Economy: Fiscal Framework

Lord Forsyth of Drumlean Excerpts

Tuesday 4th June 2013 Lords Chamber

[Lord Newby]

Clearly some do view it as that. It is worth bearing in mind that while we are reducing our deficit to the 3% EU Maastricht target over the period to 2017-18, even the relaxation that the EU has agreed in recent weeks with France, Slovenia, the Netherlands and Spain will get them back to a target of borrowing of less than 3% by 2015 or 2016. It is therefore taking us a lot longer. The Government have agreed to phase down borrowing over a much longer period than is allowed even under the reduced timetable elsewhere in the EU.

[Lord Forsyth of Drumlean]

My Lords, is my noble friend not concerned at the way in which asset prices, particularly housing and shares, are now being inflated as a result of quantitative easing? Will he confirm that this Government will never use inflation as a means to get rid of the debt, because that will result in substantial unemployment, a loss of competitiveness and the road to Carey Street?

[Lord Newby]

My Lords, this Government will make that commitment, which is why the target that we set for the Monetary Policy Committee of the Bank of England has not been relaxed, and will not be relaxed during this Government’s tenure of office.

Queen’s Speech

Lord Forsyth of Drumlean Excerpts

Monday 13th May 2013 Lords Chamber

[Lord Eatwell]

My Lords, I am most grateful to the noble Lord, Lord Deighton, for introducing this part of the debate on the gracious Speech. If only all the good news that he spoke of had some connection with economic reality.

Like all noble Lords, I look forward to the maiden speech of the noble Baroness, Lady Lane-Fox. Many noble Lords may not know that she is an accomplished actress. It was surely no accident that one of her most successful roles was as Miranda in “The Tempest”, since Miranda famously hails:

“O brave new world,

That has such people in’t!”.

The noble Baroness has been a major force in guiding this country into that brave new world of information technology and is one of the most remarkable people in it. We are all delighted to see her in this House.

The whole House is keenly aware that the central issue facing Britain today is economic failure: no growth for two years, output still 2.5% below the level of four years ago, 1 million young people unemployed, productivity well below the level of 2008, the banking system still unreformed, and a government deficit that has not fallen significantly for two years—the worst economic performance of any G7 economy other than Italy.

Given the seriousness of our economic problems, it has been widely remarked upon that there are no Treasury measures in the gracious Speech other than the welcome national insurance contributions Bill and the banking Bill carried over from the previous Session. However, there should be no surprise at this inaction. It is the very essence of the Government’s strategy that the Treasury has a very limited role other than the maintenance of austerity. Activism is to be left to others. That is made abundantly clear in the recent most valuable outline of the Government’s economic policy that accompanied the Chancellor’s letter defining the remit of the Financial Policy Committee. It was echoed by the noble Lord, Lord Deighton, today, but he left out one bit. The letter declares:

“The Government’s economic strategy consists of four key pillars: monetary activism and credit easing, stimulating demand, maintaining price stability and supporting the flow of credit in the economy”.

All that is the responsibility of the Bank of England. The letter continues with,

“deficit reduction, returning the public finances to a sustainable position and ensuring … fiscal credibility”—

austerity—

“reform of the financial system, improving the regulatory framework to reduce risks to the taxpayer and build the resilience of the system”,

which refers to the banking Bill, of which there will be more later,

“and a comprehensive package of structural reforms, rebalancing and strengthening the economy for the future, including an ambitious housing package and programme of infrastructure investment”.

All this is predominantly farmed out to other departments.

Those are the pillars on which the Government’s entire strategy is built. It is worth considering just how sound these pillars really are. First, on monetary activism, there certainly has been plenty of activity—from quantitative easing and Merlin to the Funding for Lending scheme and now Funding for Lending mark 2. The difficulty with all that activism is that when there is a lack of demand, it is very difficult for monetary policy to achieve any traction, so QE2 follows QE1 and there is no noticeable effect on lending. Funding for lending offers banks cheap funds to lend at highly profitable rates, but there is no noticeable increase in lending. Now we have Funding for Lending 2, and without any prospect of sustained growth of demand the result will be the same—no noticeable increase in lending. It is no wonder that in his letter defining its remit, the Chancellor appeals rather plaintively that the FPC,

“takes into account, and gives due weight to, the impact of its actions on the near-term economic recovery”.

In other words, “give me financial stability, but not yet”.

What all that activism has achieved is a serious distortion of the monetary system. The rock-bottom interest rates of which the Chancellor is so proud have put pension funds under severe strain, and pensioners have no chance of buying a worthwhile annuity. The excess liquidity, unused for real investment, is funding a bubble in the stock market that bears no relation to Britain’s real economic condition. The conclusion is that monetary activism may help growth a little bit but fundamentally does not work. That is one pillar gone.

Of the next pillar, reform of the banking system, the key reform is of course the banking Bill. But which banking Bill, the watered-down version of the Vickers proposals favoured by the Treasury or the beefed-up banking Bill proposed by the Parliamentary Commission on Banking Standards? The banking Bill has already passed through Committee in another place, where any amendments related to the serious criticisms of the Bill in the Parliamentary Commission on Banking Standards’ report, published on 11 March, were resolutely voted down by the Government.

A further report by the commission is due at some time in the next four weeks or so. Will the Minister tell the House how the Government intend to deal with the arguments of these two reports? Will the Government recommit the Bill in another place? If not, how are the commission’s proposals to be dealt with in this House, or has the lobbying by the banks secured the Government’s commitment to ignore the commission’s arguments? Conclusion: the banking reform Bill is decidedly shaky.

I turn to the,

“ambitious housing package and programme of infrastructure investment”,

which the Chancellor claims are at the heart of his comprehensive package of structural reforms. These were referred to by the noble Lord, Lord Deighton. We certainly need an ambitious housing package. No peacetime Government since the 1920s have presided over fewer housing completions than this Government have in the past two years. The situation is getting worse. Housing starts fell by 11% last year to below 100,000, while house prices, particularly in London and the south-east, spiralled out of the reach of young people attempting to buy a first home.

So what do the Government do? Unbelievably, they increase the affordable homes guarantee programme that applies to the existing housing stock as well as new build, giving their own special twist to the housing price spiral. This British version of Fannie Mae should be focused on new build. That is what is needed. Even this bit of economic activism on housing is a bit too much for the Treasury’s do-nothing sensibilities. The decision whether the guarantee scheme is to continue in three years’ time is to be handed over to unelected officials at the Bank of England.

What of the programme of infrastructure investment? We were told in the Budget that the Government are planning a £3 billion boost in two years’ time. I ask the Minister why, when infrastructure projects are notoriously slow to get started, work cannot begin now. The Government are committed to borrowing the money in two years’ time, so why not borrow it today? Is the postponement not entirely due to the Government’s attempt to massage a falling trend in the deficit, however slight?

As to the railways, the welcome paving legislation for HS2 proposed in the gracious Speech heralds a change of heart from the more than £1.25 billion cut in railway investment in the last spending review. The planned increased of £9.2 billion for five years from next year is clearly needed and welcome, but will the Minister tell us how it is to be funded? How much of it is to be paid for by an increase in Network Rail’s debt and how much by yet more inflation-busting increases in rail fares? Conclusion: the infrastructure pillar may be in place at some time or other in the future but certainly not today.

Finally, I turn to the fourth pillar of the Government’s economic strategy: austerity, to ensure that,

“fiscal credibility underpins low long-term interest rates”.

As all noble Lords will be well aware, there is a growing international consensus among all serious commentators on economic policy that austerity strategies have failed. The academic work purported to validate the austerity policy has been demonstrated to be seriously flawed. As for Britain, Olivier Blanchard, the chief economist of the IMF, has said that the country is “playing with fire” if it allows stagnation to continue.

As your Lordships are well aware, in 2010 the coalition’s austerity transformed Britain’s growth rate from a steady 2% a year into an equally steady 0% a year, with little prospect of returning to 2% in the near future. The level of output remains stubbornly below the level of output obtained in 2008, while other countries have at least recovered from the worst ravages of the global financial crisis. What is the Government’s justification for clinging to this failed doctrine? The Treasury argues over and over again that any change to the strategy it has followed for the past three years will damage the Government’s credibility in the financial markets, and that the subsequent increase in long-term interest rates would outweigh any benefits from cutting taxes or increasing spending. Since this is the only shred of justification for sticking to the failed austerity policy, it is worth examining for a moment.

First, with whom are the Government seeking credibility? The answer is: the markets. Who are they? What they are not is some single malevolent force tying George Osborne’s hands behind his back as he pleads to be set free to stimulate growth. In fact, the markets comprise millions of individual traders who pore over their computer screens trying to guess how the markets will move in the next month, week or even the next few seconds, and trying to make a secure return. In other words, they are trying to guess what everyone else in the market will do in response, for example, to announcements by firms or Governments, to the release of economic data or to research reports. This is not easy, but it is made much easier if an authoritative source makes statements that every trader believes all the other traders will accept. We have had a striking example of this in the eurozone, where Mario Draghi’s statement that the ECB would do everything necessary to defend the euro convinced each trader that all the other traders would take Draghi at his word. Accordingly, the markets all moved together in exactly the way in which Mr Draghi wanted. Authoritative statements can move markets, so if all the traders are convinced that any relaxation of austerity will result in higher interest rates in the UK, it will.

Credibility is potentially a vice tightening its grip around the heart of the British economy, but what do the clowns at the Treasury do about it? They do everything they can to reinforce those traders’ beliefs. They turn potential into reality and they cry from the rooftops that the markets will tighten the austerity vice because it is the only justification they have left of a failed policy, and the danger for Britain is that anyone will believe them. At the same time, they falsify the arguments for abandoning austerity. No one is expecting George Osborne to take himself off to the Tower of London, crying out to the world, “I was wrong”—although when thinking about it, that is not quite such a bad idea. What we all hope for is a steady and carefully staged change of emphasis. Bring forward that increase in infrastructure spending; why postpone it for two years? A British investment added to a strengthened banking Bill, a jobs guarantee for the long-term unemployed, a real new-build housing programme, and, to improve the existing housing stock, a reduction in VAT on home repairs, maintenance and improvements—none of these requires a fanfare announcement; all they need is real activism from a do-nothing Treasury.

What is left of the four pillars?

[Lord Forsyth of Drumlean]

My Lords, I have much sympathy with what the noble Lord says about clarity. Can he tell us by how much the Opposition would wish to increase borrowing in order to deliver the programme he has just outlined?

[Lord Eatwell]

Gross borrowing could be increased so that net borrowing would fall. That is our strategy.

Again, what is left of these four pillars is something that the Opposition perhaps do not understand. The noble Lord, Lord Deighton, who has a good economics degree, understands it very well. What is left of the four pillars of the Government’s strategy? Monetary activism that does not work, a banking Bill that fails to reform the banks in the way that Britain needs, an infrastructure policy that recedes into the distant future, and a housing policy that does precious little for the new build that homebuyers and the construction industry desperately need. Last, but by no means least, there is an austerity policy that fails to cut the deficit but is very successful in cutting real incomes. Those are the four pillars, but what this Queen’s Speech reveals is that the Government’s economic policy does not have a leg to stand on.

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[Lord Forsyth of Drumlean]

My Lords, it is a great pleasure to follow the right reverend Prelate, who is absolutely right to warn us of the considerable dangers of unmanageable debt both in households—private debt—and in government. We are heading for a doubling of our national debt by the end of this Parliament to about £1.5 trillion to £1.6 trillion. For the life of me, I do not know how it is possible to pay back that kind of money. We are passing on to the next generation a terrific burden, one that is tough enough already with interest rates that are well below historical norms. They will certainly go up, and with them will go the cost and burden of servicing the debt. I have considerable respect for the noble Lord, Lord Eatwell, but when I asked him by how much the Opposition wish to increase that debt still further, he did not really give me an answer. He told me that the Opposition did not understand this. I think that he meant the Government, but he may have been listening to the interview that his leader gave on the “Today” programme, which certainly gave the impression that the Opposition did not understand it.

