capital expensing a permanent feature, to quote him,
“as soon as we can responsibly do so.”—[Official Report, Commons, 15/3/23; col. 839.]
In the personal sector, I am equally sure that the Chancellor’s pension and childcare measures are at different ends of the wealth and income spectrum, and are the right way to encourage people to stay in work and to return to work. They will have a more direct and targeted impact on the balance sheets of individuals and families than simply a cut in income tax.
I am a supporter of the Budget. I have just one caveat or warning, which refers to defence—a point made by my noble friend Lord Howell. I very much support the Government’s rhetoric and actions regarding Ukraine and China. However, I worry that our rhetoric is in danger of running ahead of our capacity to deliver. We talk a very good talk, but how many troops, ships and aircraft do we actually have at our disposal? I am delighted that we have helped the Ukrainians as much as we have, but how much do we have left? If we are to continue playing the role that we wish to play, defence is likely to cost more and perhaps a very great deal more, and we all know how that will have to be paid for.
Autumn Statement 2022
Lord Tugendhat Excerpts(1 year, 5 months ago)
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Lord Tugendhat (Con)
My Lords, like my noble friend Lord Lamont, and unlike my noble friend Lady Noakes, I welcome the Autumn Statement. In the circumstances, it is a balanced and fair attempt to deal with the country’s current problems and to set a course for the future. It has also already done a good deal to restore confidence in the United Kingdom in financial markets, as the fact that the pound is now back to $1.20 shows—and that is no inconsiderable achievement.
However, I share the regret, expressed by my noble friend Lady Noakes, of many in my party that the Chancellor was unable to do more of a direct nature to encourage growth, and that makes me regret all the more the extent to which some Conservative MPs—ex-Ministers as well as Back-Benchers in the House of Commons—seem determined to hamper growth. Let me give examples. First, a number of them are making efforts to prevent the Government achieving their target of building 300,000 homes a year. Success in achieving exactly that number, in fulfilment of an election pledge, helped to lay the foundations of Conservative political and economic success in the 1950s. It really beggars belief that what Harold Macmillan and Ernest Marples could achieve in the early 1950s appears now to be beyond the capacity of a Government who have been in power for 12 years.
Secondly, there is the obsession of some sections of the party with distancing this country as far as possible from the European Union. I refer particularly to plans, opposed by the whole business community and the trade unions, to rid the statute book of EU-derived legislation, even when it was introduced and supported by the United Kingdom, thereby creating an atmosphere of maximum uncertainty for business across the whole range of the economy.
I also draw attention to the knee-jerk reaction against any suggestion of trying to remove the barriers to trade with the EU which were erected as a result of the particular way in which the Johnson Government negotiated our exit. If ever there was a case of putting of ideology before national interest, it is that.
I turn now to criticism of the Autumn Statement for raising taxation. Raising taxes is attacked by some members of my party as being fundamentally un-Conservative. A school of thought has grown up that appears to believe that a Conservative Government must always, and in all circumstances, be in favour of cutting taxes and reducing the size of the state. Of course, there is a strong preference in the Conservative Party for lower taxes and a smaller state, but it is not always possible to pursue policies in that direction. The preference for lower taxes and a smaller state has never been an article of faith; the party has traditionally been pragmatic rather than ideological in framing its economic policies. It has believed in providing good government in accordance with the needs and requirements of the time. Sometimes, that will involve raising taxes and increasing the size of the state. Classically, of course, that is the case in times of war, but by no means only in times of war; we live in such a time now. The challenge of climate change, the consequences of the pandemic, demography and the strains that it puts on the NHS and social care, plus defence and the threat posed by Russia, are all issues that, singly and together, can be tackled only by the state and require heightened public expenditure. In these circumstances, the Government and the whole of the Conservative Party should now recognise this reality, present the country with a set of prioritised policies that respond to the challenges it faces and explain to the people how they intend to spend their money to make their lives better and safer.
Budget Statement
Lord Tugendhat Excerpts(8 years, 9 months ago)
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Lord Tugendhat (Con)
My Lords, there is much to admire in the Budget—and I do admire it—but I should like to take the opportunity this evening to make what I hope the Government will regard as some constructive criticisms. I begin by drawing attention to the Chancellor’s Statement, in which he said:
“Public spending should reflect public priorities”.—[Official Report, Commons, 8/7/15; col. 324.]
