The Economy

Baroness Kramer Excerpts

Thursday 28th April 2016 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I join the tributes to Lord Peston. It is probably a hallmark of the man that so many of us from different Benches felt that we had a personal relationship with him. He was so welcoming when I came into the House. I can hardly bear the thought of going through financial services legislation without him and Lord Barnett and their constant commentary, great wisdom and endless humour, which carried on in the corridors after debates. We have suffered a great loss.

I gave my response to the Budget in Grand Committee. Therefore, I will use this opportunity to speak somewhat differently. However, I raised one point in that debate which I will not allow the Minister to escape hearing again. They say that if you hear the same point 20 times, eventually some attention is paid to it. Therefore, I ask the Government one more time to look again at the definition of a budget surplus that includes capital spend, because it is entirely inappropriate to do so. We face a situation where the markets are such that we can borrow at virtually zero coupon to begin to raise that funding for critical infrastructure in which we have underinvested for at least two generations. I am not talking just about transport, in which I have a direct interest. The pace of that investment must increase.

As regards the internet and broadband, the ambition that this country has for a speed of 20 megabytes for this vital piece of infrastructure is, frankly, tepid, given that the rest of the developed world is starting to look at 1 gigabyte speeds. Surely we have to invest in that, as we do in housing. We have a housing crisis. The noble Lord, Lord Hain, talked about that extensively. We should also recognise the need for housing to rent, at rents that ordinary people can afford. Every conversation we have with the Government is about housing to buy. However, housing to rent is critical and a necessary mechanism to maintaining our wonderfully socioeconomically mixed, complex cities, particularly London, which have been the wellspring of so much of our growth and productivity.

When I address productivity, the issue that is raised by company after company, large and small, is that of skills. Others have talked about this extensively. The noble Lords, Lord Mair and Lord Bhattacharyya, talked extensively about innovation and skills. I draw the Minister’s attention to a report to this House by the Select Committee on Social Mobility, which was published roughly a week ago, because it focused on the virtual complete collapse of support for our youngsters who do not take the academic route. That is the nearly 50% of young people whose goal is not A-levels and who are not heading for university. Apprenticeships do not meet their needs because most apprenticeships are aimed at much older people. This calls for a real look at that 14 to 19 age group to understand the need for a genuine and viable vocational structure to support our youngsters. Given proper education and support, many of those youngsters could match the skills that are in demand. That group is not stupid. We must get away from this grammar school versus secondary modern mentality which implies that if you are not academic, you are not brilliant, capable, creative and able. Among that group are future entrepreneurs, engineers, designers and many people who could be the backbone of our economy. Germany has recognised that and we need to do so. It goes far beyond apprenticeships. The Treasury needs to look at this issue and not pack it away in the education sector.

An issue that has hardly been addressed today, but which is absolutely critical, is that of access to finance. We have become quite good at starting new enterprises, as I think the noble Lord, Lord Bilimoria, said. If you look around the UK, you will see that new businesses are starting and many new entrepreneurs have come forward. There is a real energy in start-ups within this country, and they can now find initial financial support. However, it begins to fall apart as soon as they try to scale up. As noble Lords know, this is widely known as the valley of death of financing. As I talk with venture capital groups up and down the country, and the new innovative financing groups, it is clear that they cannot provide that missing element unless there is significant change. Venture capitalists are too concerned about turning over their investment in a three to five-year period. We are desperate for patient money, which in many countries such as America comes from angel finance, or other kinds of institutional sources across the continent. I see no way to begin to get that kind of long-term investment. The noble Lord, Lord Bilimoria, talked about the Judge Business School in Cambridge. Believe it or not—talk about burying old battles—that has produced a joint report, sponsored by Barclays, with the Saïd Business School in Oxford which looks again at this whole scale-up issue.

This must now become a major government focus. We need to look at using things like the British Business Bank and other kinds of mechanisms that may require government investment, government partnership and support, or changes in tax incentives to begin to deliver the financing for scale-up. I pick up on the point by the noble Viscount, Lord Hanworth, about how many of our companies end up in foreign hands. I am not anti-foreign; it happens—companies grow and sometimes they sell out. But in the UK, they have almost no option to sell to a British-owned entity because we have lost nearly all our tier 1 players. If they are going to remain based in this country, driving exports from the UK, keeping their research here, they are going to have to grow organically and that is why scale-up becomes absolutely critical. I hope that the Government will focus on it.

As the Minister will know, a lot of start-ups, and indeed other businesses in the country, are now turning to new FinTech, to innovative finance, rather than the conventional banks to fund their growth. The noble Lord, Lord McFall, raised the issue of the banks returning to past abusive practices. Both the Treasury and the regulator need to be on the alert because, in talking with the FinTech sector, it is clear that it is becoming very concerned about the behaviour of many of the conventional banks. Initially, our conventional banks ignored the new FinTechs—after all, many of them did not start until 2010 and were fringe players. The banks basically dismissed them. Now they are real players. Our third largest creator of new small loans to small businesses is, I think, Funding Circle; it is becoming a significant player and is taking away market that our banks would like to control. The banks, however, have the ability to come in and compete with that sector using subsidised taxpayer support. Their funding comes from deposits, on which they pay nothing, or next to nothing, because the taxpayer is providing guarantees against any risk. They have extraordinarily cheap sources of finance that they can direct against those new targets. I think that they have enough sense not to try to drive these new groupings out of business, but they will constrain their growth, which is unhealthy for the economy. We have to make sure that anti-competitive behaviours do not develop and that there is not cross-subsidisation undermining our new innovative finance industries.

In looking at those industries, I want to pick up on a key issue as we look at the economy, which is whether we remain in the European Union. Some will not have had the opportunity today to see that Tech City UK has done a poll of its membership. These are technology start-ups; they are one of our real high-growth sectors, and they are the industries of the future that many who have called for innovation have identified. Among both founders and investors, seven in 10 want Britain to remain in the EU. This industry is so exciting because it is the next generation. It is not run by people of my ancient age—you would be lucky to find somebody aged 40 within these groups. They are the future. I find it fascinating that, in talking about the EU with them, they cannot understand the debate that is taking place. Many are not Brits but have come to live here because this is such a good place to create these industries. But they are entirely comfortable and happy to identify as and be proud of being British and see no conflict at all with being in the EU. These businesses, almost from day one, are pan-European. They start with activity here in the UK, in Poland, Germany and Spain—they are pan-European and see the future as such. When people talk about the financial services industry potentially leaving London, they talk about Frankfurt and Paris. I think most people know that that is not terribly serious but, for this new industry, Berlin is. We should not ignore what is now becoming a great cosmopolitan city with a very large English-speaking population. It has become a magnet across Europe for new enterprise, which is a real risk for us. For these new driving industries, the potential to move to Berlin is always there as a possibility. I never hear that in the general discussions that come from the leavers about Brexit.

There are so many things that we could talk about under the heading of the economy today. Many have been addressed so well by others that I will limit my remarks to what I have already said. I thank the Minister for bringing forward an opportunity which, in a sense, required us not just to focus on the Budget but to include a much broader discussion of the economy.