Economy: Growth

Lord Stoneham of Droxford Excerpts

Thursday 31st March 2011 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, I congratulate the noble Lord, Lord Hollick, on initiating this debate, and the maiden speakers on their first speeches in the House. It is a gamble to deal with the structural deficit in one Parliament, and to do it primarily by public spending reductions. However, the strategy has already had one major success in reassuring the bond markets so that the UK can borrow more cheaply than countries with lower deficits. Tight fiscal policy, combined with easy monetary policy and a competitive exchange rate, provides the best choice for avoiding a sovereign debt crisis while ensuring acceptable increases in growth.

The problem is that the alternative is a bigger gamble still. It was right in 2008 to allow a rise in public borrowing to restore growth and avoid a calamitous rise in unemployment, but the second highest deficit in the OECD must now be corrected. No one yet knows how public spending cuts will affect them, and this is creating uncertainty in the economy. That is one of the principal reasons to get on with consolidating the public finances rather than dragging out the process over two Parliaments. People will always assume the worst until it is done. For some it will be painful, but for many it will not be as bad as they anticipated. Consumer spending will be weak in the coming year, but all attempts to promote growth on mounting consumer debt will end in tears. It is business investment and exports that must provide the impetus.

There are encouraging signs. The economy is already two-paced. Despite the understandable gloom in areas where public spending is strong, manufacturing and exports have prospects and growth that they have not experienced in a decade. We want to get other businesses out of the mentality of cost cutting to maintain profit margins and to now start planning for growth.

The actions of the banks are one of the keys to future growth. I think that we all have doubts about whether they will respond when the country needs them, but if we are to get the uplift in business investment that we need, they must lend more to business and particularly to SMEs, because they are their only source of capital and finance. The Government's dominant shareholdings in the banking sector must be used to set targets for the lending that the country can reasonably expect from the banks. The lack of borrowing capacity in the green bank was a principal disappointment in the Budget, as the noble Lord, Lord Skidelsky, highlighted.

The other key requirement is to achieve stability in the outlook for interest rates. Any move upwards must be avoided now, but at some later stage it will be better to have the certainty of a modest, gradual and inevitable move upwards, rather than to have consumers and businesses fearing the worst. The economy always takes longer to respond and policy-makers hope. It takes time to change direction. However, we must be patient and hold our course. As uncertainty lifts, the economy will start to pick up.