Of course it should, but those priorities are bound to change with the passage of time, and the Government need flexibility to respond accordingly. That may seem obvious, but this Government have denied, and are denying, themselves that flexibility by each year increasing the number of so-called protected departments and items. The result is to freeze priorities and to give the impression that some departments are more important than others. Thus, the protected aid budget looks, and is, treated as though it is far more important and central to the Government’s concerns than the Foreign and Commonwealth Office.
Another bad effect is that having a protected budget and guaranteed increases inhibits innovation and creative thinking. It leads to sticking to the old ways of doing things and asking for more money each year. It also means that at a time like the present, cuts have to be concentrated on the diminishing base that is unprotected, with the result that massive cuts occur in those areas in which the knife falls. I think here particularly of housing benefit and tax credits. I do not dissent from the line of the Government’s march or from the policy itself, but the cuts have been very aggressive and will not be compensated for by the living wage, which will benefit a different group of people.
So on the one hand is an ever expanding group of departments and items that are protected and, on the other, those that are being cut and cut again. I see today that some departments are being asked to produce plans involving savings of 20% to 40%. Over time, that is bound to lead to an extremely unbalanced budget and to the freezing of priorities, and getting out of that bind will be quite difficult. We have heard much in recent years of my party—the Conservative Party—breaking free from the shackles of the coalition, so it is ironic that the Chancellor should restrict his freedom of action in a manner that will become increasingly burdensome to him and make his ability to respond to changes in circumstances much more difficult.
I now turn to the living wage. As many have pointed out, this is a proposal that, if put forward by Labour, let alone by Brussels, would be attacked from these Benches as an unjustifiable invasion into the way in which business operates, particularly small businesses. The Chancellor has taken it upon himself to determine by fiat the level of wages over a wide area of the economy. Although his aim—to push wages up rather than hold them down—is different from that in the 1970s, it is a return to the policies of the Wilson and Heath Governments. Neither is usually held up as an exemplar by Ministers in this Government but we are returning to those days, as my noble friend Lord Higgins, who was in the House of Commons with me at that time, may agree. I see him nodding. Those of us who remember those days know what is likely to happen. The living wage is likely to become an instrument of electoral tactics, just as the setting of interest rates used to be before the Monetary Policy Committee was established.
I understand that the Government are aiming to improve this country’s low productivity, as the Minister pointed out in his introductory speech. He wants a high wage, high productivity economy, which is a good thing. However, the danger is that the Government may be taking us down the French route of exchanging low productivity for high productivity, coupled with high unemployment—especially among the most disadvantaged. Normally when the Conservative Government look across the channel, we do so in order to criticise the way the French do things. Here, we seem to be looking across the channel in order to copy what the French are doing, and it may very well have the same consequence.
It is right for the Government to determine the direction of the economy and take the big strategic decisions, but in a number of areas implementation is best depoliticised and left to experts. That is why I support the Monetary Policy Committee and the Low Pay Commission. I very much hope that, having neutered, or rendered null and void, the Low Pay Commission, the Chancellor will not now turn his fire on the Monetary Policy Committee.
As I said at the outset, there is much to admire in this Budget but now is the time—especially in this House—when constructive criticism is required, and I hope that the Minister will take what I have said in that spirit.
Queen’s Speech
Lord Tugendhat Excerpts(10 years, 11 months ago)
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Lord Tugendhat
My Lords, I will focus on one of the biggest disappointments of our economic reforms over the past few years. I refer to our failure to expand our exports as rapidly as had been hoped, and in particular to expand them outside the eurozone, despite the 20% devaluation of sterling on a trade-weighted basis since 2007. Ministers invariably place the blame for this on the sluggish performance of the eurozone. Certainly the eurozone’s sluggish performance has played a significant part, but as an article on UK export performance in the February issue of the Bank of England’s Inflation Report points out, UK exports have increased by much less than those of several eurozone members, including Spain, Italy and Portugal, for whom the eurozone is also their major export market.
The Bank of England suggests that part of the reason for this is the weakness in demand, since 2007, for financial services provided by banks and other financial institutions. Devaluation cannot do much about that—which, given the composition of UK exports, shows the limitations of devaluation as a means of boosting British exports. However, devaluation should have given a boost to British manufactured exports beyond the eurozone, and our failure to make progress on that front is particularly disappointing.
