Economy: Growth

Lord Bates Excerpts

Thursday 16th May 2013 Lords Chamber

[Lord Bates]

My Lords, it is always a privilege to follow the noble Lord, Lord Bhattacharyya, who has done so much to promote Britain at home and abroad in terms of economic growth. I listened very carefully to what he said and I think a lot of his remarks will probably be more warmly received on this side of the House than his own Front Bench, particularly when it comes to identifying the importance of tax reductions and controlling public expenditure, as well as the focus on enterprise.

As the noble Lord was talking, particularly about developing IT, I should have been paying more attention but I was flicking through pages 4 and 5 of the excellent House of Lords Library briefing that has been prepared for this debate. I found a lot of very encouraging things. Some things, I have to say, had passed me by, such as the tenfold increase in the annual investment allowance for small enterprises; the introduction of a seed enterprise investment scheme offering investors 50% income tax relief to encourage investment in early-stage companies; doubling the lifetime limit on gains for eligible entrepreneurs’ relief to £10 million; providing 100% business rate relief for small businesses seeking to get going; a £200 million growth accelerator scheme designed to provide business coaching for high-potential firms, which 4,000 SMEs have signed up with; start-up loans and, of course, the Funding for Lending scheme. I commend those pages to the noble Lord but I very much appreciated his contribution, and his record.

Of course, I also pay tribute to the noble Lord, Lord Soley, for securing this debate and the measured way in which he introduced it. My only disappointment is that more colleagues from the Back Benches did not want to take part in it. I know that we have just had the debates on the gracious Speech but this really is the most important issue for our country at the present time—because everything else flows from it. If growth gets under way and strengthens, revenue yields will grow and therefore we will have more to fund the public services that we talk about. That would have been good but I thank him for securing this time.

In his opening remarks, the noble Lord made mention of the farewell comments of Mervyn King as he presented his final quarterly review of economic outlook as Governor of the Bank of England yesterday. I thought that it was cause for encouragement. Certainly, the front page of the Financial Times today was very positive—you do not often see there reasons to be cheerful, and nobody could necessarily accuse Mervyn King of being an unbridled optimist. When he says:

“There is a welcome change in the economic outlook … and growth is likely to strengthen over the course of the year … That’s the first time that I’ve been able to say that since the start of the financial crisis”,

it should give us some cause for optimism. Of course, everybody immediately then rushes to say, “Well, we don’t want to be overoptimistic; we’ve got to be cautious”—my noble friend Lady Kramer reminded us of the “green shoots” of recovery described by my noble friend Lord Lamont—but there is a balance here, because part of what leadership and government are about is creating confidence in the economy. Confidence is hugely important, whether you are a Premier League football team, a small business or a Government. It is hugely important that people have confidence in our economy. We are led to believe that corporations are currently sitting on a mountain of some £750 billion of cash which could be invested to drive forward the economy. While we all need to be cautious, we need also to talk up our economy and the fact that Britain is becoming internationally more competitive, having fallen substantially down the competitiveness league tables produced by the World Economic Forum. We are now steadily climbing back up and re-entering the top 10.

Many noble Lords travel extensively around the world—the noble Lord, Lord Marland, referred to the excellent work of the trade envoys. I was in Kuala Lumpur last weekend and met SP Setia, which is investing in the Battersea power station redevelopment. It has £600 million of investments. I met there our tremendous team of UK Trade & Investment representatives, including Tony Collingridge, which had been instrumental in bringing that investment to the UK. I met many other people there who thought that SP Setia from Malaysia had got a cracking deal and wanted to know whether there were any more going in Britain, because they regarded Britain as the most favourable destination for foreign direct investment in Europe. That is a great thing. I sometimes wish that we could spend more time overseas seeing ourselves as other people see us, as Robert Burns chided us to do, because we might then be very encouraged.

A few weeks earlier, I was in Shanghai with the McLaren motor racing company, which is undertaking significant investments. The Chinese appetite for British advanced manufacturing technologies is incredible. We should take pride in British engineering, manufacturing output and in the way we are moving forward, albeit slowly, to a projected 1.2% growth in the current year and a return to pre-recession, pre-crisis levels in about 12 months’ time and about six months ahead of normal.

