Economic Prosperity and Employment
Lord Skidelsky Excerpts(10 years, 9 months ago)
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Lord Skidelsky
My Lords, I am grateful to the noble Lord, Lord Haskel, for introducing this important discussion. He has been rightly impressed by the argument put forward by the noble Lord, Lord Sainsbury, that the state must play a key part in fostering innovation, and I agree with that. However, of course, that does not exhaust the role of the state in creating prosperity. In the last chapter of his General Theory, the economist Keynes pinpointed as,
“The outstanding faults of the … society in which we live … its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes”.
I believe that these are still the outstanding faults of the society in which we live and that the state has a vital role to play in remedying them. Moreover, that is clearly connected to the topic of the noble Lord, Lord Haskel. The worst environment for innovation is rampant economic insecurity and excessive inequality. The private sector will not invest in jobs and skills unless it sees a market. The state has a role to play in sustaining that market in general, as well as in providing support to particular sectors. Once again I apologise for being the only macroeconomist taking part in this debate—I feel very lonely.
Let us consider two arguments. After the Thatcher-Reagan revolution, politicians and economists no longer believed that government policy should aim directly to influence the level of employment. Noble Lords will remember the new doctrine announced by the noble Lord, Lord Lawson: government should concentrate on controlling inflation and leave employment to the market. Let us see how well the market has done. Between 1950 and 1973—the period when economic policy was influenced by the Keynes doctrine—UK unemployment averaged below 3%. Since 1979, when the Lawson doctrine held sway, the average has been almost 8%. Today, Britain’s unemployment rate of 7.8% tells only half the story. The widest indicator of joblessness, which includes unemployment, part-timers seeking full-time work and those who are economically inactive but who nevertheless want a job, is estimated at about 12%, or 6.4 million people. On top of that you have to add the much higher level of youth unemployment. The Prime Minister and the Chancellor constantly tell us that the nation must live within its means and that the Government cannot spend more money than they have. Has it occurred to these great thinkers that our means include those unused resources and that if they were being properly utilised, the Government would have more money to spend?
The second revolution that has been associated with Lady Thatcher was the abandonment of any commitment to equality. The ideology of the 1980s was that undue compression of incomes brought about stagnation: get taxes and welfare benefits down in order to increase the incentives to work and innovate and the result would be a more dynamic economy and one in which wealth would steadily trickle down without any need for obvious redistributionary policies. The trade-off has not happened—growth was slower than it was in the Keynesian period and we are waiting for the trickle-down to happen. In the past 30 years, the share of income captured by the top 1% has more than doubled to 14%, leading to the joke that the new class struggle is between the have-nots and the have-yachts.
The economist Tony Atkinson, the great expert on distribution, writes:
“Moves towards reduced income inequality were dramatically reversed in the 1980s with a sharp rise in inequality”,
a rise which was historically unprecedented. Margaret Thatcher and her successors—we should note this historical fact—dismantled two of the main drivers of equalisation: the system of progressive taxation, and strong trade unions. The old tax system set, in effect, a cap on post-tax incomes and profits. The call for caps on bankers’ remuneration today simply reflects the failure of the current tax system to limit its stratospheric rise. The main achievement of the trade unions was to push up pre-tax earnings in line with productivity. This function has now collapsed.
The triumph of greed over professionalism and restraint has been most obvious in the financial services sector, which, ironically, new Labour decided was to become the powerhouse of the British economy. I understand well the frustration of the noble Lord, Lord Sainsbury of Turville—as a Minister for Science and Innovation under new Labour, he was told that the financial services were a great source of innovation. When he asked for examples he was told that,
“tax avoidance is an art where we are very innovative”.
I have no doubt that we will recover from the present semi-slump; we may even recover sufficiently by 2015 to give the coalition—or the Conservatives at least—another term of office. My great fear is that, having got to something like normal, we will come to believe that we can continue much as before, except for a few watered-down reforms to the banks. I believe, on the contrary, that the system of political economy that has evolved since the 1980s has, for all its benefits, grave flaws that, if allowed to continue uncorrected, will land us in a succession of crashes and crises of differing degrees of severity, which will cumulatively destroy support for the free-market economy. The chief of these flaws in our system are, to repeat Keynes,
“its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes”.