The contrast with Germany is particularly striking. Against the background of rising trade with both eurozone and non-eurozone countries, the balance of Germany’s trade has shifted in favour of the latter. In 1999, when the euro began, some 45% of Germany’s trade was with other eurozone countries—now it is 37%. The fastest-growing partners for German foreign trade include China, India, Korea, Indonesia and Brazil. Within the next few years China is expected to become Germany’s biggest trading partner.
I accept that the quality and composition of German manufactured goods are such that overall they are always likely to outperform ours in that sphere. This is a sad fact, but, I fear, true. None the less, why are we so stuck in the eurozone, as Ministers keep pointing out, while they are so much more successful at breaking out into markets in other parts of the world? The single market is meant to be a launch pad for selling to the rest of the world, not a contemporary equivalent of imperial preference. Germany and other countries have achieved that break-out, and I wonder why we appear to have so much difficulty in doing so.
This is a complex subject, and there are many reasons for this situation, but I ask the Government—if they cannot reply tonight, perhaps they will do so later—whether they feel that ownership has anything to do with it. The great bulk of German industry is German-owned, and free to seek markets wherever its management sees fit. By contrast, Sir Alan Rudge has recently pointed out:
“The UK is home to 228 large manufacturing companies … and only 93 are UK-owned”.
I have always been a great supporter of inward foreign direct investment. Many foreign companies have made a huge contribution to modernising the British economy, improving the quality of its management and introducing new ideas. The spectacular revival of the British motor industry, thanks to Japanese and German investment, illustrates this point very vividly. Where British ownership failed, Japanese and German ownership has succeeded and the United Kingdom has benefited enormously.
However, it cannot be gainsaid that much of foreign direct investment into Britain has been made to supply European markets rather than markets outside Europe. The companies that have made those investments see their UK plants as part of a worldwide network in which plants in different geographical locations are aimed primarily at different markets. The same would be equally true of FDI in, for example, Spain or other European locations against which we compete to attract investment.
I do not mean to be absolutely black and white about this. Corporate trade patterns shift in response to changing circumstances. As I have said already, this is a complex matter in which many factors come into play. None the less, it would be helpful if the Government launched a review to determine to what extent the subsidiaries of foreign-owned companies in this country have the flexibility to take full advantage of opportunities opening up in markets beyond Europe, and what can be done to encourage them.
I know that many people will say that I have focused on the largest manufacturing companies, and that is true. However, the supply chains depend on those companies and, generally, in this country the largest manufacturing companies account for the greatest proportion of exports. Therefore, if the largest manufacturing companies are concentrated in one part of the world, it will follow that the supply chains that service them will equally be concentrated on that part of the world. Rather than look to the red tape and the other things people talk about that supposedly hold us back in the eurozone, we should see why it is that Germany and other eurozone countries appear to be so much more successful.
I will refer to the remarks of the Mayor of London, who has pointed out that if we were to leave the European Union, which I personally would deeply regret and regard as very counter to British interests, we would find that many of our problems arise from inadequacies within our own economy.
Financial Services Bill
Lord Tugendhat Excerpts(11 years, 10 months ago)
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Lord Northbrook
My Lords, I disagree with Amendment 5. It gives the Treasury Select Committee too much power. As I understand it, the Treasury Select Committee already holds pre-commencement hearings with those who have been selected to become governors and deputy governors. Furthermore, as I understand it, the Government have no powers to remove a Governor of the Bank of England; rather the Treasury must give its consent if the Bank decides the governor has met the criteria for removal. It is the Bank’s decision to make. The pre-commencement hearings provide the right balance between giving Parliament an opportunity to question the new appointee on their views and qualifications without bringing into question or placing doubts over the appointment itself.
Lord Tugendhat
My Lords, I was unable to participate in the early stages of the debate this afternoon because I was at a Select Committee, but now that I am here I should like, on the basis of experience, to support the proposition of my noble friend Lady Wheatcroft—not experience of the court of the Bank of England, I hasten to add, but of the European Commission. The President of the European Commission is appointed quite separately from the other members of the Commission and he has no particular power over who else is going to become a member. The way it is done leaves him at the mercy of Governments. My experience under a very strong and good president in the case of Roy Jenkins and under a much weaker and less effective president in Gaston Thorn is that if the chairman or president, whatever he is called, of a body has no influence over the appointment of his colleagues or over whether they stay or go, it seriously diminishes the significance of the person in charge.
