UK-EU Relationship in Financial Services (European Affairs Committee Report)

Lord Bilimoria Excerpts

Wednesday 17th May 2023 Grand Committee

[Lord Bilimoria (CB)]

My Lords, it is seven years since we voted as a country to leave the European Union. I often ask, in the speeches I give to international audiences, what the world thinks of this decision. Last month, I spoke to a group of 100 business leaders from around the world, and 99% of them thought that it was a big mistake for the UK to leave the European Union. Yesterday, I spoke at a conference here in London of international businesspeople. I asked the question again, and well over 80% of them said that it was a big mistake for the UK to have left the European Union. This, whether we like it or not, is what the world thinks of our decision.

That said, the UK-EU Relationship in Financial Services report concludes that overall, the outlook for financial services after Brexit seems relatively positive, in contrast to some other sectors of the economy. However, the report says that the UK

“is at an early stage of the adjustment to life outside the EU and there is no room for complacency, particularly as the impact of Brexit on the sector has not yet fully played out. We therefore urge the Government not to disregard the importance of a cooperative and constructive UK-EU relationship in financial services”.

That is why it is absolutely key that the Northern Ireland situation is sorted out, that the Windsor Framework is accepted and implemented, and that the Northern Ireland Parliament resumes as soon as possible. We will then be able to address the TCA, because the basic EU deal is basic. It could be far more comprehensive, particularly in financial services, where we could strengthen our co-operation and agreement.

I thank the noble Earl, Lord Kinnoull, and the European Affairs Committee, for the UK-EU Relationship in Financial Services report, although as the noble Lord, Lord Liddle, mentioned, it is already a year out of date. The noble Earl mentioned some statistics in his excellent opening speech. I will go even further and highlight some of these statistics, which show the strength of the sector in this country: 2.3 million jobs, £100 billion in tax contributions, a financial services trade surplus of £63 billion in 2020, and £11 trillion of assets under management in 2020. The UK is the second-largest asset management centre globally, it is the world’s largest centre for international debt issuance and it has the highest financial services trade surplus.

Some 117 companies chose to list on the London Stock Exchange in 2021, with £37.5 billion of PE and VC funding, yet sadly Arm, a company that is Cambridge born and raised, has chosen to list in the United States. That is not a good sign, because the United States remains the leading market for IPOs, whether we like it or not. The UK is the world’s largest centre for OTC derivatives trading. The UK’s insurance sector is relatively more important than those of other major European economies. The UK remains the world’s preferred regulatory regime for financial services. The UK is the leading hub for fintech investment in Europe. The UK is one of the most international fintech markets. Green tech investment in the UK is growing. These are fantastic statistics that we are all very proud of.

However, to strengthen the UK in this area, we must address the lack of skills and availability in the workforce in the City. We must be able to expand the immigration routes. The debate at the moment is whether immigration is too high. I pointed out in another debate recently that one reason why immigration is high is that we have an increased number of international students, which is really good—but they are included in the net immigration figures when they should be excluded. If you exclude the international students, you see that you need to get the workforce that the economy needs, sector by sector, including in the financial services sector. I have said time and again that we need to revamp and reconstitute the Migration Advisory Committee so that, in the same way that the Low Pay Commission sets the minimum wage every year, and the independent Monetary Policy Committee sets the interest rates on a regular basis, the Migration Advisory Committee should be able to say, sector by sector, including for financial services, so many thousand people for a one- year, two-year or three-year visa should be allowed in.

Dublin has been the winner when companies and firms have chosen to relocate. That is no surprise when corporation tax there is 12.5%. I will come on to that later.

The City of London has said that the committee’s report recognised that:

“The City of London and the financial services … sector based in the Square Mile … is a national, European and global asset, which helps fuel business development, infrastructure, jobs and growth across the UK, Europe and the world.”


We have the largest financial services cluster in the world, but here is the point: two-thirds of the sector is based outside London, so maintaining and further developing global trade investment and retaining the City of London’s position as a global financial services hub are also key to the future of the industry.

At the end of the transition period, the UK had onshored EU equivalence regimes in many areas. The Government and regulators should adapt the EU approach and determine third countries’ and firms’ equivalence using an outcomes-based approach, ensuring that the openness of the UK is not restricted by this equivalence overlay. Does the Minister agree with this?

The UK regulatory regime for financial services is one of the most robust. Our high standards are an asset and should be maintained. We should continue to be a global leader in regulation, promoting open global markets and high standards. We need to be an attractive location for financial services talent and— I addressed this earlier—we need to allow the best talent to come here. We saw the huge difference that the big bang made, when we opened up to competition and new technology. The Treasury is now implementing a programme of building a smarter financial services framework for the UK, which repeals retained EU law and transfers 43 core financial services powers to the regulators’ rulebook. This is a good opportunity for the UK.

What about the FCA and the PRA? They need to facilitate growth and international competitiveness. When implemented by the regulators, this can help ensure that the UK remains an attractive and competitive location for financial services. The international regulatory strategy practitioner-led group of senior leaders from around the UK, which is sponsored by the City of London Corporation and TheCityUK, has advised that there are several ways in which oversight can be conducted, one of which is to establish a new financial services Joint Committee. Another is to enhance the role of the House of Commons Treasury Select Committee and the House of Lords Economic Affairs Committee. Does the Minister agree with those points? Another was to establish a technical sub-committee of the Treasury Select Committee, focused solely on financial service regulation, but that committee is already doing good work.

