Queen’s Speech
Viscount Hanworth Excerpts(10 years, 1 month ago)
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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(10 years, 3 months ago)
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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(11 years, 3 months ago)
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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.
Queen’s Speech
Viscount Hanworth Excerpts(12 years, 1 month ago)
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Viscount Hanworth
My Lords, I concur with much of what the previous speaker said in the second part of his speech and nothing of what he said in his first part.
On Wednesday 10 April, the House of Lords met to pay tribute to Baroness Thatcher. Most of the tributes were the anecdotes of those who had participated in Thatcher’s Governments, and we should not begrudge them the opportunity to reminisce. However, some of the tributes expounded the methodology of the Conservative Party as it relates to those years. Perhaps now is the time to call into question some of the things that were said on that day.
It was said that Margaret Thatcher had helped to pick Britain up off its knees, changed our place in the world, and made Britain great again. It was asserted that her programme of deregulation and denationalisation, and of defeating the trades unions, had made Britain again into a global economic competitor. Finally, it was said that Margaret Thatcher transformed the very nature of our political debate. In common with most of my colleagues on these Benches, I disagree with all of this, save, perhaps, the assertion that Mrs Thatcher transformed the nature of our political debate. For this, I believe that she and her acolytes deserve discredit.
Under Margaret Thatcher, political warfare reached a level of intensity that had not been seen for several generations. It was in this respect that she transformed the nature of our political debate. Her unbridled aggression toward her political opponents eventually led to her downfall. By exalting the motives of personal economic gain at the expense of the principle of social cohesion, Mrs Thatcher subverted the growing egalitarianism of British society. At the same time, she protected and reinforced the traditional privileges of the wealthy classes. These persons, and the party that she served, expressed their gratitude by adopting her own social and economic philosophies. The economic philosophy in question was a resurrected version of the moral philosophy of the commercial classes of the 18th century that is associated with the name of the Scottish economist Adam Smith. Smith’s nostrums are manifestly unsuited to the modern world, and their adoption by politicians has done untold damage to Britain’s economy. How has this damage arisen? It has been multifarious, but I should like to focus on two areas. The first area concerns the Conservatives’ flagship policy for the denationalisation of Britain’s strategic industries and utilities. The second area concerns financial deregulation.
One of the major Acts of privatisation, of which we will be facing the consequences in this Session of Parliament, concerned the electricity supply industry. This was enacted in 1990, at the end of Thatcher’s period as Prime Minister. She must have regarded it as her crowning achievement. The national electricity grid was one of the great technical achievements of the interwar period. Its origins date back to the Electricity (Supply) Act 1926, which created the Central Electricity Generating Board—CEGB—that set up the UK’s first synchronised, nationwide AC network. The grid provided a prototype and an inspiration for electricity networks throughout the world.
Our national electricity industry was serviced by some world-famous British engineering companies, which it also sustained. Foremost of these was BTH (British Thomson-Houston), later incarnated as AEI (Associated Electrical Industries) and as GEC (General Electric Company). This company provided generators, transformers, switchgear and turbines. Over the years, it absorbed several companies of foreign origin, including Siemens Brothers and Company, which was an offshoot of the German company. Another famous company which was sustained by orders from the CEGB was C A Parsons and Company, famous for the invention of the steam turbine.
The ultimate effect of the denationalisation of the electricity industry was to place it in foreign hands. Powergen now bears the name of its owner, the German utility company E.ON. National Power split into a UK business, which is now owned by the German utility company RWE, and an international business, which is now fully owned by the French company GDF Suez. Britain’s nuclear power stations are now in the hands of EDF Energy, which has 5.7 million customer accounts in the UK. EDF is wholly owned by the French state.