As the noble Lord, Lord Burns, said earlier, we are trying to put together something that has a governance structure in keeping with the modern age and which sets an example, inasmuch as that is possible in a body such as the Bank of England which is quite separate from the corporate sector, to the rest of the country. If the chairman is to be taken seriously by the governor and, indeed, by the entire Bank of England beneath the governor, it is essential that he should be seen to be somebody who has played a significant role in the appointment. It would be quite unacceptable if a governor were appointed in whom the chairman did not have confidence. It would be quite unacceptable if the governor felt that the chairman did not have confidence in him, just as it would be unacceptable if the chairman felt that the governor did not have confidence in the chairman.
The noble Baroness, Lady Wheatcroft, has put forward a very sensible and practical proposition. As I say, I speak with experience of having served in a body where the chairman did not have the powers that the noble Baroness suggests. My experience is that that was not a very good way of doing things.
Lord Eatwell
My Lords, these amendments raise some interesting and important issues with respect to the person of the governor. Despite the warm words of the noble Lord, Lord Sassoon, about degrees of consultation, balance and so on, the idea remains that the person will be endowed, under this legislation, with quite extraordinary powers and therefore the process of appointment should be more transparent and subject to consideration by democratically elected Members. If we are to accept an unelected individual having these powers, at the very least the appointment process should be transparent.
The idea that the Treasury Select Committee should express its views is a very good one, but I am not sure about this notion of a veto. That goes a little too far. We do not want to politicise appointments to the extent that has occurred in the United States, which makes me nervous about the suggestion by the noble Lord, Lord Turnbull, that appointments might end up being considered by the whole House, which would inevitably be whipped and become very political indeed. The Treasury Select Committee, although it may sometimes be eccentric, is not party political in quite that sense. It is a good idea that the Treasury Select Committee is consulted about an appointment and it would be a bold Chancellor who would ignore the committee’s views. Since the committee does not have a veto, it is less likely to have the propensity to develop into an overly politicised hanging court. That covers Amendment 5, which is one of the amendments from the Treasury Select Committee in another place put forward by my noble friend Lord McFall and the noble Baroness, Lady Noakes.
I am sympathetic to the idea expressed in the amendment from the noble Baroness, Lady Wheatcroft, and found the arguments put forward by the noble Lords, Lord Burns and Lord Tugendhat, convincing. The notion that the chairman should be consulted and that the degree of confidence in the relationship between the chairman and the governor should thereby be established seems to have the ring of good sense about it. The Government should take this matter under serious consideration.
My noble friend Lord Peston referred to the role of the House of Lords. Although the expertise in your Lordships’ House often comes to bear most effectively and positively on Treasury issues, in the context of an appointment of this seriousness and magnitude, one really has to turn to elected Members. If the constitution of your Lordships’ House changes in the future, then perhaps the House of Lords could have a role in this respect. However, for the moment, the Treasury Select Committee should be the focus of consultation—
Lord Eatwell
My Lords, the amendment stands in my name and that of my noble friend Lady Hayter of Kentish Town. It takes us back, because of the way in which the Bill is constructed, to the court or supervisory board of the Bank of England. The amendment lays out the roles of the court to specify more clearly than current legislation does the role of the supervisory board or court—let us leave that argument aside and concentrate on the body—which the amendment states,
“will be responsible for overseeing the development and execution of the objectives and strategic policies of the Bank”.
It relates, therefore, to the development of strategic policies, as is laid down with respect to the Financial Policy Committee, as well as to the objectives and strategic policies. They are subject always to instructions from the Treasury, which are defined in statute, as are particular responsibilities of the Monetary Policy Committee. The idea is to ensure that the board has the status that I think everyone who has spoken today feels that it should have. That is the first part of Amendment 8; the supervisory board or court would have that appropriate status.
The second part of the amendment—which proposes that the supervisory board should have its own secretariat,
“charged with providing economic, legal and monetary advice and research support to the Supervisory Board”—
arises because, I regret to say, the Bank of England has form in this area. In the early days of the Monetary Policy Committee, its independent members were denied access to satisfactory technical support. The Governor of the Bank of England at the time declared that if they should have suitable support, it would undermine the status of the Bank. It was only after a public outcry once the governor’s position was made clear that suitable economic and secretarial support was given to the independent members of the Monetary Policy Committee to enable them to do their job. The governor had prevented them having that support until there was a public outcry.
Members of your Lordships' House who have been non-executive directors of boards will know how important it is for the non-executive directors to be able to access independent advice at times in order for them to fulfil their proper fiduciary role. Having access to advice—whether it be legal or, in the case of the court of the Bank, economic and monetary—is a crucial part of the independent directors being able to do their job.