Many people talk about equivalence. The UK has onshored EU equivalence regimes in many areas, but the EU equivalence-based framework is suboptimal compared to the previous UK national regime, which had a mix of approaches. We are now free to redesign this approach to oversee services and improve the EU model. The UK should not adopt a reciprocal or “fortress UK” approach. Looking ahead, the City of London Corporation encourages the EU and the UK to continue to make equivalence assessments pragmatically, with the interest of end-users foremost in mind, and to maintain existing equivalence in CCPs and on data.

The TCA excludes financial services, on the basis that we will have an MoU. I hope that, once we have sorted out the Windsor Framework, we get to a stage where we can have this MoU and strengthen our relationship.

The European Securities and Markets Authority, which previously traded in the UK, has largely shifted to EU venues in Amsterdam. This is worrying. The share of UK-based liquidity dropped from 25% pre-Brexit to 3%.

Another bit of good news is that there were forecasts of 70,000 jobs going to the EU as a result of Brexit, but only 7,400 jobs have been lost. We need to remain attractive. It does not help that we have the highest tax burden in 70 years or to put up corporation tax from 19% to 25%. The loss of passporting rights affects EU firms as well.

I conclude with this. Julia Hoggett, the chief executive of the London Stock Exchange, says that the UK needs to be “young, scrappy and hungry” to compete as a global financial centre, especially now that it can no longer rely on its position as the

“dominant centre for financial markets in the EU”.

The head of financial services at EY, Omar Ali—I qualified as a chartered accountant at EY—says that

“I have no doubt that both the UK and EU will continue to be world leading markets, driving innovation, progress and growth”.

Budget Statement

Lord Bilimoria Excerpts

Thursday 16th March 2023 Lords Chamber

[Lord Bilimoria (CB)]

My Lords, this country, along with many others, has gone through hell for the past three years. There was the pandemic, followed by the sad war in Ukraine, which continues. Business and citizens have gone through hell. During the pandemic, when we thought we would bounce back and have a V-shaped recovery, it has been one crisis after another instead: inflation, supply-chain challenges, energy and cost of living crises, political crises including three Prime Ministers in one year. In September, the markets were spooked by the well-intentioned growth plans of Liz Truss and Kwasi Kwarteng, through their irrational exuberance and mini-Budget, with a reduction of 45% to 40% for the top rate of tax—absolutely the right thing to do, but the wrong time to do it—without the OBR to back up and validate their plan.

Since then, the Government have been trying to show calm and stability, quite understandably. Now, at last, six months after September, we have a proper Budget. We have a steady Prime Minister and Chancellor, both individuals from a business background and the Chancellor is a fellow entrepreneur, to boot. Whether an election takes place next year—and that is what the Government’s focus is on—or not, the path to growth and prosperity is crucial.

Earlier this week I was with the Nobel laureate Paul Krugman, the economist from the United States, at Cambridge. He said that we could get inflation down to maybe not the 2% target, but 3%. He said perhaps 3% could be the future target rather than 2%. The OBR has now said it will go down to 2.9%. He also said that unemployment might settle at around 4%; we had unemployment below 4% before the pandemic, and it has been very resilient. Where will interest rates settle down? They will be probably somewhere between 4% and 5%, which is what they used to be before the financial crisis, and thereafter we had over a decade of these near-zero rates which are completely unreal and abnormal.

The noble Baroness, Lady Lawlor, talked about government expenditure; it is now well over 44% of GDP. It should be well under 40%, and she gave evidence of how countries with lower government expenditure in proportion to GDP perform better. Our debt-to-GDP is close to 100%; it is going to be close to 100% five years from now. Had the OBR calculated Liz Truss and Kwasi Kwarteng’s growth plan, what is the bet that, ironically, the debt-to-GDP would not have been that much higher than the current Chancellor’s plans? If you look back to the end of World War II, you will see that our debt to GDP was 250%. In the last three years, we have gone through the biggest global crisis since the Second World War, and we have the lowest debt-to-GDP ratio of any G7 country. It is overprudent to say, “We don’t have the money; we have to be fiscally conservative and have a balanced budget”. What about being bold and going for growth, which will create the employment that will pay down the debt?

India has its Budget one month before ours. In February 2021, India had a Budget in the middle of the pandemic and said that it would not increase taxes because it did not want to stifle the recovery and hamper growth. To date, India has not put up taxes, even in its latest Budget. When I was president of the CBI, I said to Rishi Sunak, who was then Chancellor, “Come on, Rishi, don’t put up taxes. This is what India has said.” What has he done? He has just put up taxes after taxes for the past two years, so we now have the highest tax burden in 70 years. Instead of reducing tax, he announced that he is going to put up corporation tax from 19% to 25%. He countered it with the super-deduction of 130% to incentivise investment, which was fantastic news. The analysis that the CBI carried out said that that super-deduction genuinely has incentivised investment, but we have ended up with the highest tax burden since World War II at 38% of GDP.

If noble Lords remember, Rishi Sunak said that he was going to reduce income tax by 2024, but we spent £400 billion doing the pandemic that we have to recover, and we cannot reduce taxes now because we are in an inflationary environment. We were in a deflationary environment. I argue that inflation has not been demand-led; it was created by the Ukraine war and by energy prices, which are now well off their peak. Energy prices have come down.

Putting up taxes is stifling growth and the recovery. As history has shown, when George Osborne reduced corporation tax from 28% to 20% and then to 19%—he actually wanted to go down to 15%—we actually increased our tax take. Will the Minister acknowledge that? By trying to get £18 billion more a year and putting up corporation tax by almost one-third in one swoop, from 19% to 25%, you are killing the goose that lays the golden egg.