[Lord Eatwell]

I am grateful to the noble Lord for correcting any verbal infelicities that may have occurred. I wonder if he has noticed that the significant government cuts in expenditure have not resulted in a falling deficit for the past two years. In the same way, an expenditure programme targeted on worthwhile activities that stimulated a flow of tax returns would result in a reduction in the deficit. One other small point: when he says that there is a burden on our children from this debt, I wonder if he ever thinks about who we owe the debt to. The answer is that one group of our children owes it to another group of our children. Collectively, there is no burden.

[Lord Forsyth of Drumlean]

That is all right, then; we will just write it off, there will be no problem and the world will continue to treat the pound in the same way. One of the extraordinary things is that although the pound has sunk significantly on the markets relative to other currencies, we are still not able to increase our exports and improve our productivity. As the noble Lord, Lord Empey, said, the key to this is being able to sell goods and services to a global marketplace competitively. Unless we can increase our revenue, we will not pay back the debt or, more importantly, provide the public services that the right reverend Prelate rightly emphasised as being of importance. The issue for us is how we do that.

The gracious Speech is a bit disappointing in the vision stakes. It is a list of Bills. One of the things that I have learnt in almost 30 years of being associated with Parliament is that legislation is seldom the answer to any problem, and usually creates considerably more. The idea that we should address every problem by thinking of a Bill or a new regulation comes out of this gracious Speech. To be fair, many people have said that they thought that the Speech was a bit thin, and in some regards it was. Perhaps it was modesty on the part of my noble friend, but I do not know why Her Majesty did not refer in the gracious Speech to the fantastic success that we had last summer with the Olympics, when Britain was advertised across the world as a competitive, successful and enterprising nation that was proud of its young people. My noble friend Lord Deighton played his part in ensuring that the Games were an enormous success, along with my noble friends Lord Coe and Lord Moynihan. Perhaps we could have done with a touch of levity in the Speech: I was itching to know whether Her Majesty had any further plans for appearing in Bond movies, for example.

I think that we have to go back to 1946 for the last time that there was a proposal to amend a Motion on the gracious Speech, which is happening in the other place. That amendment arises, again, because of the issues that the noble Lord, Lord Empey, pointed to—because Banquo’s ghost continues to haunt us. I cannot believe that it is now so many years since we discussed the Maastricht treaty yet I find myself mouthing the same arguments now to colleagues as appeared then.

I want to touch on the central themes of the gracious Speech. We have to improve Britain’s economic competitiveness and get Britain working and our economy growing again by investment in infrastructure.

I have to say to my noble friend Lord Deighton, who is a very clever chap, that whatever one’s views on the high-speed train—I have views that I had better not repeat because I want to be supportive of the Government—the immediate need is for jobs now. In roads and transport, we want people out fixing the holes in the road that are there today. We need more activity now in order to create employment. It is no good dreaming up fantastic, high-profile, wonderful schemes that will take place in 25 years’ time. We may not be around to see the benefits of those projects.

Similarly, there is talk of wanting another Bill to reduce regulation. Why do you need legislation to get rid of legislation? I should declare an interest as chairman of a small business that my daughter runs selling handbags—which are very good, by the way. Small businesses are not allowed any rates relief while they are setting up and before they start trading. Rates are a huge burden, particularly on the retail sector. They are competing with companies, such as Amazon, that pay no corporation tax or rates because, thanks to the splendid efforts of many entrepreneurs—not least the noble Baroness, Lady Lane-Fox, whose speech we very much look forward to hearing this afternoon—they are using cyberspace and are therefore able to escape taxation. Their competitors on the high street in bricks and mortar are faced with a burden of rates that they must pay regardless of whether they are profitable. It is no good saying that we are reducing the burden of corporation tax because you pay corporation tax only if you are making a profit, and our high streets are bleeding. We need to look at the burden of business rates and shift it in a direction that takes account of the needs of entrepreneurs and people starting up, particularly in retail.

The gracious Speech also refers to our commitment to encourage people to save for their pensions, but why do my noble friend and his colleagues in the Treasury continue to interfere and change the rules that apply to pension schemes? Raids started with Mr Gordon Brown’s on dividend tax relief. Then we had A-day; rules were going to be set in stone and people could rely on them, but in every Budget and finance Bill we have another nibble at the rules on pension saving. Why does that matter? People might say that it affects only the very wealthy who have built up very large pension pots. It matters because it undermines confidence in a long-term saving vehicle in a country that needs more long-term saving. Then you have the Government, who say that they are holding down interest rates because of their control on public expenditure—which, incidentally, is going up in cash terms—and who are funding their own borrowing by quantitative easing and creating, through quantitative easing, an artificially low interest rate. You then have the contributions that employers and companies must make to company pension schemes determined by the gilt yield. The result is that billions of pounds that would otherwise be going into growth and investment to create jobs for the future are going into pension funds, whence they will never come out because the assessed liabilities of those pension funds have been exaggerated by the Government’s quantitative easing policy. Far from quantitative easing helping, it is causing enormous damage and sucking productive funds out of the economy, from the private sector, which would otherwise be invested in job creation.

There is also the commitment to supporting the union, which, of course, I very much endorse, but if people are being asked to vote in a national referendum about Scotland’s continued place in the United Kingdom, which is in the interests of Scotland and the rest of the United Kingdom, we need to sort out the issues that remain unresolved from devolution and, in particular, the role of Scottish MPs voting at Westminster on devolved matters: the so-called West Lothian question. People voting in the referendum need to know what they are voting for. The Government simply cannot continue to run away from the West Lothian question. They need to say what the arrangements will be in future.

Similarly, if we are to continue with a devolved Parliament, we need a system of funding that is fair to Wales, England and the rest. Barnett is certainly not that. Repeated reports, including one from the House’s own committee that was set up for the purpose, have drawn attention to the unfairness of Barnett. The Government simply cannot say that they are concentrating on reducing the deficit and are therefore not doing anything about Barnett. That is a non-sequitur. There is no relationship between these two arguments.

On what is going on at the other end of the Building in respect of Europe, it seems that the central theme of the gracious Speech is our country being competitive and creating those jobs and opportunities that the noble Lord, Lord Empey, talked about. That depends on our looking outwards and recognising what is going on in Europe. It is not a matter of our leaving Europe; the rest of Europe is leaving us. It is going off on this madcap scheme to have a single currency. There seems to be no price that it is not prepared to pay in terms of the misery being created, particularly in the southern European states. They have unemployment among young people of 60%—more than half their youngsters unemployed. That is not only an outrage but simply unsustainable. The rest of Europe is determined that no sacrifice is too great for the sake of this project.

[Lord Spicer]

Can my noble friend confirm that one of the reasons why it will be so difficult to renegotiate the repatriation of powers that he has implied already is the acquis communautaire? The acquis insists on all movement, all the changes in the treaty, going in one way: towards a federal state. It is endemic in the treaty and is always supported by the court.

[Lord Forsyth of Drumlean]

My noble friend is absolutely right. I remember, when I was an Employment Minister, spending hours trying to prevent the working time directive coming into being, which ended with our challenging it in the courts and being advised that we would lose because the court has a duty to promote the acquis, which is about integration. We are involved in a club that has a particular direction. That direction is to create a country called Europe with one Finance Minister, one currency and one set of interest rates, which will take no account of the relative competitiveness of the member states. We can see what is happening. The result will be years of economic decline. It is our marketplace. It is a big marketplace, of course, but the rest of Europe actually sells more to us than we sell to it. We have a Commonwealth. We have relationships around the globe. We need to get out there and sell to those parts of the world that are growing. That is where our future lies. It does not lie in being tied up in sclerotic bureaucracy created by this organisation called Europe.

As to the referendum, all the political parties are split to one degree or another on our membership of the European Union. We should have a referendum as soon as possible. Just as it was argued in Scotland that we should have a referendum in order to end the uncertainty as quickly as possible, so we should have a referendum to end the uncertainty about our continuing membership of the European Union. Some of my colleagues who are of the same view as me say, “We might lose. Perhaps we should delay it. Perhaps we should put the arguments for longer”. Others, who are in favour of us maintaining our current relationship, take the same view. Let us trust the people and let them decide.

I say to my noble friends that the most disgraceful thing has been the behaviour of the Deputy Prime Minister and the Liberals on this matter. I took part in the general election campaign. I saw the leaflets that were produced asking us to sign a petition to send to Liberal headquarters, with a picture of the Deputy Prime Minister saying that the people of Britain must be given an in/out vote. That is what the Liberals fought the general election on. Indeed, the former Prime Minister, Gordon Brown, was attacked by Nick Clegg at Prime Minister’s Questions for not giving the people an in/out vote. Nick Clegg says that he wants to restore trust in British politics. Holding the Prime Minister hostage and preventing him giving the people a say on this crucial matter is a very funny way of doing that. Let us have a referendum, get it out of the way and then concentrate on building our prosperity by selling our goods and services to the rest of the globe, and using those relationships—our soft power—to make Britain produce the resources and revenues that we need to fulfil our obligations to our fellow citizens.

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[Lord Lea of Crondall]

My Lords, as the first speaker from these Benches following the outstanding maiden speech of the noble Baroness, Lady Lane-Fox of Soho, I add that, as someone who has always been in difficulty in working my computer, let alone shopping online, I stand in awe of anyone in that line of business. Perhaps I can get some private tuition.

I welcome the role that the Bishops are taking on as the only territorial representatives in this House, as well as now having the financial expertise of the most reverend Primate the Archbishop of Canterbury, in both cases indicating a relationship to real people in real communities.

I wish also to refer to the highly political 16-minute speech of the noble Lord, Lord Forsyth. No attempt was made by the Whips on the government Benches to remind him that eight minutes had been advised. It was a 16-minute speech, and I trust that the government Chief Whip will now confirm that we can all have 16 minutes, especially in our case, as my noble friend Lord Bhattacharyya seems to have disappeared.

[Lord Forsyth of Drumlean]

My Lords, I am most grateful to the noble Lord. I think that I was interrupted, and also no time limit has been specified for this debate.

[Lord Lea of Crondall]

There is an advisory limit of eight minutes. I inquired and that was stated. I do not know whether anyone would like to confirm that that is the case.

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[Lord Razzall]

My Lords, first, from these Benches I congratulate the noble Baroness, Lady Lane-Fox of Soho, on her brilliant maiden speech. Like other noble Lords, I look forward very much to her contributions to the deliberations of this House and her contribution to driving growth in the economy, which she touched on so ably in her remarks.

There has been much criticism of the gracious Speech, particularly from those on the Benches opposite, who suggest that it is slight and insubstantial. I do not share that view. The criticism suggests that the role of government is to legislate. I do not believe that that is right; the role of government is to govern. Do we really believe that the 30 or so crime Bills in 13 years of Labour Government caused the recent drop in crime rates? I certainly do not. I come from the school which believes that we have too much legislation, and I have often thought that occasionally a one-line Queen’s Speech saying, “My Government propose no legislation this year”, would be appropriate. Whether your Lordships agree that the primary role of government is to govern, all must agree that the Government now face two major challenges, both of which have been touched on by other noble Lords: what to do about the economy and what to do about Europe.

On the economy, there is common ground that economic growth will not be forthcoming without a correction in aggregate demand. Unlike in the 1930s when Keynes was a lone voice against the austerity measures of the Bank of England, there is also now common ground that an economic slump is not self-correcting, that there are limits to monetary policy alone in dealing with a deficiency in aggregate demand, and that fiscal policy plays a significant role in stimulating demand. But then policy advocates part company. On the one hand, Keynes is prayed in aid, particularly on the Benches opposite, to dignify any proposal to spend more money and oppose cuts, while on the other hand, the right wing—not represented quite so strongly here—sees its authority in Hayek rather than Keynes to justify supply-side arguments—namely, that we need more deregulation, to scrap employment legislation, and that growth will come from the private sector always filling the space left by a retreating state. I have always leant towards the Keynesian side of the argument, but I have to accept that the UK crisis since 2008 is different from that in the 1930s.

