Economy: Growth

Lord Hollick Excerpts

Thursday 31st March 2011 Lords Chamber

Moved By

[Lord Hollick]

To call attention to the case for policies to support economic growth and to promote investment, innovation, technology, infrastructure, skills and job creation; and to move for Papers.

[Lord Hollick]

My Lords, today’s debate on growth draws on the impressive range of experience and knowledge in our Chamber. We have five maiden speeches to look forward to—from the noble Lords, Lord Kestenbaum, Lord Wood, Lord Collins and Lord Popat, and the noble Baroness, Lady Worthington.

One of the keys to growth is productivity, and in today’s time-constrained debate, although gratefully somewhat extended, that means saying more in less time. I will do my best. I do not wish to rehash the debate about the pace of the fiscal consolidation adopted by the Chancellor. That was discussed at length last week. Putting the public finances on a sound and sustainable footing after the financial crisis is an essential first step towards recovery, but we cannot cut our way out of our economic problems. We also need a credible strategy for growth, because growth matters. Small changes in the growth rate over the next few years can undermine the Chancellor’s deficit reduction plan, and if he chooses to stick to plan A that might well lead to even deeper and more damaging cuts. Low growth in the short term will make big differences to our standard of living in the long term.

A reduction in our long-term growth rate from 2.5 per cent to 1.5 per cent would reduce aggregate growth over the next 20 years by nearly 30 per cent. A prolonged period of low growth would inflict a decade of stagnation, a loss of international competitiveness, a sharp deterioration in public services and a generation of jobless young people. The Government now acknowledge this and have begun to turn their attention to growth. Growth in our economy is currently anaemic, and we still have the full impact of the cuts to come, with their inevitable blow to consumer and business demand and confidence. Food and fuel prices are rising, and the Japanese economy has been badly hit. Against that background, the risk to the OBR’s forecast is very much on the downside.

The Plan for Growth, published with the Budget, is a welcome document, and so are many of the measures announced in the Budget to promote growth. The plan is the latest in a long line of efforts to improve our economic growth rate, stretching back to the work of Neddy in the 1960s. Indeed, my noble friend Lord Layard and I are veterans of the 1996 Commission on Public Policy and British Business report, entitled Promoting Prosperity. What is striking about this 50-year body of work is that, after allowing for the impact of greater globalisation and the emergence of new technologies, there is a remarkable consistency of analysis, findings and proposed remedies. Underinvestment, low productivity, inadequate skills, lack of availability of finance and over-burdensome regulation are ever-present themes. This consistency points to the deep-rooted nature of the problem and the sheer difficulty and complexity of raising the growth rate in a developed country in a highly competitive world economy.

Another lesson from past growth initiatives and plans is the overriding importance of excellent and consistent implementation and execution of policy measures. Too often, Governments chop and change, introducing new wheezes which have a short-term political impact but fail to provide the consistent and predictable environment that business needs. Much is promised, but little is delivered.

Improving productivity is a key driver of growth and has rightly been a priority in all plans. Yet, despite a good relative performance over the past 15 years, UK productivity per hour is some 17 per cent lower than the US and 10 per cent below that of Germany. Our services sector, the largest driver of jobs growth, responsible for 65 per cent of private sector output, accounts for much of that productivity gap. Improved skills, not least management capability, greater innovation and improved levels of investment are necessary preconditions to improving productivity.

The Budget brought some notable changes to planning and important clarity on tax treatment of overseas profits, but only limited deregulation. Some old friends reappeared. Enterprise zones, despite their very modest record and short-term impact, are back in fashion. Better, surely, to make the whole of the UK an enterprise zone with time-limited measures to promote enterprise, investment and business formation. If the Government really believe in localism, allow our cities to introduce their own set of policies to attract investment, to develop clusters and to meet local training needs. Business and investors partner with cities around the world, and would welcome the opportunity to do so in the UK.

While that deregulation is promised, other parts of the Government are busy undermining proven ingredients of our success. The creative sector, where I spent much of my career, accounts for more than 7 per cent of GDP, and relies on the steady supply of richly talented individuals. That does not happen as a course of nature. The likes of James Dyson, Paul Smith, Ridley Scott, Simon Rattle, Keith Richard and Alexander McQueen all went to art school, where the wild and the wacky creative talents can flourish. Art schools have had significantly to up their intake of overseas students to make ends meet. That, and the high level of fees, risks choking off the very supply of talent, often from disadvantaged backgrounds, that we need to remain a world leader.

Reductions in the level of taxation on profits and an increase in the level of tax incentives to invest are guaranteed a very warm welcome, but have they been targeted effectively? In the light of the need to boost investment, I would favour tax breaks on investment rather than a faster reduction in the overall rate of corporation tax. Why does investment in capital goods receive favourable tax allowance treatment, when intangible investment in process improvements, creative ideas, skills and IT, all of which drive innovation and productivity and in many businesses are the most important components of growth, are disadvantaged? In addition to their aim to achieve simplicity in tax matters, the Government should also adopt the principle of neutrality.

