Autumn Statement 2023

Viscount Hanworth Excerpts

Wednesday 29th November 2023 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, I was deeply perplexed when I listened to the monarch’s speech at the opening of Parliament and, equally, to the budgetary speech of the Chancellor of the Exchequer. The question I ask is: to what extent do these speeches represent an attempt at bamboozling the public, and to what extent do they represent acts of self-deception on the part of the Government? I have not reached any firm conclusion.

The Chancellor’s recent Autumn Statement is full of doubtful claims about the success of the economy. We hear, for example, that under the Conservatives our technology sector has grown to become the third-largest in the world—that is, double the size of the German sector and three times that of France. This seems to be patently untrue, and one may wonder what statistics are being misused to support such a claim. The truth is that our manufacturing sector has sunk to a proportionate level that is way below the corresponding levels of those other economies. What, then, is the technology sector to which the Chancellor refers?

In appraising the Autumn Statement, it is clear that many of its provisions, which include significant reductions in taxes, are intended to enhance the electoral prospects of the Conservatives. However, given how dim these prospects seem to be, one wonders about the extent to which the provisions are intended to embarrass a succeeding Labour Government.

The Autumn Statement has the intention of reducing public expenditure in the early years of the succeeding Government. It severely restricts the financial leeway available to them unless they are prepared to increase taxes. A Labour Government would be intent on repairing the damage that Conservative Administrations have inflicted on public services. Damage has been done to the health service, care for the aged and the finances of local government. Our schools are in a state of physical disrepair, as are our prisons, which are severely overcrowded. Much else needs to be repaired, and public sector wages need to be restored in some measure. However, if the trajectory that has been defined in the Autumn Statement were followed, none of these repairs would be possible. There is also an urgent need to repair the physical infrastructure of the economy, which includes the transport and energy infrastructure. Our water supply and sewerage system also require urgent attention.

Beyond these needs, there are huge and looming costs associated with the transition to a green economy and the fulfilment of the programme to achieve net-zero carbon emissions. Government support is required both to sustain technological innovation and to assist in establishing the facilities that are available to a net-zero economy. So far, little has been forthcoming. An example of the shortfall has been in the failure to satisfy the requirements of the automobile industry in converting to the manufacture of electrically powered vehicles. A precondition for a successful transition is the existence of an adjacent industry for manufacturing lithium-ion batteries. The Government failed to avert the collapse of the Britishvolt project to establish a mega-factory for manufacturing batteries. The project faltered for want of sufficient investment from the private sector—this is at a time when foreign Governments are investing heavily to establish those facilities.

The derelictions of the Government can be attributed, in large measure, to the prevalence of a political philosophy that limits state interventions and proposes that our industrial infrastructure can be sustained by private capital and the initiatives of free enterprise. State interventions are necessary to achieve the transition of our energy sector. The programme to restore our nuclear power faltered because the Government failed to recognise that it could not be achieved by the private sector alone.

Their response has been to imagine that instead we can rely on so-called renewable sources of energy. But here, the intermittence of these resources necessitates a means of storing the energy. In order to accommodate lengthy and unpredictable periods when the sun is masked and the wind does not blow, there is a need for a large amount of long-term storage. It is doubtful whether effective incentives can be devised to encourage the private sector to make the necessary provisions, yet the Government and the Civil Service blithely assume that they can devise a commercial model which will allow them to avoid any direct participation in providing the energy storage.

I earnestly hope that an incoming Labour Government will not suffer from the same delusions. They must take an active role in repairing the damage and in fostering the technological transformation of our economy.

UK Economy: Growth, Inflation and Productivity

Viscount Hanworth Excerpts

Thursday 29th June 2023 Lords Chamber

[Viscount Hanworth (Lab)]

Britain has a lower rate of economic growth than—and its per capita income compares poorly with—many of its European neighbours and others further afield. Questions must be asked about the causes of these deficiencies and what can be done to overcome them. People of different political persuasions give quite different answers.

Prime Minister Liz Truss and her close colleagues had answers to these questions. They proposed that our low rate of growth was attributable to the laziness of the British workers and a lack of sufficient incentives to activate managers and entrepreneurs. In their opinion, the economy was entrammelled by bureaucracy and burdened by a Civil Service and a public sector that were required to be drastically reduced. These aspersions paid little attention to economic reality. The programme of tax cutting and job cutting met with an adverse reaction from financial markets, and Truss was expelled from office.

An indication of the unreality and carelessness of Truss’s programme was her proposal to cut £11 billion in Whitehall waste, to be accompanied by reductions in the salaries of public servants not working in the metropolis. It was quickly revealed that the entire annual salary bill of the Civil Service amounts to some £8 billion. That is significantly less than the size of the proposed cuts. It seemed that there had been an error of categories. Truss was mistaking the size of the public sector for the size of the Civil Service. The idea that the economy is entrammelled in bureaucracy and regulation that needs to be swept away is an enduring, atavistic notion of the Conservative Party that continues to inspire its policies.

