EU: Budget Report

Lord Hollick Excerpts

Thursday 25th April 2013 Lords Chamber

[Lord Barnett]

My Lords, I congratulate my noble friend on powerfully reinforcing what my noble friend Lord Eatwell said from the Front Bench about why this government policy is so inadequate.

I must say to the noble Baroness, Lady Noakes, that I thought she was telling us that she was not too happy about even bothering with these Motions and why did we have do it. We did sign the Maastricht treaty and now this Government are following the previous Government in believing that we have to continue with these Motions. I share her certainty that we are not going to join the euro. That is not because we are as inadequate to join as, for example, Greece and Cyprus, but because Gordon Brown laid it down very clearly in five economic tests, none of which could conceivably be met by any Government. At that time I was not terribly happy with them but that made it certain that we were never going to join.

We have these two Motions before us. I have to tell the noble Lord, Lord Newby, that I could not conceivably support them. I do not know how anybody could. Indeed, if he was sitting on the Back Benches now, I am sure that he would oppose the signing of these Motions. On the first Motion, we are asked to approve what the Office for Budget Responsibility has said about the fiscal outlook and the Budget Report. I certainly do not agree with that and I could not support it. The second Motion is even worse. We are told that we should support,

“the five key priorities of the 2013 Annual Growth Survey which are in line with the Government’s domestic growth agenda”,

and,

“the Government’s view that it is important to focus on implementation of existing reform commitments”.

We are told that we have “growth-friendly fiscal consolidation”. I do not know how anyone could describe the Government’s policy as growth-friendly. I bet that the Chancellor of the Exchequer would not really be able to support that proposition.

As I said, it is impossible to support the two Motions. They are based on forecasts made by the Office for Budget Responsibility. Any forecast beyond today is difficult for anyone to support. What we have now from the Office for Budget Responsibility is regular adjustments of its forecasts. The forecasts are meaningless. I do not blame the Government for the forecasts, all of which are inadequate, but I do blame them for believing them. How anyone can believe a forecast for five years ahead I find difficult to imagine. Today’s forecast happily does not show that we are in recession, but that will be revised in a few weeks’ time by 0.1% or 0.2 %—who knows? That is only for this quarter. The noble Lord, Lord Newby, like everyone else in the Government, keeps telling us that they have cut the deficit by a quarter, a third, or whatever. The fact is that in 2010, the Government forecast that they would eliminate the budget deficit by 2015. It is now called a rolling forecast. Every year, it is rolled forward.

There is now a forecast that it will be in balance by 2018. How can anyone believe that it is possible to make a forecast five years ahead? We do not know. It could be 2019 or 2020 before we get balance; we cannot be certain that it will be in 2018. The reason is that we have not got growth. Without growth, it will get worse, inevitably. Given our constant lower growth, we cannot rely on that forecast for 2018, not 2015. All that we can rely on is what is happening now, and even that is uncertain.

In the second Motion, we are asked to support that view. How can anyone ask us to support forecasts of that kind? Even the OBR does not believe them. It states in paragraph 143 of its latest report:

“There is considerable uncertainty around our central forecast”.

I am not surprised. It is inevitable that there is uncertainty about a forecast for five years ahead. We are then told that all central forecasts are unreliable and uncertain, so why on earth are the Government accepting them and relying on them to carry on with their whole policy?

I find this whole debate, and the fact that someone like the noble Lord, Lord Newby, is blithely reading out what the Treasury have given him, surprising. Unfortunately, I have agreed to give a seminar tomorrow in the Treasury on the 1976 crisis. I took the trouble to look at what I did at the time, what I said in my book and what my dear friend Lord Healey said in his autobiography. He said that there had been a £2,000 billion error in the forecast at the time. I assume that he did not mean £2 trillion, but no one has corrected it since. Even a £2 billion error in the forecast would have been enough. He said that, without it, there would not have been a 1976 crisis. That may or may not be true, but the fact is that we had a 1976 crisis, all because we were relying on those hopeless and inadequate forecasts that Governments have believed.

