Financial Services Bill

Lord Blackwell Excerpts

Tuesday 3rd July 2012 Lords Chamber

[Lord Sharkey]

I shall speak briefly in support of Amendment 35, in particular the inclusion of the requirement to promote the Government’s objectives for growth and employment. I emphasise the importance of promoting a healthy and flourishing SME sector in achieving those objectives. The report of the noble Lord, Lord Young, last month, Make Business Your Business, noted that 50% of private turnover, excluding financial services, and 60% of private jobs are provided by SMEs, but SMEs still face great difficulty in finding funding.

The Breedon report of March this year estimates that by 2016, there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. The Government need to take direct action further to improve the supply of finance to the SME sector, in particular in our deprived communities. SMEs in those communities attract only 4% of all investment in SMEs and are in areas where unemployment, especially youth unemployment, is likely to be high.

There is another urgent reason for providing finance to the SME sector. That is to do directly with job creation. The Kauffmann Foundation, a highly respected United States think tank, published a study in July 2010 entitled, The Importance of Startups in Job Creation and Job Destruction. I will have more to say about the findings of the report later in the debate, but its most striking findings were that in the 28 years it surveyed, all net new jobs came from start-ups and that during recessionary years, job creation in start-ups remained stable while net job losses in existing firms were highly sensitive to the business cycle.

That surely has lessons for the UK. If the Government are to succeed in creating the right number of new jobs, they must strongly and actively promote not just SMEs but the start-up subsector of SMEs. To have the appropriate effect, they must do that particularly in our deprived communities. Without such strong and directed promotion, the growth and employment objective is in danger of remaining just that—an objective.

[Lord Blackwell]

My Lords, I apologise to the House that I was unable to contribute to the Second Reading debate. The fact that all these amendments recognise the interlinking of financial stability policy and the wider economic objectives is a major step forward. However, the amendment proposed by the noble Lord, Lord Eatwell, is mistaken in its wording. It is a fallacy to believe that monetary policy and financial policy can be conducted orthogonally, independently of general economic and fiscal policy. The two inevitably interact, and it is fallacious to believe that we can have a government Chancellor of the Exchequer in one corner deciding on a fiscal policy and an independent bank deciding on monetary policy in complete isolation—and, if necessary, disagreeing and conducting an alternative economic policy.

We are in this situation only because the previous Government separated monetary policy from the independence of the Bank of England in 1997. Until that point, the assumption was that the Chancellor of the Exchequer and the Government were accountable to Parliament and to the electorate for economic policy in the round. The Governor of the Bank of England certainly had a crucial role in advising the Prime Minister and the Chancellor of the Exchequer on monetary policy.

At the end of the day, however, a common policy was agreed that ensured that monetary policy and fiscal policy were aligned to the same objectives. They might be the right objectives, they might be the wrong objectives, but at the end of day the Government and the Chancellor of the Exchequer were accountable to Parliament and to the electorate for those decisions. The idea, as the noble Lord said, that at times you want a Bank of England or a financial policy committee to pursue a policy that is at odds with government policy is mistaken and misrepresents the way in which these functions ought to work together.

I therefore much prefer the wording of my noble friend’s amendment, Amendment 35A. Although I agree with much of what the noble Baroness, Lady Kramer, has said, my noble friend’s amendment has the great advantage of simplicity, and I support him in that.

[Lord Peston]

My Lords, I criticise both Amendments 35A and 35 on the grounds that they are both illogical and make no economic sense, to put it as bluntly as I can. I am amazed, however, at the intervention by the noble Lord, Lord Blackwell, just now, because he comes to the wrong conclusion. How can he support Amendment 35A on the basis of his analysis of interlinking?

Let me start with Amendment 35A. If you asked anyone why you would want to achieve what is in paragraph (a), the answer would be, “Because it makes the economy work better”. It is not wanted for its own sake, as far as I can see, because it involves a total confusion of means and ends. Therefore, sensible economics would delete the words—a favourite activity of my noble friend Lord Barnett and me—“subject to that”. All that is required is the word “and”—forget the “subject to that”.

The same applies to the amendment in the name of the noble Baroness, Lady Kramer, et al. What she wants to achieve is desirable; no-one would doubt that. However, if we ask, “Why do you want to have a stable and sustainable supply of finance to the economy?”, the answer is, “Because it makes the economy work better”. We cannot assume that the Government’s economic aim is to make the economy work worse; quite the contrary. My view is therefore that I would be reasonably happy with either of the amendments if “subject to that” was taken out, but in no other circumstances.

If I can, I will go back to the Monetary Policy Committee, which the noble Lord, Lord Barnett, and I have criticised for years now because of the “subject to that” clause. It gets around this dilemma by ignoring “subject to that”. I have said in this House before that in my judgment the MPC breaks the law under which it was set up, because there are now real inflationary dangers. You do not have to be a Friedmanite to say that expanding the quantity of money, which is what monetary easing is, is immensely dangerous when it comes to the future inflation rate of this economy.

Somehow or other, most members of the MPC—I am not certain that they all do—ignore that bit of the subject, go ahead with quantitative easing and forget their inflation objective, even though they are not achieving it. These two amendments might well be equally innocuous. Maybe in practice the whatever it is called—I am still having trouble with the acronyms but I think I am talking about the FPC—will become totally cynical and forget the subject of that bit at certain critical times. It would be better if the three little words “subject to that” were taken out; and then, to be perfectly honest, I do not care which amendment we agree to.