The proponents of Brexit assert that we have been suffering from an oppression of regulation imposed by the EU. The falsity of that opinion has been demonstrated during our consideration of the Retained EU Law (Revocation and Reform) Bill. The complaints of bureaucracy tend to be loudest when bureaucratic agencies are understaffed and when, as a result, they are forced to make decisions in a summary and inflexible way. Some of the loudest complaints nowadays are aimed at local authorities, which lack sufficient resources and manpower adequately to fulfil their many bureaucratic functions.

An explanation for Britain’s low economic growth is easy to come by: there is little in the economy on which to base that growth. Britain’s industrial sector, which is where one would expect to find the growth, has been severely diminished; nowadays it accounts for a bare 10% of our gross domestic product. What may not be so evident to many observers is that the hypertrophy of our financial sector has been both an accompaniment to and a cause of our industrial decline. The financial sector has been mediating the sale of our national infrastructure and of our industrial assets to foreign owners. That has maintained demand for the pound and inflated its value, and the overvalue of the pound has made Britain’s exports uncompetitive while lowering the costs of imports. That has been a major cause of our industrial decline.

Among the dogmas that have prejudiced our economic prospects is the belief, which has been central to Conservative economic policy, that the private sector must be relied on to undertake investments that maintain our industrial infrastructure. According to this doctrine, the Government should minimise their involvement and any initiatives that the Government might propose should be assessed on strictly commercial criteria.

The dogma has been maintained in the face of undeniable evidence to the contrary. It has been responsible for a failure to develop our energy infrastructure and for the collapse of the crucial programme for nuclear power, which cannot be sustained by private finance. An industrial transformation is required in order to staunch the global emissions of carbon dioxide. The British Government have been prominent in declaring the need for that transformation but have failed to take the necessary actions. Our targets for the electrification of road transport have been the most ambitious among the European nations, but our support for our automotive industry has been the very weakest. We have failed to promote the manufacture of batteries and hydrogen fuel cells, and the inevitable consequence will be the loss of our automotive industry.

An industrial transformation aimed at achieving net-zero carbon emissions requires strategic economic planning organised by central government. It requires a major expansion of the supply of carbon-neutral energy, which is bound to come preponderantly from nuclear energy. The experience of the present Government indicates that we cannot expect the necessary investment to come from the private sector.

As in the immediate post-war era, we must look to the Government to provide the necessary finance via taxation and government borrowing from the financial sector. Indeed, the taxes should be imposed on those who can afford to pay them, including the large corporations, which have proved adept at avoiding taxation while reaping exorbitant profits. In the absence of major government initiatives to support the necessary industrial transformation, our economic decline will continue. The consequence will be widespread economic and social misery, which may be accompanied by increasing political instability. Further opportunities will be created for populist movements proposing spurious panaceas, such as we have witnessed in the Brexit movement.

Economy: Overseas Trade Deficit

Viscount Hanworth Excerpts

Wednesday 25th May 2016 Lords Chamber

[Lord O'Neill of Gatley]

My Lords, I like to think that my talents are spreading as the years go by but I am not yet capable of reading a French newspaper and so have not read that particular story.

[Viscount Hanworth (Lab)]

My Lords, it is clear that the only way in which to mend the balance of payments is to increase substantially our exports of manufactured goods. For our goods to become saleable abroad, the value of the pound must be reduced. If nothing is done to overcome the balance of payments problem, it is inevitable that the pound will eventually plummet. Can the Minister envisage a more orderly way of reducing the value of the pound?

[Lord O'Neill of Gatley]

My Lords, it is time for repetition again: our trade balance is smaller than it has been at any time in the past 10 years. It has been stable at around 2% of GDP. The deterioration of the current account, which has been significant in the past two years, is due to a growing imbalance in the so-called investment account.

The Economy

Viscount Hanworth Excerpts

Thursday 28th April 2016 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, I also begin by expressing my appreciation of the late Maurice Peston. Maurice was my academic colleague at the start of my university career. Our opinions were in agreement over a wide spectrum of social and economic issues. I valued his friendship greatly, as much as I valued his wisdom and his reckless humour.

The Government have pursued some disastrous economic policies throughout their period in office without heeding the consequences, which have been to perpetuate our economic depression and wreck our manufacturing industries. All the while, they have been fondly imagining that the UK economy can be revived by encouraging investors from overseas. One of their encouragements to investment has been a regime of low business taxes. Our corporation tax rate of 20% is one of the lowest in Europe. It compares with the OECD average of 25%.

The measures by which we protect our workers from exploitation by their employers have become some of the weakest in the European Union. This has also been envisaged as an encouragement to investors. The Government’s mantra has been that Britain is open for business. These inducements have not worked. They have failed to attract productive industrial investment to the UK, nor have our banks or our native financial institutions been willing to invest in our manufacturing industries’ productive capacity. Our manufacturing sector has shrunk to become one of the smallest, as a proportion of GDP, among the economies of the European Union. It now accounts for less than 10% of our GDP.