We were worried that we would have a double whammy in this Budget: an increase in corporation tax and a taking away of the super-deduction. Again, I spoke to Rishi when he was Chancellor and said, “Please bring in a replacement for the super-deduction”, and he said, “I will”. The Government have stuck to that and come up with this 100% tax deduction for investment in plant, machinery and technology, which is fantastic and just what we need.

But the point about corporation tax is not the absolute tax rate itself; it affects our perception and our inward investment. Historically, this country has been the second-largest or third-largest recipient of inward investment in the world, but now we have a situation where AstraZeneca, as the latest example, with more than £300 million of investment, is going to Ireland, which has a corporation tax rate of 12.5%. We have a rate that is double that. Arm, a company that we are so proud of, which was founded in Cambridge and whose technology we all have in our mobile phones, has decided to list in New York. Although our Government keep saying that our corporation tax is the lowest in the G7, it is now higher than the OECD average. Image and impression count.

On the positive side in this Budget, the investment zones are great news. They are based on something that I and the CBI have been championing for a long time: clusters based around our world-class universities. This is great news. We need to do more of this. I was in India last month, leading a University of Birmingham delegation as its chancellor. I spoke at the QS World University Rankings annual conference. I was so proud making my keynote speech that Britain, at 1% of the world’s population, has four out of the top 10 universities in the world; America has five and Switzerland has one. We have 17 out of the top 100 universities in the world, of which Birmingham is one. But is there anything in the Budget to help our universities? They have been managing on £9,250 fees that have been frozen. If you take that in real terms, we are now managing at £6,000. How are we meant to carry on being the best in the world when we are underresourced and run on the cheap? This cannot go on for ever.

I was on the Times Education Commission that reported last year. Our private schools cover 7% of our schoolchildren and are some of the best schools in the world by far. The funding for a private school child is three times the funding for a state school child. Where is the education spending in this Budget? Investment in education in the last decade has hardly increased, whereas in areas such as health it has increased hugely. Investing in education is the best investment. It will increase productivity. That is our future.

On SMRs—small modular reactors—this Budget gives another bit of good news: prioritising nuclear and saying that it will be treated as green is spot on. The Government say that they are going to look into SMRs. Why are we “looking into” SMRs? Why are we waiting? Rolls-Royce has the technology. These small modular reactors can give power to 1 million people, and cost one-sixth of a large plant such as Sizewell. They take five years to make, and we have not even started building one. Nuclear has been neglected by every Government, whether Labour, Conservative, or the Liberal and Conservative coalition. Nuclear has been neglected to our peril and I am glad that we are giving it focus.

There was nothing about housebuilding in this Budget. We need more houses desperately.

The shortage occupation list was addressed in the Budget, but just for construction. What about hospitality, agriculture, financial services and technology? Every sector of our economy has shortages. I have said time and again to the Government: why not have a revamped Migration Advisory Committee? As the Monetary Policy Committee sets interest rates each month and the Low Pay Commission sets the minimum wage every year, have the Migration Advisory Committee advise the Government sector by sector on the shortage occupation list. Would the Minister agree that we need to do that?

Here is the point. Immigration is made into this big bogeyman. Net migration is going up, but why? Because international students are included in the figures. We are now beating all records on international students—there are 690,000—and because they stay for a minimum of one year, they are treated under UN rules as immigrants and are counted. They are not immigrants. If you take international students out of those figures, the whole picture changes. Why are the Government making a rod for their own back? Why do they not, like many other countries, report to the UN but domestically exclude international students from the net migration figures? Could the Minister respond on that please?

Let us talk about energy. It is so good that the energy cap is being maintained for consumers, who need the help, but where is the help for businesses? There is no help for businesses, which have been devastated by energy costs.

IR35 reform is needed to help self-employed people but there is nothing in the Budget. The apprenticeship levy needs reforming desperately to help skilling, but there is nothing in the Budget. Our business rates are the most expensive in Europe and need to be reformed—the Government keep saying that they are going to reform this—but there is nothing in the Budget.

Fuel duty being frozen is very welcome, but alcohol duty is increasing. Pub after pub has been closing but the Government go and put up alcohol duty. As the founder and chairman of Cobra Beer, I am very grateful that draught beer duty has been frozen.

Defence expenditure will go up to 2.5% when it can, but it needs to go up to 3% right now. There is a war in Ukraine and we need to be prepared for the worst. At the end of the excellent Ukraine debate that we had recently, I quoted my Cambridge University contemporary and friend, Brigadier Justin Maciejewski, the head of the National Army Museum:

“Armies need might and mass to win. That means good weapons, good people and enough of them to be a credible deterrent. Without effective defence, everything that you treasure is threatened. Defeat in war means you lose everything: no health, no pensions, no education and no safety”.


He ends by saying:

“We need to be prepared, and preparation has a price.”

To conclude, the IFS has just reported on the Budget. It is very gloomy and has said we are stuck in a “lost decade” of falling living standards. The stealth tax of freezing thresholds until 2028 is going to raise over £120 billion. It is going to cost people on the lowest level of tax £500 more per year. On Brexit, the IFS says that the nation’s output will be 4% lower in the long term. We are avoiding a recession thankfully, but look at what is happening on the sidelines. Look at Silicon Valley Bank and Credit Suisse. We have got to be prepared. The noble Lord, Lord O’Neill, said that the Government have a narrow vision of credible fiscal rules.