This will come in sharp contrast to other parts of the world; for example, in Europe. The same newspaper has heralded the encouraging performance of British business in terms not just of growth figures but of greater confidence, as evidenced by the Purchasing Managers’ Index report on new export growth, which had gone from expansion from contraction, tipping over the 50-point threshold for the first time in recent years. It pointed to the fact that 500,000 vacancies were being advertised in jobcentres, which was their highest level since 2008. Let us contrast that with the eurozone. We do not want to point to other people’s suffering, although, sometimes, when I hear the policy prescriptions put forward by the party opposite, they remind me of something that you can point to as if they were on “Blue Peter” and say, “Here’s one where we can actually see it being road-tested”. You have only to go across the Channel to see President Hollande putting forward his solutions for the economy. They are having a disastrous effect. His wealth tax of 75% is driving people through the Channel Tunnel to London to build up our economy rather than build up their own at a rapid rate. We need to remember that, in an age of intellectual capital, intellectual businesses are highly mobile and pay attention to tax rates, as the noble Lord, Lord Bhattacharyya, reminded us. At a time when we are reporting that we have perhaps come out of that phase of the recession, that is why the French economy has gone back into it. The unemployment rates are another indicator here that we have to look at. According to the Economist this week, the unemployment rate in France is 11% and rising; the UK’s is 7.9% and stable or falling. That is a very important indicator along with GDP.

The other thing that we need to look at is the number of new jobs being created in the economy. One and a quarter million jobs have been created in the economy since 2010, which is the fastest rate of job creation that we have witnessed since 2000. Moreover, for every one job lost in the public sector, six jobs are being created in the private sector. That addresses one of the points made earlier about one of the objectives that we set out with being to rebalance the economy away from relying just on financial services towards relying on manufacturing—we are seeing a growth in exports. We need to move away also from overdependence on the public sector to a more balanced economy. We are seeing a rate of growth in new enterprise that is almost unprecedented, with 471,466 new businesses, new enterprises, established in the past year. Anyone who has ever set up a business will know that the first year is incredibly tough, and the number of start-ups which go out of business in their first year is tragically high, but the ones which stay the course are where the growth will come from—in employment, in revenues and in taxes. Therefore, the fact that we have an enterprise-friendly culture in this country is important.

Perhaps I may offer a note of caution about the growth figures for an unusual reason. Understanding national accounts is something which I never really got to grips with—even when I was a Treasury Minister, I have to confess; understanding corporate accounts comes a little bit more naturally. National accounts are incredibly complex and faceted. We chase after this half-time score of the GDP growth rate every quarter, and sometimes we are happy and sometimes we are sad. Knowing what goes into a lot of indicators is a bit like the old argument about pasties: if you knew what went into them, you perhaps would not eat them quite so readily. We have to get better at measuring what is happening and following the right KPIs for the growth of our economy.

The GDP figures are collected by way of a survey, as those who have worked in that area will know. The mix of the survey, which is organised by the Office for National Statistics, includes 6,000 manufacturing companies, 25,000 service sector companies, 5,000 retail companies and 10,000 companies in the construction sector. I am always suspicious of round numbers. We should look into this and ask why we define progress and growth in our country by that mix of samples. How often is that looked at? I encourage my noble friend, who I know takes these matters seriously and perhaps understands them much better than I ever did, to undertake a review of what goes into the GDP statistics. That in itself would make for an interesting debate. At the time that the first data are released, only 40% of the information is in and available. That is why we constantly get revisions and it comes down. At the end of the day, it is only a survey.

In business, the only thing that people watch when they are in charge of the finances is cash. You can waffle your way through a P&L account or set of accounts but you cannot waffle your way through the cash you have in the bank. That is one of the things that we should benchmark ourselves against. There are some better indicators. VAT receipts would be a very good indicator to use to track the health of the economy: they are reported quarterly and are one of the highest levels of adhered-to taxes. We have to look again at the basket of what we are measuring to ensure that we make the right judgments and policy prescriptions for the economy.

