Economy: Growth

Baroness Sharp of Guildford Excerpts

Thursday 21st June 2012 Lords Chamber

[Baroness Sharp of Guildford]

My Lords, I, too, thank my noble friend Lady Kramer for introducing so expertly this timely debate. In preparation, I went though a number of the documents that have been issued by BIS over the past couple of years or so. I was struck by the introduction that my right honourable friend the Secretary of State for Business, Innovation and Skills, Vince Cable, made to A Strategy for Sustainable Growth back in 2010. He said:

“The growth we need should be different from the past. Instead of relying on ever increasing household debts financing unaffordable consumption, we should look to greater business investment … We need to position ourselves to prosper through the transition to a greener economy. Our country should make more use of its scientific excellence, so that innovation becomes a motor for long term growth and change”.

In other words—and this was picked up by a number of speakers, notably my noble friend Lady Kramer and the noble Lord, Lord Bates—we need a shift from a consumption-led economy to one led by investment. As my noble friend Lady Kramer has said, there is great hope that we shall see this investment coming from the small and medium-sized enterprises that constitute such a considerable part of our economy. There is real frustration that all the efforts to increase money supply do not seem to reach that sector. We see it in the renewed efforts of the Chancellor in this past week to ensure that that money is targeted for small and medium-sized businesses.

However, as the noble Lord, Lord Bates, said, the problem is also one of confidence. To some extent, one can see that in what is happening at the moment. Britain is locked into what Keynes would have called the “classic liquidity trap”: we are increasing the money supply but it makes no difference. Until confidence among businesses changes—the “animal spirits”, as Keynes called them—we will not see this rising investment that we so badly need.

I find myself worried by what is proposed by the Opposition in terms of a reduction in VAT. It seems that their solution—to reduce the VAT and people will start spending money—is not correct. It just takes us back to an economy which is based on consumption, not on investment. It is vital that we see investment improved.

I will concentrate my remarks on two sectors that Vince Cable mentioned in his introduction: first, the transition to a greener economy and, secondly, making the most of our scientific excellence; on that, I will pick up the whole issue of skills. Mariana Mazzucato, who is now a professor at my former university home of the science policy research unit at the University of Sussex, has pointed out in relation to the eurozone crisis that, in many ways, the message and advice that other European countries ought to be getting is, “Do what the Germans do”, not just in terms of cutting back and austerity but in terms of mirroring how Germany has created its competitiveness. In an article in the Guardian on 17 May she wrote:

“German competitiveness is not due only to its lower unit labour costs (which are not low when welfare benefits are included), but to its strategic investments in research and development, vocational training, state investment banks that create ‘patient’ finance, and its recent emphasis on greening the economy. Similarly, the engineering group Siemens did not win a UK contract for fast green trains because of low wages, but because of its innovation investments, which have made it one of the most competitive companies in the world”.

It is not just in so far as its labour costs are low. It is also because its investment in innovation, and training its staff to use these investments, effectively means that its productivity is far higher than most EU countries, including the UK.

In some respects, one might say that the coalition Government are following this advice precisely. The green investment bank, which was launched last week, is in many respects a state investment bank, aimed at helping firms, particularly small and medium-sized businesses, make the transition into the green economy. This does not just mean photovoltaics and wind energy developments, which have been given so much publicity, but solid investments in better heating systems and insulation. Fifty per cent of the energy consumed in this country is consumed by domestic heating. It remains shaming that the average home in Sweden—a country with a much colder climate than ours—consumes only 25% of the energy used by the average British home. Investments in insulation, draught-proofing and double glazing remain among the best that we can make. They require no long-term planning and development, provide jobs in the hard-hit construction industry and can provide them now, not in three years’ time.

As my noble friend Lady Kramer indicated, we Liberal Democrats have for some time been urging a major programme of housebuilding. In Sweden, new homes use hardly any energy; they are energy-neutral. A major programme of new, affordable homes, built to modern standards, would improve our performance enormously. In the 1960s, when the population was increasing at a similar rate to the present one, the target was to build 300,000 homes a year, many of them in the social housing sector. Today, our target is 170,000 homes over five years—34,000 a year—and last year the number of affordable homes under construction fell to 15,698. The potential is there to use this period of recession to invest in a long-lasting asset that will increase general well-being and the benefits of which should last for a very long time. I can only hope that we will seize this opportunity, for it would appear be a win-win proposition.

I also want to talk about science and innovation. I applaud the ring-fencing of the science budget of £4.6 billion and the extra money that has gone into the research budget in the past 18 months. However, the 2010 spending review slashed capital expenditure in the science sector and, as the Campaign for Science and Engineering has exposed, left the sector as a whole £1.7 billion worse off in cash terms. Spending on science is not just money for research to underpin our science base. It simultaneously trains a cadre of scientists and technicians, who are essential if we as a nation are to pick up and use modern technologies to the full. That is precisely what underpins Siemens and German competitiveness.

I fear that while all eyes have been on undergraduate fees and their impact, we have given no thought to the postgraduate situation. Yet it is the availability of these highly trained and highly skilled workers that attracts high-value-added foreign investment, such as that in the pharmaceutical industry, and which—note the position of Pfizer—will leave us if we do not maintain the training of a large number of highly qualified people.

We may well be ring-fencing science in relation to other public expenditure but we ignore what is happening overseas. Figures for 2009 show that, at 1.8%, the UK spends a smaller proportion of its GDP on R and D than any other G7 nation except Italy, while the government spend of 0.17% is bottom of the G7 league table. Germany, the US and Japan are now up to 3%, while China is fast moving up the league tables, as others have noticed. If we are to meet the aspiration expressed in David Willetts’s speech in January—that Britain should be the best place in the world to do research—we need to increase our spend substantially.

I very much endorse what the noble Lord, Lord Bates, said about the visa issue. We are doing much harm to ourselves with our current visa arrangements, which discourage many postgraduate students from applying to do their work in Britain.