This country has so much potential. The noble Baroness, Lady Moyo, who we welcome, spoke in her excellent maiden speech about economic growth. We need to grow; we need to reduce taxes; we need to invest. Debt will then fall, and the sixth-largest economy in the world will continue to be one of the top economies in the world. We will show our excellence in combatting climate change, in wind power, and in innovation and creativity. We have to have faith; we have to have belief; and we have to be bold.

Autumn Statement 2022

Lord Bilimoria Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Bilimoria (CB)]

My Lords, the Chancellor said the Autumn Statement on 17 November 2022 will lead to a shallower recession and higher long-term growth. He promised

“stability, growth and public services”,

£55 billion of increased taxes and spending cuts. Yet during the pandemic we spent £400 billion to save the economy, debt to GDP went up to nearly 100% and the OBR has predicted that in 2027-28 we will still have 97.3% debt to GDP. Here is the caveat: the OBR forecasts are forecasts, and invariably they do not actually transpire.

We have the highest tax burden in 70 years. The OBR has predicted that the tax burden will hit a record 37.5% as a share of GDP in 2024-25. Income tax thresholds are frozen. The fiscal drag will bring millions of people to either start paying tax or be dragged into higher bands. There is also the windfall tax on energy companies and corporation tax going up from 19% to 25%. As the noble Lord, Lord Bridges, said, high taxes will stifle the recovery and growth.

When it comes to spending, the good news is that schools are getting £2.3 billion, but that is a drop in the ocean. We have underinvested in schools for decades. As for the guaranteed 2% on defence, we need to go up to 3% because of the Ukraine war and other global threats. Does the Minister agree?

The OBR predicts that inflation will peak at a 40-year high of 11.1%. On growth, the OBR has forecast that we will be in recession—we probably already are—and we expect growth of 1.3% in 2024. Before the financial crisis we were growing at an average of 2.5%. Unemployment is at record lows rate of 3.6%; the OBR forecasts that it will go up to 4.9%. As the noble Lords, Lord Fox and Lord Bridges, said, the OBR has forecast a dramatic decline in real household disposable incomes—the lowest in memory.

What about the Opposition? The shadow Chancellor has said that the Government’s actions

“have forced our economy into a doom loop, where low growth leads to higher taxes, lower investment and squeezed wages”.

She said the UK was

“the only G7 economy that is still poorer than before the pandemic.”—[Official Report, Commons, 17/11/22; cols. 844-57.]

We recently had our CBI annual conference—I have just stepped down as president and am currently vice-president—in Birmingham, where I am proud to be chancellor of the university. There, Tony Danker, our director-general, said:

“Britain is in the middle of stagflation—hit with rocketing inflation and negative growth—for the first time”


in many years. He went on:

“Now, we know how to fight inflation. We know how to fight recession.”


But do we

“know how to fight them together”?

What about growth? He said that

“growth is good. It’s a precondition to a stable society. Without growth the NHS gets worse not better. Without growth, people’s lives get worse not better. Without growth, we lack the resources we need to transform ourselves to a zero-carbon world.”

Since the financial crisis, we have had low growth and flatlining, if not declining, productivity.

There is good news about business rates relief—the Government are finally going to address this—and about infrastructure and Sizewell C, but what about small modular reactors? Rolls-Royce has the capability. We can get them up and running in five years. A 500-megawatt SMR can power electricity for 1 million people. Why have we not started yet?

What about private sector investment? The 130% super- deduction was absolutely brilliant. Now that corporation tax is going up from 19% to 25%, we need permanent full allowances, because that will incentivise companies to invest. We at the CBI estimate that that would unlock an extra £50 billion in capital investment per year by the end of the decade. Do the Government agree?

What about trade? Our trade as a percentage of GDP is the lowest in the G7. Our biggest trade agreement is with the EU. That TCA needs to be unlocked, but we cannot unlock it unless we resolve the Northern Ireland protocol. We need to get round the table and resolve that now.

In his speech at the CBI conference, Prime Minister Rishi Sunak said that

“we … plan to grip inflation and balance the books … And critical to achieving all this is innovation.”

But we invest 1.7% of GDP in innovation and R&D, compared with 3.1% in America. The Prime Minister also said that

“we will … deliver our Lifetime Skills Guarantee to help people of any age retrain and acquire new skills.”

This is great news. When will this start? There are 1.3 million job vacancies.

In his speech, my successor as president of the CBI, Brian McBride, spoke about the good news of our tech unicorns. We have one of the highest levels of tech unicorns in the world. On the other hand, he said:

“We also have one of the biggest skills mismatches in the G7.”


We estimate that 90% of the UK workforce will need to retain by 2030.

Net migration is at 500,000 up to June 2022, yet there are job shortages in every sector, not just in low-skilled jobs. I was addressing the highest tech companies in the country. I asked, “How many of you are experiencing labour shortages?” Every single hand went up. I have said time after time that the Migration Advisory Committee needs to be revamped so that, like the Low Pay Commission and the Monetary Policy Committee, it can independently tell the Government to give one, two or three-year visas sector by sector: so many thousand jobs in this sector, so many thousand in that sector. Why do the Government not do this?

The good news about reskilling is the Help to Grow scheme launched by Rishi Sunak when he was Chancellor; I am on the council. Great—mini-MBAs for SMEs.

In his speech to the CBI, Keir Starmer said his party

“is proud of being pro-business.”

That is great news to hear. He said:

“We won’t ignore the need for workers to come to this country … Migration is part of our national story”.