The regime of low taxes has meant that another of the Government’s objectives—to reduce their budget deficit—has not been met. The date by which the Government’s budget should be returned to surplus has been successively deferred. The swingeing reductions in government expenditure have not succeeded in reducing the deficit. Instead, they have exacerbated our high level of unemployment and served to immiserate a large sector of our population.

There has been some significant inward investment during the period in question that has greatly profited our financial sector and those who work within it. However, instead of talking of inward financial investment, which is a highly misleading description, we might talk more accurately of a process of divestment. The financial sector has been instrumental in divesting the nation of ownership of many of its productive enterprises. They have been sold abroad in a manner that has enriched the financiers. The nation has also divested itself of ownership of a large amount of residential and commercial property in a process that has been accompanied by considerable inflation in prices.

The Government have done nothing to impede these processes. Our lax laws of corporate governance have allowed the hostile takeover by foreign interests and global financiers of some of our premier companies. The laws have permitted the rapine capitalism of which Philip Green, the erstwhile owner of British Home Stores, is a notable exponent. Companies such as Cadbury, Boots and Rowntree’s, which were once the exemplars of philanthropic capitalism, have been sweated by their new owners to produce exorbitant profits in the short term. Many of our high-tech industries have gone the same way. On a previous occasion I highlighted the example of our aviation industry, much of the supply chain of which has fallen into foreign hands. The intellectual capital of these industries has been captured by foreign owners, and further investment in their industrial capacity and research and development has not been forthcoming.

It is widely recognised by the Governments of our economic competitor nations that Governments have a role to play in fostering the research and development that leads directly to industrial applications. Our Conservative Government have chosen to relinquish this role. They have sought justification for this dereliction in their free-market ideology.

A painful example of this failure is provided by our nuclear industry. It was once a world leader. It should have been destined for a major revival in consequence of our need to build a new generation of nuclear power stations. Instead of depending on our native resources, the Government have been prepared to allow any willing provider to build the power stations. It transpires that the only willing providers were the nationalised industries of France and China. A latecomer has been the Horizon Consortium, led by Japan’s Hitachi Corporation. Its advanced boiling water reactor is currently subject to a generic design assessment, which is a very prolonged affair. Now it is doubtful whether the French nationalised industry EDF, or Electricité de France, is prepared to undertake the task. I mention in passing that the Government have flatly rejected the suggestion that we should acquire equity in the French company so that it might become an industry owned jointly by ourselves and the French. That would have been one way of ensuring that a nuclear power station would be built at Hinkley Point. However, in response to that suggestion, we have been told that any contract to build a power station should be a strictly commercial affair. I am inclined to assert that, in view of the Government’s proposed inducements and guarantees, it would be nothing of the sort.

The consequence of this debacle is that we may have to rely solely on the Chinese to build our nuclear power stations. We shall be heavily dependent on a foreign provider with interests and intentions that are likely to be inimical to our own. The encouragement of Chinese inward investment has been a prominent part of the agenda of the Chancellor of the Exchequer, George Osborne. During his trip to China in January 2012, which was ostensibly to encourage their uptake of British exports, he succeeded only in encouraging the Chinese to purchase British companies. Osborne’s encouragement of Chinese investment has had some devastating effects. Uniquely among the countries of the European Union, Britain has offered no resistance to the dumping of surplus Chinese steel on our markets at subsidised prices, with which our own industry could not compete. This lack of resistance has been in consequence of a desire not to offend Chinese interests. The result is that we are in danger of losing our national steel industry, albeit one that is now largely in foreign ownership.

It is now time for me to offer some prescriptions for how a British Government ought to handle their economic affairs. I shall begin with the first issue that I have raised. The Government should reform our laws of corporate governance so as to inhibit the depredations of venture capitalism, be it native, foreign or global. The predominance of the financial sector has been at the expense of the economy’s other sectors. Its activities have enhanced the demand for the pound on the international currency markets. The pound’s elevated value has made it difficult, if not impossible, for British firms to sell their manufactured goods abroad. The Government ought therefore to take steps to devalue the pound in order to encourage such exports. Only in this way can our unprecedented current account deficit be tackled.

The Government ought to be far more active in investing in our national infrastructure. The only infrastructure projects that have been pursued throughout this Government’s period in office have been a legacy of the previous Government. Their unwillingness to undertake more investment has been in consequence of their self-imposed fiscal constraints, which have also made them unwilling to support the research and development that is essential in any successful industrial economy. A Government who intend to support essential social investments ought also to be prepared to raise the necessary taxes. There is huge scope for acquiring extra revenue by addressing the tax avoidance and tax evasion that is rife in this country. Nevertheless, it will be necessary to increase rates of taxation.

