Economy: The Growth Plan 2022

Lord Lupton Excerpts

Monday 10th October 2022 Lords Chamber

[Lord Lupton (Non-Afl)]

My Lords, it is always a pleasure and a challenge to follow the noble Baroness, Lady Wheatcroft. Two years ago, I watched the then Prime Minister take a pickaxe to one of the granite foundations of our country’s reputation: respect for the rule of law. Now I feel that I may have watched this Administration if not tear up then at least damage the Conservatives’ hard-won and hitherto well-deserved reputation for fiscal prudence.

Much of the commentary over the last two weeks has been sensationalist, too general and insufficiently nuanced. There are quite a few cooks stirring today’s toxic broth of geopolitical and economic stresses—Covid, Putin, energy costs, inflation, to name a few—but I will restrict my comments to just three observations.

First, the collateral crisis was one of those foreseeable unforeseens except by a few wise people, such as my noble friend Lord Wolfson of Aspley Guise. Its genesis, perhaps, was far too many years of unwisely loose monetary policy, through both quantitative easing and artificially low interest rates. Those influences encouraged long-term investment funds to pep up their returns through the derivatives market, which became a problem when interest rates rose both hugely and suddenly two weeks ago, requiring those funds to post collateral they did not have. Braver and earlier action on both rates and QE, as many advocated, would have softened this blow. In any event, as many noble Lords have said today, the return to higher interest rates is the new norm. In the long term, that will be good for our economy. Artificially cheap money distorts behaviour.

Secondly, many of the big policy changes in the Chancellor’s mini-Budget had been well flagged in advance without causing market disruption, so what caused the markets to take fright in the Far East overnight on Sunday/Monday of last week? I am supportive of much of the political philosophy underlying the Chancellor’s Statement. Britain is overregulated and over-nannied. The individual has been lured into thinking that it is the duty of the state to solve any problem, when it is not and cannot be. We are overtaxed and underproductive. We lack sufficient investment and we are trapped in a low growth cycle, but there is a time for fiscal loosening on a massive scale and it is not when unemployment is low, inflation is high and markets are already expecting a ballooning of the budget deficit to near 8% of GDP.

It is the timing and execution, as much as the substance, of the Chancellor’s Statement that has been catastrophic. The numbers were unverified by the OBR and there was no clear plan. A rushed Statement on the Friday was compounded by unscripted, boastful words over that weekend. It displayed a mixture of naivety, lack of experience and overconfidence, which asked to be punished by international capital markets and duly was. The international capital markets were the first to hold the Government to account.

Thirdly, why does a market reaction of such severity matter? The answer is that, at the end of June this year, overseas investors held about 31% of the Government’s total debt of £2.2 trillion. Their views matter; they do not have to buy our debt. As the previous Bank of England governor said, we rely on the kindness of strangers, and two weeks ago those strangers were not feeling kind. Commentators understandably focused on the rise in rates at the long end of the yield curve and, at one point, a near 10% fall in sterling against the dollar. However, the yield increase at the short end has been even bigger, which has raised interest rates, including mortgage rates, and put greater pressure on households. This plays into my argument that it is financially illiterate to loosen financial policy when there is an inflation problem. It just forces the Bank to hike short rates more—the “accelerator and brake” syndrome.

Markets are a drama. They are built on confidence. They are an amalgam of analysis, courage, fear, confidence and scale. This makes them so human. What might prove to be relatively small misjudgments, either political or economic, can have and have had huge negative impacts, which a more measured, informed, well-explained and mature approach might have avoided. I very much hope that our political leaders, like the best business leaders, have the humility to take learnings from the errors of judgment and mistakes made.