Personally, because I do not believe any forecasts beyond today, I find it impossible to go along with the two Motions. I am sorry that there will not be a vote; if there were, I would be happy to vote against them.

[Lord Hollick]

My Lords, I want to discuss the political and policy judgments that have been made since the financial crisis. The previous Chancellor, my right honourable friend Alistair Darling, like everyone else, did not see the 2007-08 banking crisis coming, nor the damage that it would do to our public finances, but in the eye of the financial storm, he did an excellent job of judging what needed to be done. He organised the huge recapitalisation of the banks. He sought to find the most effective balance between policies to repair the public finances and reduce public debt and also to promote growth. He recognised that the UK’s ability to finance its ballooning deficit would require the support of the bond markets, which would need to be convinced that the Government were prepared to take the tough and correct measures to achieve those joint objectives. He rightly anticipated that external events might call for additional rebalancing of the policy mix, over and above the deployment of automatic stabilisers. His was a pragmatic and thoughtful response to an unprecedented crisis, and it commanded broad support at home and abroad.

What happened next? One of the present Chancellor’s first and very important decisions on coming into office was to ratchet up the austerity targets and to shun the flexible, carefully nuanced approach of his predecessor and instead opt to wear a very tight financial straitjacket. That approach, which we now know as plan A, was given intellectual credibility by a report from US economists Rogoff and Reinhard, which Osborne cited in a speech as,

“Perhaps the most significant contribution to our understanding of the origins of the financial crisis”.

Buoyed by that report and the plaudits from the hedge funds and bond investors in the City and, crucially, strong backing from the IMF, the Chancellor believed that he had struck exactly the right policy balance between austerity and growth which would lead to the elimination of the structural deficit by 2014-15. Crucial to that judgment was the forecast of strengthening economic growth over that period.

As we have heard from all sides of the House today, that has not come to pass. Indeed, recent employment, bank lending, government borrowing and GDP numbers all confirm that the economy is flatlining. The UK is now the worst performing major economy. As the UK’s performance has weakened, as each forecast is missed and as austerity measures are tightened and extended, confidence—an ingredient vital to economic growth— has evaporated. Domestic consumer spending is depressed, export performance has fallen well short of forecast and companies continue to defer investment projects. Rating agencies downgrade the UK, citing a weaker economic and fiscal outlook and, specifically, the lack of growth.

The high priest of the international bond market, a group that I am sure is high on the Chancellor’s Christmas card list, Bill Gross of PIMCO, the world’s largest bond investor, declared last week that,

“the UK … have erred in terms of believing that … fiscal austerity … is the way to produce real growth. It is not. You’ve got to spend money. Bond investors want growth”.

The intellectual prop of Rogoff and Reinhard turns out to be a shoddy piece of research from the “garbage in, garbage out” school of analysis, with the corrected model—

[Lord Vinson]

Before the noble Lord sits down, he is leading up to a rather important figure. Earlier in his most interesting speech he recognised that Darling had the problem of a ballooning deficit of borrowing. Everything that he is saying now would increase the deficit of borrowing. Would he like to give us the sort of figure that he would like to see that borrowing figure go up to?

[Lord Hollick]

I am coming to that.

The intellectual prop of Rogoff and Reinhard turns out to be a shoddy piece of research because the corrected model shows that highly indebted economies can grow at 2% or more. Perhaps the unkindest cut of all, though, is the IMF’s verdict that plan A is not working. In the light of the weakening economy, it is urging the Chancellor to show greater flexibility and adopt measures that will help the economy to grow. The Chancellor has sought to rubbish this assessment by asserting that the IMF is itself not united in that view. However, my own inquiries suggest that this is not the case and that the damning criticism of the Chancellor’s stewardship is a widely held view within the IMF.