Another effect of the denationalisation, which began immediately, was the crippling of the companies that had served the industry. This was the consequence of the so-called dash for gas, whereby the newly privatised electricity-generating companies, many of which were on a small scale, opted for combined cycle gas turbine generators. The British engineering companies, which had been crippled by the loss of their primary market, were unable to compete. The outcome has been that virtually all the modern equipment in our power stations is of foreign origin. The major suppliers of this equipment are the Japanese companies Toshiba and Mitsubishi, the American company Raytheon, the French company Alstom, which absorbed a large part of GEC on the eve of the privatisation, and the German company Siemens. The strength of these various companies derives from the fact that they are sustained by the electricity-generating utilities of their native countries, which, for the most part, are nationally owned industries. The failure of our national Governments to support our strategic industries in the way that has been common in the countries that are our competitors is both remarkable and hard to explain. However, part of the explanation lies in the insouciant free-market and laissez faire ideology that was espoused by the Conservatives during Thatcher’s Administrations and that continues to dominate the policies of the present Government. We have seen its devastating effect on several occasions recently.
The story of our electricity network has been paralleled by the story of our rail network. A recent episode concerned the proposal to award the contract for supplying Thameslink rolling stock to the German company Siemens in preference to Bombardier, which is a Canadian-owned enterprise that runs the last remaining manufacturer of rolling stock in Britain. Siemens is also the company that has provided most of the equipment for our wind-powered electricity-generating facilities.
Another respect in which the policies of Margaret Thatcher have done great damage to the British economy has been in the promotion of the interests of the City of London via the programme of deregulation which began in 1986 during the time of Thatcher’s second Administration. Here, there is a sharp division of opinion between the Conservatives and us on these Benches. A week ago, a senior Conservative politician proposed that we should leave the European Union for the reason that the Parliament in Brussels seems to be intent on placing restraints on the activities of the City. He pointed to the success of the City and its importance to all of us through the fact that it accounts for a large proportion of the British national economic product. Far from being an asset that benefits the nation as a whole, the City serves the interests of a very restricted class of people at the expense of the rest. The very size of the City is a symptom of the morbid hypertrophy of an organ of the economy that threatens the health of the body as a whole. Until recently, the City has been responsible for sustaining an overvalued rate of exchange that has made it difficult and sometimes impossible for our industries to export their products. The City has been largely responsible for the way in which our industries have fallen into the hands of foreign owners. It also bears responsibility for one of the longest periods of economic recession on record, which we are currently undergoing. The detrimental effects of the City have been monstrous.
Economy: Growth
Viscount Hanworth Excerpts(12 years, 5 months ago)
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Viscount Hanworth
My Lords, I, too, welcome the noble Lord, Lord Deighton. I must also express my condolences to him for the frustrations that he will inevitably face. There is a level of exasperation that is liable to render one speechless and that is how some of us on these Benches have been reacting to the Government’s economic policies. Others have been able repeatedly to highlight the failures and fallacies of these policies, with a seemingly undiminished fervour. The Shadow Chancellor, Ed Balls, is one such person. He has observed what should be clear to all of us, if we are not blinded by ideological preconceptions or by political allegiances.
The policies of the Government have been holding the economy in recession and causing untold misery to great numbers of working people, to people who are seeking to work and to people who, for one reason or another, are incapacitated. Perhaps the first thing that needs to be explained is the insensitivity of the members of the Government to the effects that their policies are having on a multitude of ordinary citizens who fall into the middle and the lower reaches of the spectrum of income and wealth. That such insensitivity is not an inevitable concomitant of Conservative politics is surely indicated by the nation’s experiences under the post-war Conservative Governments which, by and large, shared a consensus on social and economic policies with the Labour Governments. It was well understood by the post-war Conservatives that a necessary condition for the growth in the country’s prosperity was an assurance in the minds of the majority of its citizens that they would profit from their labours within a society that was destined to become increasingly egalitarian. The egalitarian instincts of one Conservative Prime Minister, Harold Macmillan, are deservedly well remembered. As Churchill’s Minister responsible for housing from 1951 to 1954, he was charged with the task of fulfilling the promise to build 300,000 houses per year, and he achieved the target a year ahead of schedule.
The present Government are also mindful of the manner in which a house-building boom can serve to alleviate a recession; and they may have been mindful of the effects of the house-building boom of the 1930s, to which local authorities contributed largely by providing social housing. However, in a manner that seems to be utterly perverse, the Government seek to relieve building contractors of their obligations under Section 106 of the Town and Country Planning Act 1990 to provide a modicum of social housing. Their thought is that the obligations to provide social housing are imposing a constraint on the profits of the building contractors. Here is a prime example of an economic argument, conceived in the abstract, that has no basis in fact and that bears no examination.