Politicians of all parties avoid talking of raising taxation rates. It is feared that to do so will inevitably damage their electoral prospects. However, this need not be so. The US economy’s emergence from the great depression was accompanied by a marked growth in central government taxation and expenditure. Surely the electorate can be persuaded of the necessity of such increases by being reminded of their beneficial effects.

Economy: Balance of Payments and Industrial Productivity

Viscount Hanworth Excerpts

Thursday 10th December 2015 Lords Chamber

[Lord O’Neill of Gatley]

My Lords, luckily the decision on what happens to interest rates has absolutely nothing to do with me and is the responsibility of the independent Bank of England.

[Viscount Hanworth (Lab)]

My Lords, one of the factors that inhibits our exports is our overvalued rate of exchange. Should the Government not consider establishing a sovereign wealth fund to purchase foreign assets whenever the sterling rate of exchange exceeds a certain threshold value? This, after all, would compensate for our selling our family silver abroad.

[Lord O’Neill of Gatley]

My Lords, by and large as a result of the Bank of England’s responsibility for monetary policy, in effect the responsibility for what happens to the exchange rate in a very competitive world is hugely influenced by our monetary policy relative to others. We have been and remain in favour of open markets, where prices are determined in world markets.

Economy

Viscount Hanworth Excerpts

Thursday 10th September 2015 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, I have heard it said by a member of the party opposite that austerity is now at an end. This is a false perception. Our economic misery will not cease until our manufacturing industries and our foreign trade have been revived. This will require a technological revival and a macroeconomic policy very different from the one that the Government are pursuing. I have no confidence that this Government are capable of delivering such a revival.

At the end of the Second World War, Britain was one of the world’s leading technological and industrial nations. Besides being a leader in aviation, Britain was also a pioneer in nuclear technology, in electronics and in digital computing. Our automotive industries were also world leaders. These are the industries that have received the support of the Governments of the nations that are our economic competitors.

In Britain, our technological industries have been damaged by their relationship with successive Governments. Over the years, much of our former technical and scientific competence has been destroyed. The demise of British industry has been accompanied by perennial balance of payments problems that have been due to the overvaluation of the pound.

This problem also dates back to the early post-war years. In 1949, when Stafford Cripps was Chancellor of the Exchequer, the pound was devalued by 30% in order to stimulate our exports. The beneficial effects were quickly eroded by our high levels of domestic inflation. Another devaluation of our currency was needed in the early 1960s. However, the Wilson Government, which had been strongly influenced by British and foreign financiers, were unwilling to take the necessary steps. When it took place in 1967, the devaluation was by an inadequate 14%. In spite of the fact that we now have a floating exchange rate, our currency continues to be overvalued. This persistent overvaluation threatens our future prosperity.

The attitudes of successive Governments to our technological industries were strongly influenced by the problems of our aviation industry. The post-war industry was populated by numerous small and highly innovative enterprises, all of which sought government support. The situation was unsustainable. In 1957, a defence White Paper, sponsored by Duncan Sandys, proposed to solve the problem at a stroke. All projects for manned military aircraft were to be cancelled in favour of anti-aircraft missiles and intercontinental ballistic missiles. Although Sandys did not achieve the complete elimination of manned aircraft, he did establish a precedent for dealing with the technological industries.

The Civil Service, with the Treasury in its vanguard, developed a methodology of cancellation that was applied to many other industries by succeeding Governments. The Government of Harold Wilson did as much as their predecessor in cancelling the high-tech projects that threatened to make inroads into the Government’s budget at a time when they were severely constrained by a balance of payments crisis. This process of curtailment was vigorously pursued by the succeeding Conservative Governments of Margaret Thatcher. The consequence for Britain today and for the foreseeable future is that we have to rely heavily on our economic competitors to provide the technological skills that are so severely lacking. Unless we can amend this situation, our economic prospects will be bleak.

Throughout the post-war period, Britain’s financial sector has survived and prospered, which has been in spite of the weakening of the rest of the economy. The financial sector nowadays profits from an open economy that allows the free inflow of financial capital. A consequence of this inflow is that the balance of payments crisis that would otherwise have been occasioned by the failure of our export industries has been overcome by the sale of our assets to foreign buyers. The inflow of capital is largely responsible for the overvaluation of our currency, and it has greatly enriched those who earn their living in the financial sector. It is notable that, when they have taken trips abroad, ostensibly for the purpose of promoting our export trade, the Prime Minister and the Chancellor of the Exchequer have succeeded not so much in selling our manufactured goods as in selling large stakes in our native enterprises and our utilities.

It should be clear where the current trajectory of the economy is carrying us. We are heading towards economic misery if not towards an economic crisis. The process will not be averted unless we can restore our manufacturing industries and the technical skills on which they must depend. If we do not do so then our society will become increasingly divided between the rich few and the impoverished majority.

