Economy: Government Policies

Lord Myners Excerpts

Thursday 24th March 2011 Lords Chamber

[Lord Risby]

My Lords, it is a great pleasure to follow on from my noble friend Lord Lyell. I add to the congratulations already offered to my noble friend Lord Lawson on securing this debate and on being a truly reforming Chancellor. I also congratulate warmly my two noble friends Lord Hussain and Lady Stedman-Scott on their excellent maiden speeches. I know that they will greatly enrich the proceedings of your Lordships' House in the years to come.

We appear today to be in something of a circular situation, with consumers feeling bruised and nervous, their confidence weak and, in consequence, banks being reluctant to lend, especially to smaller and start-up businesses. Yet, ironically, the overall cash position of corporate Britain is very high by historic standards. Unleashing this would undoubtedly spur on economic growth and confidence, and this was at the heart of what the Budget was all about.

A fundamental necessity for any new Government after the general election was to convince the markets that the deficit would be tackled, and this has worked. While the interest-level cost of our massive borrowing has decreased, it has risen in other countries, as we have heard, such as Spain and Portugal. What has happened in the past 24 hours to Portugal absolutely says it all. Given that we have the highest deficit in the industrialised world, we had to respond to the sovereign debt crisis, which was and is pervasive in southern Europe. We avoided that, and had we not done so, the consequences would have been simply cataclysmic. Interest rates would have risen. Even now, with restraint, our total debt will be £1.36 billion.

[Lord Myners]

Trillion.

[Lord Risby]

Trillion. It is simply wrong and absolutely immoral to bequeath to our children and grandchildren a debt burden of this order, which would have been even worse because of the profligacy of this generation in government.

However, at the heart of this most difficult legacy was the behaviour of banks, so disproportionately important to the UK economy. This was due substantially to a failure of proper regulation. I have heard it described as a product of light regulation. The FSA’s bureaucratic procedures and micromanagement meant that it did not focus on the big picture—for example, the borrowing and lending practices of Northern Rock. The tripartite system ensured that neither the Treasury nor the FSA nor the Bank of England took the necessary pre-emptive action to stop what so tragically ensued. It diminished in consequence our credibility and ability to influence the pattern of emerging European financial services regulation.

Nevertheless, given the massive importance of the financial services industry, it is crucial that previous failed arrangements are replaced. No regulatory system is perfect, but at least the Bank of England previously closely monitored financial institutions and will do so again. Without this, overall economic recovery will not happen. While Governments can assist with an appropriate tax and regulatory framework, it is the private sector that will ensure this, with innovation and new enterprise crucial to it.

I declare an interest in this regard because I am deputy chairman of the Small Business Bureau. The renewed emphasis on smaller businesses is extremely important, as the weight of regulatory and tax pressure is for them inevitably disproportionate. Planning laws have been too restrictive and have benefited larger businesses such as supermarkets. They have also had the effect of distorting house prices. Therefore, I greatly welcome George Osborne’s recognition of this, and the reform of Business Link to assist budding entrepreneurs is welcome, too.

Of significant potential is the renewed government-supported export drive, which specifically includes small businesses. It is gratifying that the strategy outlined in your Lordships' House by my noble friend Lord Green includes financial support and advice to SMEs. The structure of export promotion in this country has been ill focused, with regions even competing with each other at international trade fairs. Our trade promotion activities compared with those of our rivals have been inadequate, and the strategy which has been outlined brings fresh coherence to a huge marketing opportunity abroad. The new enterprise finance guarantee scheme, a new working capital scheme, a new bond support arrangement and credit insurance are specifically targeted at SMEs and in that regard are particularly welcome.

This focus on acorn companies is long overdue. They account for half of all private sector output and 60 per cent of private sector jobs. Freeing them from new domestic regulation, limiting audit and reporting burdens, the small business rate relief and fresh access arrangements to increase finance to them, matched with easier planning consents, will help promote entrepreneurial activity. The increase in the SME rate of research and development tax credit is additional good news.

History has shown us that, in politics, defeat often produces a kind of introspection. It has certainly manifested itself since the last general election. It is as if the Opposition were not responsible at all for the economic crisis which engulfed us. In the context of the economy today, to have one policy, which is simply to say that reduction of the deficit should be slower, is frankly no policy at all. If there is a coherent alternative strategy, I hope that we shall hear it today.

[Lord Myners]

My Lords, I join other Members of the House in congratulating the noble Baroness, Lady Stedman-Scott, and the noble Lord, Lord Hussain, on their maiden speeches, and the noble Lord, Lord Lawson, on his timely securing of this debate. I pay tribute to the noble Lord as one of the three great post-war Chancellors of the Exchequer that this country has had in office.

Yesterday’s Budget, on which the noble Lord, Lord Lawson, said we were likely to focus in speaking to this debate, was characterised as a Budget for growth. However, rather sadly, the text did not follow the headline, because we had a story of declining growth—the third downward adjustment in growth forecasts for the current year in the space of 10 months. The only things that went up were the things we did not want to go up. Unemployment is going up by another 140,000; inflation is going up, including the important GDP deflator; and the deficit is going up.