There is now a growing recognition, which is reflected in much recent literature, that better national economic performance is correlated with greater social equality. There is plenty of evidence for this among our European neighbours. In Britain, in recent years, the degree of inequality has been increasing rapidly and exorbitant rates of pay have become common in our financial sector. The justification that has been offered for such remunerations is that they provide incentives to effort and that they are necessary for attracting talented people to serve in the financial sector. The Government appear to have accepted such spurious assertions. The Government have gone further in reviving the doctrine of the trickle-down effect. This asserts that the economy is best stimulated when the greed and the enterprise of the rich are activated by abundant rewards. To this end, there has been a reduction in the top rate of income tax.
This Government have been influenced to a remarkable degree by tendentious economic doctrines that they have failed to re-examine in the light of our present circumstances. One such doctrine concerns the supposed crowding out of private economic enterprise by government initiatives that pre-empt the supplies of labour and capital. A misplaced faith in the alacrity of private enterprise has led to the mantra that social provision should be open to any willing provider. The willing providers have not been forthcoming, except where there have been easy pickings, such as in the provision of manpower services and in security. In the case of the private provision of health services, the Government are contemplating tilting the playing field so as to favour private providers.
The fallacy of willing providers has been evident in connection with the major infrastructure projects that this country so urgently needs to undertake, if it is to retain its competitiveness in the global economy. There is a further fallacy of economic thinking that is operative in this area. This is a belief that social and national economic decision making can be, and ought to be, conducted within the same framework as commercial decision making and according to the same decision rules. Within such a decision-making framework, one of the essential elements is the commercial rate of interest, which is allied to the concept of the rate of discount. The basic nostrum is that future earnings and economic benefits should be measured and compared via their discounted present values. A pound promised tomorrow is judged to be of lesser value than a pound given today, by virtue of the fact that today’s pound could be invested profitably to generate a return that is determined by the market rate of interest. Notwithstanding that the current interest rates are markedly lower, commercial project evaluation continues to be based on a target rate of return of some 6% per annum. This implies a rate of discount that diminishes the value of next year's pound by 94%. Some simple arithmetic will reveal the fact that, in these terms, a pound promised with certainty 15 years hence will have a present value of only 40 pence. At this rate, it is no wonder that commercial enterprises are concerned with the here-and-now at the expense of making provisions for the future.
It is precisely in making provisions for the future that the obligation of Governments must lie. It is in this respect that the present Government are in serious dereliction of their duty, which is to initiate and finance the major infrastructure projects upon which our future prosperity depends. Many of these projects must be seen within perspectives of time that extend well beyond 15 years. To finance such projects, which are the only sure way of stimulating the economy and of overcoming the recession, without causing a balance of payments crisis, the Government must borrow from the banks and on the open market, or they must guarantee the borrowing of public bodies. They must also raise taxes from those who can afford to pay them, including from large corporations that have proved adept at avoiding taxation. Unfortunately, it seems that the Government are incapable of contemplating such actions.
Financial Services Bill
Viscount Hanworth Excerpts(13 years ago)
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Viscount Hanworth
My Lords, we have waited a long time for the legislative response to the financial crisis that began in 2007. The legislative response in the USA to the great crash of 1929, occasioned by rampant speculation in the stock market, was far more rapid. Already, by 1933, the Securities Act and the Glass-Steagall Act were in place. The powerful Securities Exchange Commission was in operation by 1934. The primary purpose of the Securities Act of 1933 was to ensure that buyers of securities received complete and accurate information before making their investments. The purpose of the Glass-Steagall Act was to enforce a separation of investment banks from retail banks and to limit the risks to which the latter were exposed.
A measure of the tardiness of the present legislative response in the UK is the fact that the recommendations of the independent commission on banking are unlikely to be enacted before 2019, by which time the financial environment in which the banks are operating may have changed considerably. We may learn something more about the Government’s intentions on Thursday, when the Chancellor is due to give a speech in the Mansion House. We fear that he will have succumbed to the pressures of some intense lobbying by the banks.