Good migration has always been good for this country, yet we have fewer industrial robots than any other comparable country. He also made the point about investing in green growth. I believe we should invest in wind, hydrogen, solar, SMRs and, of course, the green industrial revolution, including HydroFLEX, the world’s first retrofitted, hydrogen-powered train, developed by the University of Birmingham with government and industry support.

We do not have an industrial strategy. Do the Government have a plan for an industrial strategy? The business department, BEIS, includes “Industrial Strategy” in its name. The apprenticeship levy is not flexible enough; we need to make it more flexible.

Finally, all this talk about reducing international students and restricting them to elite universities is absolutely wrong. As a third-generation international student from India, I know that international students bring in £30 billion to our economy. They enrich the culture of our universities, form lifelong and generation-long bridges and are one of the strongest elements of soft power in our country. Do not damage international students. We should increase their number from 600,000 to 1 million.

I conclude: growth; investment; address the immediate need for skills; address the long-term need for skills; bring in workforce from abroad; innovation; invest in the green industrial revolution; and let us be grateful and celebrate our universities and our international students.

Financial Markets: Stability

Lord Bilimoria Excerpts

Thursday 3rd November 2022 Lords Chamber

[Lord Bilimoria (CB)]

My Lords, between 8 and 19 September, after Her Majesty the Queen sadly passed away, the whole world looked to this country with the utmost respect thanks to that wonderful lady. On 23 September, it all came crashing down. I had been travelling around the world, in Asia and in Europe, and people said to me, “What is your great country doing to itself?” On 24 October, on Diwali day, our first south Asian-Indian Prime Minister, Rishi Sunak, was appointed. What happened on 23 September? Liz Truss and Kwasi Kwarteng’s plan was a good plan with its intentions for growth and to cut taxes. When I was president of the CBI, I constantly said to Rishi Sunak, when he was Chancellor, “Please don’t put up taxes”. The Indian Budget in 2021 deliberately did not put up taxes. The Indian Government said, “We do not want to stifle the recovery and hamper growth, because that is what will happen if we put up taxes, and businesses have suffered enough”. Instead, we have the highest tax burden in 70 years.

In life, more often than not, it is not only what you do but how you do it. I remind noble Lords of the irrational exuberance of Liz Truss and Kwasi Kwarteng on 23 September, pulling rabbits out of a hat, including removing the cap on bankers’ bonuses. This is the right thing to do to make the City of London more competitive, but not when people are going through the most acute cost of living crisis in memory. Reducing the top rate of tax from 45% to 40% is absolutely the right thing to do. It was 40% under Margaret Thatcher, John Major, Tony Blair, and Gordon Brown, who put it up to 50%. Then it was taken down from 50% to 45% by George Osborne, and not to 40% because of the coalition with the Liberal Democrats. He would have taken it down to 40%; it should be at 40%, but not now—timing is everything.

The markets were spooked of course, because there was no OBR report to back up and support the so-called mini-Budget. There was no plan and no budgeting. Removing the national insurance rise of 1.25% is again the right thing to do. The Labour Party itself said that it would not have increased national insurance. Now everyone is focused on this black hole of £50 billion. No one talked about the black hole of £400 billion that was spent during the pandemic. Our debt to GDP is, at the moment, about 100%. It is the second lowest in the G7. Japan is at 250%, America is at 150%, Italy and France are both over 110%. Our debt is not that high. It is all about perception, and about the Government and the Treasury having a plan, and the Government and an independent Bank of England working together.

Before the financial crisis in 2008, we had an average growth rate of 2.5% and interest rates of about 5%. After the financial crisis we had austerity. Austerity did not work; it led to no growth and declined productivity. We had almost 0% interest rates for over a decade. We must not go down the austerity route. We need efficiencies in public services. We are all grateful for the National Health Service; its expenditure has gone up from £110 billion to £150 billion, and will continue to increase. It needs root and branch reform. We need to be able to continue to offer health, social and dental care free at the point of delivery, and that will need efficiencies.

Putting up corporation tax from 19% to 25% is going to hamper our competitiveness and will harm businesses in every way. To counter that, the Government should encourage investment. The super-deduction of 130% has been taken away. I ask the Government if they will introduce a 100% tax deduction for capital investment, innovation and R&D to encourage investment? We need to invest in skills and to reform the apprenticeship levy. Can the Minister tell us if the Government will reform it?

We are crying out for the reform of business rates. The rates we have are some of the most expensive and unfair in the world. They are killing our high street, hospitality and retail sector. Will the Government reform business rates? Will the Government agree that business needs help right now to survive this winter, in the face of a recession? We need to temporarily reduce VAT to 10% for the hospitality sector, as we did in the pandemic. We need to give business rates relief, as we did before. We need to activate the shortage occupation list. Do the Government agree that we need a revamped Migration Advisory Committee, much like the Low Pay Commission that sets the minimum wage, and the independent Monetary Policy Committee that sets interest rates? We should have an independent MAC that activates shortage occupation lists, sector by sector, granting one or two-year visas, to give industry the workforce it needs.

We need access to cash flow and government-guaranteed loans. That way businesses will survive. If not, we will have 10% of hospitality going bust. We need the help now. I would rather do that to prevent unemployment and businesses going bust. We need a credible plan and a credible budget, not irrational exuberance, and to continue to invest in education, infrastructure and defence—and I am sorry to say I think that 3% defence expenditure is going to be required.

