United States Budget: Economic Impact

Lord Newby Excerpts

Monday 10th December 2012 Lords Chamber

[Lord Roberts of Conwy]

To ask Her Majesty’s Government what assessment they have made of the effect on the United Kingdom economy of the outcomes of the “fiscal cliff” discussions in the United States of America.

[Lord Newby]

My Lords, the Office for Budget Responsibility, which is responsible for producing independent economic and fiscal forecasts for the UK economy, based its forecasts last week on the assumption that fiscal policy will be tightened in the US by between 1% and 2% of US GDP. This, in turn, assumes that the US Congress will reach a budget settlement by the end of the year and that the fiscal cliff will be avoided.

[Lord Roberts of Conwy]

Is my noble friend aware, as I am sure he is, that many believe that unless the end-year fiscal crisis in the US is averted, involving as it does some hundreds of billions of dollars’ worth of tax rises and spending, there is a risk that the US could return to recession, and the prospects for our exporters to the United States could be very gloomy indeed? Such prospects are already gloomy in the eurozone and other countries where lower growth is anticipated. Is there a specific remedy for that situation, should it develop?

[Lord Newby]

My Lords, I agree with the noble Lord that the US economy is extremely important to our exporters. Last year, we exported £80 billion of goods and services to the US, which amounted to 16% of our total exports. However, perhaps I have watched too many episodes of “The West Wing” but I suspect that a deal on the US budget will be done in time, albeit at the last minute.

[Lord Bilimoria]

My Lords, it is estimated that if the US falls off its fiscal cliff, its GDP will fall significantly. Will the Minister admit that, following the Chancellor saying in the Autumn Statement that deficit reduction will now take three years longer, we in this country have already fallen off our own fiscal cliff?

[Lord Newby]

No, my Lords, the situation is quite the opposite. The fact that the Government took decisive action in 2010 to effect a fiscal consolidation over a number of years—and then flexed that, given the severe headwinds that we faced from the eurozone—means that we are not faced with a fiscal cliff and we are now looking to a period of growth next year that will be higher than that anticipated in, for example, the eurozone.

[Lord Davies of Oldham]

My Lords, it is all right for the Minister to wish the Americans well, but why do the Government not emulate them? Is he unaware of the fact that the American economy has been growing at 2%, while we are teetering on the edge of our own cliff towards a third recession?

[Lord Newby]

My Lords, I agree with President Obama on this.

[Noble Lords]

Oh!

[Lord Newby]

Earlier this year, in relation to the US and UK economies, he said that,

“our objectives are common, which is we want to make sure that we have … governments that are lean, that are effective, that are efficient, that are providing opportunity to our people, that are properly paid for so that we’re not leaving it to the next generation”.

[Baroness Kramer]

I ask the Minister not to emulate the US fiscal cliff and to go for certainty in British fiscal and economic policy. However, does he not agree that British exporters should be careful not to overreact to either the fiscal cliff or the eurozone crisis? In the Autumn Statement, there was more than £1.5 billion in additional government support for exports; should not businesses both small and large be seizing those opportunities—and seizing them now?

[Lord Newby]

I absolutely agree. The challenge now is for exporters to continue exporting in markets where they already do that. For example, our exports to the US this year have increased by 4% and are therefore still exploiting existing markets. However, in addition, the key is getting more companies exporting to the newer markets. That is why the increases in exports to China, Brazil and India over the past two years have been so significant.

[Lord Soley]

The Minister referred to the decisive action in 2010. Surely what the Government were doing at that time was talking us into a deeper recession than the one we were already going into. Secondly, does he not recognise that without growth we will not get out of the problems we are in? Historically, cutting deficits does not really work unless you have high growth as well. We do not have that and it does not look as though we will get it under the current policies.

[Lord Newby]

My Lords, if the Government had not adopted a credible fiscal policy in 2010, it is almost certain that interest rates in the UK would now be significantly higher than they are, as they are in much of the eurozone. Bear in mind that every 1% increase in interest rates means £12 billion extra in mortgage payments. This would have been have been a huge gamble that would almost certainly have failed had we not taken decisive action in 2010.

[Lord Forsyth of Drumlean]

My Lords, is the lesson that we need to learn from both sides of the Atlantic not that if Governments live beyond their means and raise the tax burden too high, growth disappears—a lesson that my noble friend Lord Lawson taught us in the 1980s and which we need to relearn?

[Lord Newby]

My Lords, the key challenge for Governments, either in this country or on the other side of the pond, is to ensure that there is a credible fiscal framework and a competitive economy so that businesses can invest. That is what the Government have been seeking to achieve.

[Lord Tomlinson]

My Lords, if the economy is doing as well as the noble Lord suggests, does he regard the threats from the rating agencies as being a vote of confidence?

[Lord Newby]

My Lords, the rating agencies, as we all know, have an unblemished record in dealing with businesses and countries. For those countries that have seen their credit rating reduced, including the US, there has been virtually no impact on their ability to borrow.

[Baroness O'Cathain]

My Lords, can we not realise that trade is a two-way thing? It is import substitution and exports. We should encourage more import substitution in all our purchasing in this country. It is never mentioned and there is no reason why some of the wonderful British goods that are exported to earn foreign currencies should not be bought by people here, thereby reducing our imports.

[Lord Newby]

My Lords, I absolutely agree with my noble friend, and it is very important that we do all we can to support new initiatives, such as the one being led by my noble friend Lord Alliance to reinvigorate the textile industry in the north-west, where there now appears to be the prospect—if we get it right—of creating almost 250,000 jobs in textile manufacturing for the first time in a generation.