Economy: Growth

Lord Lamont of Lerwick Excerpts

Tuesday 29th January 2013 Lords Chamber

[Lord Lamont of Lerwick]

My Lords, I join with other Members of the House in congratulating the noble Lord, Lord Deighton, on his maiden speech from the Front Bench. Like other noble Lords on this side, I am delighted to find that he is not entirely still under the spell of his former distinguished teacher.

Growth ought to be the natural state of an economy. Most economies tend to grow over time. Financial crises, bad harvests and various other factors can, of course, delay or obstruct that growth. But growth is the natural order over time, because human beings have a natural instinct to make two blades of grass grow where one grew before and a natural instinct to innovate. Growth, it is worth remembering, does not come from Governments; it comes from individuals.

What, then, should our reaction be to the figures which were released last week and showed a 0.3% drop in GDP in the final quarter? The figures can always be sliced in many different ways. One can portray them, as indeed the noble Lord, Lord Eatwell, did, as saying that four out of the last five quarters have been negative; that the economy was flat all last year; and that the economy is still below the 2008 peak. On the other hand, you can formulate them a slightly different way: the economy grew by 0.3% in the last six months; although the economy is below the peak of 2008, if you exclude North Sea oil production it is only a whisker below that peak, and North Sea oil has been in dramatic decline with interruptions to production. The fact that there has been no growth last year is the same as in France, while the 0.3% drop in GDP in the last quarter compares with a drop of 0.5% in Germany; and, collectively, the whole of the eurozone is currently in recession. What I draw from all that is that when the dust settles and this is all in the history books, I suspect we will find that almost all the countries in this part of the world had a broadly similar experience, whichever way one tends to look at the figures at any particular moment.

We heard a lot about the views of the IMF, but we have not actually had the views of the IMF; we have had the views of Mr Blanchard. Christine Lagarde, the director-general of the IMF, has been extremely supportive of the Government’s strategy and we will only officially hear the views of the IMF in May, when we hear the results of the article 4 consultation. The noble Lord, Lord Eatwell, talked a lot about the multiplier effects. Interestingly, there was a report in the press at the weekend that the IMF has concluded that the multiplier effects, both of austerity or of any deficit spending, are extremely slight in the case of the UK. No doubt we will hear more about that when the article 4 consultation takes place.

There is no doubt that the figures for the last quarter were extremely disappointing, but the idea that some extreme excess of austerity is holding back the British economy seems to me very much open to question. The Government have shown that they are prepared to be flexible in their deficit reduction programme. They have relaxed the programme twice and put back the date at which they expect, and are aiming for, a fall in the total debt-to-GDP ratio. As my noble friend Lord Forsyth said, the difference between the Government and the Opposition is much exaggerated by both sides for the purposes of both sides. I do not think that the noble Lord, Lord Eatwell, is right in saying that the capital expenditure planned under the last Government was higher than that of this Government; in fact, the cuts that Alistair Darling put forward were bigger than those of this Government, some of which have been reversed. Can the Minister comment on that precise point?

Despite the small differences between the planned reductions in expenditure, it is true that if you compare the outcome of expenditure with the original Darling plan for reductions in expenditure, the latter was much tighter and more austere than what the Government have implemented. If you compare our austerity programme to that in other EU countries, it is difficult to argue that these cuts are savage or that this fiscal consolidation is sudden and dramatic. At the beginning of this crisis we had a deficit to GDP of around 12%. That was almost exactly the same as Greece’s. I am sorry to say that today Greece has a considerably lower deficit than the UK’s. Italy, France, Ireland, Portugal, and Greece all have lower deficits than we do. These have not been caused by growth—a solution somehow magicked out of the air by the party opposite. That is not how they have reduced their deficits. They have done so by making more savage cuts and far severer fiscal consolidations than we have made.

With a debt-to-GDP ratio of around 70% to 80%, which is where it is expected to peak out, if we go on adding to that overall stock of debt at the rate of 12%, as it was when we started off, or 7% or 8%, because the annual deficit is the amount that we add to it each year, we would soon get to a situation in which a debt-to-GDP ratio would be 100%. As economists such as Reinhart and Rogoff have argued, that is the level at which the overall stock of debt becomes dangerous for the long-term growth of an economy. They would argue that that is why Japan has had such a bad time for such a long period. If deficits really solved long-term economic growth, Japan would not have been stranded in the situation in which it has been for such a long time.