We now have a Prime Minister and a Chancellor with business backgrounds. We have interest rates that have gone up to 3%; they will go up to 5%. We must focus on investment, growth and this country’s strengths, with its strongest combination of hard and soft power in the world, and a reputation for integrity, which is why we have been trusted historically by the world.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, I join in welcoming the Minister to her role and thank all noble Lords who have spoken. It has been a quite exceptional debate, both for its quality and new ideas and the wide range of contributions. But while we have been standing here, the Bank of England has raised interest rates by 0.75 of a point to 3%. That is the biggest hike since 1989 and it is forecast that the UK is facing a “very challenging” two-year recession, which would be the longest on record.

I say to the Minster, since she is here, that this calls for the Chancellor to come to Parliament and to speak more generally to the nation. So many people will now be desperately worried about what will happen to them. Several speakers today—I am thinking of the noble Lords, Lord Young, Lord Best and Lord Campbell-Savours—focused on housing, both on mortgage costs and the immediate impact on the rental market. That will feed through to people long before we get to the Autumn Statement on 17 November. Will the Minister ask the Chancellor to reassure the nation before then, rather than leave people twisting, quite frankly, with overwhelming concerns? All three of those speakers talked about longer-term reforms. Those things matter, both for housebuilding and for the rental sector, but we have an immediate crisis, and that is what I ask the Minister to focus on and deal with immediately.

After the events of the past weeks, I hope we no longer have to deal with discussions that question the need for financial stability. It is a prerequisite for a functional economy, and fiscal responsibility clearly underpins that stability. I have been listening for years to people who have claimed that we can print money, borrow, cut taxes and spend, with almost no limit. I pick up the phrase of the noble Lord, Lord Kestenbaum, who said that one day the music will stop. We have to take proper responsibility.

We also need to recognise that we are not the US economy with the almighty dollar and a domestic market of 350 million people. We are not in the EU with a domestic market of 450 million and 27 countries at our back. We are a medium-sized European economy, adrift since Brexit from any significant trading bloc and with a currency that is no longer a globally used trading vehicle. We have made our economy significantly more vulnerable. I pick up the point made by the noble Lord, Lord Desai—that the UK is an inherently fragile economy and we have to recognise that in the decisions and actions we take.

I also hope—I really disagree with the noble Lord, Lord Bilimoria, here—that we have heard the last from those who claimed that very low corporate taxes, reducing taxes on the richest, slashing regulation and cutting public services are the answer that will hand us growth.

[Lord Bilimoria (CB)]

I did not say cutting public services.

[Baroness Kramer (LD)]

I misunderstood; I thought the noble Lord was advocating cuts in public services to balance the books.

[Lord Bilimoria (CB)]

I said efficiencies.

[Baroness Kramer (LD)]

I would like to deal with that issue of efficiencies and cuts. After so many years of cutting out the fat and getting to the bone and flesh, the word efficiency is used extremely casually. Very often, it is expensive to make the change that underpins efficiency, so I will be looking to see if the noble Lord, Lord Bilimoria, speaks out against cuts in the real financing of public services.

We have been through this low-tax strategy and, frankly, it is an ideology that has been proven to be wrong. It may have suited or looked sensible when first implemented, but we have seen consistently over a long period that it does not deliver growth in the UK economy. I shall be fascinated to hear speeches from the Conservative Benches after the Autumn Statement. I am sure there will be lots of support for whatever the new orthodoxy is, and I look forward to seeing how Members opposite align that with the enthusiastic speeches in favour of the mini-Budget.

Businesses are now trying very hard to get the Government to hold back from their other false growth claim, which is slashing regulation. I noted that even the noble Lord, Lord Wolfson, said in this House that business is not looking to cut or change existing regulation. Last week I was at Mansion House to hear the Lord Mayor of London trying to impress on the Government and regulators that the City and financial services depend on the accreditation and confidence that regulation provides. If ever we needed to understand that regulation, having standards and getting it right are important, it is in light of the crisis triggered by LDI.

Numerous speakers picked up that point, including my noble friends Lady Bowles and Lord Sharkey, the right reverend Prelate the Bishop of St Albans and the noble Lord, Lord Sikka, as well as the noble Lord, Lord Davies, who looked specifically at the need to reform the way we think about and structure pensions. These are not deregulatory actions; they will often incur different, but firm, regulation. Regulation is a mechanism for enforcing standards, and the casual notice that a deregulation agenda somehow leads to growth is something most of industry is pleading with the Government not to adopt.

In the end, it is ordinary people and small businesses that pay the price of decisions that fly in the face of the real world and the experience we have been through. The noble Lord, Lord Kestenbaum, made the point that market instability hits many ordinary people. I will not repeat the many conversations that have taken place today on the impact of the rising cost of living, mortgages and rents; that has been very well laid out. The noble Lord, Lord Liddle, made the point that we cannot ignore poverty, the right reverend Prelate the Bishop of St Albans talked about the problems of in-work poverty, and all the conversations about rental reform very much feed into these concerns. I have simply no idea how most families manage when the cost of the very basics for living are up by 17%.

The Government are going to have to confront the impact of declining real wages. You cannot clap nurses one week and push them to food banks the next. I disagree again with the noble Lord, Lord Bilimoria, that uncapping bonuses is just a timing issue. You cannot say that one group of people cannot work effectively unless they have uncapped bonuses, then look at nurses and say that they can work effectively even with declining real wages. That bonus system, together with light-touch regulation, played a huge role in driving the 2007-08 crash that still scars us today. There is an old saying: fool me once, shame on you; fool me twice, shame on me. We have to be very careful about how we handle the financial services industry, for which I have great respect but where the wash of money tempts people to find a workaround in so many different ways. Indeed, LDI is a very good example of the industry trying to find a workaround.