If the Bank had not behaved in this way in the past, I would not feel that the amendment was necessary, because one would say, “Well, of course, they should have appropriate support”. Unfortunately, however, important independent members operating within the structure of the Bank have not in the past been given the support that they needed to do their job. It is therefore important that independent members of the court should have access to the advice and research support that can make them effective non-executive directors. I beg to move.
Lord Tugendhat
My Lords, I support the amendment of the noble Lord, Lord Eatwell. He draws the lesson from what happened to the outside directors of the Monetary Policy Committee. It might be said that the Bank has learnt its lesson on that and that the situation will not arise in the future, but as I pointed out at Second Reading, the Bank has behaved unacceptably in relation to having an inquiry into its performance during the financial crisis. Whereas the FSA had an inquiry and the results were published, the Bank of England rather stuck to Montagu Norman’s axiom, “Never explain, never excuse”. The Bank of England is a fine and venerable institution, but it finds it difficult to change. Unless there is some provision of the sort that the noble Lord, Lord Eatwell, suggests, one cannot be sure that the supervisory board—or whatever it is going to be called—will necessarily have the economic, legal and monetary advice and so forth that is required. The role that it is taking on is complex. It will deal with highly competent officials in the Bank. It is essential that the non-executives on the supervisory board have absolute certainty that they have all the back-up they require.
When one looks at the demands being placed on non-executive directors of more normal financial institutions, it is clear that, if they are going to fulfil their functions, they will need much more back-up than non-executive directors were accustomed to in the past. Their responsibilities and accountabilities are greater and they will need absolute certainty and right of access. That applies to the Bank of England and I hope that the Government will take into account that, if we are to have proper governance, it requires proper support.
Lord Sassoon
My Lords, we debated earlier amendments tabled by the noble Lord, Lord Eatwell, which sought to convert the Court of Directors into a supervisory board. Following on from those amendments, Amendment 8 sets out some of the functions of that board. There is little between the noble Lord and the Government on the substance of the amendment, but my key argument is that the amendment is not needed because its most important parts are addressed by government Amendment 13.
Government Amendment 13, which I will talk to at much greater length when we get to it, will give the new oversight committee responsibility for overseeing the Bank’s performance against its objectives and strategy—precisely what the first part of Amendment 8 seeks to achieve. As for the second part of Amendment 8, I appreciate that in the past the Bank was slow to realise that the MPC members needed their own dedicated support. That lesson was learnt a considerable number of years ago, and both MPC and FPC external members now have access to appropriate resources. The point about the FPC is important and relevant because that has been created in shadow form only very recently.
We can see the considerable output that the FPC is already producing, which it could not possibly do without that support. I am wholly confident that the oversight committee will have sufficient support once it comes into being, and I do not believe that it is necessary to put it into the Bill. I ask the noble Lord to consider withdrawing his amendment.
Lord Burns
The committee consists only of the non-executive directors; the executive directors will be there, in a sense, only in attendance. It can work. Normally within a board, if it was doing this kind of review, it would be the non-executive directors who were in the lead and making the running. I have found from experience that one should do everything one can to keep the executive and non-executive directors together when one is handling these kinds of issues and trying to learn lessons from the past. We do not want a situation where one part of the board feels that it is being picked on by another. However, given the level of distrust that we have heard this afternoon from many noble Lords about this, I can understand the concerns that, if the Government had brought forward the proposal in the sense that a number of us suggested, they would have come up against the pressure of saying, “Well, it will simply be controlled by the executive directors, in the end, if it is done that way”. Over time, however, a well functioning board should be able to handle these kinds of policy reviews within the whole of the board. That is the best way of learning longer term lessons from these experiences.
Lord Tugendhat
My Lords, I agree with what the noble Lord, Lord Burns, has just said. This is an admirable amendment, and I agree with almost all of it. There is one point I am going to raise in a moment, but I do not see why it cannot be done by the court. The fact that the Government have gone to all this trouble to set up a committee instead of leaving it in the court means that one wonders what lies behind it. It seems to be diminishing the authority of the court in some peculiar way. I do not understand the purpose; if the court consists of the directors of the Bank, it seems very odd. That is one point. Otherwise, however, I agree with the thrust of this amendment.