Budget Statement

Viscount Hanworth Excerpts

Tuesday 21st July 2015 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, when one considers the Budget speech of George Osborne and the policies that it proposes, one is bound to wonder how much of what we heard was the product of an intentional bamboozlement and how much was the product of the Government’s self-deception.

The previous Budget speeches of George Osborne have been wilfully deceptive. As the leader of the Opposition has observed, they have been full of political traps, games and tactics, and we could have expected as much from the most recent Budget speech. But now there are indications of an undercurrent of a wholly misguided optimism regarding the prospects for the UK economy. We have been told that the British economy is growing faster than any other major advanced economy, that living standards are rising strongly and that the Government’s long-term plan is working. However, we know that growth is slowing, that unemployment has increased and that the rising value of the pound is threatening the viability of our export industries.

It is easy to identify the rhetorical passages of the Budget speech that are designed to mislead, because they represent the exact opposite of what most people recognise as the truth. How many people are liable to be deceived by the assertion that this was a Budget for working people from a one-nation Government, who have the intention of benefitting the whole nation? The Budget has been at the expense of the least favoured of our society—the unemployed, the young and the low earners. The current size of the welfare budget is a clear symptom of the Government’s failure to address the problems of unemployment and low pay. The Chancellor understood that he could not blatantly slash the welfare budget without resorting to a diversionary tactic. This tactic has been to promise to raise the minimum wage in a series of gradual increments. However, these increases will not compensate the low paid for the sums that they will lose from a much less generous tax regime. Nevertheless, the Chancellor has had the effrontery to tell us that those with the broadest shoulders are bearing the greatest burden, and that we are all in this together. This is utter bamboozlement.

We ought also to assess the Budget against the backdrop of the current fiscal and macroeconomic circumstances. A significant element in the fiscal equation is the sale of government assets, which this year will deliver privatisation proceeds higher than the previous record in 1987. The Chancellor’s fiscal strategy relies heavily on such fortuitous circumstances as the availability for sale of the Government’s large investment in the banks that were in danger of failing during the financial crisis. This is far from the judicious balance of taxation and spending to which the Chancellor has alluded.

The Government’s obsession with reducing the levels of taxation and state expenditure is accompanied by a serious dereliction in their duty to maintain the national capital infrastructure. We have seen endless deferments and cancellations of vital investment projects, to the extent that we can no longer claim to be a modern industrial economy capable of competing in the world’s markets. The catalogue of aborted projects is far too large to allow me to itemise it. The latest addition to the list has been the cancellation of the electrification of the Manchester, Leeds and TransPennine railway.

The other macroeconomic account that should command our attention is our external balance of payments, which is in a perilous state. Our current account deficit is now running at over £100 billion a year, which is over 6% of our GDP. The deficit on the current account is due largely to the implosion of our manufacturing industries. Manufacturing as a proportion of GDP is now barely above 10%, and we produce too little to sell to the rest of the world to pay for our imports.

We have been balancing our payments by selling our financial and capital assets to investors from overseas. This has stimulated the demand for the pound, which is responsible for the highly favourable rate of exchange that has made it virtually impossible to sell our products abroad. This circumstance cannot prevail indefinitely, and when it ends we shall be in deep crisis.

There is a delusion in the minds of many members of the Government that is well represented by the document entitled Fixing the Foundations that accompanied the Budget. We find it asserted in red lettering that Britain is:

“A trading nation, open to international investment”.

Being open to international investment implies that we are willing to continue to sell our national assets, including our ports, airports, public utilities and so on to foreign owners. While we continue to do so, there will be no possibility of increasing our exports of goods. While we continue to do so, which can be only for a limited period, the City of London, the bankers, the financiers and those who support them will continue to profit at the expense of the rest of us.

I assert that it is well within the powers of the Government and the central bank to lower the rates of exchange of sterling. They should be purchasing foreign currencies when they become too cheap vis-à-vis the pound. The Japanese, Chinese and Koreans are masters of this strategy, which we should also adopt and pursue vigorously.

Queen’s Speech

Viscount Hanworth Excerpts

Thursday 4th June 2015 Lords Chamber

[Viscount Hanworth (Lab)]

I wish to talk about the dangers of our current economic circumstances, which have been exacerbated over the past five years of a Conservative Administration. I believe that we are heading for a crisis that will impoverish the nation, and from which it will take a long time to recover. I should like to examine this situation in the context of competing economic theories.

In the years following the end of the Second World War, until the 1970s, Keynesian macroeconomic theory held an unassailable position. Keynesian theory placed its emphasis on the supply side of the economy and on the role of central government in regulating economic demand through fiscal controls. It gave little recognition to the monetary and financial aspects of the economy. The theory had shown how an economy could be lifted out of a recession, but the problem in the UK in those post-war years was with an overheating economy.

