Eurozone Crisis

Lord Hollick Excerpts

Thursday 1st December 2011 Grand Committee

[Lord Hollick]

It is a great pleasure to follow the maiden speech of the noble Lord, Lord Wolfson. He showed great humanity and insight, with a nice, witty touch. He is a man of considerable distinction in the business world and, as we have heard today, comes from a family of great distinction. He was the youngest CEO in the FTSE 100 when he was appointed as CEO of Next. He showed, as has been mentioned on a number of occasions, a great flair for promoting some of the causes close to his heart when he announced his £250,000 prize—no mean prize, that. Perhaps he might like to consider a more modest prize for Peers who can come up with an exit strategy from the current economic turmoil that we find ourselves in. Sadly, as he has pointed out, he will be unable to participate in that, as House rules would probably prevent him under a conflict of interests. I congratulate him on his speech, and we very much look forward to his contributions.

I am very grateful to the noble Lord, Lord Lamont. There are two debates here, one about Europe and one about the United Kingdom. I intend to talk about the United Kingdom, but obviously against the background of all that has been said on Europe. The OBR report was a truly sobering document. There has been an alarming deterioration in the public sector finances, with borrowing set to rise by more than £150 billion above last year’s forecast. Growth has stalled for at least another 18 months, with all the risks on the downside. Household budgets, down by 2.3 per cent this year, are under intense pressure, particularly for the less well-off. This takes place against the existential threat of the disintegration of the eurozone, with all the consequences that have been colourfully and accurately made plain in this debate.

The Chancellor’s key economic judgment in 2010 was that fiscal consolidation would promote growth, that private sector growth would replace the jobs lost in the public sector and that private sector investment would make up for the shortfall in public sector investment. That judgment has been shown to be wrong. If you peel away the rhetoric, the Chancellor is now admitting as much. He is now being urged by both the IMF and the OECD to consider a more flexible approach, with a staged approach to cuts combined with temporary tax cuts. The Chancellor, like his predecessor, has worked hard and successfully to maintain credibility in the financial markets. As we have seen in the eurozone over the past few months, once credibility is lost, it is hard and very painful to regain: borrowing costs increase to quite unsupportable levels. Financial markets want to see a clear plan, effectively implemented; but they are also well aware that fiscal consolidation without economic growth is a dead end. The risk in today’s very volatile world economy is that our current recession will turn into a depression.

In March, the Government published The Plan for Growth, with 137 measures. They have just published a scorecard on how they are getting on with these measures. The OBR judged at the time that the measures would have no significant impact on growth. So how does the latest package shape up? Is this apparently long list of rather hurriedly assembled growth measures likely to make any measurable difference? It will not, according to the OBR, until 2014-15. I would be grateful if the Minister could confirm that the Treasury also agrees that the measures will have no discernible effect over the next three years, when growth is most needed.

In our debate on growth in March, noble Lords on all sides of the House urged the Government to focus on infrastructure and SME financing. The Government listened and acted. The noble Lord, Lord Skidelsky, has long advocated an infrastructure bank, which I enthusiastically support. An independent specialist bank that can evaluate risk, access and finance projects and possibly take advantage of the Government's ability to borrow at ultra-low interest rates will be essential if we are to encourage pension funds to invest in infrastructure. Pension funds are indeed hungry for safe, long-term, inflation-proof returns. However, all the evidence suggests that they prefer to invest in established projects with proven cash flows, not in risky greenfield projects.

SMEs create jobs and bring competition to established players, to the benefit of productivity and the consumer. SMEs are now coming to the centre of the political debate. On the supply side, more rigorous competition needs to be stimulated in sectors such as banking, utilities and energy supply if new entrants are to be encouraged to enter the market. Of course, funding must be more readily accessible. Credit-easing initiatives are welcome, particularly after the poor experience of Project Merlin. However, the Treasury is still far too fixated on debt finance. Many of our SMEs are undercapitalised by international standards, in part because the tax system treats debt finance more favourably than equity finance. With insufficient equity, the SME owner pays a very steep price to the bank and has to pledge all his assets to raise a loan.

Instead of tinkering with minuscule tax reliefs for EIS or VCT schemes, why do we not tap into the considerable cash resources of entrepreneurs and the wealthy in our society and encourage them to invest risk capital in SMEs by allowing equity subscription to be written off against the marginal rate of tax? This would not only bring in much needed equity to SMEs but would make available the experience and knowledge of the investors. I can testify that the smart-investor model works well in the venture capital industry here and in Europe, and it is one of the key ingredients behind the successful level of business formation in the United States.

Why SMEs are not borrowing is apparently a mystery to the Treasury. The reason is simple: why should they take on more borrowing to increase capacity if there is no sign of an increase in demand? When Bob Diamond appeared recently before the Economic Affairs Committee of this House, he noted that since the start of the year more than 40 per cent of Barclays business customers had increased the level of their cash deposits with his bank because they saw no merit in investing at a time of weak demand.

If the Government are to deliver growth, they must stimulate demand. Now that the Chancellor is embracing a more flexible and interventionist approach, he needs to be bolder. He should borrow to finance infrastructure projects that generate cash returns, and should stimulate demand by lowering taxes such as VAT and the basic rate of income tax, which will feed directly through to consumption. He should provide much bigger tax incentives to invest in SMEs and to encourage employment and training. He has already identified a number of areas where taxes can be raised without damaging growth. I suggest that he should now bear down even harder on loopholes such as the stamp duty avoidance scheme on expensive properties and on the regressive structure of community charges. Now that he has at last embraced a new approach, he needs to turn this week's mish-mash of measures into a bold and coherent plan to promote growth through investment and demand management.