When we talk about cash at the bank, the reality is that we seem to be doing a little better. We have not paid down any of the debt and our overdraft currently stands at £111 billion but that is down from £159 billion three or four years ago. The deficit is down by a third but there is still a very long way to go before we ever get to the point we need to reach of paying down some of the debt as well. That has now been moved to 2017-18. It is encouraging that that cash element in the transaction between what is going out of the government bank account and what is coming in seems to be heading in the right direction and confirms the optimism of the Governor of the Bank of England.

--- Later in debate ---

[Lord Newby]

My Lords, I thank the noble Lord, Lord Soley, for initiating this debate because he asks the single most important question facing the country: how do we get more growth? He and the noble Lord, Lord Davies, have a relatively straightforward answer. Sadly, we believe that it is the wrong answer. Their answer is to borrow more. It was not the answer of the previous Labour Government. The Fiscal Responsibility Act required the Government to have halved the deficit by the financial year 2013-14. I am not sure whether the Labour Party has finally and formally renounced that legislation, but that was the course that it set.

The noble Lord, Lord Soley, points out that we had 225% of GDP borrowing after the Second World War, but I should have thought that he could see that the circumstances at the end of the Second World War were so fundamentally different in almost every respect from those of today that that is not a useful analogy.

There are a number of reasons for getting the deficit down. In my view, the most clearly demonstrable one is that a higher deficit and an incredible fiscal consolidation programme would undoubtedly lead to higher interest rates. Why is it that at the end of last week the UK was paying 1.84% on its debt, the US was paying 1.86%, Italy was paying 3.89%, and Spain 4.25%? The answer is: because this country has a credible economic policy in which the markets believe. Without that, there is no reason why our interest rates could not rise by 1% or 2%. Bear in mind that a 1% increase in interest rates means that a mortgage payer with a £100,000 mortgage is paying out an extra £1,000 per year, leaving aside the additional costs to industry and the additional billions of pounds extra that the Government will be paying to service their debts.

When the Government came in, national debt was running at 11.2% of GDP. That was possible in a crisis. I do not think anybody believes that such a level of national debt, which seems to be the level that the Opposition are talking about—we still have national debt running at more than 7%—is sustainable. The noble Lord, Lord Soley, talked about Keynes. People disagree about Keynes, but I am pretty certain that he never advocated sustained levels of borrowing over a long period. He knew, as everyone else knows, that although such a thing is possible, and desirable, over a short period, it is not possible in the long term.

Today, in part, we have been discussing another of Keynes’s aphorisms, which is hugely important at the point at which we find ourselves in the economic cycle: his emphasis on the role played by “animal spirits”, to use his phrase, on investment decisions and a whole raft of economic decisions. Indeed, that was the burden of the speech by my noble friend Lord Bates. At this juncture, the turn in the cycle that we are clearly seeing will accelerate because the view of people in the markets—“animal spirits”: what people are saying to each other—is changing positively.

I would like to address specifically several of the points made by the noble Lord, Lord Soley, about the components of growth. Indeed, most of these features have been about one or more components of the growth picture. I start with infrastructure, where there was widespread agreement that more needed to be done. Last year, according to the World Economic Forum, the overall quality of our infrastructure was 24th in the world. We do not believe that this is good enough, which is why we are investing more in transport infrastructure in this Parliament than was the case under the previous one. Our railways are seeing the largest programme of investment since the Victorian era. Incidentally, I am pleased to see, as I am sure the noble Lord, Lord Soley, is, that the amount of freight carried on the railways is going up significantly, which reverses a very long-term trend and is very welcome.

Total public and private investment in infrastructure between 2010 and 2012, at £33 billion per year, is higher than that of the final five years of the previous Government. At Budget 2013, the Chancellor unveiled an increase in capital spending plans by £3 billion per year from 2015-16. That is in addition to the £5.5 billion of investment in infrastructure announced in last year’s Autumn Statement. This included £1.5 billion for the road network.