I would like to point out to the Minister an inconsistency in his approach. In a couple of the previous amendments that we have discussed, he told us that what is being suggested is unnecessary, because, of course, the Government would behave in a proper fashion. They would consult everybody, including the chairman. There is no need to be specific in saying that the chairman should be consulted on the appointment of the governor. There was another occasion when the Minister said that there was no need to be specific. Yet here the Government say,
“If the person to be appointed to conduct a performance review is an officer or employee of the Bank, the appointment requires the consent of the Governor of the Bank”.
Lord Eatwell
My Lords, is the Minister accepting my Amendment 29? He seemed to say that it was referring to the right sort of thing. If he is not accepting it, why is proposed new Section 9B(4) left in the form that it is, referring only to procedures? I have another question, but would he answer that one?
Lord Tugendhat
May I add a question so that the Minister can answer both together? The Minister is dealing with these matters with such grace and elegance that I feel very bad in questioning his or the Government’s motives in any way. Nevertheless, when we were dealing with the question of whether the chairman should be consulted on the appointment of the governor, basically what the Minister said was that reasonable people will behave in a reasonable fashion and there is no need to spell all this out, because it will be done in the normal course of events. Here he is insisting on absolutely spelling it out so that in practice the governor has a block. Of course I agree that in a properly run organisation, as I am sure the Bank would be, an employee would not be appointed contrary to the wishes of the governor; the relationship between the chairman and the governor would overcome that. None the less, to give the governor an absolute block is a sort of belt and braces that is completely at odds with what the Minister said in an earlier discussion. That means that one does look with some suspicion as to why, as I said earlier, there is one sauce for the goose and another for the gander. If he wants to spell it out here, why could he not spell it out earlier?
Lord Sassoon
My Lords, in legislation we come back regularly to this question of what needs to be spelled out and what does not. Elegantly or otherwise, I am not sure what more I can say other than that we have to take each case on its merits. Sometimes there are good arguments for spelling things out and at other times there are not. I know that I will disappoint my noble friend and it is a perfectly fair question, but I am not sure that there is much more that I can usefully add.
On the question from the noble Lord, Lord Eatwell, about Amendment 29, I will be clear. I do not accept Amendment 29 because I do not believe that it is necessary. I believe that Amendment 13, which I thought was helpfully clarified during this debate, more than covers the ground. I refer the noble Lord in particular to proposed new Section 3A(2)(a), which I would suggest makes it clear right at the beginning of the Government’s amendment that the function of the oversight committee and its ability to review performance is very widely drawn in relation to the objectives of the Bank and of the FPC. I believe that new Section 3A enables the oversight committee explicitly to review the activities of the FPC, which are there right at the beginning of this amendment.
Clearly I am having difficulty understanding the noble Lord’s concerns but I am absolutely clear that the substance as he has explained it and the specific example that he gave are completely within the ambit of what is being put in the Bill as the function of the oversight committee.
Banking Reform
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Lord Sassoon
Perhaps I might answer my noble friend first. I am grateful to her for welcoming these next steps as we implement Vickers. On the questions about timetabling, we are firm not only on implementation by 2019 but on sticking to our commitment to completing the passage of the legislation in this Parliament, which allows for time for pre-legislative scrutiny this autumn and a proper and full process. On her point about whether we have thought about the read-across to the Financial Services Bill, we have done so—for example, we have picked up the Vickers recommendation about the FCA having a competition objective, and that is already drafted in the Financial Services Bill. There will be other important elements, such as account-switching, that will come in from September 2013. Everything fits together. I appreciate her recognition that a more diverse banking sector has also been thought about; it is a very important element of this.
Lord Tugendhat
My Lords, I welcome the Statement and I congratulate the Government on the speed at which they are moving. I have one question: where one part of a bank is within the ring-fence and one part is outside, does the White Paper say anything about auditing? Would one expect there to be the same auditors for both parts of the bank, or would they expect to have different auditors? Does the White Paper take a view on that?
Lord Sassoon
As far as I am aware, there is no prohibition or restriction on the use of auditors. I am pretty sure that the audit position is not addressed, but if I am wrong about that I will write to the noble Lord.
Financial Services Bill
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Lord Tugendhat
My Lords, I will not follow the noble Lord, Lord Mawson, down the Lea Valley but I should like to revert to the causes of the troubles in 2008, for which I think there were two main reasons. First, by far the most important was the belief in light-touch regulation, to which both main parties, the financial community, most economists and commentators, and I at that time subscribed. To this was linked the near universal view in this country that the lighter the touch, the greater London’s competitive advantage.