The forthcoming Article IV assessment of the UK economy by the IMF will provide a detailed analysis of the economy and recommendations for policy changes. It will be interesting to see whether the Chancellor chooses to fight the IMF every inch of the way, which may be his instinct, or whether he will see it as an opportunity to recognise that his experiment has failed and that new measures are needed.

As it happens, the IMF assessment coincides with the arrival of Mark Carney, the new Governor of the Bank of England, who last week described the UK as a crisis economy. Billed as an advocate of a more activist monetary policy whose monetary bazooka, according to one recent Treasury briefing, will leave us knee-deep in newly printed money, Mr Carney in recent weeks has begun to row back hard from the far reaches of monetary adventurism. He has made it crystal clear that Governments should not be looking to central banks to return countries to prosperity. Mark Carney will also have noted that his predecessor, who has one vote on the committee, has failed to persuade the MPC in recent months to increase quantitative easing.

I have suggested before that we should not be surprised if, as part of the extended negotiations to secure Mr Carney’s services for the next five years, the Chancellor privately acknowledged the need for more supply-side reforms and fiscal measures to stimulate demand to help to promote growth. The coincidence of the IMF assessment and the new governor’s arrival could just provide the opportunity for the Chancellor to alter course. To do that, though, the Chancellor and the Prime Minister would have to move off their favourite mantra that you cannot borrow your way out of debt. In one sense, that particular fox has already been shot, as the automatic stabilisers have allowed increased borrowing to fill in the financing hole left by no growth. The Chancellor now needs to take that lesson one step further and introduce fiscal measures such as lower NIC and measures to promote investment in infrastructure and new housing stock. Borrowing to invest to promote growth will pay back in increased economic activity, greater confidence and rising tax receipts.

The Government need to stop the endless tinkering with banking rules on capital, funding and liquidity. Alistair Darling bequeathed the coalition a well funded banking sector, with bank shares trading above the levels where the Government had invested. On assuming office, the coalition began reworking the banking rules, a project that continues to this day. Since the start of this Government, bank lending to non-financial businesses has fallen by an unprecedented 19%. This collapse in bank lending will not be reversed until and unless the Government allow them to get on about their real business, which is to provide credit to finance growth.

Will the Chancellor heed the advice of the IMF, the bond markets and business and acknowledge that the public finances can be repaired only if meaningful growth can be achieved and sustained? Waiting for something to turn up is the wrong policy choice. Business, hard-pressed citizens and many on his own Benches will be hoping that he has the political courage to do so. Rather than wasting his time on ludicrous Enron-like efforts to massage the deficit numbers and issuing endless press releases on growth projects that never see the light of day, the Chancellor should deploy his intellect, his energy and his ingenuity in devising and implementing growth policies that will get Britain moving forward again.

[Lord Vinson]

Perhaps the noble Lord could attempt to answer my question. He would give his whole contribution much more cogency if he could come up with a figure for the sort of level that he would like to see the Chancellor increase his borrowing to.

[Lord Hollick]

I am not talking about figures; I am talking about the importance of using the public finances to invest in growth. That is what we need. Without growth, we simply will not be able to repair the public finances.

[Lord Marlesford]

My Lords, I strongly support the fundamental economic strategy of my right honourable friend the Chancellor. On the other hand, I am not wholly happy with the way in which he has been attempting to carry it out. The objectives are right but the methods are rather questionable.

First, he has sought to reduce the deficit, and particularly government spending in many areas, which I support. There is no doubt at all that the expenditure on the whole welfare area has been wildly out of control, and it absolutely has to be gripped. Equally, there is no doubt that growth will come from actual economic activity on the ground.

Much of the problem is caused by the behaviour of the banks. I give credit to Alistair Darling for the way in which he handled the crisis. The mistake was then to use, or to expect to be able to use, the banks as a means of generating growth in the economy through quantitative easing. Far from lending the money that they had been supplied, they used it to reinforce their extremely fragile balance sheets, so QE did not achieve the objectives that the then Chancellor hoped for. The Chancellor should probably have abandoned at a much earlier stage what was effectively his support of the banks and their balance sheets. Their behaviour in the past few years since the crisis has been lamentable. It has been as unethical, selfish and greedy as ever, and it has been incompetent.