In the 1930s, we did not see the difficulties in the banking sector that we have had since 2008. Indeed, in his classic work, Keynes hardly mentioned the problems of the banking sector. If we take banking assets relative to GDP, the UK has the biggest banking sector of any major industrial country. The banking crisis and the measures taken to avoid future crises have, as my noble friend Lady Kramer said, seriously impeded credit flows, particularly to SMEs and to individuals. As the Minister indicated, the Green Investment Bank and the business bank represent an attempt to start to deal with this problem. However, progressing from millions to billions being available for investment through those two institutions will not be easy.

To understand the other difference with the 1930s, I need to be a bit technical. In the 1930s, Keynes assumed that private sector multipliers of two to three times for every £1 of public sector spending would apply. However, the Office for Budget Responsibility now estimates that there is an income multiplier of only 0.4 for tax cuts and revenue spending and a multiplier of one for capital projects. Tax cuts, or an increase in current spending as advocated by certain members of the Opposition, would have significantly less effect on the creation of demand and carry a much greater risk of damage to our credibility in world markets and our ability to finance the deficit. When the coalition Government were formed in 2010, it was clear that the UK would lose the confidence of our creditors without a credible plan for deficit reduction. However, the issue for the Government now is whether the balance of risks has changed. In May 2012, the IMF said that the risk of losing confidence as a result of a more relaxed fiscal policy, particularly the financing of more capital investment by borrowing, may have diminished relative to the risk of deterioration of public finances through lack of growth. I believe that there is now a case for a significant increase in public investment where there are impediments to growth, particularly capital spending on housing and infrastructure spending on the so-called “shovel-ready” projects.

On Europe, the noble Lords, Lord Lawson and Lord Lamont, as well as television star Michael Portillo, have now weighed in on the side of the “come out” camp. I am slightly reluctant to intrude on Tory grief over this issue but will make three points against them. First, the noble Lord, Lord Lawson, disagrees with the common assumption that leaving Europe would cost 3 million jobs. Indeed, he said that the Deputy Prime Minister was talking “poppycock” in using that argument and knew nothing about economics. As Alistair Darling said in the Times last week, although any assessment is theoretical, even if only 1.5 million jobs would be lost, that is a lot of jobs. Secondly, the main thesis of the noble Lord, Lord Lawson, was that our presence in Europe distracts our industry from competing in the growth markets of Asia, India and South America. However, it does not seem to stop the Germans in those markets—and they do not want to come out of Europe. The third argument against those advocating coming out seems to be the potential loss of international investment. The motor car industry is a classic example of an industry that has seen major overseas investment, primarily because of our presence in the European Union. The motor vehicle industry is a huge success story—last year, for the first time ever since the creation of the motor car, we exported more motor cars from the UK than we imported. Why should Tata, the Japanese and the Americans locate a new plant in the United Kingdom if we are outside the European Union? It is a highly risky strategy to assume that the European Union would allow us free trade in motor vehicles if we were outside it.

I have a suspicion that the arguments to come out, certainly from members of the Tory party in another place, have much more to do with fears of UKIP than economics. However, those Members of another place who are in fear of UKIP are in danger of misreading why people have been voting for UKIP.

[Lord Forsyth of Drumlean]

I am most grateful to the noble Lord, who obviously feels very strongly about this and feels that he has very strong arguments. But if they are so strong, why is the Liberal party in the coalition preventing the Government committing themselves to having a referendum, so that we can have this debate and people can decide, given that the Liberals campaigned for an in/out vote during the general election campaign?

[Lord Razzall]

I am grateful to the noble Lord, Lord Forsyth, for his intervention. As in so much of life, the question is timing. We are not in favour of having a referendum now. We might well have been in favour of having a referendum in 2010. Bearing in mind the policy of the Prime Minister to renegotiate our arrangement with the European Union, it seems sensible to have that referendum once that renegotiation has been completed.

Going back to my argument, I do not believe that people are voting UKIP because they want to come out of Europe. That is demonstrated by the detailed research that the noble Lord, Lord Ashcroft, has done. I commend his polling information to all noble Lords. It is very informative. People are voting UKIP because of a desire to go back to a perceived past world of Englishness, with no foreigners, with grammar schools and smoking in pubs, and where people knew their place.

John Major spotted this trend 20 years ago when he glorified a world of,

“long shadows on county grounds, warm beer, invincible green suburbs, dog lovers … old maids bicycling to Holy Communion through the morning mist”.

Unfortunately for his point, John Major quoted Orwell out of context. In criticising the past, Orwell had also talked about:

“The clatter of clogs in Lancashire mill towns, the to-and-fro of the lorries on the Great North Road, the queues outside the Labour Exchanges”.

I fear that this is the world to which UKIP wishes us to return. When I think of UKIP, I also think of 80 year-old Wyn Florey, on my ward committee, who said to me in the 1980s, “Don’t let them tell you about the ‘good old days’; they weren’t”. On the same point, my Tory colleagues might be better persuaded by William Whitelaw, who said in 1972:

“I do not intend to prejudge the past”.

I hope that, in deciding about Europe, Tory colleagues are not seduced by UKIP, and follow the Whitelaw advice. I hope and pray that they will not sacrifice the interests of our children and grandchildren to a misplaced nostalgia.

--- Later in debate ---

[Baroness Hanham]

I was not ignoring Europe. I was speaking directly to the points that were made about India and Africa. Of course our trade with Europe is extremely important, both imports and exports. I do not think anybody is going to want to unbalance that. The noble Lord’s point is well made and I was not trying to underestimate its importance. Trade with the rest of the world is also extremely important.

In January 2013, the Government introduced a one-in, two-out system of deregulation whereby no new regulation is introduced unless it is offset by deregulation of twice the equivalent value. That will be part of the discussions we will be having later when the deregulation Bill comes forward.

I have a sheaf of papers here and about two minutes to deal with them. The noble Lord, Lord Eatwell, spoke about the banking reform Bill. The Government are going to give careful consideration to the recommendations made by the Parliamentary Commission on Banking Standards, including those it makes in its final report. We will consider tabling amendments to the Bill when and if appropriate. The Government have committed to ensure that both Houses will have enough opportunity to consider and debate any amendments tabled.

The noble Lord, Lord Bilimoria, asked about promoting trade beyond Europe. UKTI is working with the Foreign Office and applying a range of criteria to prioritise its focus on emerging and high-growth markets.

The noble Lord, Lord McFall, and the noble Baroness, Lady Kramer, asked about the break-up and sale of RBS and other banks. The government shareholdings in RBS and Lloyds Banking Group are managed on a commercial and arm’s-length basis. UKFI works closely with those banks to assure itself of their approach to strategy. Its objectives are to create value for money for the taxpayer and to devise and execute a strategy for realising it in an orderly and active way over time.

My noble friend Lord Forsyth suggested that quantitative easing has exaggerated the liabilities of pension funds because of low interest rates. We recognise that quantitative easing is a major tool designed to affect the economy as a whole to meet the 2% inflation target over the medium term. Over 2011-12, companies with defined pension schemes have seen their scheme deficits more than double from around £100 billion to £250 billion, but the recent fall in gilt yields cannot be ascribed to quantitative easing alone. Factors such as flight to safety from the eurozone also have an impact.

[Lord Forsyth of Drumlean]

I realise it is rather late, but the point that I was making was that the assessed deficit is based on gilt yields, not corporate bond yields. If the Pensions Regulator were to change that view, huge sums of money that are not required but appear to be required because of the fall in gilt yields would not be put into pension funds.

[Baroness Hanham]

I thank my noble friend for that extra explanation. I shall carry straight on because I might just get a few more of these done.

The noble Baroness, Lady Hayter, asked whether private landlords will be required to check the immigration status of tenants. Many landlords already carry out some identity checks. An additional requirement, such as taking a copy of a passport, should not be too burdensome.

My noble friend Lord Tugendhat asked a number of questions, as did the noble Lord, Lord Monks. They are all quite technical, so I hope they will forgive me if I reply in writing.

There were questions about the consumer Bill that will come before us in the not-too-distant future, and there will be a great deal of debate and discussion on it.

My noble friend Lady Byford raised the question of rural broadband. I am sure she will appreciate that, during the passage of the Growth and Infrastructure Bill a few months ago, there was considerable discussion of rural broadband and the necessity for it including the permitted development rights and the limitation of those. The Government absolutely recognise that rural broadband is essential, not only to promote industry and its facilities but also for individuals.

My noble friend also asked whether local authorities have sufficient resources for planning, based on the new permission for agricultural buildings to be converted. We are giving all authorities a 15% inflation-linked increase in fees. Some have managed to deliver significant improvements in their services despite other reductions.

The noble Lord, Lord Mawson, speaks with great experience and he and I have discussed issues like this before. I note with concern what he was saying about neighbourhood budgets and communities. Perhaps we might discuss that further some other time.

I will probably run out of your Lordships’ patience as time goes on. I will deal with two more points and then answer the others in writing.

The noble Lord, Lord Warner, spoke about youth unemployment as well as other important matters. The 16-17 year-old unemployment level fell by 5,000 to 192,000, down 21,000 from the same time last year. The 18-24 year-old level rose by 25,000, but that is down 25,000 from the same time last year. The proportion of 16-24 year-olds not in employment, education or training has fallen over the year and is currently at 15%. That is too high and needs to come down. I accept entirely what noble Lords say: youth employment is one of the real problems that we need to address. The noble Lord also asked about the resource transfer from the National Health Service to social care. As he will know, all government spending is being reviewed as part of the spending review, including social care funding.

Finally, my noble friend Lord Trenchard asked what we are doing about excessive regulations where primary legislation is not required. The deregulation Bill is not all we are doing to reduce regulation. We are also making changes through secondary legislation, but this Bill will help us meet our target to repeal and reform at least 3,000 regulations in this Parliament.

I must just respond to my noble friend Lord Tope on city deals because he was so nice about me. At the moment there is no plan for rural deals. Of course, some rural areas are caught up within the city deals and are helped by that. The Government plan to devolve to all local enterprise partnerships, rural and urban, the single local growth fund.

I apologise for gabbling and being rather short. Where I have not answered, correctly and in appropriate detail, points that have been made, I will do so in writing.

Banking: Quantitative Easing

Lord Forsyth of Drumlean Excerpts

Wednesday 27th March 2013 Lords Chamber

[Lord Newby]

My Lords, the Bank can do a number of things. However, on the change in the remit, the idea of having intermediate thresholds, which the Fed and other banks around the world have adopted, is to give longer-term certainty about the path of interest rates, which, we hope, will stimulate business confidence.

[Lord Forsyth of Drumlean]

Did my noble friend see the report in the Financial Times on Monday that the Japanese company, Fujitsu, was going to invest £800 million in Britain, but that all that money will go to reducing the deficit on its pension fund? How much longer will we see artificial deficits being created because gilt yields are used to calculate the liabilities of pension funds, and these liabilities are being exaggerated by the effects of quantitative easing? When are the Government going to do something about this?

[Lord Newby]

My Lords, there is obviously a tension in respect of interest rates in that some people benefit from low interest rates and some people lose from low interest rates. It is the Government’s view that low interest rates are in the interests of the economy in promoting growth in a very difficult economic environment.

Infrastructure: Expenditure

Lord Forsyth of Drumlean Excerpts

Monday 25th March 2013 Lords Chamber

[Lord Deighton]

I thank the noble Lord for drawing attention to an important part of our intervention to improve the public sector’s delivery of these crucial projects. On the question of the amount of resources required, we are not simply discussing the resources in Infrastructure UK here; we are discussing the resources right across government, particularly in the government departments that are charged with delivering infrastructure: the DfT and DECC being the two primary examples. Between now and June, we will work precisely to define their requirements, based on the project load that they are managing, and what they ought to be staffed with in order to make that happen. That gap is thus being defined, and we have to assess what is in the departments as well as what is in Infrastructure UK in order to determine how to fill in that difference.