A monetary aspect of Keynesian theory to which little attention was paid in the early post-war years concerned a theoretical curiosity described as the liquidity trap. The liquidity trap denotes a situation in which injections of cash by the central bank into commercial banks fail to decrease already low interest rates. Therefore, an expansionary monetary policy becomes ineffective. I shall return later to this matter, because it fits our present economic circumstances.

In the 1970s, economists began to espouse monetarist doctrines that were utterly at variance with the Keynesian nostrums. The doctrines were accompanied by a free-market ideology that advocated a widespread deregulation of economic and financial activities. Markets were deemed to be rational and self-regulating. These ideas, which were readily adopted on the right wing of British politics, had an appealing simplicity.

One of the simplifications of the monetarist theory was the assumption that the rate at which the stock of money circulates throughout the economy could be regarded as constant. In that case, since it was geared to the circulation of money, economic activity could be regulated by controlling the available quantity of money. The theory took little account of the towering edifice of credit and of derived money that can be generated by the financial sector on the basis of the so-called high-powered money provided by the Treasury and the central bank. In the latter years of the Thatcher Administration, the nostrums of the monetarists were utterly negated by the growth of this edifice. This was the result of the financial innovations that the Conservatives’ deregulation of the banking system encouraged. It was the unstable nature of this vastly inflated financial structure that caused the crisis that occurred in 2007 and 2008, during the subsequent Labour Administration, the effects of which continue to afflict us.

One of the myths perpetrated by the Conservatives during the recent electoral campaign is that the financial collapse was Labour’s responsibility rather than theirs. The blame that falls on a Labour Administration is a failure to recognise the extent to which the hypertrophy of Britain’s financial sector was endangering the nation. The blame must rest squarely on the Conservatives for having unleashed the malign forces in the first place. Thereafter, over the past five years, they may be blamed for having done next to nothing to diminish the dangers posed by our financial sector.

It is important to understand the manner in which the activities of Britain’s financial sector are serving to perpetuate the pathologies of our economy. These activities have succeeded in averting a balance of payments crisis that would otherwise have overtaken us long ago. In the process, they have created the circumstances that will eventually give rise to much greater difficulties.

The UK’s current account—which captures the value of flows of income and goods between the UK and the rest of the world—has now reached a record deficit of 6% of gross domestic product. The overall balance of payments has been maintained, as it must be inevitably, by adjustments on the capital account. These consist of the sales to foreigners of purely financial assets, of residential properties and of the public utilities and manufacturing enterprises that remain in British hands.

The result of this process has been the maintenance of a high value of the pound versus other currencies. The overvalued pound makes it generally difficult and often impossible for British companies to export their manufactured products. The reductions in the value of the pound that occurred between 2008 and 2010 have not materially altered this circumstance.

The prolonged overvaluation of the pound has left Britain with a severely diminished industrial sector, which satisfies an ever-decreasing proportion of our own domestic demand. A major crisis will arise when the supply of assets for sale overseas has been depleted and when the remnant of our industrial sector will be too small to engage in any effective import substitution. I believe that the crisis will be upon us sooner than most of us are liable to expect.

I now wish to return to the matter of the Keynesian liquidity trap. This was little more than a theoretical curiosity in the early post-war economic environment but it now has a very tangible embodiment. It is represented by our commercial banks, which have benefited from large injections of money from the central bank via operations that are nowadays described as quantitative easing. The banks had been expected to supply some of the money to industrial enterprises for the purpose of investment but they have not done so. Instead, they have retained most of the money, albeit that some of it has already found its way into financial assets.

The existence of the liquidity trap has some disconcerting implications. The abundant surplus of money, if it is not to be deployed in stimulating an investment boom, will surely be available for fuelling a further boom in financial and capital assets. Such a boom will favour those who are in possession of such assets, and they are the richer members of our society. What we will see is a worsening of the already sickening inequalities of our society.

To avert an impending economic crisis, or, at least, to reduce its severity, we need to reduce the value of the pound, and we must cease to sell our assets overseas. We need to ensure that the money that has been pumped into the economy finds its way into industrial investment. In short, we should observe the nostrums of Keynesian economics.

Budget Statement

Viscount Hanworth Excerpts

Wednesday 25th March 2015 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, you can fool all of the people some of the time, and you can fool some of the people all of the time, but you cannot fool all of the people all of the time. If we take as our evidence his Budget speech of last Wednesday, this is a nostrum of democratic politics of which George Osborne seems to be in denial. Indeed, he seems to have forgotten it completely.

The Conservative Government have had almost five full years in which to observe the developments within the modern British economy and to take the necessary steps to correct its most dysfunctional aspects. Instead of addressing the most prominent problems, the Conservatives have been fanatically pursuing an atavistic political and economic agenda which they have inherited from a previous Conservative Administration: that of Margaret Thatcher, which lasted from 1979 to 1990. The Conservatives under Margaret Thatcher sold council houses without any replacements. They privatised many previously publicly owned industries. They sought to defeat the power of working people that was vested in the trade unions and they oversaw a prolonged period of industrial decline.