With regard to the stimulation of the economy, the time has come for more direct government expenditure on our infrastructure. There are masses of things that can be done. I am of course not talking about nonsenses such as £30 billion on HS2, which is wildly outside any parameter of time and is most unlikely to produce any useful return for the taxpayer or the nation. I am talking about things such as housing, road construction and the maintenance of our national infrastructure, because that is true investment. Giving banks more money through quantitative easing to restore their balance sheets is not true investment.

The Chancellor’s tax policies in one important area have been unwise. I am talking about the petrol tax. The Chancellor has already forgone some £1.5 billion of revenue by not increasing the petrol tax as planned. The extraordinary thing to me is that the petrol tax figure that we are talking about is always about 3p per litre, and that alone costs £500 billion a year, yet the price of petrol at the pump varies by more than that. The price at the pump basically goes up and down according to the price of oil. The Chancellor has made a huge mistake in effectively wasting the opportunity cost of the petrol tax. I hope that as soon as the time is appropriate he will go back and change that particular policy.

I agree with the noble Lord, Lord Harrison—I sit under his distinguished chairmanship on Sub-Committee A of the European Union Select Committee—that the single market in Europe is very important and should be enhanced and nurtured. However, I do not believe that, for strategic planning, Britain can rely on Europe for the future. Europe is in a frightful mess. People say that 40% of our exports go to Europe; that may be. What we should be doing is switching our effort into markets where we can compete and which are expanding, such as Asia, the United States and Latin America, and not pinning our hopes on Europe, because in Europe there is very little hope. My worry is that the European Commission has proved itself to be incompetent in offering advice to member states on how to run their economies. During the euro crisis, it came to the realisation—very late, but in a big way—that it had been a great mistake to confuse the toxic debt of banks with the toxicity of sovereign debt, and decided that they should not be confused.

Let us consider what happened with Cyprus. The European Commission, having made the mistake with the wretched Irish, the Spaniards and the Greeks of making them take the bank debt on to the government books, the very next thing was what happened in Cyprus. That is an example of unparalleled incompetence. What happened was that the Cyprus Government came forward with a plan to rescue their banking sector. Of course, they would come forward with whatever they thought suited themselves and their friends, perhaps including the Russian oligarchs. The plan that they came forward with involved raiding the balances of deposits in banks. It had been for some while a crucial component of confidence in the banking system throughout the EU that deposits in individual regulated lending institutions—banks, primarily—were underwritten up to €100,000. My criticism is that the attempt to sweep that aside so that the small depositors in Cyprus would pay their share—although I could quite see the Cypriots putting that forward—was signed off by the troika of the European Commission, the European Central Bank and, just to remind the noble Lord, Lord Layard, who is so keen on it,the IMF. Those three signed off on a policy that will for many decades, I suspect, put a deep suspicion in people’s minds about lending to banks. The United States has a much prouder record of protecting depositors in banks. I believe that one of the roles of the state is always to protect small depositors in a financial system.

That was a very depressing example, and one reason why I am rather gloomy about Europe being able to work out under the semester what its progress is to be. It is still wrestling with the crucial question, which applies primarily to the euro area, of whether there can or should be mutualisation of debt. Is it possible to have a Eurobond, a bond issued by the European Central Bank, to fund individual countries’ Governments and is underwritten centrally? For how much can this be done? We are not even clear what the total sovereign debt of the euro area is at the moment. It is very doubtful whether this Eurobond will work. There is a thought about having two sorts of bonds: a blue bond, an ECB-guaranteed bond for national Governments, and a red bond, which national Governments would issue. This strikes me as a very questionable approach. What is it trying to achieve?