If deficits of 7% to 8% per annum have left the country not growing, is it credible that one of 10% or 12% will suddenly cause the economy to leap into life? We hear about the multiplier effects, but never about what is going to happen when these so-called stimuli are withdrawn. Anyone who thinks that this would be the real world experience of deficits ought to read the diaries of Mr Morgenthau, President Roosevelt’s treasury secretary, who expressed his disillusionment with the deficits being run in America in the 1930s. He wrote that all the United States had to show for it was unemployment at much the same level and no increase in production. In the UK today we are running deficits that are considerably higher than those run by the Roosevelt administration.

[Lord Skidelsky]

The noble Lord mentioned a point of history. Of course, American unemployment fell very rapidly in the 1930s, so if he wants to leave the House with the impression that it did not fall, I must say to him that that is just wrong.

[Lord Lamont of Lerwick]

No. President Roosevelt initiated back to work programmes—that is true—but the private sector, the economy, was not generating growth. If the noble Lord, who is a very eminent historian, wishes to doubt that, just let him read the Morganthau diaries, because they are full of deep disillusionment about the pointlessness of the programme that he himself was implementing and the effect that it was having on the growth of the economy.

I am not arguing that deficit financing can never be of use or play a part in taking up the slack in the economy when the private sector is unable to borrow, but we are in a position where both public and private finances are under pressure at the same time. It is a much favoured parlour game to decide what Keynes would have thought of doing in this scenario today. Of course, the House is very fortunate in having the eminent historian, the noble Lord, Lord Skidelsky, who knows more about this subject than anyone else, to tell us. Indeed, we also have the noble Lord, Lord Eatwell, a most distinguished Cambridge economist—a university that is profoundly affected today by the shadow of Maynard Keynes. I am sure that the noble Lord, Lord Eatwell, remembers Milton Friedman’s comment about Cambridge academics and their theories, which have applications within 25 miles of Cambridge University.

This recession is indeed different from a normal cyclical recession. It is, as the noble Lord, Lord Skidelsky, said, a balance sheet recession, but it is a recession that has followed a severe banking crisis. As economists such as Rogoff and Reinhart have shown, I think quite tellingly, such recessions tend to last much longer than normal, cyclical recessions, and are much deeper.

So what can be done to stimulate growth? I believe that there are things on the supply side that can do this—training; lifting and relaxing planning controls, as the Government have done; infrastructure spending, very much as the Minister outlined, although if infrastructure spending is to be financed by cuts in current spending, that will squeeze consumption further, which has been one of the problems of the economy, because inflation has not come down, and it has been inflation that has been squeezing consumption and living standards.

However, the real problem of the economy, I believe, is not fiscal policy but the lack of credit in the economy and the failure of the banking system still to make credit available. The risk is that the new businesses that drive innovation and produce the new products will be strangled because of the lack of credit. The Government have introduced the Funding for Lending scheme. It is too easy to say what the effects of that are, but if it has a good effect, maybe it ought to be expanded further. However, they have been piling regulation upon regulation on and demands for more capital from the banks, and that, in the last analysis, is incompatible with more lending and makes more lending more difficult and more expensive for the banks.

The Government have said that they want to see new entrants into the banking sector, which I think would be highly desirable, but I am not sure that that message has got through to all parts, particularly the lower parts, of the Financial Services Authority. I noticed that the chairman of Metro Bank said the other day that if he had known what was involved in starting a new bank in the UK, he is not sure that he would do it again or would have done it in the first place.

We await the arrival of Governor Carney, and there are great expectations of him, but he will not exactly be a man on a white horse, and I think it would be unfair to regard him as that. He has talked a lot already about central banks doing more to promote growth. I hope, however, that the Bank and the Government will be cautious about more quantitative easing. There is in this situation, even now when we do not have growth in the economy, a danger of creating more asset bubbles. We have seen the consequences of the “Greenspan put” in the past, where central bank action has been taken to keep the financial markets buoyant and the result has not been that we have avoided a crisis but that the crises have got successively worse. When I look at the level of the stock market, which of course can be interpreted favourably in one sense, I wonder whether it is reflecting the prospects for the economy or the consequences of quantitative easing.

The Opposition have inevitably been very critical and the Government inevitably are in a difficult situation. I think it was Boileau, the French writer, who once observed that those who come to tell the people they are not well governed will never lack a welcome. The only surprising thing is that those who are telling the people they are not well governed are those who were in charge five minutes ago and helped to create the situation we are in. It is not an easy situation and, most of all, I think what we need are what Tolstoy called those two grand old warriors—time and patience.