Economy: Currency Fluctuations

Lord Davies of Oldham Excerpts

Thursday 17th November 2016 Lords Chamber

[Lord Davies of Oldham (Lab)]

My Lords, I join colleagues in congratulating the noble Baroness, Lady McIntosh, both on securing the debate and on producing such a challenging and feisty speech to open it. I had worried that we might be revolving around some narrow technicalities with regard to the exchange rate, but she set the tone by emphasising the impact on the economy and wider society of the depreciation that we have gone through in the past few months. In doing so, she indicated that the situation which confronts us is a real challenge to the Government.

There is no doubt that the floating exchange rate is not an element of policy for government at present. Both the Minister and I recognise that the floating exchange rate is the basis on which the economy revolves, and it is not for the Chancellor or any politician to fix it but for the Governor of the Bank of England and his colleagues. This might suggest that the emphasis on the exchange rate may be misplaced, particularly as a considerable number of specialists have emphasised that the depreciation that has gone on thus far is long overdue. The International Monetary Fund thought that we were due a considerable reduction in our exchange rate some time ago. That is now what we are faced with, but the noble Baroness, Lady McIntosh, said that there were consequences of that—as she mentioned, for agriculture and the food industry in particular—and that contained within the situation was the potential for substantial inflation. I want to comment on that in more detail in a few moments.

A whole range of significant external events impact on the economy, but I do not think that any measure up to the impact of the nation’s vote to withdraw from the European Community. There is no doubt that that is what this depreciation in the currency reflects the most—a point that the noble Lord, Lord Bilimoria, stressed. The impact on companies is of course varied, but we should bear in mind—the noble Lord, Lord Bilimoria, stressed this the most, but he was not the only one—when we talk about our manufacturing industry and our industrial capacity to take advantage of a lower exchange rate and boost our exports, just how complex the ownership of our industry is now and the different factors that come into play. It is not just the British exchange rate which dictates the costs of British companies, given their extensive component parts, often foreign-owned, all building up to the product that they seek to take to the market.

This is not the time for me to emphasise from this Dispatch Box the range of policies which we think the Government should adopt. We have the advantage of hearing from the Chancellor next week and we will have a full debate on the economy subsequently. That will be the time when we will test the Government’s intent against the challenges which they face.

My noble friend Lord Haskel emphasised an important point in this debate. It was a Labour Government who placed responsibility for the bank rate on the Bank of England. It is therefore not immediately amenable to action by government, but we know that in fact the Government have to act against that background for us to have a hope of taking advantage of the depreciation in the rate.

But the problem is surely something on which the noble Lord, Lord Paul, put an optimistic dimension when he commented on the position of India. The noble Lord, Lord Bilimoria, who shares some background with him in those terms, was a little more pessimistic. I do not think that, when the Prime Minister visited India, we were able to derive enormous expectations from that. Yet clearly India is an important trading market, and one in which we would hope to realise greater potential. Indeed, we must have greater success with the Indias and Brazils of this world to make up for the very severe changes affecting our major trading market—the European Community.

I know that the Government are reluctant to declare what their hand will be in the negotiations; some have been unkind enough to suggest that that is because they do not have a hand to play—or at least, not one about which they are managing to convince even their own Cabinet with any degree of unity. None the less, it is clear that we are going to have tough negotiations with Europe. We cannot expect that the Europeans will approach our requirements with any great empathy; indeed, they will certainly approach them in terms of their own interests. We all recognise that trade flows both ways, but we are still likely to have great difficulty; consequently we will need many more new trade deals—those which formerly were in the framework of the European Community but which the United Kingdom will now have to negotiate for itself.

That is a pretty challenging perspective in the present world position, but if there is another dimension that might make this situation even more difficult, it is the result of the American presidential election. We all, particularly those of us who have been involved in electoral politics in the past, know the difference between electoral rhetoric and effective action by Governments. Nevertheless, it is clear that the president-elect of the United States has very strong protectionist leanings. He won a lot of votes for suggesting to those who thought they had lost through the development of international trade that it would be America first—and America successfully protected. He identified, as his major element of protective activity, China, which he regards as a manipulator of exchange rates. That should send a chill down the spine of everyone concerned about the development of the British economy. The prospect of our being involved in worldwide negotiations of the greatest significance to secure markets in areas where the largest economic unit in the world, the United States, is arguing the case for protectionism is a profound worry to us all, and shows the dangers we face.

We can face these consequences rather better than we did in the 1930s, when states that engaged in individual protectionism reduced world trade and industry, and increased unemployment, until the only stimulus a nation could produce in response to the collapse of world trade was to spend huge amounts of government money on armaments and the development of the Second World War. That was the greatest factor in reducing the huge levels of unemployment in the 1930s. We can learn lessons from that period and we can avoid that, but it means that the Government must address themselves with great skill and commitment to the negotiations that are necessary.

Another element, which the noble Baroness, Lady McIntosh, introduced first but on which others have also commented, is the threat of significant inflation. We have, of course, had a period in which inflation has been negligible. But it is clear that, as the noble Baroness, Lady Kramer, emphasised, two years or so from now we shall see quite a significant feed-through of external costs into our economy and the development of inflation.

One responsibility that the Government must sustain over this period is clear. The people who spend the greatest percentage of their income on food are the very poor. Those who are low-paid or on benefits spend £1 in every £6 on food. The Government are now pursuing a four-year squeeze on benefits. They cannot possibly sustain that position against rising costs. Otherwise, they will be saying that those who have borne a very heavy burden since 2008 and the financial crisis—no wage increases, seeing others take their jobs and a massive reduction in benefits—will have to bear the largest burden of what will feed through in inflation in 18 months or so. Surely that cannot be sustained.

The debate has ranged widely. It is a precursor to the major debate we must have on the economy shortly, and it has developed from one on the exchange rate to one on the fundamentals of the British economy. I am grateful to all noble Lords who have participated in it.