The independent commission might have been expected to recommend a clear separation of investment banking and retail banking to create a regime comparable to that of the Glass-Steagall Act. Instead, the commission has proposed that these activities should remain within the same institutions, provided that they are separated by a firewall. This will allow banks to transfer capital between their investment and their retail branches, thereby enabling them to continue to gamble with depositors’ money.
The Bill we are discussing today deals with none of the aforementioned issues. It deals instead with the minutiae of the formal relationships between the statutory authorities that are intended to constitute a new financial supervisory framework. It proposes to replace the Monetary Policy Committee with a Financial Policy Committee and to replace the Financial Services Authority with two new bodies, the Prudential Regulation Authority and the Financial Conduct Authority.
Those new bodies are to be clustered under the umbrella of the Bank of England. They are to pass their recommendations to the Governor of the Bank of England, who will be responsible for conveying them to the Treasury and to the Chancellor of the Exchequer. The Bill will confer greatly increased powers on the governor; and a major point of contention between the Chancellor and the shadow Chancellor, which was debated in the House of Commons during Second Reading, is whether the various authorities should be allowed independent access to the Chancellor.
Together with its Explanatory Notes, the Bill comprises 330 pages. Notwithstanding its length, it is devoid of genuine substantive content. It is extraordinary—at least to my mind—that neither the Bill nor its Explanatory Notes contain any mention of the principal leitmotifs of the financial crisis. There is no mention of credit default swaps, which allow players to place bets on the creditworthiness of assets that they do not own. There is no mention of collateralised debt obligations, which were implicated in the demise of Northern Rock. For the rules on short selling, which allows speculators to profit from tumbling asset prices, one is referred to the Financial Services and Markets Act 2000; and there is nothing much to be found there.
There is nothing in the Bill to address the urgent need to bring the trading of financial derivatives under the auspices of an exchange, where they would be recorded and rendered transparent. In the absence of such arrangements, the preponderance of trades in derivatives will continue to be conducted over the counter; and these trades will continue be a dangerous and imponderable aspect of financial activity. There is no mention in the Bill of the Basel accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision, or of the manner in which British banks made extensive use of special purpose entities to evade these rules. These have the deceitful purpose of removing liabilities from the balance sheets and converting them into seeming assets. Doubtless it will be argued that these matters do not fall within the remit of the Bill but they do not appear to lie within the remit of any other Act, existing or proposed. If they are to be left to the discretion of the new regulatory bodies or authorities, we might ask why those authorities have not been given clear cues or promptings in this regard.
The Government’s approach in proposing this legislation has been remarkable for its conciliatory and consultative nature. There have been inputs to the draft legislation from the Treasury Select Committee of the House of Commons, from a Joint Committee of both Houses, from the European Union Committee of the House of Lords and from many other bodies besides. There has also been an indication from the Financial Secretary to the Treasury that the Government will be seeking further to amend the Bill in your Lordships’ House to strengthen and refine it. All of this seems to speak of a decent diffidence in the face of highly complex and imponderable matters and of a desire to spread the responsibility for getting things right among many of the interested parties. However, this interpretation is belied by the fact that the Government have forced the Bill through the Commons at an indecent pace.
It might seem surly to question the seeming good faith of the Government’s approach. However, one’s suspicions are readily alerted when one hears from senior Conservatives that a basic intention of the legislation is to avoid damaging the financial services industry. There is therefore a strong suspicion that the dilatory and protracted nature of this legislative process is a consequence of a desire to avoid interference with the profitable workings of the financial sector. If so, we are witnessing the promotion of a factional interest that has been greatly unfavourable to the rest of us.
The legislative response of the Government to the global financial crisis is also remarkable for its insularity. In drafting the Bill, there has been little attempt to adapt the framework for UK financial regulation to the supervisory framework of the European Union. The matter of how the two should fit together is to be dealt with in a memorandum of understanding and the details are to be left to the discretion of a regulator. Nevertheless, there seems to be a belated recognition in government circles that the UK ought to play a more active role in influencing European Union policy. This is in contrast to the attitudes evinced by the Prime Minister, who is keen to veto any provisions of the European Union that might inhibit the City of London. Thus, he has declared his unyielding opposition to a financial transactions tax, despite the fact that the European Parliament has recently voted in favour of such a tax by a substantial majority. A transactions tax would represent a much needed sedative to be administered to the financial markets and its proceeds could be used to stimulate the economy.
