Queen’s Speech

Viscount Hanworth Excerpts

Monday 13th May 2013 Lords Chamber

[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

Tuesday 29th January 2013 Lords Chamber

[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

Monday 11th June 2012 Lords Chamber

[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

Wednesday 16th May 2012 Lords Chamber

[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

Thursday 22nd March 2012 Lords Chamber

[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

Monday 18th July 2011 Lords Chamber

[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.