On the growth front, the world is enjoying stronger growth. In all our major competitor countries, growth estimates have increased over the past three months. In the UK, we are going in the reverse direction. Even the long-term forecasts from the OBR on growth were due to a sleight of hand. The OBR has a simplistic model: if growth is not delivered this year, it adds it into future years, so it will always track back to a long-term trend growth of 2.25 per cent. There is asymmetrical risk in the OBR forecast. Put simply, the risk of us doing better than the OBR has forecast is, first, low; and, secondly, of little consequence. The risk of us doing a lot worse is high and could be devastating.

This was less a Budget for growth than a Budget which clings to growth assumptions to support the logic of the thinking behind the Budget. I do not see the party opposite as being one of “crazed fanatics”, as mentioned by the noble Lord, Lord Lawson. There is a logic to what the Government are doing—I do not deny that—but the Budget and the Government strategy is driven by ideology and is resting on some crude misunderstandings of economics. The challenge for this side of the House is to set out the facts and articulate clear and credible alternatives. We have not always done that.

Let us look to the facts. During the period 1997-2010 the UK achieved the second highest growth rate per capita in the G8 countries, surpassed only by Canada. That is a fact of achievement under the previous Government. The deficit in 2007, before the global financial crisis, was less than 3 per cent and borrowing as a percentage of GDP was in the bottom quartile for the G8 countries. In 2007, George Osborne endorsed the Government’s spending plans. Indeed, he said he would replicate the quantum of government spending. That is the backdrop to an economy which was then confronted by a global crisis. Its impact on us was emphasised—the Prime Minister was wrong to say that we were less exposed to the global and financial sector downturn than other economies; we were hit hard—because of our dependence on financial services. We were hit not on expenditure—it was not an increase in expenditure; the cyclical adjusters went up—but on taxation. That is a temporary phenomenon; once the economy recovers, taxation recovers.

In 2010, the economy was recovering: we had had two quarters of successive economic growth, the deficit was coming down—it was £20 billion lower than forecast—growth was re-established and unemployment was coming down. That has all been placed at risk by the economic strategy of this Government—a strategy that is based on a misreading of the economy; a misreading of the impact of their own talk of austerity, which is forcing down economic confidence, as we see from the nationwide index and other indices of business and consumer confidence; and a misreading of basic economics and finance.

I shall cite three examples. First, it is simply wrong to remove demand from the economy when we have significant excess capacity. The role of the public sector is to provide demand in those moments when the export sector or the private sector is not providing the demand. Secondly, there was no panic in the area of funding—quite the opposite. We were funding at record low rates, with maturities which, due to the wisdom of previous Chancellors of the Exchequer, were the longest of the G8 countries.

We must remember that a deficit in itself is not wrong; it is the purpose for which it is used. To have a deficit to run benefit payments over a long period of time is an inter-generational transfer which is difficult to justify. To have a deficit for capital investment—to build roads, hospitals, schools and infrastructure—is a good thing. That is where the ideology of the Government, which is centred on small government, is wrong because it is not supporting investment in infrastructure.

Many of the measures announced yesterday were sound—it is not my job to emphasise them—but there were a raft of inadequate headline grabbers: the double tracking of railways in the Cotswolds and an enterprise zone in Sheffield—I wonder how the Prime Minister and Deputy Prime Minister thought up those two; the filling of pot holes; a new home subsidy which will simply drive up the price of houses; and the non- doms hit again. That is a very bad thing for the economy; it is something that we did which I deeply regret. I also deeply regret the 50p tax rate. These measures are anti-growth and wrong for innovation and economic prosperity.

The new enterprise zones will simply move activity from one area to another, although I will be arguing the case that Cornwall should be one of them. If the gift is there, one might as well reach out for it. Interestingly, the 11 zones announced today are all in urban areas. I hope we will find some rural areas among the other 10 to be announced.

Where are the growth builders in this Budget? Infrastructure investment—cut; education—cut; workforce expansion—to be reduced. I welcome the simplification of the tax system but we need stable and predictable taxation. Yesterday we were hit by a sudden increase in oil tax. Last night the Chief Secretary guaranteed that the oil tax would not be passed on to customers; can the Minister give a similar guarantee that the bank levy will not be passed on to customers? I believe that it will be because the bank sector is not openly competitive enough. I am sure that the banks are now regretting deeply all the time they spent on project Merlin because, clearly, the Government’s word was not worth it in terms of what they expected to get out of it.

I hope that we also look to monetary policy. I am deeply concerned about the doubling of inflation. I am aware of the time; I am closing and there is no need for the Minister to gesticulate because I am sure that on this occasion he can cope with my questions. I am deeply concerned about inflation and it is a great shame that the Bank of England is losing its credibility because it is unable to do the right thing to combat inflation.