Conservative politicians are aware that the British financial sector accounts for 75% of the financial activities of the European Union. No doubt they feel that this justifies the UK asserting its priority and independence in these matters. However, this figure gives a false measure of the importance of the UK’s financial sector to the rest of Europe. The appropriate measure is a comparison of the size of the UK’s overall economic activities with those of the rest of the European Union. Surely, if the UK proves to be intractable, the rest of Europe may agree to sideline us. The regulatory authorities of the UK have been likened to a caged canary placed in a gold mine for the purpose of giving warnings of impending explosions. However, the toxic gases of financial obfuscation are liable to overcome the bird long before it is able to sing a warning note. We have a right to expect the Government to protect us from the financial services industry. However, it seems that their legislation will not even serve to protect the industry from itself.
Queen’s Speech
Viscount Hanworth Excerpts(13 years, 1 month ago)
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Viscount Hanworth
My Lords, within the past few weeks we have had to face the reality of a double-dip recession. Britain is facing prolonged economic woes. The Governor of the Bank of England has expressed his certainty that the UK economy will eventually emerge from its recession, but it is notable that he has been unwilling to give a timescale for this forecast. Others have foreseen the prospect of a decade of economic misery, and the experience of Japan comes to mind.
The lost decades of Japan, running from 1991 virtually to the present, followed the bursting of a Japanese asset bubble. The parallels between Japan’s experience and the current circumstances of the UK economy are close and very discomforting. Despite the quantitative easing that occurred in Japan under the guise of a zero-interest rate regime, its economy stubbornly failed to revive. There was a prolonged weakness in domestic demand, which was partly the consequence of the traditionally frugal habits of Japanese consumers, and there was a failure among Japanese export industries to provide a necessary stimulus. This failure could be attributed to the rise of the manufacturing industries of the competing south-east Asian economies and to the maintenance of the high value of the Japanese yen in international currency markets.
All of these features are characteristic of the British economy at present. Nevertheless, the British experience differs from that of Japan in some crucial respects. The lost decades of Japan followed years of post-war economic success in which its export industries led the way. British industry, by contrast, has suffered years of senescent decline. The withering of British industry has meant that we have had to make our way in the world by other means. For years, we have experienced a balance of payments deficit in our exports and imports of manufactured goods—and even in the overall current account, which includes exports and imports of both goods and services. The deficit has been made good by a surplus on the capital account. There have been large inwards capital investments, mediated by the City of London.
There has been a remarkable sale of British assets to foreign owners, in the process of which the City financiers have reaped some remarkable benefits and personal rewards. They have ensured that British companies can be taken over more easily than companies anywhere else in the world. The foreign ownership of our rail franchises, of our power industry, of our water utilities and of much else besides implies that we have ceded our strategic control over investment decisions in vital areas of the economy. While these massive inward investments enable us to sustain financial deficits, they also serve to exacerbate our fundamental problems. Inward flows of capital equate to a demand for sterling on the international currency markets, which enhances the value of the pound. Such a high value relative to other currencies means that our exports are expensive and face a limited demand. The decline in the earnings of our export industries increases the need for the inward flow of capital. The cycle cannot continue indefinitely. When it is broken, which will happen sooner rather than later, we shall face a very harsh economic climate.
The manner in which capital flows have come to displace exports is well illustrated by the Government’s recent efforts to find ways of stimulating the British economy. In January, George Osborne took a trip to China. His primary aim, so it was declared, was to encourage the Chinese to increase their imports of British goods. A secondary aim, which Mr Osborne pursued in his meetings with senior figures in China’s financial sector, was to encourage investment in British manufacture. The primary aim was quickly relinquished; instead, Osborne succeeded in convincing China’s sovereign wealth fund to purchase an 8.6% stake in Thames Water, which is London’s water company. There have since been further Chinese acquisitions, including a manufacturer of one of Britain’s favourite breakfast cereals. More significantly, there has been strong encouragement by the Government for China to assume a major role in regenerating the UK’s nuclear power-generating industry.