The second reason was that in the build-up to the crisis, and after it had struck, the FSA and the Bank of England performed badly as institutions but also in terms of their co-ordination. The story is well known and I will not rehearse it here but I would point to one big difference between those two institutions. The FSA admitted error ages ago and instituted an inquiry while the Bank of England refused to do either until very recently, and then it was very grudgingly.
Clearly, Governor Montagu Norman’s maxim that the Bank should “never explain, never excuse” lives on. Against that background, I find it strange that the Government should feel that the Bank of England’s record before and during the crisis, and indeed since, is such as to warrant it receiving the vast increase in powers that are being lavished on it. I also recall from personal experience as well as anything else that the Bank’s record of financial regulation in the 1990s and the early part of this century was far from ideal. Johnson Matthey, Barings and, of course, the secondary banking crisis all come to mind.
I am glad that the Government have agreed that the Chancellor should have the power of direction over the Bank of England for use in a crisis where public funds are at risk and that they have put the Bank of England and the Treasury under a statutory duty to co-ordinate when managing threats to financial stability. But that does not alter the fact that in normal times during which the conduct of policy will either avoid or provoke possible crises, the Bank of England will wield enormous powers for which it must be held accountable. I will revert to that point in a moment but I want first to deal with another.
Instead of seeking to improve on the institutional structures that they inherited by adapting them and the way they interact in the light of experience, the Government have opted for root and branch organisational change. That is the same choice that they have made on the National Health Service. It is a strategy that always involves very great dangers, because it creates the classic conditions, during the process in which the changes are taking place, of uncertainty, in which risk management, the reconciliation of diverse objectives and keeping reporting lines open can go awry.
I have other worries, too. The burden on the governor will be immense, as other noble Lords have pointed out. He or she will be the master of monetary policy and both micro and macroprudential regulation in the world’s fifth or sixth largest economy and its second largest and most complex financial centre. That is quite simply too much for one person.
In addition to these responsibilities, as again has been pointed out, the governor will have to function effectively at the European and international levels and will have a constant responsibility to justify his or her actions to Parliament and the general public. Finding somebody to fulfil all those roles is going to be very difficult indeed and, however good the person who is chosen, they will bear an immense burden, which I think it is very unwise to create.
I also fear that problems in one area of the Bank of England’s activities will contaminate its reputation and abilities in others. In particular, I fear that any controversy, let alone any errors, in its handling of regulatory matters will contaminate its reputation and render more difficult its handling of monetary policy. Regulation is always a subject of crises and controversy—that is the nature of the beast. So I do not see how this form of contamination can be avoided.
My final fear under this head is of group think, to which a number of noble Lords have referred. Under the tripartite system, co-ordination could and did go wrong. Under the new one, there is the danger that there will not be enough debate, exchange of ideas, free expression and thinking outside the box about issues, dangers and what might be coming down the track. This is not an unfounded fear. If ever there was an institution prone to group think and institutional orthodoxy, it is the Bank of England—and I have already referred to Montagu Norman’s dictum, “never excuse, never explain”. The Bank of England has been going for more than 300 years. It is a very fine institution but, like any great institution, it has faults and other characteristics, which are very difficult to eliminate and are likely to endure. That is why it is very dangerous to put it in such an overwhelming position.
This brings me to the admirable report of the Commons Treasury Select Committee. The Government have chosen the wrong way to reform but, given the route that they have decided to go down, the Treasury Select Committee’s recommendations are absolutely essential to guard against the inherent dangers of the new system and enable it to work properly. I will not enumerate the recommendations in detail, because others have referred to them and we are time-limited. But I attach particular importance to the recommendations relating to the role, powers and composition of its proposed supervisory board. I also think that the role, powers and character of its chairman are a matter of great importance, as are the manner and terms of appointment of the governor and the need for published indicators of financial stability by which the Bank of England’s performance in that field can be assessed. Finally, under that heading, what the report has to say about the role of external members, both of the supervisory board and of the various committees, is very important indeed. I urge the Government to look very closely at this report and accept most of its recommendations.
With this Bill, the Government are creating an overmighty subject, whose decisions will impinge directly on households and businesses. The Treasury Select Committee’s proposals will go a long way to ensuring that it is subject to proper internal control and parliamentary accountability. They will also help it to function better than would otherwise be the case and, perhaps, to overcome some of the fears and doubts that I have expressed.