The Government have a big role to play in addressing both. I am grateful to the noble Lord, Lord Haskel, for giving me the chance to set out my ideas on these matters.
Economy: Growth
Lord Skidelsky Excerpts(11 years, 3 months ago)
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Lord Skidelsky
My Lords, I join the noble Lord, Lord Eatwell, in welcoming the noble Lord, Lord Deighton, to the Treasury Bench; I hope that he enjoyed the experience of renewed contact with the supervision of his former teacher.
When George Osborne took over the controls at the Treasury, he decided that fiscal policy would be governed not by the state of the real economy but by the state of the public finances, as measured by preset fiscal targets, particularly the rate of deficit reduction. Those targets were designed to reassure investors in government debt that the state was solvent and would remain so. Half-way through the life of this Parliament, we can say that the effects of that policy in terms of output and growth have been disastrous. Britain, like the eurozone, remains stuck in the slow lane. We did not grow at all last year, and we enter 2013 with a realistic prospect of a triple-dip recession. Despite our freedom to devalue and massive open-market operations by the central bank, British output is 3% lower than in 2008. The results of the fiscal targets are correspondingly dismal. A state with high debt where no growth has become the new normal will not retain the triple-A rating on its sovereign debt.
What has gone wrong? The central design failure is that the targets were set on the heroic assumption that the economy would recover despite the tightening of fiscal policy implied by the targets themselves. In a balance sheet recession, when the private sector is cutting spending to reduce its overindebtedness, that assumption was just wrong. Put simply, we cannot all deleverage at once. To save more, you spend less, and if everyone does that, including the Government, the economy shrinks. That is lesson number one to which the noble Lord might respond.
George Osborne blames the failure of Britain to grow on the eurozone, but that argument is circular, as it is following exactly the same policy as we are. It is the Chancellor’s own policy which explains the stagnation of the British economy, not the eurozone.
Mad economists are emerging from the woodwork to say that George Osborne is not cutting deep or fast enough. For example, Andrew Lilico appeared on the “Today” programme this morning telling us that the reason that the deficit is not going down is that austerity has not started. Apparently we are in the middle of a Keynesian boom. We need more cutting. Cut benefits, cut the welfare state, cut government, cut everything that can possibly be cut—and behold, the private sector phoenix will rise from the ashes. These Einsteins of finance never explain how bigger cuts are supposed to produce recovery, or, indeed, even cut the deficit itself. It makes one despair of economics.
The Chancellor can claim that the unemployment figures are slightly lower than they were some months ago. How can this be when output has not grown and may even have fallen? There is a puzzle here, but it is not a large one. The reason is that today, with a more flexible labour market, a fall in output is not necessarily, or immediately, reflected in a fall in employment. It may simply lead to a movement of workers into lower-paid, part-time or intermittent jobs or work training schemes, none of which count towards recorded unemployment. This has certainly been happening. It also explains why the Government can claim success in increasing private sector employment faster than the public sector is shedding employment.
I have no doubt that if the Chancellor continues cutting as hard and fast as Mr Lilico wants, those of us left with decent jobs or incomes will be able to have as many drivers, gardeners, trainers, cleaners, nannies, domestic servants, chefs, butlers and waiters as we can possibly want, and, no doubt, at the equivalent of Victorian wage levels. In other words, back to the world of “Downton Abbey”. After two centuries of industrialisation, what a wonderful solution to the unemployment problem.
The obvious alternative to blind faith in fiscal targets is action to restore the economic trajectory that underpinned the targets in the first place. The international organisations are now saying this; the noble Lord, Lord Eatwell, has quoted Olivier Blanchard, who has just said that the Chancellor should “ease up” on fiscal austerity, which is as near as an international civil servant can come to saying that his policy is dead wrong. Even Boris Johnson says we should junk the word “austerity”.
In plain English, “easing up” on austerity means stimulating investment. Public capital spending is not included in the current deficit target, so the Government can restart the investment machine without breaching their own targets on current spending. That is the only way to get the deficit down, or to meet their targets.