The UK has long been a laggard in capital investment. Last year, investment sank to 15 per cent of GDP, down from a 30-year average of 17 per cent, compared with 19 per cent in Germany and 21 per cent in France. Two particular areas of underinvestment stand out: infrastructure and energy. In its report last November on growth priorities, the McKinsey Global Institute estimated that the UK needs to spend £350 billion on transport over the next 20 years to renew our strategic network of roads, railways and airports to expand capacity and help to close the productivity gap. A further £170 billion is required over the same 20-year period to renew our energy infrastructure. It is therefore regrettable that the Government have gone for a quick political fix on fuel duty by clobbering the oil companies and thereby putting the oil companies’ investment plans at risk.

The Government currently enjoy exceptionally low long-term borrowing costs and should and must be at the heart of this vast infrastructure investment programme. But here we come up against a persistent and wretched piece of Treasury dogma, which dictates that, unlike in most OECD countries and contrary to the rules operating in the European Union, all borrowing by the Government, even if it can be serviced from cash revenues, must be included in the PSBR. Of course, borrowing that has to be financed through future taxation must be included, but if the return exceeds the cost of borrowing, the borrowing should not count towards the PSBR. As my former colleague at the IPPR, Gerry Holtham has pointed out, a state infrastructure bank could turn the PFI model on its head and provide loan finance for the construction of a road which could then be leased to the private sector in return for a rental income which can service and repay the debt. Road usage forecasting is sufficiently robust to enable the risk to the taxpayer of default to be covered by an appropriate guarantee charge, which should be included in the PSBR.

The income to finance the renewal of our road network will flow from the long overdue introduction of road pricing, which can easily be deployed using the vehicle number plate recognition system that works very effectively in London. Charging consumers for the use of expensive public assets is a fact of life in most countries, but in the UK, the very threat of it leads to a serious outbreak of jitters in the Government. I have advocated its introduction to Ministers in this Government and their predecessor and have always been met with an enthusiastic response to the idea but a terror at having to take responsibility for its introduction. The very severe challenges we face require boldness and courage from the Government. Timidity simply will not do.

Road pricing is but one example of how Governments can open up new markets and foster demand without recourse to the Exchequer. This Government and their predecessors have been quietly and impressively working, using administrative and legal powers to create new markets in the energy sector. Feed-in tariffs and the upcoming Green Deal are two such examples. The costs of the solar panels installed under the feed-in tariff scheme are largely borne by the total population of electricity consumers. The Green Deal is likely to see a range of energy-saving technology installed in homes, paid for by loans from electricity suppliers, which will be paid out of fuel-cost savings. The green mortgage thus created will attach to the property until repaid, regardless of who the owner is. Both schemes will create many jobs quickly, boost the economy and encourage product innovation and manufacturing. Another more conventional idea floated by the Secretary of State at the Department of Energy and Climate Change just before the Budget, which sadly did not survive the Treasury cull, was to lower the rate of VAT to 5 per cent for a limited period for home refurbishment and repairs up to a limit of, say, £20,000. This would have created many new jobs quickly, improved the housing stock and brought some cash transactions that are currently not in the VAT net back into the VAT net—all at a modest cost to the Exchequer. Perhaps the Secretary of State’s suggestion is being held back for next year’s Budget.

Another opportunity to stimulate a market and create demand at no cost to the taxpayer is the provision of sophisticated healthcare technology to the home that can be monitored remotely and that will allow the elderly and infirm to remain safely and happily in their own home and to delay or avoid the expensive option of a care home. This could be financed out of existing local authority budgets.

Ready access to finance is the sine qua non of growth. SMEs complain about the lack of availability of loan finance and the steep cost of loan renewal. Project Merlin might help but needs to be very closely monitored. Many SMEs are held back by a lack not of loan finance but of capital, and while there are welcome increases in the EIS and VCT allowances for early-stage companies, the threshold levels are set far too low to help the one sector of our economy that can create the majority of new jobs that we so badly need. Again, timidity seems to have won out.

The Plan for Growth reminds me of my school report—“a worthy and promising start, but much, much more needs to be done”. The OBR’s judgment was more dismissive; it saw insufficient evidence that The Plan for Growth would do anything to raise long-term growth. I anticipate that your Lordships will identify today many ideas and opportunities that will help us to improve on that position.

--- Later in debate ---

[Lord Hollick]

My Lords, this has been an excellent debate. I thank every speaker for the informed and constructive way in which it was conducted. There were many excellent ideas and there have been five outstanding maiden speeches, which give us a glimpse of the formidable contribution that our new colleagues are going to bring to our debates.

The Minister has not had the opportunity or the time to go through each and every one of the suggestions that was made. Perhaps he will find an opportunity in future to do that, and perhaps he will take up the suggestion of the noble Lord, Lord Higgins, of having a meeting in the Moses Room to discuss some of these things. The contribution that has been made today is worthy of continuing discussion and serious consideration by the Government. With that, I beg leave to withdraw the Motion.

Motion withdrawn.