[Lord Forsyth of Drumlean]

My Lords, will my noble friend confirm that had he continued with Alistair Darling’s plans for capital expenditure, capital expenditure would have been severely reduced?

[Lord Deighton]

My noble friend is precisely right that the restoration to capital expenditure which this Government have made through the 2010 spending round, the two Autumn Statements and the recent Budget, has restored capital expenditure levels to considerably above the previous Government’s plan.

Welfare Benefits Up-rating Bill

Lord Forsyth of Drumlean Excerpts

Tuesday 19th March 2013 Lords Chamber

[Lord Low of Dalston]

My Lords, I have put my name to this amendment and will briefly signify my support. There is not a lot that I can add to the comprehensive account given by the noble Lord, Lord McKenzie. The only point I would stress was made by somebody on television last night—that we now live in an environment where inflation is considerably higher than we were used to in the first decade of this century. We understand that the new Governor of the Bank of England advocates that the inflation target should be allowed to float free. We are in an environment where inflation is set to hover around 3.5% or higher with no prospect of it reducing. In these circumstances, to cap the increase in benefits at 1% is simply unjustifiable. I support the amendment moved so comprehensively by the noble Lord.

[Lord Forsyth of Drumlean]

My Lords, there is no one in this Chamber who would not like to see support for those on low incomes and families to be increased. What was striking when the noble Lord proposed this amendment was that, apart from a vague suggestion that it might be possible to find the money by pursuing tax evaders, there was no indication of where the £3 billion needed to provide uprating in line with inflation—assuming the Government’s forecasts are correct—could be found. That is deeply irresponsible and it is particularly irresponsible of an Opposition who will not say what they would do in government. In other words, while it is not their responsibility, their line is “You should spend the money”, but when it might be their responsibility, they are not prepared to say what they would do. That is completely dishonest politics.

We have a dangerous position in our country, partly caused by the present Government constantly harping on about how they have reduced the deficit by a quarter. According to a poll carried out by ITN and a separate poll by the Centre for Policy Studies, which may not be quite so objective, when asked the question, “Do you think by the end of this Parliament the national debt will have gone up by £600 billion, be just the same, or will have gone down by £600 billion?” only 6% got the answer correct: that it will have gone up by £600 billion. So here we are, living in a country where we have to make difficult decisions—this Bill is an example of having to make difficult decisions—and where the vast majority of people believe that the Government are cutting debt, when in fact all the Government are doing is reducing the amount by which the debt is increasing. I will wager that when we have a debate at the end of this Parliament and come the next election, the Opposition will pursue the same kind of irresponsible tactics which we see in this amendment. They will say, “The Government were elected to reduce the debt, but the debt has gone up by 50%. If we had been in government, it would have been different”. That is the politics of it.

Let us look at it from the point of view of people on low incomes—working or non-working—faced with inflation. If we follow the prescriptions contained in this amendment, the consequence will be that the pound will sink still further. The consequence of the pound sinking still further is that the energy and fuel costs that the noble Lord, Lord McKenzie, spoke of will go up. So how does it help people who are struggling to say “Your benefits will go up by inflation” if at the same time you pursue policies which will result in higher inflation and higher debt and leave an even bigger problem to solve at the end of the day, which will be solved on the backs of the poor?

The noble Lord said that the Government are handing out a tax-free benefit to the very rich. I remind him that when his party were in government, people on very high incomes were paying less in marginal rates of tax than they are now. I also remind him that the effect of cutting the top rate of tax from 50% to 45% will be, as has been proved over and over again in countries around the globe, that the revenue to the Treasury will go up. Although the noble Lord and his party quite rightly point to the excesses in the City arising from bonuses, and so on, they seem to forget that 52% of those obscene bonuses come back in tax and national insurance. Actually, it is more, because there is an employers’ contribution of 12%, so 64% of those bonuses come back to the Treasury in revenues.

The name of the game here is to increase revenues to the Treasury. Then we will be in a position to do something about welfare. We are now in this difficult position and my noble friend is having to take this painful legislation through the House. The Opposition should recognise that that is a consequence of their period in government. The noble Baroness shakes her head. While they were in government, welfare benefits went up by 60% in real terms.

[Baroness Hollis of Heigham]

To pensioners.

[Lord Forsyth of Drumlean]

Yes, the noble Baroness, Lady Hollis, makes the point that a large percentage went to pensioners, but I do not hear from the opposition Front Bench a cry that we should cut the benefits to pensioners to avoid this position. The very fact that she says that from a sedentary position indicates that she accepts that.

Whatever the merits of how the money was distributed, it went up by 60%. One pound in every £4 which this Government are spending—by the way, that is money which we have not got because we are having to borrow £150 billion every year to make that expenditure—is going to welfare. To argue that it is not necessary to constrain welfare expenditure in those circumstances is, frankly, totally irresponsible. It is the worst kind of politics.

The noble Lord seeks to present people on this side of the House as uncaring and unconcerned about the poor whereas, actually, if you are concerned about people who are hard up, you want to make sure that the costs of living for them and the stoppages in their pay packet are reduced to as low a level as possible. If we follow those prescriptions of continuing to spend money we have not got, of continuing to pay more in welfare than people are gaining in increased incomes in the private sector, that is the road to Carey Street and to undermining our whole welfare system of support.

The truth is that while Labour was in office, it was paying tax credits to people on up to £50,000 a year. It was a policy deliberately designed to create a client state, and it was a policy funded on the back of a bubble created by holding down interest rates. It was irresponsible economics and it was irresponsible public expenditure. A responsible Government, faced with the windfall tax revenues that they had, would have put some aside for a rainy day. Now we find ourselves with a huge, exploded welfare budget and difficult decisions that need to be taken.

I hope that the House will reject the amendment which, while we all appreciate the sentiment, would actually do down those who are hardest up in our society and having the most difficulty. The noble Baroness shakes her head. It is the consequence of spending money which we did not have.

[Lord Harris of Haringey]

My Lords, I hesitate to give the noble Lord a lesson in economics, but the problem that the Government currently face is a complete absence of growth. Further cuts in welfare benefits will make that worse. One thing that you can say for certain is that the people on the lowest incomes will spend that money and that that money will then feed into the economy, therefore doing something about the growth problem that the Government have exacerbated by what they have done in the past few years.

[Lord Forsyth of Drumlean]

I do not think that was a lesson in economics but a lesson in magic. If that is the case, why do we not just double welfare benefits? People will spend even more, the economy will grow and everything will be fine. The noble Lord nods his head in agreement. As an individual or as a household, you cannot continue to spend more than you earn without getting into the kind of problems that we have seen among people who have taken out payday loans.

This is the payday loan approach to government. You have a big debt, so you take out another one. You pay a higher rate of interest on it but you hope that somehow you will be able to pay it back. In the end you are able to pay only the interest. At the moment the Government are printing money to fund their expenditure requirements. That is quantitative easing. In 1997 the Bank of England held no government bonds. Now it holds 27% of the entire bonds in issue. When interest rates rise, those bonds will fall in value. How will the difference in value be made up? That will be a cost for the taxpayer. Our level of borrowing now, which will have gone up by 50% by the end of this Parliament, will have to be financed and that will come out of the future welfare budget.

The noble Lord is describing a way of robbing our children of their living standards and creating a bigger problem for the next generation to meet the needs of those who are most vulnerable. This is a way of making it more expensive to create the safety net that we all support. This is not a lesson in economics but in the kind of fantasy approach to politics that got us into this position in the first place. That is why the Government are right to persevere with this legislation. Indeed, they have been very reasonable in their approach. They have tried to protect the most vulnerable and have agreed to increase welfare payments by 1%. This is extraordinary, given that we have an economy that is not growing at all.

[Lord Harris of Haringey]

Exactly.

[Lord Forsyth of Drumlean]

The noble Lord seems to think that the reason why the economy is not growing is that the state is not large enough. How big does he want to the state to be? It is already taking nearly 50% of everything created by the Government and spending it, and that is not enough because they have to borrow on top of that.

If levels of taxation are high, which they are, and levels of regulation are high, we will not get the growth that is required. We need to constrain public expenditure to make room for the private sector to create wealth. Once we have a bigger cake, everyone can have a bigger slice, but if we try to proceed in this way we will end up with a smaller cake and those dependent on welfare benefits will be cruelly cheated. They will find their living standards destroyed by inflation, higher costs and the inability of the Government to finance the kind of programmes that Members opposite are prepared to say now that they would support, although they are not prepared to say so at a general election.

[Lord King of Bridgwater]

My Lords, I agree with a particular point that my noble friend has made and would like to add that the Bill has come forward on an especially interesting day. I refer to Cyprus. The warning is on the packet. There has been a certain amount of calm around, as though we had come through all our problems and were moving steadily forward into calm waters, and as though the eurozone was secure. The financial markets, with the euro increasing in value, may have had that illusion. However, it has all been blown away. I have not heard any recent news; I do not know whether there has been a decision yet about what Cyprus will do. We should remember that, at the moment, there is a very real risk. Clearly, people have been caught in Cyprus. If Portugal, Spain and Italy decide that this will be the European practice, people there may find that their savings and funds in their banks are not as secure as they had been assured they were. After all, everyone thought that there was a clear undertaking that below a certain level, around €100,000, their own bank accounts were at no risk. If that changes, we face a very serious situation.

There is complacency around, as I picked up from an article today by the chief economist of HSBC, as though with just a bit of going forward and a bit more luck we will be back on the old growth train and in the business that we were in before. What has been exposed is that over many years we have been living on borrowed money, on a construction boom in the financial services area and on public expenditure. Now that those have to be constrained, suddenly people are turning around and saying, “How, as a country, are we going to earn our living in future?”. We are finding that we have slipped in the leagues. In one of our most successful areas of overseas earnings, defence expenditure, we have now slipped a place and China has overtaken us. China is now taking away a number of the markets that our manufacturers used to serve extremely well. It is said that we hope to sell Typhoon to Oman, the UAE and one or two other countries, but the point has been made that its successor will be made in America, and that will be the end of one of our most successful overseas earnings. When you see where we earn our living in the world, we are not in a happy place.

That is why I very much agree with my noble friend Lord Forsyth. All of us in this House would like to say, “Let’s increase benefits. Let’s deal with all the hard cases and see how we can give people more money”. Look at the situation in Ireland, where benefits have been cut by, I think, 10%. There has been talk of cuts today but in fact we are taking about how big an increase the Government should impose, not an absolute cut in the amount. Other countries in Europe are cutting by 6%, 10% or 12% the actual amount that people are getting—what hardship that must represent.

This is not a pleasant speech to make. It is much more popular to say, “Let’s have some more benefit”. I say this against a background of a new situation that has suddenly come upon us: if this House—the unelected House of Lords—decides today to cut right through one of the decisions made as part of the prudent financial planning to find our way out of the problems that we are in, and if that triggers a loss of credibility in our national approach and the Government’s approach to tackling those serious problems, it will really be a problem for people on benefits if there is a run and we then find that the low interest rates that the Government have enjoyed for their substantial borrowing no longer apply.

I agree with my noble friend on this point. There is an illusion that somehow we are reducing our debt. We are not; we are reducing the rate at which the debt is increasing. One of the blessings that we have had is that at least we have been able to borrow at an extremely low rate because we had some credibility. If the House of Lords today kicks away one of the planks that help to shore up the credibility of a Government who have a plan to try to deal with our problems, and if those international interest rates are then demanded of the Government and the country when we try to borrow money, the problems that we will incur for all our people could be vastly greater. Look at the tragedies that exist now, such as the unemployment rates in Spain, which is 50% in certain age groups.

We have held things together so that we have a lower unemployment rate than the eurozone countries. There is so much that we have to hang on to. This is a dangerous time. I say seriously to your Lordships: do not tamper at this stage with this very difficult situation, at a time when we are least able to face it and when it could quite seriously endanger our whole economic structure. I do not think that people understand what a mess the world is in at present. There is a huge amount of complacency around. We are not by any means out of the woods yet, and it is our duty to ensure that we hold firm.