In this context, I welcome the Government’s announcement that they have approved the second phase of High Speed 2. However, I have two questions. Why will it take so long? The first phase is scheduled to be completed in 13 years’ time, and the second phase in 2033. Two years ago I asked the noble Lord, Lord Adonis, who had just stepped down as Secretary of State for Transport, how long it would take to complete this project with any sense of urgency. He said that it would take about five years. He is in his place, and I hope that he does not tell me that I have remembered that wrong. As I have said before, if only we had a Lloyd George in charge of this programme, we would get some movement.
My second question is: how will it be funded? According to the Financial Times, the Government will have to,
“start raising private sector finance to part fund the £34bn project”.
Why? Here is an opportunity for the Government to take advantage of the spectacularly low cost of their own borrowing—why it is so low is the subject of another discussion—to finance the whole thing itself. It is a genuine capital investment, which will yield an identifiable rate of return. Perhaps the noble Lord would give us some indication of how the Government will finance this project. I hope that they will not repeat the disastrous PPP schemes which made such a mess of the London Underground and Channel Tunnel projects.
Will an investment strategy such as I have proposed not cause the public debt to increase? This is the crunch question. The Minister said in opening that it would not be possible to borrow our way out of our debt crisis. If indeed the project starts reasonably expeditiously, the debt will go up. There is no doubt that it will be higher in 2015 or 2017 than it would have been otherwise, but so will the capital stock and the economy itself, while the increased output can be taxed to finance the interest cost of the extra debt.
There are, of course, obvious risks. The risk of a pro-growth strategy is that borrowing more than initially planned may spook the bond markets and lead to a rise in borrowing costs. However, it is a much smaller risk than putting one’s faith in pre-set fiscal targets which produce a stalling economy, without any guarantee that this will actually deliver on the fiscal numbers. Which strategy does the Chancellor really think is more likely to keep our AAA rating with the credit markets?
If the growth-first strategy makes sense for Britain, it should make sense for Europe as well. This country was a pacesetter in adopting fiscal targets as a guide to policy after the financial crisis. Why not be the first mover in showing how to reset policy and help lead Europe out of self-defeating austerity?
Lord Lamont of Lerwick
My Lords, I join with other Members of the House in congratulating the noble Lord, Lord Deighton, on his maiden speech from the Front Bench. Like other noble Lords on this side, I am delighted to find that he is not entirely still under the spell of his former distinguished teacher.
Growth ought to be the natural state of an economy. Most economies tend to grow over time. Financial crises, bad harvests and various other factors can, of course, delay or obstruct that growth. But growth is the natural order over time, because human beings have a natural instinct to make two blades of grass grow where one grew before and a natural instinct to innovate. Growth, it is worth remembering, does not come from Governments; it comes from individuals.
What, then, should our reaction be to the figures which were released last week and showed a 0.3% drop in GDP in the final quarter? The figures can always be sliced in many different ways. One can portray them, as indeed the noble Lord, Lord Eatwell, did, as saying that four out of the last five quarters have been negative; that the economy was flat all last year; and that the economy is still below the 2008 peak. On the other hand, you can formulate them a slightly different way: the economy grew by 0.3% in the last six months; although the economy is below the peak of 2008, if you exclude North Sea oil production it is only a whisker below that peak, and North Sea oil has been in dramatic decline with interruptions to production. The fact that there has been no growth last year is the same as in France, while the 0.3% drop in GDP in the last quarter compares with a drop of 0.5% in Germany; and, collectively, the whole of the eurozone is currently in recession. What I draw from all that is that when the dust settles and this is all in the history books, I suspect we will find that almost all the countries in this part of the world had a broadly similar experience, whichever way one tends to look at the figures at any particular moment.
We heard a lot about the views of the IMF, but we have not actually had the views of the IMF; we have had the views of Mr Blanchard. Christine Lagarde, the director-general of the IMF, has been extremely supportive of the Government’s strategy and we will only officially hear the views of the IMF in May, when we hear the results of the article 4 consultation. The noble Lord, Lord Eatwell, talked a lot about the multiplier effects. Interestingly, there was a report in the press at the weekend that the IMF has concluded that the multiplier effects, both of austerity or of any deficit spending, are extremely slight in the case of the UK. No doubt we will hear more about that when the article 4 consultation takes place.