That Government also unleashed the financial sector by deregulating its activities with consequences that eventually came to a head in 2007 in a major financial crisis. During Thatcher’s period as Prime Minister, the Conservatives sought to effect a major redistribution of income and wealth in favour of the already prosperous classes. Perhaps the most extreme example of Conservative measures of redistribution occurred in 1988, when the top rate of tax was reduced from 60% to 40%.

The present Government have had the same intentions as their forebear, but they have had less room for manoeuvre and have been weakly restrained by the coalition partners, the Liberal Democrats. Most of the leading publicly owned industries and utilities had already been privatised, so this Government have had to apply their privatisation policies elsewhere. They have applied them to agencies that have been responsible for some basic social provisions.

On the national level, privatisation has extended to the Prison Service, the police force, labour exchanges and education. A major privatisation of our National Health Service is now well under way. At local level, the budgets of councils have been slashed and they have been compelled to hand many of their functions to private enterprises. We have seen the emergence and rapid growth of a new class of unregulated private monopolies, which have assumed the role of the public service providers. Some of them have been notoriously inefficient and exploitative. They include such giant enterprises as Atos, Capita, Serco, G4S and the notorious A4e, which, notwithstanding disturbing allegations of malpractice, continues to gather contracts from the Government.

The ideological justification for employing such agencies to provide public services has been the supposed superior efficiency of private enterprise when compared with that of the public bodies that they have replaced. Even a cursory examination of their activities will show that their operational efficiency has often been dire. However, the concept of efficiency that has been espoused by the Government encompasses the cost savings available from reducing the number of employees and their rates of pay. Contracts of employment that would not have been tolerated when the unions were a force to be reckoned with are now commonplace. Rates of pay in many occupations have been falling drastically at a time when remuneration of high earners has been rapidly increasing.

The Government appear to be satisfied with such an outcome on the grounds that a cheap labour force coupled with high rates of profit and of salaried remuneration are factors that will render the UK attractive to inward investment from abroad. Inward financial investment mediated by the City of London has become a vital factor in averting what would otherwise have become a major balance-of-payments crisis.

The process of the deindustrialisation of Britain, which accelerated dramatically in the era of Margaret Thatcher, has proceeded apace. In 1979, manufacturing in the United Kingdom contributed 25% of GDP, and it contributed largely to our export earnings. In 2010, manufacturing accounted for only 12% of the country’s national output. Its decline has been greater than in any comparable western economy.

The inward financial investment, which has averted a balance of payments crisis, has added nothing to our manufacturing capacity. It has found its way into purely financial assets and into residential and commercial property. Much of it has been devoted to the acquisition of company ownership via hostile takeover bids. Water companies, power companies, airports and banks have been among the many enterprises that have fallen into the hands of foreign investors.

The high-tech industries that continue to emerge in Britain have been particularly prone to hostile takeovers. Their vulnerability can be attributed to a number of associated factors and circumstances that serve the interests of our financial community and their political allies within the Conservative Party. Foremost among those are the rules of corporate governance that facilitate mergers and acquisitions to an extent unparalleled anywhere else among western economies. Britain’s financiers profit hugely from mediating the sale of British companies to foreign buyers. In seeking the finance for expansion, our small and medium-sized enterprises in the UK cannot rely on the commercial banks, which are the main source of industrial finance in other countries. Instead, they must rely upon either retained profits or stock market flotations. Because shares in such companies inevitably entail voting rights, a stock market flotation renders a company prone to the sorts of takeovers that have been bedevilling our manufacturing enterprises.

The inwards foreign investment that has delivered our nation’s assets into the hands of foreign owners has also sustained the high value of the pound. For many years, our overvalued currency has made it difficult for our manufacturers to export their products, which has exacerbated our current account deficit. The Government have done nothing to amend this circumstance, which is now severe. They have done little to restrain the depredations of our overgrown financial sector. They have failed to compel our banks to provide funds to British manufacturing enterprises.

It is extraordinary that in such circumstances George Osborne has been able to declare in his Budget speech that,

“Britain is back paying its way in the world today”.—[Official Report, Commons, 18/3/15; col. 770.]

He has talked of reductions of deficits as if they were reductions of indebtedness, which is increasing in all our national accounts. The Government’s finances have a heavy reliance on the inflated taxes from the financial sector, and their revenues collapsed when the financial sector collapsed. The Chancellor has done much to encourage the revival of the financial sector. He has done nothing to aid the recovery of other sectors of our economy or our society. The Government have been serving the interests of a very narrow sector of our society, and the British electorate will not be fooled for much longer.

Budget Statement

Viscount Hanworth Excerpts

Thursday 27th March 2014 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, from my perspective this has been a distressing Budget. It has all of the features that we have come to expect of the activities and the enactments of the Chancellor. I wish to examine some of these features, albeit briefly.