I intend to support my right honourable friend Iain Duncan Smith, whose commitment to this area I think we all admire enormously. He is doing the best that he can. He is agreeing to an increase in benefits for the most deserving people in this country, but not as large an increase as they might have hoped to see. That is the only realistic approach that can be taken at this time.

--- Later in debate ---

[Lord McKenzie of Luton]

My Lords, of course we are aware of what is going on in Europe, and I shall come on to issues of borrowing in a moment. We are talking here about an amount that is less than 0.1% of total government expenditure. The noble Lord cannot seriously be arguing that taking our position rather than that of the Government would bring the whole edifice crashing down. That simply does not reflect reality.

The problem that the Government have is that because they have failed to deliver growth in the economy there is a real risk—this is what is happening—that their austerity programme is making debt worse. This was again a point made in a very powerful article last week in the FT.

We have heard a great deal about the Labour Government’s record. When the Labour Government left office the economy was growing again and it was the austerity measures which choked off that growth. As to the Labour Government’s record on debt, before the international crisis hit, our debt levels were the second lowest in the G7, lower than when we came into office in 1997, I believe.

[Lord Forsyth of Drumlean]

I am following the noble Lord’s argument very carefully. If he is saying that we can get growth again by spending money uprating benefits in line with inflation, why will he not therefore make the commitment that a Labour Government would do that?

[Lord McKenzie of Luton]

My Lords, I make the commitment that we should review on the usual basis at each uprating period. No Government or Opposition immediately prior to a general election are going to pre-empt the programme they would have. The noble Lord knows that full well. He is making a silly political point.

There is a real risk that by cutting back you make the debt situation worse. It depends upon the multiplier. There have been some recent studies which suggest that it is made worse because the multiplier effect would mean that if you did not cut back you could create growth greater than the saving you are seeking to make. We shall hear from the Chancellor tomorrow about his view on borrowing for capital spend, for example. The relative merits of that depend upon the multiplier effect.

Ultimately, the argument in favour of the Government’s Bill as it stands is that it is locking in an unknown. You cannot know in year two or indeed the next year what the rate of inflation will be and you cannot know, therefore, the extent of the cut you are visiting on the poorest people in our country. That is what we object to in this Bill.

We could go on for ever in an economic debate, but I think it is time to test the opinion of the House.

--- Later in debate ---

[Lord Forsyth of Drumlean]

My Lords, this amendment is simply a variation on the previous amendment. In the previous debate, we went through the arguments for why it is economically impossible to sustain inflation-related increases. I do not propose to repeat the arguments, but this amendment would result in exactly the same position, given that the exceptions proposed by the right reverend Prelate constitute a large part of the Bill. It is just a way of saying that, if one was going to make the same savings, one would have to make bigger reductions in the increases for everyone else, or else one would have to find the money. Once again, the right reverend Prelate did not tell us where the money would come from.

[Baroness Hollis of Heigham]

He did, actually.

[Lord Forsyth of Drumlean]

I am happy to give way to him if he wants to explain where the money would come from, but I suspect not. A large part of his flock of the clergy will be recipients of benefits because of the wages that they are paid by the Church of England. Everyone is in the same boat here. The noble Baroness, Lady Sherlock, argues that somehow it is possible to find money which we have not got and that she is proud to support the amendment because of the reduction in the top rate of tax paid by those who she describes as millionaires. I remind her that those people are paying 5% more in tax than they did under her Government. I also remind her that the effect of cutting those high rates of tax has been to increase revenue and therefore to make it possible to do more in that respect.

Surely, by now, we have learnt that lesson. It is a cheap political argument to say that it is possible to create money out of thin air and that this Government want to protect the rich at the expense of the poor. If we want to help the poor, we have to get the economy growing again. The noble Baroness says that the economy is not growing because of this Government. The economy is not growing because of the burden of debt which she and her fellow members of the Labour Party ran up.

[Lord McKenzie of Luton]

The noble Lord keeps going on about debt. Is it not right that, because of the failures of the noble Lord’s Government, the lack of growth has meant that borrowing is now about £200 billion more than they planned when they came into being?

[Lord Forsyth of Drumlean]

I am utterly amazed by the noble Lord. He is now criticising us for spending £200 billion more than we planned, when part of that money is being used to provide the 1% uplift in benefits. Talk about wanting to have it both ways. On the one hand, he is criticising the Government for not borrowing enough, but now he is criticising the Government for borrowing more than we planned. The reason why we are having to borrow more than we planned is because of all the commitments made by the previous Government without a clue as to how they would fund them. That includes commitments on welfare. Welfare spending accounts for £1 in every £4 that the Government spend.

On the basis of the noble Lord’s criticism that we are spending £200 billion more, that would mean that £50 billion is going on welfare. In all the time that I have been involved in both Houses of Parliament, I have never seen a more irresponsible Opposition. It is not good enough for the right reverend Prelate to come to tell us that we need to do more to help working families with young children without explaining from where the money is to come or addressing the main problem.

[Lord Griffiths of Burry Port]

My Lords, I have taken no part in this debate so far. Has the noble Lord not suggested somewhere where the money can come from; namely, that people like us could pay it? If children would benefit I am prepared to pay it. Is he and are we?

[Lord Forsyth of Drumlean]

My Lords, I am grateful to the noble Lord, Lord Griffiths of Burry Port. I did not think that he was a bishop and I was addressing my remarks to the Bishops’ Bench, but I say to him that the burden of tax has gone up substantially, and the reductions in government expenditure have so far been quite limited. We are discussing not a cut in government expenditure but limiting the increase in government expenditure to 1%.

I have had several goes at persuading the right reverend Prelate to indicate where the money for his proposal might come from. One possibility might be for people to put wages up. If the Church of England were to put up its clergy’s wages, less would be claimed in benefits and more would be available for others, but that is not a practical proposition for the church because the church, like the Government, is faced with a financial crisis and has to live within its means. What is good for the church is good for the Government and is good for particular families.

The most irresponsible part of the arguments that have come from the Bishops’ Bench this afternoon is about what happens if inflation is allowed to let rip. I fear that that may be about to happen as we continue to print money and borrow. As the noble Lord, Lord McKenzie, pointed out, we are borrowing far more than we planned to meet our commitments and to be fair to the most vulnerable. What happens when inflation takes off? I remember the 1970s, when inflation was running at very high levels, at 20% and more, and interest rates were at 15% and more. Who suffered? Children, the poorest and families suffered. There is nothing Governments can do to protect them once inflation takes off.

We do not want to go back to that kind of society. It tried to cope with inflation by protecting people through indexation, but it was unable to keep up with it and the result was, as the then Labour Prime Minister put it so eloquently:

“Inflation is the father and mother of unemployment”.

Jim Callaghan said:

“We used to think that you could spend your way out of a recession, and now we know that you cannot”.

Those words were said as the Labour Government left in 1979, leaving another Tory Government to clean up the mess, just as we are doing now.

The right reverend Prelate’s amendment of course carries great emotional impact. We would all like to see working families with children have a higher standard of living, but the way to do that is to create the wealth that enables us to support those families and enables them to get the levels of income and employment that they need. You do not do it by shaving the edges of the currency, allowing inflation to take off and committing those families’ children as adults to a debt burden that, frankly, will be impossible to pay off. They would be paying the interest for the rest of their lives, and that would disadvantage their children. In rejecting this amendment, as I hope she will, my noble friend is speaking not just for our children but for our grandchildren, who are entitled to expect responsible government in these straitened times.

[Lord Bates]

My Lords, I support what my noble friend Lord Forsyth said. When the right reverend Prelate comes to respond to the debate, I would be grateful if he would comment on the following point. He made great play, and I do not underestimate this, of the effect and impact of limiting the uprating of child benefit and child benefits generally to 1%. According to Appendix 3 of the helpful Library note on the Bill, regarding the child tax credit element, in 2011-12 the child element of child tax credit increased by 11.1%, a significant sum. That followed significant increases of 13% in 2008-09 and 12.5% in 2004-05. If one is to argue that limiting that increase now to 1% would have a significant effect, if you take it as a snapshot, that may be the case, but if one looks over time, one has to factor in those significantly higher-than-inflation increases that have occurred in the child tax credit element in the past.

One of the problems with trading figures with regard to child poverty is that you get some curious results. One of the most notable is that in 2010 there were 300,000 fewer people in poverty because the recession had caused the median income to drop—in other words, children were said to have been pulled out of poverty not because anything had changed in their lives but because the rest of society had got poorer. We have to be clear about what we are arguing for when we talk about the interests of children, which of course should be paramount.

I turn again to a theme in the debate on the previous amendment: one cannot just take this in isolation. One needs to look at what the Prime Minister has announced today on childcare, for example, which will make a significant difference to people by enabling them to move into employment. One needs to look at the pupil premium or the raising of tax thresholds, which means that someone on the minimum wage has seen their tax bill halved under this Government. One has to look at these things in the round. Unlike the Opposition, we have ring-fenced the budget for the National Health Service, on which people significantly depend. Again, in the round, we need to get this absolutely correct.

I will react to the charge that somehow there is an easy pot at the other end of the income scale to be tapped into. As a result of this Government’s actions, the richest pay more tax on capital gains, more stamp duty on their homes and more tax on their pensions and are less able to evade tax than was the case before. These factors need to be borne in mind in the broad reach of these changes that I know when taken in cold, clinical isolation, one year at a time, without reference to trends over time, may allow one to draw one conclusion but should be placed in the proper context. I seem to recall from my youth the good theological concept of placing individual verses in context in order to understand their meaning, and one might think it was a good idea to place this one measure in the broader context in order to understand what the Government are doing to bring people out of child poverty, which we accept is significant. Other measures, such as limiting the proposed increases in fuel duty—another factor that has a big impact on the poorest in society, particularly those with families—and caps on rail fares and on council tax, all seek to address the issues.

We also need to recognise that child poverty has a wider set of causes than cash payment alone, and in many ways, we are focusing here on cash payment on its own. We need to place in context the fact that the children’s opportunities and their likelihood of being in poverty are affected primarily by the extent to which they live in a workless household. Therefore, all our efforts to get people into work should be welcome.

--- Later in debate ---

[Lord Forsyth of Drumlean]

I am most grateful to the right reverend Prelate. My criticism was that he did not say which of these he wanted to do. If the church’s position is that it wants to tax winter fuel benefits, please say so and say that the money from that could be used for this purpose. As for increasing taxes on pension contributions, he may not have noticed but the Government have already done that.

[Baroness Hollis of Heigham]

My Lords, I would have thought that the right reverend Prelate’s point was that we are facing political choices, not ones of financial necessity. We can make choices here and we are choosing instead to go after poor children.

--- Later in debate ---

[Lord Kirkwood of Kirkhope]

My Lords, my Amendments 4 and 9 in this group take us into much lighter territory. I hope that the noble Lord, Lord Forsyth of Drumlean, will understand and relax, because the purpose of the amendments is not to attack the savings which it is the principal purpose of the Bill to achieve but only to protect the position of benefit recipients should the Office for Budget Responsibility’s estimates for inflation be exceeded by 3%, which is the figure that I have chosen for the purposes of the amendments.

The amendments are different from those which have gone before because, apart from anything else, they are much less susceptible to attack on grounds of financial privilege. A problem that I had with some of the earlier amendments, and I share some of the analysis, was that they were prone to attack on those grounds. I think that those of us who participated in consideration during the passage of the Welfare Reform Act last year felt that financial privilege was being used rather rashly in the other place, but the purpose of this House is to persuade the House of Commons perhaps to think again about some of the legislation that comes to us.