The Government’s attitude to the emerging crisis in the UK power industry serves to illustrate their basic economic philosophy and to highlight its dangers. The Government’s economic philosophy is dominated by an atavistic notion of free-market enterprise. Britain, they say, is open for business and any willing provider of goods and services is welcome to participate. According to this philosophy, the Government should relinquish any responsibility for making industrial investment decisions and, by relinquishing responsibility, they imagine that they will conveniently avoid the blame for mistaken decisions. For example, it is believed that if a previous Government had adopted this stance, they would not have been blamed for encouraging the UK nuclear industry to pursue the development of advanced gas-cooled reactors when the rest of the world was opting for pressurised water reactors. Yet by avoiding making strategic decisions about the future of such industries, the Government are abrogating their essential responsibilities.
What should a responsible and imaginative Government do when faced with Britain’s economic problems? The answer is that they should do many things that are not even in the nature of the present Government to consider. In the first place, they should instruct the Bank of England to pursue an active exchange-rate policy aimed at lowering the value of the pound vis-à-vis the currencies of our economic competitors. At the same time, the Bank should seek to reduce the volatility in the exchange rate which, by common consent, has a negative impact on our export industries.
However, there are some far more demanding requirements that we should make of the Government. They should look to the infrastructure of our national economy and ensure that some fundamental needs are met in a timely manner. This would entail support for emerging technologies and the fostering of Britain’s neglected scientific and engineering skills. The renewal of our power industry is perhaps the most urgent requirement at present. It offers possibilities for technological innovation that it would be appropriate to discuss in detail on another occasion. For the present, it should be observed that none of these things will materialise without a commitment from the Government to provide the substantial support that is necessary.
Economy: Budget Statement
Viscount Hanworth Excerpts(13 years, 3 months ago)
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Viscount Hanworth
My Lords, the Budget that we are discussing today has appalled many people on this side of the House. At a time of high unemployment, when fuels bills and food prices are rising, benefits are being cut and many families are feeling painful financial pressure, the Chancellor, George Osborne, has chosen to benefit the rich. This is bound to have dire consequences for the Conservative Party and its allies when they submit themselves to the judgment of the electorate.
We understand that, before deciding to cut the top rate of tax, the Chancellor asked for an assessment of how much revenue was being derived from top-income earners and how much would be lost in consequence of this largesse. He may have been encouraged to go ahead with his cuts on learning that the tax take was less than one might imagine. To use this as a justification for cutting taxes implies an inverted logic. The reason for the revenue being less than expected is well documented in the report of the Select Committee on Economic Affairs, which tells of an estimated tax gap of £42 billion, which is a substantial proportion of the current budget deficit. The gap is defined as the difference between tax collected and the tax that should have been collected. This enormous figure represents the total of tax evasion and tax avoidance. It is a testimony to the extent to which high-income earners, aided by tax consultants who operate on an industrial scale, have managed to avoid paying their taxes. It represents a huge fiscal resource.
It is difficult to understand what justification the measures of the Budget might have had in the minds of its proponents. Can it really be true that, by taking an emollient attitude towards high-income entrepreneurs, who represent only a small proportion of the beneficiaries, the Chancellor imagined that he might stimulate the economy? Are we witnessing a reprise of the grotesque and wholly discredited doctrine of the trickle-down effect?
Perhaps we should take stock of what the Government have been doing lately to encourage industry and enterprise. We can begin with George Osborne’s trip to China. This was ostensibly a trade mission in which the Chinese would be encouraged to purchase goods manufactured in Britain, and in which direct foreign investment in the UK would be encouraged. British exports to mainland China are valued at £7 billion, which could surely be increased. As it transpired, the Chancellor did very little to encourage the purchase of British goods. He did far more to encourage inward investment. Just 24 hours after his arrival, we learnt that a Chinese sovereign wealth fund was to acquire a 9 per cent stake in Thames Water. Much more of this sort was expected to follow.
It is curious that such inward investment should acquire the unquestioning approval of so many commentators. In effect, it ensures that foreign countries will profit from the labours of British workers by reaping the profits and dividends that would otherwise accrue to Britain. The malign effects of such investment differ from the often beneficial effects of direct foreign investment in industrial capital, albeit that the two categories of investment are often confused. However, one should not overlook the manner in which foreign enterprises, such as the Japanese motor manufacturers, are liable to displace native enterprises. They are also free to repatriate the profits and the dividends.