The Budget is highly political in the sense that it is dominated by the objective of gaining an electoral advantage for the Conservative Party, no matter what the long-term costs of doing so might be. The Budget promises a continuing attack on welfare provision and a shrinking of the public sector to a level not seen in post-war years. Apart from a token investment—equal to the amount of money to be spent on the repair of potholes in roads—in the Ebbsfleet housing project, which was announced in advance of the Budget, there have been no plans for any further centrally funded investment in social and economic infrastructure.

The Budget manifests the Conservatives’ desire to do nothing that might amount, in their perception, to undue activity on the part of the state. Some of the provisions of the Budget have been designed to appeal to pensioners and to those who are heading towards retirement. Such people constitute a significant part of the active electorate and the Conservatives have been fearful that, unless they appeal to those people, UKIP might seduce them. This is one explanation for the deceptively attractive proposal to allow people, on their retirement, to get their hands on the entirety of their pension endowments without suffering what has hitherto been a heavy tax penalty. This is likely to inject extra cash into the economy to stimulate it in time for the general election.

The critics have been quick to spell out the detriment from this provision. It would add an impetus to an already overheated property market as pension endowments are used to buy property to generate retirement incomes from lettings. This would compound the severely deleterious effect of the Government’s misguided Help to Buy policy. This liberalisation of the pension rules is also liable to lead to penury in old age for a substantial number of incautious people who will grab their wealth and spend it. The financial services industry is set to scramble wildly in an attempt to mop up the cash that has been liberated by offering pensioners all sorts of innovative financial products with deceptive inducements. Little has been done to protect gullible pensioners.

We should briefly remind ourselves of the current state of the economy and of the tasks that confront the Chancellor. At a time when it seems as if the economy is set to expand, there is a desperately poor export performance, which promises an eventual crisis. There is low productivity and low investment in a much diminished manufacturing sector. There are spiralling levels of household debt and there is a vigorous inflation of house prices, without any significant activity in housebuilding that might meet the needs of young people.

The nostrums of Keynesian economics, which were once widely accepted by the Conservatives, indicate that the Government should have taken a central role in addressing these problems. They should have become active in stimulating the economy at a much earlier stage of the recession. The means of doing so should have been a heightened level of investment in the infrastructure of the economy. There has been a lingering consciousness in the Government’s mind about the need for such an investment programme. There has been recognition of the need to invest in airports, rail links, sewerage systems, power stations and housing. In every case, the projects have been deferred until, supposedly, the economy is better able to afford them. In other words, there has been a complete inversion of the Keynesian logic.

Two major impediments have stood in the way of such investment projects. The first has been an ideological insistence that the projects should be financed and undertaken solely by willing providers from the private sector. The willing providers have not been forthcoming. The second impediment has been the concerns over the public sector borrowing requirement, allied to a desire to eliminate the budget deficit. With such an agenda, it has been impossible for the Government to fund investment projects. The budget deficit is due to the recession of the economy, which has reduced the flow of funds from taxation. It would be largely overcome if the economy could be restored to full employment.

A misconception has been affecting the common understanding of the borrowing requirement. It has been widely believed than any net borrowing denotes a burden of debt that cannot be sustained indefinitely. This fallacy has arisen from a failure to distinguish between the current account and the capital account of the Government. One should bear in mind that any successful business enterprise is bound to have a substantial and permanent burden of equity capital and financial debt, which corresponds to its borrowing via stocks and bonds. The enterprise is not liable to be criticised for the fact that, in order to sustain its capital investments, it is bound to borrow. The same should be true of the investments in social capital for which the Government are responsible.

In making their social investments, the Government have two advantages that are denied to private enterprises: on the one hand, they can borrow at much lower rates of interest than are typically available to private enterprises; on the other hand, whereas private enterprises must service their debts via insecure commercial profits, the Government can service their debts by the taxation over which they have control. The present Government have forgone the opportunity of undertaking much needed social investments at a time when the rates of interest on the necessary borrowings are at a virtually unprecedented low level.

When the Government have contracted to proceed, eventually, with an investment project, they have promised the undertaker a so-called market rate of return that is utterly exorbitant. The rate of return that has been promised to Electricité de France for building a nuclear power station is far in excess of the already excessive 10% discount rate that the Government typically use in their project appraisals. Moreover, the returns have been promised for a 35-year period. It would have been appropriate to finance this project, at far less cost, via the Government’s borrowings on their capital account. The cost of such borrowings could be serviced from the expected revenues of the project, but equally—logically—it could be serviced from taxation. In a wholly egalitarian society, it should make no difference which of these two means is adopted for financing investments in social capital.

From the perspective of the Conservative Party, which is averse to the strongly progressive taxation that is the corollary of a highly unequal society, the preferred means of financing such investments is by charging the consumer. However, there is an electoral disadvantage in imposing costs on the consumer. This has deterred the Government from making the social investments that are their responsibility, and this failure to invest promises social and economic problems in the future.