We wait to see the Autumn Statement on 17 November. I think everyone here is very well aware that Shell announced last week not just quarterly global profits of $9.5 billion, over twice those for the same period last year, but that it also paid no windfall taxes. BP had almost the same earnings and paid a tiny bit of windfall tax. The House might be interested to know that the oil and gas sector has in just this quarter paid out $29 billion to shareholders. This, if anything, demonstrates that this tax has been very badly structured. I understand the Chancellor wanted to put in many thoughtful loopholes, but they desperately need to be removed and this must become a meaningful tax. To pick up on points made largely by the noble Lord, Lord Liddle, one of the things we need to think through is a shift from taxing earned income so heavily to looking at unearned income.

I agree with the noble Lord, Lord Bilimoria, that small businesses are under terrible pressure, and that needs to lead to reform of business rates and various schemes that will let them manage the debt they are carrying, many for the first time. Of course, I also join with others in calling for the uprating of benefits in line with inflation and protection for the triple lock.

There are many things that I do not forgive this Government for, because for years they have ignored the fundamentals of growth in the economy. That may be a point for a different debate—I would love the opportunity to develop it. The Chancellor faces hard choices. The Conservative Party has over the last decade brought those choices on itself, but the unfortunate part is that it has also brought them on the country.

--- Later in debate ---

[Baroness Penn (Con)]

The noble Baroness is right that there is more than one regulator at play in this space. That point was also made by the noble Lord, Lord Davies of Brixton. If the noble Baroness will forgive me, I will come on to some actions taken after the 2018 stress test shortly.

The noble Lord, Lord Tunnicliffe, asked what the forthcoming Bill will do to promote financial stability. Allowing us to tailor our financial services regulation to the UK’s situation and needs will mean that we can create the best regulation for our circumstances. In a world where financial services are evolving all the time, with new developments and technologies requiring regular changes, the measures in the Bill will mean that UK regulations can remain up to date and effective.

It is also the role of the Government to ensure that their own decisions lead to trust and confidence in our national finances. Our responsible approach to managing the economy meant that we went into Covid and the current economic crisis with strong public finances, allowing us to intervene to support people’s lives and livelihoods. In that context it is important to acknowledge that, while well intended, the recent growth plan had unintended consequences for economic volatility.

Mistakes were made, and we have taken steps to fix them. Most of the tax measures in the growth plan have been reversed and the associated volatility dissipated. However, we are still faced with a profound economic crisis, with global inflationary pressures driven by increased demand post Covid, elevated energy prices after Putin’s invasion, widespread labour shortages and, in response, central banks across many major economies raising interest rates.

My right honourable friend the Chancellor of the Exchequer has been clear that we will take the measures needed to restore confidence and trust in the UK’s public finances and to deal effectively with the economic shocks that are being felt across the globe. In doing so there will be difficult decisions to take, but I hope that I can reassure the noble Lord, Lord Tunnicliffe, and others, that in taking them, this Government will protect the needs of the most vulnerable.

Specifically on recent events, the FPC noted in its July Financial Stability Report that the worsening global economic outlook had caused markets to be volatile in recent months. Since July, global inflationary pressures have intensified further. Specifically on the intervention by the Bank of England, all noble Lords will be aware that in late September there was elevated uncertainty in the UK bond market that resulted in gilt yields rising rapidly and significantly. LDI funds, many of which held leveraged positions in the gilt market, faced significant margin calls as a result. In some cases, these calls exceeded the cash buffers that they held, forcing them to raise cash by selling gilts into a falling market. Large sales of gilts into an already illiquid market led to yields increasing even further, in turn triggering further margin calls and forcing further gilt sales to try to maintain solvency.

This would have led to a spiral of falling prices but increasing pressure to sell gilts, so, within its remit, on Wednesday 28 September, the Bank of England started temporary purchases of long-dated UK government bonds, with the aim of restoring orderly market conditions. In line with the Bank’s statutory financial stability objective, the purpose of these operations was to act as a backstop to restore orderly market conditions and reduce any risks from contagion to credit conditions for UK households and businesses while the appropriate adjustment takes place. This operation was fully indemnified by the Treasury.

It is worth remembering that the Bank’s intervention served to keep the gilt market stable so that funds had time to adjust their positions in line with the changed market conditions. The speed and scale of repricing far exceeded historical moves, and therefore fell outside the expectations of risk management plans or regulatory stress tests. Throughout the intervention, the Bank worked with LDI funds and pension schemes as they built their financial resilience ahead of it coming to an end. Market conditions have since improved. The Bank’s usage of the scheme, at under £20 billion, was significantly below the maximum size permitted under its maximum daily auction size and below the increase in the indemnity provided by the Treasury. This stress in the LDI sector highlights the necessity of ensuring that the appropriate risk oversight and mitigation systems are in place for market-based finance.

I shall try to address the question asked by the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, about what has happened since the 2018 exercise that looked at this. Since then, the Bank of England has worked with other domestic regulators, including the Pensions Regulator and the FCA, on enhancing monitoring of the risks. That included working with the Pensions Regulator on a survey of DB pension schemes in 2019 and prompting work to improve pension liquidity risk management. As the FCA noted in its letter to the noble Lord, Lord Hollick, and my noble friend Lord Bridges in March this year, the FCA contacted the largest LDI fund managers to ask them what plans they had in place to deal with increased volatility. It also probed large managers on the speed with which they could call money from underlying pension funds in the event of stress.