The noble Lord, Lord Soley, and my noble colleague Lady Kramer talked about airports, which is clearly a significant component of the nation’s infrastructure. I do not believe that there is total agreement that we need to have a major national airport hub in this country, but the Government believe that it is a requirement. As noble Lords know, the Airports Commission, headed by Sir Howard Davies, is looking at airport capacity in the short and the long term. We are looking forward to seeing his interim report later in the year. In the mean time, Heathrow has spent £1 billion upgrading and Gatwick is spending £1.2 billion, so it is not as though our airports are atrophying. We know that it is a long-term issue and has been a long-term problem with no consensus within or between parties, but that is what the Davies commission is looking at.

The noble Lord, Lord Soley, talked about housing, which again is a long-term challenge. All parties have taken their eye off that issue over the past decade as house prices have risen inexorably and the proportion of the population owning their own homes has risen. There are three components to improving the stock and appropriateness of housebuilding. First, we have to make it easier to build houses. Secondly, we have to help to supply more houses. Thirdly, we have to make sure that there are no artificial restraints on demand for housing.

We believe that the National Planning Policy Framework, which we published in March 2010, has had some effect in a positive direction. The proportion of planning applications being approved is at a 10-year high, a significant proportion of which are around housing. As for building more houses, we already have an £11 billion commitment in the spending review. The Budget 2013 announced a housing package totalling £5.4 billion, including the Help to Buy and mortgage guarantee schemes. There is a lot of activity on that front. However, I agree with most noble Lords that we have to do more, and we are actively attempting to do so in three strands: to make it easier to get planning, to help have more finance to build houses, and to make it easier for people to afford a mortgage.

The international component of our economic activity is clearly crucial. To rebalance the economy, we need to export more. Last week’s evidence of a narrowing of our trade deficit is a positive sign that UK exporters have faced significant challenges in recent years. Yesterday’s data confirmed that the recession in the euro area, which is our most important export market, continued in the first quarter of this year. Therefore, as the noble Lord, Lord Marland, explained, we are right to be looking more widely.

In the period 2009-12, our goods exports to China increased by 96%, to Brazil by 49%, to Russia by 133% and to India by 59%. Last year, while our exports to the rest of the EU fell by 2.5%, our exports to the rest of the world rose by 1.2%. While we look elsewhere, we should not forget that we are still exporting 42% of our goods and services to the eurozone. As we try to get more SMEs involved in exporting, many will go to the eurozone because it is so much easier for a whole raft of reasons. Getting on a plane or a train to get to a potential export market in an hour is very different from going to Brazil or China.

I have seen that with a small manufacturing company in West Yorkshire which exports mainly to Europe. Through its website, out of the blue it has had a couple of orders from Brazil for £25,000, which is pretty good for this company. The question is what it will do to capitalise on it. It has no idea who the people are who have asked for this export. The directors have had a long discussion about whether they should go to Brazil. Eventually, they decided that they would go but the cost, in time and money, meant that that was a very difficult decision. If that order had come in from Spain, they would have been off straightaway. Therefore, as we rightly put more emphasis on the rest of the world, we must not ignore the fact that the bulk of our exports are to the EU and will remain to the EU. The EU is where people dipping their toe in the export market will start.

Over the past year, we have increased UKTI’s budget by £70 million to help to deliver world-class services to move SMEs into exports and to focus our activities on the high-growth market. I hope noble Lords will feel that we are making a real impact in that crucial area.

My noble colleague Lady Kramer discussed the challenge of corporates paying the right amount of tax, an area on which we the Government have put a lot of additional emphasis. At the G8 meeting, we made clear that international tax avoidance and rebalancing the rules around taxation are our top priority. At the recent meeting of G8 Finance Ministers, which included George Osborne, it became clear that we had the support of all the leading countries to look at this. It is not something that we can do unilaterally. It has to be done on a global basis. I think that for the first time ever there is a global consensus that we have to do more around corporate tax avoidance.

