Covid-19: Economic Recovery

Lord Griffiths of Fforestfach Excerpts

Tuesday 20th April 2021 Grand Committee

[Lord Griffiths of Fforestfach (Con)]

My Lords, it is a great pleasure to take part in the debate and to follow my noble friend Lord Vaizey, whose optimism and view of technology and what can be done I very much agree with.

As my noble friend Lady Penn reminded us when she introduced this debate with an excellent speech, the Government should be rightly proud of their economic record over the past 12 months. They have avoided what could have become the catastrophe of mass unemployment. Facing a 10% fall in output—one of the largest ever falls in peacetime—great global uncertainty and the knock-on effects of Brexit, the Chancellor, Rishi Sunak, acted decisively and boldly to support jobs and business. Over the past year, the Chancellor has kept on announcing new measures, slightly adjusting the policy as required. The result is that unemployment today is far lower than forecast last year and an economic recovery is well under way. The official estimate for GDP growth this year, even in the Budget, was only 4%. I say that because, by contrast, some reputable forecasts have put it at nearly double that figure for this year, followed by another 5% to 6% next year. As my noble friend Lord Lilley suggested, the potential of a market economy to create prosperity is truly remarkable.

We heard from my noble friend Lady Penn in her opening speech of the endless measures the Government have introduced to deal with the pandemic crisis. People will say that much more could have been done. I shall comment on two aspects. Two-thirds of the rise in unemployment over the past year has been among the under-25s. We have youth unemployment of nearly 1 million in the UK. This is an extraordinary, depressing and dispiriting form of rejection for young people. The longer a person is out of work, the more long-term damage is done to their career and livelihood, involving long-term unemployment and permanently reduced earning power. They are frequently the last to be hired and the first to be let go. The evidence of the damage done in Spain and Greece over the past decade should concern us.

I have no doubt that it will take years, not months, to tackle the problem. The Government will rightly say that they are aware of it and have taken a number of steps to deal with it, and today’s announcement of flexible apprenticeships is absolutely welcome. However, I have a nagging concern that we could be doing more in a co-ordinated way, with one Minister wholly responsible for driving the policy. I am not suggesting I have easy answers, but I believe the problem is a festering sore in our society and something easily exploited by subversive ideologies.

The second area I want to comment on is investment. It is clear that the Chancellor’s intention is that this recovery should be investment led, hence the provision of the super-deduction tax break on investment spending. It seems that certain industries, such as construction and IT, will not be eligible for the tax break because they lease or hire short term rather than buy. In view of the importance of investment for this recovery and for longer-term growth, does the Minister not think that this area should be looked at again?

As I hope is clear, I am wholly supportive of the Government’s commitment to the recovery and to the return of full employment. But, as my noble friend Lady Penn mentioned in her opening speech, the debate is an attempt also to review what has been done. However, I have two have major concerns for the future and believe that the present is the time to begin to address them.

While the sun is shining, it is very easy for any Government—we have seen it in the past—to postpone taking the decisions that are critical if recovery is to be sustained and stronger economic growth achieved, so that we have growth not just this year and next year but in the following years as well. In this context, the Government must be prepared to allow a structural challenge in the economy to take place. The fact that the bank rate is at 0.1%, the lowest in the Bank of England’s 374-year history, while the recovery is roaring ahead, gives no incentives for heavily indebted companies, popularly termed “zombie companies”, to put their house in order. These companies can just about manage to pay interest on their debt but have little chance of ever repaying the debt itself. However, they employ capital and people who could be much better employed from society’s point of view in new and growing firms, using state-of-the-art technology, leading to higher productivity. The Government must allow this change to take place. Of course, there will always be exceptions for individual firms, which can be accommodated by special assistance. However, for the change to take place, the time has come for the Bank of England to begin changing the stance of monetary policy.

The Bank is committed constitutionally to working with the Treasury and not against it, even though it has operational independence. When a year ago the pandemic hit, the Treasury, the OBR and the Bank of England assumed that the major problem we faced would be deflation. As a result, the Bank cut the basic rate to 0.1%. It has continued with that low interest rate ever since, as well as extending the policy of quantitative easing: namely, increasing liquidity in the economy each month. It also alerted the banking system to the possibility of negative rates. However, I believe that deflation is no longer a realistic prospect, and that is the tone of today’s debate. If the Bank wishes to continue with a policy of quantitative easing and keeping interest rates at rock-bottom level, it must set out its case in detail, accompanied by evidence to back it up. I do not believe it is doing that at present.

Such a change made by the Bank in resetting monetary policy would help the Treasury in another way. The Chancellor has been decisive and bold in tackling the pandemic crisis, but it has involved a huge increase in public spending and an aggressive easing of monetary policy. To pay for the increase in the excess of expenditure over taxation, we have to borrow at an unprecedented rate for peacetime, and this will fall on those who will pay the tax—maybe not those of us taking part in debate but our children and grandchildren. To do this and keep interest rates low, the money supply has expanded by 15% over the past year.

The lead letter in the Financial Times today was from the Shadow Monetary Policy Committee, chaired by Tim Congdon, warning of the dangers of what is happening. It has been evident for some time now that the combination of this extraordinary fiscal stimulus and aggressive monetary easing has raised the spectre of inflation. The public do not like inflation; they feel cheated by higher prices. We know from the history of the 1960s, 1970s and 1980s that, while it initially stimulates employment, inflation—when it has run its course—ultimately destroys jobs.

In my judgment, the return of inflation will prove no friend of the Chancellor in protecting long-term jobs in the UK economy, which is another reason our success in the recovery must be set within a long-term monetary and fiscal framework, rather than just the immediate future. I believe this requires no major policy changes but a signal from the fiscal and monetary authorities that they are determined to keep the rate of inflation at its present objective level of 2%.