Amendment 4 would simply disapply the 1% limit on benefit uprating in the event of inflation reaching 3%. I would be interested in the view on this of the noble Lord, Lord Forsyth, because he knows a lot more about it than do. Judging where inflation will come out in September 2013 and September 2014 is an inexact science. We will learn tomorrow what the Office for Budget Responsibility and the Chancellor think about the situation, but the two years covered in the Bill, September 2013-14 and September 2014-15, are considered to be facing inflation increases of 2.6% and 2.2% respectively. The purpose of the amendment is to ask what happens if those estimates are wrong. They are forecasts; they are not scientifically worked through. We have therefore to ask ourselves what we do as a legislature if inflation reaches 3%.

Change in the real-terms value of benefits is very sensitive to inflationary increases. I have said that the Office for Budget Responsibility’s baseline is 2.6% for September 2013 and 2.2% for September 2014. That reduces the real value of benefits by 4% and produces a saving of £3 billion; that is already agreed and is in the Bill. However, checking Library figures, I am advised that if inflation exceeds Office for Budget Responsibility estimates by 1% in the two years covered by the Bill, it will reduce the real value of benefits in the hands of claimants by 6% and result in a windfall saving to the Treasury not of £3 billion, which is what the deficit reduction programme is looking for, but of £5.1 billion. You can multiply the figures. If the OBR baseline is exceeded by 2%, that reduces the real value of benefits by 8% and produces a windfall saving for the Treasury of £7.2 billion. I have no way of knowing whether any of that will happen. All I seek with this amendment is to ask what the Government will do if it does.

The financial context is slightly worrying and has been getting worse since the coalition Government promulgated this policy some months ago. We will learn more about this in the Budget tomorrow. The Budget may well be—and some of us will argue that it should be—looking to promote growth and loosen some of the constraints on inflation that the Bank of England’s Monetary Policy Committee is required to oversee. However, we have a Bank Governor-designate in Mr Mark Carney, who comes with a reputation of being prepared to live with higher levels of inflation. If that happens, then the 3% figure in the amendment may well be breached sooner rather than later. In some of the earlier debates the noble Lord, Lord McKenzie, rightly adverted to the fact that the markets are already pricing in higher inflation in the short term over the two years that the Bill covers.

As a legislature, we now face an increasing risk of inflation for these two financial years; I put it no higher than that. We very much need to take that into account. The CPI calculation of inflation is a national figure, worked out with average figures on a statistical basis, but someone said to me the other day that childcare costs have gone up 6%, as anybody who has studied the incidence of rising costs on low-income families will know. That is a long way in excess of the general CPI rates that we face, as with food prices, rents and energy prices, particularly for the low-income families that I am concerned about.

I am grateful to my noble friend for the considerable discussion that we had about this. He was generous in considering what I said, but it would be helpful if the House knew what the Government would do if the 3% inflation figure was breached. I am reasonably content that there are overriding powers in the Social Security Acts, but I do not think there are in the Tax Credits Acts; I might be wrong about that. What happens if something untoward happens to inflation and we end up in the 2014 and 2015 fiscal years with something unexpected suddenly coming over the horizon? Surely some of these reductions in the value of benefits that I have alluded to would be quite unconscionable as a windfall increase to the Treasury’s coffers in a way that is not intended, as I understand it, but may well happen by mistake?

[Lord Forsyth of Drumlean]

I have looked carefully at my noble friend’s amendment and listened to his speech with care, but he does not provide the remedy in the amendment. It simply says that the uprating limited to 1% is cancelled if inflation reaches 3%. Would he indicate why he chose 3% and what the remedy would be? If he specifies a remedy, then we are back into the argument about cost.

[Lord Kirkwood of Kirkhope]

The remedy would simply be that if 3% was breached, then the clauses in the Bill fall and there would be the default position of an annual uprating process. It would be at the Secretary of State’s discretion with the usual provisions of Section 150 of the Social Security Administration Act 1992. It would be taken year by year and would say that inflation was forging ahead in an unforeseen way. For myself, I would listen to an argument that said that we should stick to 1% on costs shown in those circumstances, but if 3% was breached we would go back to the status quo. That does not have a cost at all.

The noble Lord, Lord Forsyth, and I have been doing government uprating statements for 30 years together and I have never known a Government not get an uprating statement that they wanted if they had a majority. That is what I think would happen in these circumstances. However, the Secretary of State would be obliged to come back and say to both Houses that the circumstances were not what he had anticipated or what the Office of Budget Responsibility had calculated and that therefore there would be a chance for reconsideration. That is all I ask.

In fact, Clause 1(5) and Clause 2(4) of the Bill give the Treasury power to protect itself from the downside. These clauses say that if inflation falls below 1% it will not admit the full 1% uprating and will reserve the right to adjust it. Yet there is no limit to which the Treasury will allow inflation to increase before it comes back and argues its case in Parliament one way or the other. There is a 50:50 chance of this happening. I believe in my heart of hearts that the Government would respond to that. I do not believe it would be at all conscionable to leave 3.5% or 4% inflation with these 1% caps for the two years in this Bill.

We need more than that. We need some inflation-proofing and protection for recipients of benefits in the two years covered by the Bill if inflation races ahead. That is the burden of the argument. It is no more and no less than that. I do not think that it would be attacked on the grounds of financial privilege. It has no direct effect, as I see it, on deficit reduction. I am content that the Government get £3 billion in savings, but not content that they get £5 billion or £7 billion, because that is not what the Bill is designed to do. I argue in this amendment that there is no protection in particular for low-income families. I hope that my noble friend will give me some reassurance about what the Government will do in these eventualities. If he is not prepared to accept this amendment, I may well be tempted to test the opinion of the House. I beg to move.

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[Baroness Masham of Ilton]

My Lords, I have my name to Amendment 12. I support what my noble friend Lady Morgan of Drefelin said.

The Bill could see vulnerable cancer patients and other seriously ill patients losing out on almost £500 per year if inflation rises. That is a great deal of money for people who are not working and who are ill. I hope that the Minister will give some hope that those vulnerable people will not suffer and that he will support this helpful amendment.

[Lord Forsyth of Drumlean]

My Lords—

[Lord Foulkes of Cumnock]

Oh!

[Lord Forsyth of Drumlean]

The noble Lord, Lord Foulkes, normally cheers when I get up to speak, but not on this occasion, perhaps because we have found something to disagree on.

I must congratulate my noble friend Lord Kirkwood on this very ingenious amendment. I suspect that he started from a position opposed to the Government’s proposals, knowing his long and distinguished record in supporting people on low incomes. I am sure that he would have preferred that the status quo had a rival—

[Lord Kirkwood of Kirkhope]

Since the noble Lord asked, let me tell him. I am looking him straight in the eye. I have voted for the Government all through this afternoon against my better judgment, but I say this to him: if any further cuts are introduced by the coalition Government for the rest of this Parliament, he can forget any support coming from my direction for the next two years.

[Lord Forsyth of Drumlean]

The noble Lord and I both have our crosses to bear in the coalition. I am grateful for his confirmation that he does not support the principle. This is just a very clever device to try to get us back to where we started from without making a commitment to spend money. The amendment states that the provisions in the Bill which limit the benefit increases to 1% can be set aside if inflation reaches 3%. That is for very good reasons. The noble Lord argues the case about people on low incomes and the effects of inflation. The noble Baronesses, Lady Morgan and Lady Masham, in their amendment, have highlighted the desperate impact that inflation has on cancer patients who are not working.

The best way to protect those people is to ensure that inflation does not rise to 3%. The idea that it is inevitable that inflation will rise to 3% is deeply damaging.

If the noble Lord, Lord Foulkes, wishes to interrupt, I will be happy to give way, but otherwise I would be grateful if he did not make remarks from a sedentary position, which is distracting me from my argument—which of course, was his intention.

The best way to protect people is not to have inflation. One thing that sets inflation running uncontrollably is people’s expectations of inflation. When the noble Lord makes a speech saying, “I think that inflation is going to be more than 3%”, people hear that and think, in their wage negotiations, “Lord Kirkwood says that it will be more than 3%; the Government say that it will be two and a bit per cent”. Expectations drive the inflation rate, and inflation is devastating for the poorest in our society and for people on fixed incomes.

Therefore, we need to follow a policy that will limit the possibility of large increases in inflation. That is where we have a problem. To do that, we must show that we have control of public expenditure and have plans in place that can be relied on.

If the amendment were accepted, anyone looking at the Government’s plans for financial responsibility over the next two years would say, “They have marked down that social security and benefit payments will be this, but, of course, because of Lord Kirkwood’s amendment we cannot rely on that because if inflation is above that figure, the Secretary of State will need to take a decision”. They will note that he will be taking a decision in the run-up to an election and will therefore draw conclusions about what the pressures on the Secretary of State might be.

The amendment drives a coach and horses through the Government’s finances for anyone looking at whether they can rely on the Government delivering.

[Baroness Hollis of Heigham]

Can the noble Lord help me? Is he arguing that the best way to protect people against inflation is to have no protection against inflation?

[Lord Forsyth of Drumlean]

Yes, got it in one. The one thing that we learnt in the 1970s was that indexation, like other palliatives, is absolutely disastrous, because it sets the ball rolling, which gets faster and faster with people chasing inflation. Of course that is exactly what I am arguing.

[Baroness Hollis of Heigham]

If the noble Lord follows that argument through, is he therefore saying that, should inflation happen, that is just tough luck, and the poor cannot not have the possibility of any protection from the Secretary of State doing what he would now do, which is to consider all the options in the circumstances?

[Lord Forsyth of Drumlean]

I have the highest regard and respect for the noble Baroness, Lady Hollis. She knows more about social security and understands the issues better than anyone else. I wish that she was on the Front Bench. If she was, she would be putting forward alternative proposals that might be more attractive and meet some of the points that are being considered, but she is not on the Front Bench and there are no alternative proposals.

We have to contain public expenditure not to within our means, because we are spending more than our means; the noble Lord, Lord McKenzie, pointed out that the Government are already borrowing and spending £200 billion more than was planned. I am simply arguing that if we continue like this the pound will continue to sink. The cost of energy, which, as the noble Lord, Lord Kirkwood pointed out, is a major cost for families, will go up. He supports windmills and other forms of energy generation that are the most expensive known to the planet and which are put on people’s bills without their knowledge as a tax and add to the pressure on these families. That is another example of where, if he is worried about poor households, he should abandon his attachment to windmills and other things that are raising energy costs and adding to inflation. The name of the game is to contain inflation by not having daft policies such as windmills and other energy policies. It is to act in a responsible way so that people will not decide that they do not wish to buy government debt, which is already a problem, and will not result in further pressure on the exchange rates.

I am sympathetic to the points that the noble Lord, Lord Kirkwood, has made and with which the noble Baronesses, Lady Morgan and Lady Masham, are concerned in respect of the people who are affected. The problem is that the remedy that they propose would make things much worse. It is not a good place to be. We would prefer not to have started from here, but it was Mr Gordon Brown who put us in this position, ably assisted by the noble Baroness, and we must sort this mess out. Clever as it is, this amendment is a smart attempt to get round the basic purpose of the Bill, which is fundamental to protecting people on low incomes.

[Lord Bates]

I support the noble Lord, Lord Forsyth, but I want to go one step further. He has dealt incredibly effectively with the measured arguments put forward by my noble friend Lord Kirkwood in Amendment 9, but it does not quite hit the interesting amendment in the names of the noble Baronesses, Lady Morgan and Lady Masham. I want to make a couple of points drawn from the Office for Budget Responsibility report looking at this Bill and the impact assessment.

Front and foremost are two things. The first is the control of inflation and the second is the creation of employment. They will help the poor more than anything else. If we fail to tackle the debt, the cost of borrowing will rise, as my noble friend Lord Forsyth has said. If the cost of borrowing rises, inflation will rise on the back of it. Therefore it follows that tackling the deficit is the best thing that can be done to help the poor. In table 2 on page 6 of its forecast, the OBR estimates that inflation will be: 2.6% in 2013-14; 2.2% in 2014-15; 2% in 2015-16; and 2% in 2016-17 and thereafter. It is clearly assessing that the culmination of the effect of these and other measures being taken is to move us towards a situation in which inflation is on a steadily downward course. That is the OBR’s assessment, which was used as the basis of the 2012 Autumn Budget Statement. As noble Lords have said, we will find out tomorrow where we stand vis-à-vis that.

