Budget Statement

Lord Marlesford Excerpts

Thursday 21st March 2013 Lords Chamber

[Lord Marlesford]

My Lords, I am very glad that my right honourable friend the Chancellor stuck to plan A. It would be unthinkable to abandon it. There was no question that it would be abandoned. Yet there are some dangers. I quote one sentence from the Chancellor’s speech that is very relevant:

“I will be straight with the country: another bout of economic storms in the eurozone would hit Britain’s economic fortunes hard”.—[Official Report, Commons, 20/3/13; col. 932.]

Such a storm may have started in Cyprus. It was absolutely astonishing that the troika—the European Central Bank, the IMF and the Commission—should have agreed a package of measures that involved a levy on deposits in Cyprus’s banks: 6.5% on deposits under €100,000 and 9.9% on those above €100,000. That flew in the face of the EU-wide recognition that deposits in banks up to €100,000 are guaranteed. It was an astonishing thing to happen.

In case noble Lords feel that I am being alarmist, or that Cyprus is a mere minnow and we should not worry about it, I would remind them of a little history. On 11 May 1931, the small Austrian Creditanstalt bank failed. That triggered the financial collapse of central Europe. By 13 July, the German Danat-Bank collapsed and all German banks closed until 4 August. Between 19 and 24 August, we had a major economic crisis in Britain. Five days of Cabinet meetings failed to agree the spending cuts demanded by American bankers at the time, and that led to the collapse of the Labour Government. We cannot play these games with the eurozone trying to have it both ways. Only a few months ago, eurozone Ministers declared that they must absolutely make sure that in future there was no confusion between sovereign debt and bank debt. For Cyprus they have again produced a formula that has done precisely that. It is not surprising that the banks in Cyprus are closed.

What is the answer to that? The Chancellor pointed out that 40% of our exports are to Europe. I suggest that the Government do everything they can—Parliament as well—to focus the eyes of exporters beyond Europe. Let us make much more effort about Asia and probably also Latin America. They should become a real priority. I am not saying that the Government can do that: the Government cannot make exports but they can at least propose that as a strategic aim. We must take advantage of the Asian market. We have the inestimable advantage of having special links with Hong Kong, which is the financial centre of Asia. It is the third most important financial centre in the world after London and New York. That is something we really must look at and quickly.

I will quickly mention one or two other points. The shift in the responsibilities of the MPC is very interesting. It will become much more like the Fed. That is a very big responsibility and I hope it can measure up to that. It was right to stimulate the economy with some extra expenditure, but only £3 billion was given. Why so little an amount?

Here I come to the one mistake that the Chancellor made: the fuel tax. That was tempting politics but damned bad economics. Cancelling the fuel tax increases has already cost, by the Chancellor’s own figure, £6 billion. It looks as though, if it continues at this rate, it could cost up to £20 billion by the end of this Parliament. That is not a sensible way of spending money—the opportunity cost is extremely high—first, because it is being done in little slices of 3p and, as everyone knows, 3p is less than the variation in petrol or diesel prices between pumps. Secondly, all vehicles are becoming much more efficient. A vehicle that previously did 30 miles to the gallon now regularly does 40 miles to the gallon. There is therefore a natural and desirable trend for less fuel consumption as fuel costs rise. The United States would not be having its huge financial problems if it taxed road fuel at a sensible level.

There is also a serious lacuna in the Government’s thinking regarding their unwise energy policy involving massive subsidies for solar and wind power that are being passed straight on to the consumer through the levy on the electricity companies. That is a grave mistake.

I welcome the aim of the housing help to buy scheme and mortgage guarantee, but with some apprehension. As the noble Lord, Lord Desai, said, there are real dangers in the Government introducing or getting involved in subprime lending. There are echoes of Freddie Mac and Fannie Mae in America, which did precisely the same thing and whose collapse cost American taxpayers hundreds of billions of dollars.

We must recognise that you have to be delicate when dealing with the City. It currently produces 13.5% of Britain’s GDP. That does not mean that I am any sort of spokesman for the banks. Bank balance sheets are extremely fragile. The noble Lord, Lord Desai, referred to domestic debt; there is still £55 billion of credit card debt held by British banks. That is not the money that you and I spend each month and pay off; it is overrun debt on which the rates of interest are anything between 17% and 25%. The chance of it being paid back is remote, and the question that one must ask is: at what price do the banks have that debt on their balance sheets? If they have it at anything like par, that represents a serious danger. The banks sold off some of that debt about three years ago at rates of between 8p and 12p in the pound. If the outstanding debt were valued at market rather than nominal value, the banks would be safe.

--- Later in debate ---

[Lord Marlesford]

If I may very rapidly read from the Minister’s statement, it was the eurozone finance Ministers who announced the package which included that. The eurozone finance Ministers, therefore, approved that part of the package.

[Lord Dykes]

Yes, of course, because the Cypriot Government then submitted those suggestions to them, which were accepted. That was the sovereign decision of the sovereign country of Cyprus, which made its own suggestions in response to the request from the Council of Ministers and the German Government, and quite rightly.

The difficulty now is what we do from now on and where we go. The reality still confronts us in this economy that, to quote another source from many years ago, one has to enlarge long-term public spending on public assets with a high multiplier effect. Government spokesmen in recent years have kept on saying that public sector is bad and wicked, and private sector is good, and that we should rely on the private sector to respond to the inaction of the Government, but that never works. We all know that, and the evidence is there. Huge global corporations will make their decisions irrespective of what national Governments do. Facebook would not be particularly responsive to particular individual national Governments in the world, for obvious reasons, and neither would Microsoft, although the national subsidiaries in different countries respond to some national government decisions, as we know. Equally, sometimes very high-tech innovative companies in different countries themselves make their own decisions and have particularly good fortune such as very strong bank support and other access to capital, which enables them to be free-floating and not respond to government. However, in the vast majority of businesses, whatever their size, and in particular small companies, the reality is that you wait until the Government are expanding the economy. That is not a criticism of the way companies run businesses; if I was running one now as I used to in the old days I would do the same thing.

The noble Lord, Lord Kestenbaum, who is not in his place now, earlier mentioned economies where public sector and private sector activity is mixed up together in a constructive whole. Bavaria, mentioned by the noble Lord, Lord Haskel, is a very good example of that, where a centre-right moderate Government, over many years, never said no to public spending as long as it was on long-term investment assets. It was nothing to do with short-term current account. The British Treasury is still far too short-term obsessed. Therefore, until we change, we will be stuck in that ominous way that was so ably described by the very able business editor of the Evening Standard yesterday, when he referred again to the Chancellor. He wrote that a wiser man, earlier on,

“would have been less aggressive, less dogmatic about the rightness of his policies, so that he would have had room to manoeuvre when they seemed not to be working. But Osborne has closed down all those options so today’s Budget is the work of a man who is in a hole but continues to pretend that the only way forward is to keep digging. The public finances remain in a dire state, and even a bit of sleight of hand with the numbers can’t conceal the fact that we have made absolutely no progress over the last 12 months”.

The terror of the slightest increase in our interest rates in this country will stop further action until there is a big change of heart.