Economy: Growth

Lord Wolfson of Aspley Guise Excerpts

Tuesday 29th January 2013 Lords Chamber

[Lord Wolfson of Aspley Guise]

My Lords, I also welcome the Minister and am pleased to see a fellow businessman on the government Front Bench. As a serving FTSE 100 chief executive, employing around 50,000 people, I declare a very real interest in this debate. For the past four years, the economy has felt like walking up the down escalator. You have to work very hard just to stand still, and with real effort you might just move ahead.

The Minister has found himself, as a businessman, in the middle of an intensely political debate with a very simple business solution. To characterise the debate so far, we have, on the right, the belief that any expenditure—capital or otherwise—merely adds to national debt and, as such, undermines the financial health of the Government. It increases debt because you cannot borrow your way out of a recession, particularly a debt-led one. On the other hand, you have the equally misguided belief that all the Government need to do is pull the demand lever, loosen the reins and become the spender of last resort, boosting the economy and lifting it by its boot straps. We are told such spending would be good no matter what it is on. The Government will be the investors of last resort.

If I was a diplomat, I would say that both sides are right. As I am a businessman, I must say that both sides are wrong for one very simple reason. What matters, and will make both arguments right, is not how much is spent but what the money is spent on —that is, the quality of the investment. It is extraordinary to me, when I hear the Government talking about investment plans or the Opposition talking about how much money they would inject into the economy, that they talk about the amount spent, not the return on that money. Ultimately, it is the return on the money that matters. If the Government can invest in infrastructure that provides them with a cash return in excess of the interest on the money borrowed to build that infrastructure, not only will that not increase the deficit, it will actually reduce it because it is a good investment.

There is, however, a word of warning for those who take courage from these words and think that capital investment is all we need. It depends on the type of capital investment. If taxpayers’ money is to be invested, it must be invested profitably. I hear the very good point about HS2 made by the noble Lord, Lord Skidelsky. There is a very simple reason why the investment is not being accelerated and that is because, although the cost-benefit analysis currently shows a profitable project, the returns to government are, over 60 years, about one-third of the total capital cost. As far as the Government are concerned, it is a loss-maker. For as long as the Government invest in loss-making assets, their finances will be undermined, wealth will be destroyed and the economy will be pulled back.

How are we to reconcile the very simple principle of profitable investment? I use the word “profitable” in a very special sense—a sense in which it is not often meant, particularly in another House in this great Palace. I do not mean “profitable” in the sense that it is likely to win votes; nor do I mean it in the sense that it will be socially beneficial, but in the sense that it will produce a cash return. Where are such investments to be found? History would say that Governments have not been particularly good at investing in truly profitable assets.

The answer lies in a little story that I should like to share with noble Lords. I recall from my time as a young retail apprentice at the age of 10, being taken out with my dad around the local village. Every Saturday morning at 9 o’clock there was a queue of between 10 and 15 people outside the baker’s shop. One day, rather foolishly, I said to my dad, “He must be a very clever baker to have that queue outside”. The answer came back: “No. That is a wasted opportunity. That is money that is not being made. That baker should be opening his doors half an hour earlier and he would make more money”. There is a clear lesson there. Where there is a queue, there is demand; and where there is demand, there is potential for profit.

If we want to find a queue in this country, we need to look no further than virtually every part of the road network at 8.30 am and 4.30 pm. Here we have a government monopoly—a business that only government can effectively invest in. It would produce, by my calculations, 10 pence of government revenue for every passenger mile travelled. Projects and roads could easily be built that would pay for themselves and therefore fulfil our criteria of truly profitable investments. They would not meet that terrible test of all government ventures: they are not politically popular. None the less, if you need any convincing of the economic potential tied up in our road network, do a little mental experiment—it is always fun. Imagine a London in which the M25, the M1 and the Westway were permanently closed. Imagine the havoc that that would wreak on our economy and very quickly you can see how much damage it would do. Now reverse that concept and ask yourself: why not build more great motorways? A flyover from Croydon to central London could get commuters into London in 12 minutes—that journey takes about an hour and a half today at the wrong time, if you are lucky. Such projects could easily be built and financed. It requires a level of focus and discipline that the Government simply do not have but the answers are there.

Not only are there measures by which the Government could invest profitably in the economy, there are other free ways that they could do so. Legislation is relatively free and it can do much to liberate demand. I take issue with the noble Lord, Lord Eatwell, when he said that there is no demand. As a retailer, I can tell him that there is an enormous amount of pent-up demand in the UK. In my company, we have identified 1 million square feet of trading premises that we would like to open, but this year we will open barely 250,000 square feet. That is not because we do not have the money. We are generating £250 million more cash than we can profitably invest in our business, after paying taxes and dividends. That £250 million cannot be invested because at least 700,000 square feet is tied up in a chronically slow planning system that has no sense of the time value of money. For example, it took us nine months to get planning permission for a stock room for a shop that we wanted to open in Surrey Heath. The opening of the whole shop was held up for that time. There was no sense of remorse. The attitude was, “If we make the decision tomorrow, next month or in nine months’ time, it really makes no difference. We will make the decision when we get to it. Wait your turn”.

This is amazingly debilitating but, above and beyond that, there is a more profound problem with our planning system. The essence of it is that the shape that our economy should take is determined from the top down, whereby decisions are based on what activities take place in which locations, through a system of zoning and restrictions on use that is, frankly, Soviet in its approach to economic development. I am used to it now, but it still surprised me two months ago when I went to see the chief planning officer of a big town. We were proposing to open a store that would have taken £15 million. The planning officer said, “No, I don’t want you to open it there; I want you to open it here, on the wrong side of town, next to the single-lane road that is always blocked”. That store would have taken around £4 million, rather than £15 million. That was bad news in itself, but the really bad news came when he told us that we would have to wait four years for that site to become available.

Our planning system replaces the initiative and intelligence of hundreds of thousands of entrepreneurs with the uncomprehending dead hand of a small number of extremely overworked planners. Since the time of Stalin, the world has lost faith in planned economies. We prefer free markets; we need to take that lesson to county hall. The pent-up demand held back by our planning system runs not into the hundreds of millions but into the tens of billions. The message is very clear: liberate pent-up demand rather than try to push, encourage and incentivise demand that will not happen of its own accord. If we really want to be brave in our economy, we should not just free up use of brownfield sites; we should take a small fraction of the 92% of this country that is greenfield. We should take the ugliest sites closest to London and turn them into beautiful new garden cities, because then those tens of billions will become even more tens of billions.

The potential is there; the Government do not need to spend a penny. It is in the hands of the planner’s pen—we can create wealth and stimulate growth in this country. The rules of effective government intervention are very simple indeed, and they come down to one simple, pleasing principle: follow the demand that is already there. We must liberate the demand that is pent-up within our economy and abandon the crowd-pleasing subsidies, pet projects and announcements that we have to endure every two or three weeks about some brand new stimulus for some small part of our economy. We must seize instead the big structural opportunities and liberate the private sector to invest where it wants to and the public sector to invest where it can make money, not just for the taxpayers but for the whole country.