There is no doubt that the figures for the last quarter were extremely disappointing, but the idea that some extreme excess of austerity is holding back the British economy seems to me very much open to question. The Government have shown that they are prepared to be flexible in their deficit reduction programme. They have relaxed the programme twice and put back the date at which they expect, and are aiming for, a fall in the total debt-to-GDP ratio. As my noble friend Lord Forsyth said, the difference between the Government and the Opposition is much exaggerated by both sides for the purposes of both sides. I do not think that the noble Lord, Lord Eatwell, is right in saying that the capital expenditure planned under the last Government was higher than that of this Government; in fact, the cuts that Alistair Darling put forward were bigger than those of this Government, some of which have been reversed. Can the Minister comment on that precise point?
Despite the small differences between the planned reductions in expenditure, it is true that if you compare the outcome of expenditure with the original Darling plan for reductions in expenditure, the latter was much tighter and more austere than what the Government have implemented. If you compare our austerity programme to that in other EU countries, it is difficult to argue that these cuts are savage or that this fiscal consolidation is sudden and dramatic. At the beginning of this crisis we had a deficit to GDP of around 12%. That was almost exactly the same as Greece’s. I am sorry to say that today Greece has a considerably lower deficit than the UK’s. Italy, France, Ireland, Portugal, and Greece all have lower deficits than we do. These have not been caused by growth—a solution somehow magicked out of the air by the party opposite. That is not how they have reduced their deficits. They have done so by making more savage cuts and far severer fiscal consolidations than we have made.
With a debt-to-GDP ratio of around 70% to 80%, which is where it is expected to peak out, if we go on adding to that overall stock of debt at the rate of 12%, as it was when we started off, or 7% or 8%, because the annual deficit is the amount that we add to it each year, we would soon get to a situation in which a debt-to-GDP ratio would be 100%. As economists such as Reinhart and Rogoff have argued, that is the level at which the overall stock of debt becomes dangerous for the long-term growth of an economy. They would argue that that is why Japan has had such a bad time for such a long period. If deficits really solved long-term economic growth, Japan would not have been stranded in the situation in which it has been for such a long time.
If deficits of 7% to 8% per annum have left the country not growing, is it credible that one of 10% or 12% will suddenly cause the economy to leap into life? We hear about the multiplier effects, but never about what is going to happen when these so-called stimuli are withdrawn. Anyone who thinks that this would be the real world experience of deficits ought to read the diaries of Mr Morgenthau, President Roosevelt’s treasury secretary, who expressed his disillusionment with the deficits being run in America in the 1930s. He wrote that all the United States had to show for it was unemployment at much the same level and no increase in production. In the UK today we are running deficits that are considerably higher than those run by the Roosevelt administration.
Lord Skidelsky
The noble Lord mentioned a point of history. Of course, American unemployment fell very rapidly in the 1930s, so if he wants to leave the House with the impression that it did not fall, I must say to him that that is just wrong.
Lord Lamont of Lerwick
No. President Roosevelt initiated back to work programmes—that is true—but the private sector, the economy, was not generating growth. If the noble Lord, who is a very eminent historian, wishes to doubt that, just let him read the Morganthau diaries, because they are full of deep disillusionment about the pointlessness of the programme that he himself was implementing and the effect that it was having on the growth of the economy.
I am not arguing that deficit financing can never be of use or play a part in taking up the slack in the economy when the private sector is unable to borrow, but we are in a position where both public and private finances are under pressure at the same time. It is a much favoured parlour game to decide what Keynes would have thought of doing in this scenario today. Of course, the House is very fortunate in having the eminent historian, the noble Lord, Lord Skidelsky, who knows more about this subject than anyone else, to tell us. Indeed, we also have the noble Lord, Lord Eatwell, a most distinguished Cambridge economist—a university that is profoundly affected today by the shadow of Maynard Keynes. I am sure that the noble Lord, Lord Eatwell, remembers Milton Friedman’s comment about Cambridge academics and their theories, which have applications within 25 miles of Cambridge University.
This recession is indeed different from a normal cyclical recession. It is, as the noble Lord, Lord Skidelsky, said, a balance sheet recession, but it is a recession that has followed a severe banking crisis. As economists such as Rogoff and Reinhart have shown, I think quite tellingly, such recessions tend to last much longer than normal, cyclical recessions, and are much deeper.