In response to many noble Lords, including the noble Lords, Lord Sharkey, Lord Sikka and Lord Davies of Brixton, and the right reverend Prelate, the Government recognise that there will be lessons that need to be learned from the market volatility seen in recent weeks. The regulators are working with the industry to improve their resilience to market shocks, and it remains a focus of the Government and regulators to ensure that we have a robust regulatory system.

In addition to the ongoing monitoring of systemic risks by the FPC, His Majesty’s Treasury and UK financial regulators have been working internationally as part of the Financial Stability Board, as I previously noted, to develop global approaches to identify and address vulnerabilities in market-based finance. The noble Lord, Lord Sikka, asked why we take a different approach to the regulation of banks versus non-banks in the financial system. Part of that is the international nature of the non-banking part of our financial system.

The Bank of England has also committed to working with the Pensions Regulator and the Financial Conduct Authority to ensure that appropriate levels of resilience are in place to mitigate risks to UK financial stability. As the Pensions Regulator chief executive emphasised earlier this month, DB pension schemes were not and are not at risk of collapse due to rapid movements in the price of gilts, and savers should not make any hasty decisions about their pension pots.

I turn to pensions. As I have just stressed, defined-benefit pensions remain strong, and members of those schemes that were invested in LDI funds are not at risk of losing out as a result of either the aforementioned volatility or interventions made by the Bank. Indeed, the independent Pensions Regulator issued a statement on 12 October for trustees of defined-benefit and defined-contribution schemes and their advisers, which communicated its expectations on matters for trustees to consider in relation to managing schemes and supporting savers.

The noble Lords, Lord Sharkey, Lord Best and Lord Campbell-Savours, and my noble friend Lord Young of Cookham, rightly mentioned the housing market, and I want to respond directly. The fact is that interest and mortgage rates have been rising since last autumn in response to global trends. This is not a UK phenomenon, with the US Federal Reserve having raised its base rate since March 2022 and the ECB taking similar steps. In the UK, around 75% of residential mortgages are on a fixed rate and therefore, in the short term, shielded from rate rises. However, I know that, for those on variable rights and those who are seeing their own fixed-rate deals coming to an end in forthcoming months, there will be significant concern. Where mortgage holders fall into financial difficulty, FCA guidance requires firms to offer tailored forbearance options. While it is important to note that the pricing of mortgages is a commercial decision for lenders in which the Government do not intervene, the Government do offer support through Support for Mortgage Interest loans for those in receipt of income-related benefits and protection in court through the pre-action protocol.

Similarly, the setting of rates is a commercial decision for private landlords in which the Government do not intervene. However, we understand that many people will be worried about the impact of rising prices. My noble friend Lord Young of Cookham spoke more broadly about the reform needed in the private rented sector in order to provide more security to tenants in that sector. I agreed with much of what he had to say. Indeed, the Government’s programme of work to reform the private rented sector continues through, for example, our commitment to ban Section 21 no-fault evictions. We heard ideas from my noble friend Lord Young and the noble Lords, Lord Best and Lord Campbell-Savours, for other changes that we could potentially make in housing. I will take those back to the department and ensure that they are looked at carefully.

The noble Lord, Lord Sharkey, asked whether the local housing allowance would be uprated. He will know that, as part of our response to Covid, the rates of local housing allowance were increased significantly to the 30th percentile of the market, with 1.5 million households gaining just over £600 a year. We have maintained those rates at an elevated level last year and this year in order to ensure that claimants can continue to benefit from this. This is reviewed annually, and I will not comment further on the uprating of benefits.

More specifically, many noble Lords spoke about the difficulties that vulnerable people are facing this year with the rising cost of living. The Government absolutely recognise that and are focusing our support most heavily on those households. People are facing a difficult time. We have put in place an energy price guarantee and further support for those on income-related benefits, pensioners and those with disabilities. There is also discretionary support for local authorities to provide help in their local areas.

I am conscious of the time so I will begin to wrap up. Many noble Lords used this debate as an opportunity to look ahead to the Chancellor’s Autumn Statement. I welcomed the constructive efforts by the noble Lord, Lord Liddle, to make suggestions not just about areas of spending that should be prioritised but about ideas for tax reform to help to fund them, which always needs to come alongside. I will only say to him, on his suggestion for equalised pension tax reform, that we have heard in this Chamber in recent weeks about the challenges of keeping GPs and others in their roles because of the tax treatment of their public sector pensions, and the idea might perhaps be a bit more complicated than it may look at first sight.

[Lord Bilimoria (CB)]

My Lords—

[Baroness Penn (Con)]

I am afraid I am really short on time, so I will make some progress and finish.

As the Chancellor has said, and as I think the noble Lord, Lord Desai, and the noble Baroness, Lady Kramer, agree, stability is a pre-requisite for growth. It is vital for families across the country—from the jobs they depend on to mortgages they have to pay, and to savings for pensioners and businesses investing in the future—and vital for the Government’s ability to borrow and invest in our economy.

The Chancellor will deliver his Autumn Statement on 17 November. Many noble Lords have asked me to speculate on its contents. They will know that I cannot, but I can say at this stage that the Prime Minister and the Chancellor are clear that the priority will be to ensure economic stability by setting out a concrete plan to get debt falling in the medium term. However, they are also clear about their priorities when taking the difficult decisions that this will necessarily entail: to support the most vulnerable and to drive growth to ensure that we have a strong economy by building jobs for the future—and our resilience to future shocks, too.