George Osborne’s principal objective during his visit to China was to turn London into the first non-Chinese trading hub for the renminbi, China’s national currency. Such a development would be a major benefit to the City of London, which is one of the most important parts of the UK economy in his opinion, and to which he has strong allegiances. As well as such benefits, we should consider the costs that are imposed on the rest of us by the City of London. Its costs are not only the episodic ones associated with the lengthy financial crisis that began in 2008. They have been borne by the rest of the economy over a much longer period.
The City of London can be likened to a diseased organ of the body. Its hypertrophy has pre-empted the life-blood that would otherwise sustain the other organs. As I have already indicated, the massive inward investment that the City has facilitated has found its way, in the main, not into physical capital but into financial assets. The City has facilitated the acquisition by foreign investors of large tracts of British industry and many of our essential utilities. In the process, the captains of finance have greatly enriched themselves and the pound sterling has maintained a high value against other national currencies.
The consequence of this overvaluation of the pound has been the inability of our manufacturing sector to export its products. This has led, over many years, to its atrophy and decline. These consequences are manifest in a comparison of the proportion of national product that originates in manufacturing in the UK with the proportions in other European Union countries. According to figures published by the OECD, the UK proportion is around 20 per cent. Among our European neighbours it is, on average, 25 per cent or 26 per cent. In view of the disadvantage of our overvalued currency, our industry needs to be fostered carefully and protected. The Government often seem to be doing the exact opposite.
They have failed to constrain the banks and the financial sector more generally to provide much needed investment funds to small and medium-sized enterprises. That is the point that the noble Baroness, Lady Kramer, made so forcefully. They have also failed to take steps to ensure that British manufacturers have an adequate chance to gain contracts for the supply of equipment to some of our major infrastructure projects. A recent example is provided by the Thameslink project. The contract to provide the rail fleet has been awarded to the German firm of Siemens.
One investment in infrastructure that is urgent, and will remain so for many years to come, is the renewal of our energy resources. Last year, investment in wind power fell by 40 per cent compared to the year before, and the Government have failed to support an industry that could have become a major exporter. Since 2009, our nuclear industry has been in the hands of an Anglo-Franco-American consortium, in which we are decidedly the junior partners. The Government have made little attempt to ensure that the promised renaissance of the nuclear power industry will be to the benefit of British manufacturers and technologists.
Their declared intention is to rely heavily on the private sector to achieve the necessary investments in infrastructure. We have already observed that private finance initiatives, mediated by the City, have been more costly to the taxpayer than the direct investments via the erstwhile nationalised industries. Those industries ought to have been allowed to raise funds in their own right but, in the main, they were prevented from doing so.
This Budget and the statements and pronouncements that have surrounded it seem to be the products of the ideological fantasies that were inculcated to young Conservatives in the era of Margaret Thatcher. This ideology has done great damage to our economy, both in the period of the previous Conservative incumbency and—dare I say?—in later years as well. It continues to wreak havoc.
Finance (No. 3) Bill
Viscount Hanworth Excerpts(13 years, 11 months ago)
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Viscount Hanworth
My Lords, the report of the Select Committee on Economic Affairs conveys one startling fact. We are told in paragraph 125 of the latest available estimate of the tax gap, which for the year 2008-09 was £42 billion. The gap is defined as the difference between tax collected and the tax that should have been collected.
This gap represents an enormous sum of money and one must look for ways of putting it in perspective. The comparison that comes to mind immediately is with the size of the budget deficit. Of course, this is a highly variable amount, but for the past two years it has been at roughly the same level. These deficits have been roughly four times as large as the tax gap and they were preceded by deficits that were virtually negligible.
The immediate cause of the rising deficit and the rising debt was the financial crisis. It was not, as some have suggested, the result of the profligacy of the then Government. The Government were constrained to buy a large proportion of the equity of the failing banks and to supply them with funds in other ways as well. To do so, they had to raise the money by selling bonds.