Other elements need to be taken into account. We have the Low Pay Commission’s report coming up shortly. The Low Pay Commission provides a report that influences the minimum wage. The report was submitted at the end of February. I do not know whether my noble friends on the Front Bench have had sight of that recommendation, but it, too, provides a lock. Despite in previous incarnations being against the minimum wage, the Government have said that they support the minimum wage and have always accepted the recommendations of the Low Pay Commission to increase income as a result. Taking that together with the changes to universal credit that are deemed to be providing additional benefits to people estimated at £168 a month for 3 million families and the likely increase in tax thresholds and their impact on the salaries and incomes of the poorest in our society, it seems fair and reasonable, as the noble Baronesses, Lady Morgan and Lady Masham, have suggested, periodically to undertake a review. Post-implementation reviews normally take place three to five years after implementation.

We are talking about some of the most vulnerable. I believe that the position affecting the poorest in our society will not be as great as some people anticipate and that the situation with the combination of policies that I have outlined will lead to an increase, but as we are not having the annual uprating review, some periodic review of how this is working against projections of inflation and of the impact on the poorest in society would be sensible. I encourage my noble friends on the Front Bench to support it if possible. Should such a review take place, it should not need focus on the one narrow measure that has been the theme of this debate but should assess the wider impact on the poorest in society, taking into account the other measures—the pupil premium, NHS, the lid on fuel increases, the increase in personal allowances, the increase in the national minimum wage et cetera—which we are talking about. With that, I support the noble Baroness, but I am afraid not my noble friend Lord Kirkwood.

--- Later in debate ---

[Lord McKenzie of Luton]

My Lords, let me make it clear that we support each of these amendments. The request in the amendment in the name of the noble Baronesses, Lady Morgan of Drefelin and Lady Masham of Ilton, that there should be a review seems modest and straightforward. If the Government should seek to resist that, or a reasonable and clear alternative, I would be amazed.

The case is the same with the amendment of the noble Lord, Lord Kirkwood. As I understand the proposition, he is saying that should in any year the current expectations of inflation be in excess of 3%, which we currently expect to be the case, the 1% automatic uprating would not apply and there has to be an annual assessment, as happens at the moment. That assessment might lead to a 1% uprating, or to some other form of uprating, but there would not be the automatic application of 1%. Who knows what will happen to inflation? I do not predict that there will be a surge in inflation but, if there were to be, is any level of real cut in the standard of living of poor people acceptable to the Government? Is that what they are saying? They would be if they rejected this amendment.

[Lord Forsyth of Drumlean]

Would the noble Lord apply the same principle to pay in the public sector?

[Lord McKenzie of Luton]

We are talking about specific provisions in the Bill about the uprating of benefits. The noble Lord has worked quite hard to differentiate himself from the noble Lord, Lord Kirkwood, and his amendments. The suggestion that somehow having this provision in the Bill will fuel wage inflation across the land, fuel expectations up and down the country and bring the economy to a halt is, frankly, frivolous and a nonsense. The noble Lord knows that full well. He is an experienced parliamentarian and an able debater, but I do not believe that he did himself justice in the way he sought to pick away at the noble Lord’s amendment.

[Lord Forsyth of Drumlean]

I was asking the noble Lord a straightforward question. He is enunciating the principle that if inflation were at 3% or more, it would be necessary to abandon a position that held the increase in benefits to 1%. I am simply saying that if that is the Opposition’s view, is it also their view in respect of public sector pay? If inflation turned out to be much higher, would the same apply to people working in the public sector? If not, why not?

[Lord McKenzie of Luton]

My Lords, we are debating a different Bill. If the noble Lord wants to debate a proposition about public sector pay, let us have some propositions and we can consider that. The noble Lord knows full well that he is trying to lead the Opposition in a particular direction.

I come back to the point that the amendment of the noble Lord, Lord Kirkwood, is very straightforward. It just says that an automatic 1% uprating would not apply automatically if inflation reached a certain level. That seems entirely unobjectionable and I cannot see why the Government cannot accept it. If the Government do not accept it, they have to say what level of inflation, what level of real decrease in people’s circumstances, they would find acceptable, because that would be the consequence of rejecting the amendment. This is a very modest proposition. I really am surprised at the trouble that the Government are having with accepting it. I would hope at least that the noble Lord’s colleagues would stick with him on this issue as the arguments that we have heard against it are quite spurious.

Inequality: Income and Wealth

Lord Forsyth of Drumlean Excerpts

Monday 11th March 2013 Lords Chamber

[Lord Deighton]

With respect to the 1% of the top taxpayers, the first point I would make is that actually they are responsible for paying 24% of income tax. The top 10% pay just under 50% of income tax—I think it is 44%—so their contribution to our revenues is the greatest in proportion. As for the development of inequality since this Government came into office, the commonly accepted measures of income inequality have in fact decreased.

[Lord Forsyth of Drumlean]

My Lords, will my noble friend confirm that the substantial increase in the capital gains tax levied, which was forced through the coalition by the Liberals, has led to a dramatic reduction in the revenue from capital gains tax?

[Lord Deighton]

I thank my noble friend for that question. I am not aware of the initial revenue yields. I asked the department earlier, and it said that it did not break it down that way. My noble friend clearly alludes to the importance in tax management of understanding the ultimate yield on a tax, rather than simply assuming that when tax rates are changed people will continue to behave the same.

Taxation: Income Tax

Lord Forsyth of Drumlean Excerpts

Wednesday 6th March 2013 Lords Chamber

[Lord Newby]

My Lords, the living wage is one component in supporting the poor, and the Government have made it clear that they encourage people to use it. However, for many people who are poor the key thing is to get into work and, having got into work, to work the number of hours that are compatible with the family circumstances in which they find themselves. Particularly via the universal credit, we are taking steps to make sure that work always pays and that people are indeed encouraged to take up the maximum number of hours that are appropriate for them.

[Lord Forsyth of Drumlean]

My Lords, while congratulating the Government on raising the threshold at which people pay income tax—an ideal which was first put forward by my noble friend Lord Saatchi—perhaps I may just ask whether they have any plans to raise the threshold at which people pay national insurance. Many of the people to whom the noble Lord, Lord Greaves, referred are still paying national insurance at very high rates, and national insurance is a tax. Would we not be wise to merge national insurance and income tax so that people realise just how much is being taken out of their pay packets?

[Lord Newby]

My Lords, the Government do not have any plans to raise the threshold for national insurance simply because—as noble Lords will be aware—to do so would be extremely expensive. The Government looked at merging national insurance and income tax but have decided that they will not take that consideration any further forward for the course of this Parliament.

EU: Eurozone Financial Transaction Tax

Lord Forsyth of Drumlean Excerpts

Tuesday 5th March 2013 Lords Chamber

[Lord Newby]

My Lords, as I said in my original Answer, we are fully engaged in discussions going forward. If the FTT is introduced, it will have a number of impacts on the UK. The Government are in the process of assessing what those impacts might be.

[Lord Forsyth of Drumlean]

My Lords, can my noble friend tell us how much the European Commission expects the tax to raise? Will it not be pensioners and consumers who have to pay it?

[Lord Newby]

My Lords, the estimate that the Commission has produced is that the tax would raise €35 billion. It would not be raised from all financial institutions across the EU; it would be raised only from those established in countries which levy the tax. A tax such as this, which covers things like shares, trickles down through multifarious channels but, obviously, at the end of the day, a very large number of people end up paying a small amount towards it.

Economy: Rating Agencies

Lord Forsyth of Drumlean Excerpts

Wednesday 27th February 2013 Lords Chamber

[Lord Deighton]

I thank the noble Lord for those observations, which contain several of different questions. If you review Moody’s analysis of the UK economy you could not see a stronger recommendation of the Government’s policy of fiscal consolidation. I commend it to everybody as background to policy and why it is the appropriate one in these circumstances.

On the specific question about the impact of currency movements on the exposure of various lenders, my experience in those markets tells me that lenders manage their currency exposures very effectively and that the currency devaluation should not increase those particular exposures.

[Lord Forsyth of Drumlean]

Will my noble friend confirm that it is the same rating agencies that are apparently of such concern to the Opposition which told us that the junk collections of mortgages, which in part caused the financial crisis, were AAA-rated? Should we not look at what is happening in the real economy rather than at what rating agencies are saying about it? Is it not true that my right honourable friend the Chancellor of the Exchequer is presiding over a remarkable situation, given the shambles that he inherited from the previous Government?

[Lord Deighton]

As always, I thank my noble friend for his important observations. There are, again, several issues in there. First, he is absolutely right—Moody’s refers to this—that two things have caused this downgrade. The first is the sluggish growth of the global economy, which has slowed down the British economy; and the second is the very high levels of public and domestic debt, and the difficulty in driving those down.

On the second point, with respect to the credibility of the rating agencies, there are some very important issues surrounding that, particularly when one discusses complex securities such as the ones that we had in the mortgage-backed market. Frankly, with respect to the sovereign market, all the information used to determine credit assessments is perfectly visible to everyone, which is why the markets’ reaction to the downgrade on Friday was so measured.

Welfare Benefits Up-rating Bill

Lord Forsyth of Drumlean Excerpts

Monday 25th February 2013 Lords Chamber

[Baroness Afshar]

My Lords, I speak on behalf of the minorities and the moral economy of kin. For minorities who have been in this country for a very long time, it is the family who has given support and sustenance to those who are unemployed and suffering. That is normally done by people who are employed but in marginal jobs—hand-based employment such as catering—essentially by stretching the resources of the family unit in order to include the extended family.

Unfortunately, with the kind of cuts proposed at this stage, the extended resources of the family will no longer be able to help. My fear is that those of the younger generation who are likely to be serving in the restaurant with their dads or working with their mums by knitting or producing shirts and so on will now join the ranks of disaffected young people, and then be branded as home-made terrorists. It is a dangerous precedent. We really need to nurture the moral economy of kin because it is these families who offer support, but on this kind of income and with these kinds of cuts they will simply be unable to do so.

[Lord Forsyth of Drumlean]

My Lords, perhaps I may pick up on some points made by the noble Lord, Lord McKenzie. I have the highest respect for the noble Lord, Lord Low, and nothing would give me greater pleasure than to vote for the amendment. There is a problem, however, in that we cannot afford to vote for the amendment. The noble Baroness who has just spoken talked about cuts. We are not talking about cuts but about not having increases. It is true that there might be cuts because of inflation, but if we go down the road proposed by the noble Lord, Lord McKenzie, inflation will be even higher and the cuts will be more severe. It was Lord Callaghan who pointed out, as a Labour Prime Minister in the 1970s—sometimes I feel that we have gone back to the 1970s; even the Daleks made an appearance in Westminster last week—that inflation is the father and mother of unemployment.

It is really quite extraordinary for the noble Lord, Lord McKenzie, to make so much of the rating agency’s downrating of the UK from AAA status. I do not know whether he has read what the rating agency had to say about why that downrating was being made. It was because the agency believed that the Government would not be able to meet the targets that they had set, and which the Opposition are constantly urging us to abandon. The noble Lord talked about the impact of the sliding pound and of inflation, which is a consequence of not meeting these targets. On the idea that finding money out of thin air will not hurt the poorest hardest in the long term, because of the inflation that would be created and the impact it would have on the pound, the hard reality is that we simply cannot afford to do what the noble Lord, Lord Low, would ask of us.