In that respect, I should like briefly to mention the personal and corporate tax avoidance in tax havens where up to now there has been a huge degree of secrecy. There is a growing momentum of considerable proportions to open up data about people and companies that have set up entities, which until now have been secret, in the principal tax havens of the world. It is worth while looking at what has happened in the past year. Having signed an agreement on the automatic exchange of information with the US in September, we have done the same with the Isle of Man. In March, we reached agreement with Jersey and Guernsey. In April, France, Germany, Italy, Spain and the UK agreed to develop and pilot multilateral tax information exchanges. Also in April, we set out our priorities around tax transparencies for the May European Council. Most significantly of all, perhaps, within the past month the overseas territories have agreed to greater automatic information exchange with the UK. Here, we are talking about the Cayman Islands, the BVI and other places that have had a degree of secrecy which we believe is simply no longer acceptable.

The noble Lord, Lord Bhattacharyya, spoke with his unrivalled knowledge about the constraints on innovation and investment. I had a great deal of sympathy with much of what he said, particularly about supporting reshoring, which to a certain extent is happening anyway. However, as he suggested, I am sure that the Government should look at ways of doing more. I am particularly aware of an initiative that my noble friend Lord Alliance is heading up on the textile industry and which is bearing considerable fruit. His view is that the potential from reshoring textile manufacture, so that we can have the just-in-time manufacture of textiles in the UK, could be as much as 250,000 jobs in the north-west. This is potentially a huge thing.

I agree with the noble Lord, Lord Bhattacharyya, that we could be doing more. I was particularly interested in his suggestion of how we might use public procurement to help. We should look at that further, and I will discuss it with my colleague Vince Cable, because it seems an interesting idea. I say in passing that the suggestion that we should be emulating the Americans to increase car manufacturing here seems to ignore the fact that car manufacturing has increased here substantially, without government bailouts but with government support. That is because we have had fantastic investment by companies such as Tata, which have completely turned around iconic British brands by investing more than £100 million of their own money in innovation and investment. They are working very closely with the universities, possibly including the university of the noble Lord, Lord Bhattacharyya, and are placing their own research people in those universities. That has happened without direct government subsidy, on the American model, but because this is a good environment for that kind of activity.

We have a raft of initiatives on the table. There are the Catapult centres, whose work includes high-value manufacturing, initiatives on science and innovation and capital projects from the research partnerships fund. We have done a raft of things to help small businesses to generate capital and have access to it, from abolishing stamp duty on shares and expanding the small business research initiative to £100 million and having further funding committed via the new investment bank, which we are in the process of establishing.

For three-quarters of his speech, the noble Lord, Lord Bates, did a tremendous job in helping the movement of animal spirits in a positive direction. Then he slightly undermined that by saying that the figures on which we are placing a certain amount of hope are perhaps not worth the paper they are written on. I paraphrase slightly. However, I think we will have in the UK what has just happened in the US, where the basis of the GDP figures is being looked at. I believe this is the case, although it may not be on exactly the same basis as he wants. The sad thing is that if the consequence of that rebasing of GDP leads to GDP figures going down, everybody will say that this is the Government’s fault for being completely incompetent, while if it shows them going up, that will lead to everybody saying that they have been fiddled, so I do not place too much hope on that. A consistent series of figures is probably the best that can be done. Although it does not necessarily reach an absolutely precise representation of the truth, that is good enough.

[Lord Bates]

If the noble Lord will allow me, I just need to correct for the record that I did not say that the GDP figures were worthless. I never used that term. I simply queried the mix between the construction and service sectors—be it 5,000, 10,000 or 12,000—and whether that mix was under review in order to ensure that we are accurately reflecting the performance of the economy.

[Lord Newby]

I apologise to the noble Lord. As I was saying, I believe that the ONS is doing a pretty fundamental review of that at the moment.

The Government are under no illusions at all about the challenges ahead in respect of growth. Implementing our ambitious programme of reform and securing strong, sustainable growth will not be easy, but the Government will not deviate from their course. The prizes in the global economic race are great and we are determined to win more of them.