Following the crisis, there has been a savage fiscal retrenchment by the current Government, and one might have expected the debt and the deficit to have been reduced as a result. This has been a false expectation. In explaining the fallacy, one needs to make a firm distinction between the gross budgetary effect of a marginal reduction in the Government’s expenditure and its net effect. The net effect of a reduction of £1 of expenditure is the value of £1 less the reductions in the tax receipts occasioned by the additional unemployment and the reduction in economic activity, and less the consequent expenditure on unemployment benefit. In the present circumstances, a reduction in the expenditure has barely any effect on the net level of the deficit.
Given that this is the case, one is bound to wonder why the coalition Government have placed such emphasis on their strategy for reducing the budgetary deficit by reducing the expenditure. The answer may be twofold. First, there may be a mistaken belief in the effectiveness of such fiscal stringency in reducing the deficit and the debt. Secondly, it fits well with the Government’s political and economic philosophy to take steps to reduce the level of government economic activity.
The Government’s economic strategy may have been influenced by the desire to obtain the approval of the risible credit rating agencies. These agencies have been passing judgments on the viability of various European economies and on the likelihood that they will default on their sovereign debts. Perhaps, therefore, we should compare our economy with the economies that have suffered from the adverse effects of the assessments of the credit rating agencies and wonder whether it might reasonably be subject to the same aspersions.
It should be remarked at the outset that whereas those economies that are currently subject to debt crises have a substantial proportion of their borrowings in short-term loans from the money markets, UK debt is, by contrast, preponderantly of the medium and long-term varieties that have a limited exposure to the whims of the markets. The UK’s public debt as a proportion of GDP stands at 80 per cent. By comparison, Greece’s debts are 142 per cent of GDP, Ireland’s debts are 96 per cent, Portugal’s 93 per cent and even Germany has greater public borrowings than the UK at 83 per cent of GDP.
One should also compare the size of the annual deficits of the various countries. Here, at present, Britain does not fare so well. As a proportion of GDP, its current deficit is the third largest in Europe. It must be conceded that the UK could and should do better in reducing the level of its budgetary deficit. Given that this cannot be achieved effectively by reducing government expenditures, one must ask by what other means it might be reduced. The means must be by securing the growth of the economy and by increasing the levels of personal taxation.
There is ample scope for obtaining significant revenues by increasing the top rate of taxation. The current British rates are below those of other northern European countries and they have been at low levels ever since their radical reduction in the early years of the Thatcher Administration. The basic UK rate is at 20 per cent; the higher rate, which becomes effective for incomes above £35,000, is 40 per cent; and an additional rate of 50 per cent—which is a recent provision—is operative only for incomes in excess of £150,000. At the level of income where the additional rate is chargeable, it becomes common for remunerations to take various forms that are aimed at the avoidance of tax. Disguised remunerations are widespread throughout the financial sector and at the higher reaches of corporate enterprise. These sidestep income tax through awards or incentive payments mediated by trusts, third parties or offshore pensions. Non-repayable tax-free loans are also common. If the additional rate were raised and tax avoidance tackled, we should go a long way towards eliminating the budget deficit.
The Government are well aware of the problems of tax avoidance and they have widespread backing for their aim of stamping it out. There is much to be done before tax avoidance in the upper echelons is successfully quashed. To defeat the cunning of the tax avoidance industry requires an ongoing and sustained commitment to the task. The problems will not be overcome until the level of capital gains tax is further increased. It should be graded according to income so as to become commensurate with the levels of income tax. This is because much of the higher remuneration is gathered in the guise of capital gains.
The importance of the task and the reward for undertaking it are increasing as the distribution of income in this country becomes more unequal and as the ranks of the middle-income earners are decimated. It should be noted that the UK records the highest value in northern Europe of the Gini coefficient, which measures the inequality of income distribution. It remains to say how the economy should be stimulated. It should be stimulated not from the demand side but from the supply side by the provision of capital to businesses and enterprises, both large and small. The banks should be called upon to provide this capital, and they should be subject to severe penalties if they fail to do so.
The Government have recently declared bold plans for investing in renewable energy and in nuclear power generation, but these will come to nothing if the necessary capital is not available. At present, the encouragement to banks to lend more is akin to pushing on a string. The Government need to be far more commanding in their approach to this problem.