Queen’s Speech
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Lord Tugendhat
My Lords, my big disappointment in the Queen’s Speech is the absence of a Bill to deal with top executive pay. Mr Cable appeared to promise one and it is long overdue. In the previous Parliament, the noble Lord, Lord Gavron, introduced such a Bill, which I supported, as did the noble Lord, Lord Taverne, and several other noble Lords from both sides of the House. I am pleased to see that he has reintroduced a similar Bill, so if the Government do not come forward with a measure, it at least lies in the hands of the House of Lords to push this proposition along. I hope it will enjoy the all-party support that it deserves.
The fact that shareholders are at last exercising some muscle over excessive pay linked to poor performance is encouraging. I refer here to the recent revolts at Aviva, AstraZeneca, Barclays, Trinity Mirror and Xstrata, to name only a few companies. We have seen similar phenomena in the United States and Switzerland. However, the fact that shareholders are now exercising some muscle does not mean that the Government can sit back and do nothing. The examples to which I have referred are egregious. We need a framework and a set of criteria within which shareholders can act and the rest of society can assess their effectiveness.
“Society” is a key word here. As Niall FitzGerald, the former chairman of Unilever, has pointed out:
“Business is part of society, not outside it”.
The rate at which top executive pay has increased in recent years puts those who receive it beyond the range of normal society. Here, I do not refer to just the banks by any means. Between 1999 and 2009, the total earnings of FTSE 100 CEOs jumped from 47 times UK median full-time earnings to 88 times. In 2010, the increase in CEO remuneration was 43%, while other top executives achieved even more. Last year’s increase looks likely to be more modest but still way beyond that of most other—probably all—sections of society.
Richard Lambert, the former director-general of the CBI, made two very important points about this phenomenon in an article in the Financial Times last November. One was that this is a “big company” issue, involving a small group of individuals. Those in SMEs are in nothing like the same category. The other was that it,
“is damaging the interests of British business in political, economic and reputational terms”.
Two months ago, Simon Walker, the current—I emphasise “current”—director-general of the Institute of Directors was more blunt. He wrote in the Financial Times that,
“executive remuneration at our biggest companies is at the wrong level”.
Therefore, let us hear no more nonsense about politicians criticising or seeking to act on top executive pay being anti-business. To the contrary, it is necessary to save business from itself.
Against this background I should like to set out some points and principles that should inform the Government’s approach. The first is to subject to severe scrutiny arguments about an international market in executive talent and the UK being in danger of losing out. There is indeed such a market, there are such individuals and we must ensure that the United Kingdom does not lose out. However, this market is very much smaller and the number of individuals much fewer than most of this theory’s proponents tend to put forward. They account for a very small proportion. Most senior executives do not fall into this category and are neither willing nor able to move internationally. What happens is that the enormous packages sometimes—quite often properly—awarded to the internationally mobile, whether British or foreign, pull up other people’s packages behind them. You then have the phenomenon whereby because someone—whether British or foreign—who has been recruited from outside earns an astronomical amount of money, his or her colleagues therefore need to be within the same range. Of course, that does not follow at all.
That is one reason why it is very important to make senior executive contracts simpler and more transparent. In recent years they have become ever more complex and opaque, and designed to make it hard for outsiders to comprehend the level of benefits. It is vital that shareholders should be able to understand exactly what senior executives stand to get in return for meeting what objectives, and what their severance terms are. The Dodd-Frank reforms in the United States require the publication of a single aggregate figure for the total annual compensation of each board member and we should have the same.
Linked to that, the time has come to look carefully at so-called incentivisation schemes. Too often in recent years these have led to corporate strategies being distorted by the desire of executives to earn bonuses linked to short-term growth in profits or share price rather than taking a long view.
Finally, under this head, Richard Lambert makes a good point when he suggests that companies should be required to produce a budget for the pay of their top executives so that if one executive gets more for some exceptional reasons, others would share in a smaller pot. This budget in turn should be linked to the company’s strategy.
As I said a few moments ago, business is part of society. By that, I mean that it also comprises not only those who run it but those who own it—shareholders, directly or indirectly—and those who work in it. The ultimate decision on senior executive pay must rest with shareholders. But I believe that we should also strive to find a way of ensuring that those who work for an enterprise are able to make an input into what senior executives are paid. The senior executives should have to explain and justify their remuneration to those who work for them. Finding the right way to do that will be extremely difficult but I think that that is one element that also needs to be looked into and to which we need to find an answer.