It is the cheapest of cheap politics to keep going on about millionaires being given a subsidy. First, that assumes that the state is entitled to their money and that it can spend that money better than they can; and, secondly, that if they spend it by investing or buying goods it will not generate wealth and prosperity in the economy, while somehow a state bureaucracy involved in spending money and taking it by force through an Administration will get better value and growth. That is a delusion which we happily abandoned in the 1970s when we abandoned rates of income tax at 98% and discovered that the consequence of cutting taxes to 40% was that the rich ended up paying a higher proportion of tax than in the past. Already we are seeing that the proportion of tax paid by the very rich is falling and the proportion paid by the poorest is rising. That is not as a consequence of the recent measures made by my right honourable friend the Chancellor in his Budget but as a consequence of the politically inspired 50% tax, which the previous Government introduced as some kind of political gesture to try to create division between the parties.

We can all make speeches saying that we would like to have more money available for those who are poorest but if we were to follow the prescriptions of the noble Lord, Lord McKenzie, and his party—in so far as we can work out what their prescriptions are—the effect would be higher inflation, higher interest rates and higher unemployment, with those who are poorest in our country being the most disadvantaged. It would not be the rich or the people in the public sector but those who are unemployed, while the prospects for new jobs would be reduced.

I say to my noble friend that she is right to press ahead and, I hope, to reject this amendment. It is not because we do not care about those who are most vulnerable in our society but precisely because we do that we want an economic policy that will deliver the wealth that is necessary to pay the bills. The truth is that we are in this mess because the previous Labour Government spent money on welfare that was based on an unsustainable bubble. That is why we now have the problem. It is very regrettable that noble Lords opposite should seek to make party politics out of this issue while not acknowledging the very heavy burden of responsibility they carry for having brought this situation about and the real courage being shown by my right honourable friend the Secretary of State in bringing forward this Bill. It is trying to bring into effect a welfare system that will be within our means and will recognise the need to encourage those who have the greatest need.

[Baroness Meacher]

It is very fashionable to blame the previous Government for our predicament but does the noble Lord accept that the banks have to carry perhaps 90% of the burden of responsibility, and that the banking crisis started in the United States—not even in this country? In fact, if there was a weakness, it was in the degree of regulation. My understanding is that the previous Conservative Administration opposed even the level of regulation that this country had. This is therefore not a party political issue; it is about banking, and this country has been deeply wounded by the banking crisis.

The other question for the noble Lord is whether he accepts, as Lord Maynard Keynes argued rather powerfully, that if you are in a terrible state of recession the best way to get yourself out of it is to generate growth. That means that you should not be withdrawing demand from the economy in this incredibly irresponsible way. What the Government are doing is very worrying.

[Lord Forsyth of Drumlean]

I am most grateful to the noble Baroness. I disagree with the idea that leaving money, as Gladstone would have put it, to fructify in the pockets of the people is withdrawing money from the economy, and that somehow the state would spend that money more effectively.

As to her particular question about whether I accept that all this difficulty was caused by the banking crisis, no, I do not. I think that the banking crisis was caused by the monetary policy being pursued by the previous Government by targeting inflation. The noble Baroness seems surprised by this, but the fundamental causes of the financial crisis were the huge financial surpluses that were being built up—I hesitate to stray too far from the amendment—in China and the Middle East, which kept interest rates low, and an inflation-targeting policy being pursued by the Bank of England that meant that they were very low interest rates. As a result, the banks tried to go for yield. The banks were certainly at fault in devising packages that they thought would reduce risk and give a higher return, and it is certainly true that regulators such as the FSA should have been on to this.

However, the fundamental point is that while Labour were in charge they did nothing about that; indeed, they revelled in it. We were told that they had abolished boom and bust, and that they had come up with a new paradigm. That is why that Labour Government, even at the height of the boom, with huge revenues coming in and house prices and asset prices going through the roof, did nothing except collect the tax. Instead of putting the tax away for a rainy day, what did they do? They spent it on welfare that they could not afford, and when the boom collapsed there was a sudden gap in the market that my right honourable friend is now having to deal with. So let us not rewrite history here; let the Labour Party take responsibility for what it did in government.

The fact is that under both Governments we have been living beyond our means. We have been spending about 10% more than we earn, and we have been saving nothing. We need to save 10%. The consequence of that is that our living standards will fall unless we are able to create growth, and you do not create growth with the state taking more and more from the productive part of the private sector. According to the OECD, close to 50% of our GDP is being spent by the Government. We used to define communist countries as those where more than 50% of the state’s production was spent by the Government.

I say to my noble friend on the Front Bench that this is not an easy amendment to oppose—of course it is not—but she is absolutely right to do so because it is in the long-term interests of the most vulnerable people in our country that we stick to this policy and do not go further down the road that has brought us to this mess. If we travel down that road, it will mean that the hardship endured by the most vulnerable will be all the greater.

[Baroness Lister of Burtersett]

My Lords, I had not planned to speak to these amendments but I have been stung into doing so by the remarks of the noble Lord, Lord Forsyth. I am going to keep my powder dry for later amendments. First, he started by saying that this is not a cut. Of course it is. He then had to concede that if you do not uprate benefits in line with inflation, you are cutting benefits. Do not tell the mother who has to struggle that this is not a cut—it is.

Secondly, the noble Lord said that we cannot afford to uprate benefits in line with inflation. This is about choices—particularly, as the right reverend Prelate the Bishop of Leicester made clear at Second Reading, moral choices. We can afford to protect people living in poverty from inflation.

I will not make the contrast with millionaires because the noble Lord said that it was a cheap contrast. I will simply make the contrast with a policy of which the coalition Government are very proud—that of uprating tax allowances by more than inflation. As Gingerbread, I think, pointed out to us, this is the least effective way of targeting resources on people in poverty. A much more effective way of helping them is by inflation-proofing their benefits. There is a choice. The choice was made to increase tax allowances by more than inflation, which is of no help to people too poor to pay tax, including people in work too poor to pay tax; of minimal help to people on means-tested benefits, because they lose some of it; and of greatest help to higher-rate taxpayers. That was a choice. It was believed to be all right because we could afford it, but we cannot afford this.

[Lord Forsyth of Drumlean]

Is the noble Baroness not leaving out an important ingredient? The reason why that choice is made is because by cutting the tax burden and encouraging people to save to invest and to work harder you create the wealth that is needed to create the welfare state. That is the difference. The noble Baroness seems to think that it is a fixed cake and that whatever happens it is impossible to increase the size of the cake and thereby make more money available for those in greatest need.

[Baroness Lister of Burtersett]

I do not want to get into a great debate about the economics of this, but are people in low-paid work who are getting tax credits not contributing to the wealth of the country in the same way? They are affected just as much as people on so-called welfare, which I prefer to call social security. The economic case was made by the noble Lord, Lord Low, and the noble Baroness, Lady Meacher. This is not about the state taking money out of the productive economy and somehow filing it away somewhere; this is about the state redistributing money to people who are more likely to spend it and to spend it in local communities, thereby helping to boost economic growth at the time we need it. I do not believe there is an economic case. I do not accept the crocodile tears that are being shed by someone who is prepared to support a Bill that will hurt people in poverty the most.

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[Lord Newby]

My Lords, we and the noble Lord will simply have to agree to differ on that. The noble Lord, Lord McKenzie, repeated some of the arguments made about millionaires and the huge tax boost that they allegedly got. He did not mention that the Budget changes announced last year affecting millionaires and those on very substantial means would generate five times as much income as the 45p tax rate. It is simply untrue to claim that the Budget measures last year mean that millionaires as a group are paying, and will be paying, less tax this year and next than they have in the past. Equally, it is simplistic and false to argue that there is a sort of mechanical problem with HMRC, or an inability of HMRC to collect money from millionaires. Millionaires are extremely clever at avoiding tax. All the evidence from the Office for Budget Responsibility and the work that it did demonstrates why the 50p tax rate simply would not generate anything like the amount of money that was originally envisaged. Indeed, it said that it was quite possible that the 50p tax rate would mean less money being collected than would otherwise be the case.

[Lord Forsyth of Drumlean]

I am most grateful to my noble friend. Have we not had a spectacular example this very day of how cutting taxes can result in huge increases in revenue? The Chancellor’s decision to reverse his plan to increase the tax on the oil industry has resulted in the £25 billion of investment reported today, with huge implications for future revenue and employment.

[Lord Newby]

My Lords, that is an extremely good point. It demonstrates that there is no simplistic relationship between tax rates and the amount of tax collected. In some cases there is and in some there is not. The trick of government is to understand the difference between the two. Frankly, I do not believe that the Opposition have reached that point.

The noble Lord also talked about tax avoidance and conflated wealthy people avoiding tax and the situation relating to Starbucks. On the question of Starbucks and profit shifting, the Government, along with the French and Germans, have started a process with the OECD—something that the previous Government never did—to change the basic global accounting rules so that we can get to the bottom of corporations that are shifting their profits to low-tax jurisdictions. This holds the prospect of being successful in the medium term, but whatever it does it will have no impact on the effectiveness of the Government’s treatment of individuals. As we have debated many times in recent months at Question Time, the new focus that HMRC is putting on going after people who are avoiding and evading tax is generating many billions of pounds more in income. While the previous Government cut the number of HMRC people working on compliance by 10,000, this Government have already increased it by 2,500 and will increase it further.

I was very taken by the comments of the noble Baroness, Lady Afshar, on extended families. In the past year, employment has increased by more than 500,000 and I am unaware of any differential effect on the minority ethnic communities such that small firms in those communities have been shedding jobs disproportionately. Perhaps they have, but I have not seen any evidence. One of the more welcome developments of the past year, which has surprised a lot of commentators, is that hundreds of thousands more people are in work, and this increase in employment has taken place disproportionately in regions other than London and the south-east. There has been a slight rebalancing of employment prospects, and regions such as Yorkshire and the Humber, which I know, have done remarkably well in difficult economic times. I completely support the noble Baroness’s view about the moral economy of kin, but I question whether what has happened in recent months has undermined it to the extent that she suggested.

Finally, the noble Lord, Lord Bach, implied—very gently; I know that he did not really mean it—that the Government might have influenced what amendments were considered to be in scope of the Bill. He knows, as we all know, that the Government have no power to determine what is in scope of the Bill.

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[Lord Forsyth of Drumlean]

I am most grateful to the noble Lord. I am a bit puzzled because he said in answer to my noble friend Lord Bates that we were discussing the policies of this Government, not the last one. He is a little selective. However, given what he has described—an economy which is not growing at all—how on earth does he expect to fund the increase in benefits that he says he is in favour of? That is the crux of the matter. It is not about where we would like to be or how the world might be different, the fact is that the economy is not growing. If the economy is not growing, how is it possible to expand the welfare budget?

[Lord McKenzie of Luton]

I was talking about the last Labour Government in response to points that the noble Lord himself made earlier on. On growth, I would outline that there is one particular proposal that we in the Labour Party have been working on—the long-term jobs guarantee, and we have explained how it could be funded by, yes, restricting tax relief for the wealthiest in terms of pension contributions. It would get people into work, get them spending, and take them off benefits and welfare support. That is the way to do it. Perhaps I can turn this back to the noble Lord. The approach the Government have undertaken has simply failed to deliver growth; it is not happening. Everyone knows that and it does not need me to expound on it. The Government have failed to deliver.

It is because of that that we are challenging this burden of a real-terms cut. The noble Lord said that it is not a cut, but of course it is a cut in real terms because it is a cut in people’s living standards. It is also a cut that we do not know the magnitude of over the life of this Bill, which is why we object to it so strongly. We do not know what the rate of inflation is going to be in two years’ time. We can speculate on the impact of the downgrading of our credit rating, but getting growth in the economy and thus providing more employment is certainly more likely to impact in a positive way. That is what we would argue for and plan for. It is making the people at the bottom end of the income scale pay for the failure of this Government that we object to. This Bill is the wrong way to deal with benefits uprating. There is a tried and tested way that has operated for many years which is open to the Government rather than locking it down and forcing people into a real-terms cut in their living standards.

I suspect that we will have another round of this argument on Report because it is the fundamental part of our objection to the Bill, but in the mean time, I beg leave to withdraw the amendment.