So what can be done to stimulate growth? I believe that there are things on the supply side that can do this—training; lifting and relaxing planning controls, as the Government have done; infrastructure spending, very much as the Minister outlined, although if infrastructure spending is to be financed by cuts in current spending, that will squeeze consumption further, which has been one of the problems of the economy, because inflation has not come down, and it has been inflation that has been squeezing consumption and living standards.
However, the real problem of the economy, I believe, is not fiscal policy but the lack of credit in the economy and the failure of the banking system still to make credit available. The risk is that the new businesses that drive innovation and produce the new products will be strangled because of the lack of credit. The Government have introduced the Funding for Lending scheme. It is too easy to say what the effects of that are, but if it has a good effect, maybe it ought to be expanded further. However, they have been piling regulation upon regulation on and demands for more capital from the banks, and that, in the last analysis, is incompatible with more lending and makes more lending more difficult and more expensive for the banks.
The Government have said that they want to see new entrants into the banking sector, which I think would be highly desirable, but I am not sure that that message has got through to all parts, particularly the lower parts, of the Financial Services Authority. I noticed that the chairman of Metro Bank said the other day that if he had known what was involved in starting a new bank in the UK, he is not sure that he would do it again or would have done it in the first place.
We await the arrival of Governor Carney, and there are great expectations of him, but he will not exactly be a man on a white horse, and I think it would be unfair to regard him as that. He has talked a lot already about central banks doing more to promote growth. I hope, however, that the Bank and the Government will be cautious about more quantitative easing. There is in this situation, even now when we do not have growth in the economy, a danger of creating more asset bubbles. We have seen the consequences of the “Greenspan put” in the past, where central bank action has been taken to keep the financial markets buoyant and the result has not been that we have avoided a crisis but that the crises have got successively worse. When I look at the level of the stock market, which of course can be interpreted favourably in one sense, I wonder whether it is reflecting the prospects for the economy or the consequences of quantitative easing.
The Opposition have inevitably been very critical and the Government inevitably are in a difficult situation. I think it was Boileau, the French writer, who once observed that those who come to tell the people they are not well governed will never lack a welcome. The only surprising thing is that those who are telling the people they are not well governed are those who were in charge five minutes ago and helped to create the situation we are in. It is not an easy situation and, most of all, I think what we need are what Tolstoy called those two grand old warriors—time and patience.
Infrastructure (Financial Assistance) Bill
Lord Skidelsky Excerpts(11 years, 6 months ago)
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Lord Skidelsky
My Lords, as someone who has never been averse to having a go at the Chancellor of the Exchequer, I start by saying how idiotic and puerile it is for newspapers to make a lead story of which ticket he used for his journey from Chester to London. It is George Osborne’s stewardship of the economy, not his travel arrangements, which deserves censure. However, we have an infantile press.
Three big mistakes stick out over the past two and a half years. The first was the belief that cutting down government spending would automatically produce recovery. I know the Government now claim that they never believed anything so simple or idiotic, but they did, and there is plenty of evidence to prove it. Austerity is not a recovery policy.
The second has been the Chancellor’s failure to distinguish between current and capital spending. This has made the deficit seem more dangerous than it was. The prime example of this blind spot was the £50 billion cut in capital spending. The noble Lord, Lord Adonis, has drawn attention to the devastating consequences of this for the construction industry and for house, transport, education and hospital building.
The third was the Chancellor’s belief that without a severe fiscal contraction Britain would go the way of Greece: that is, interest rates would go through the roof. This was doubly wrong. First, with an independent central bank able to buy government debt in whatever quantities were needed there was never any chance of gilt yields rising to the levels experienced by Greece, Portugal, Ireland and Spain. Secondly, and perhaps even more importantly, a reduction in the cost of government borrowing is no guarantee of a reduction in the cost of commercial loans sufficient to offset the collapse of the private demand for loans. That is the explanation of a point mentioned by the noble Lord, Lord Desai, regarding cash mountains sitting in corporations.
All three mistakes were interrelated parts of the wrong theory of the economy. Anyone who is interested in economics must start the analysis there. I am not going to go into it, but it is well known to those who are economically literate. The results have been zero growth since George Osborne took office. That was entirely predictable and was predicted by some of us. I have been saying for two and a half years—and I am not alone—that austerity would not produce growth and it has not produced growth. Now the international agencies are saying the same thing. Slowly but surely, the Government are being driven to plan B, though the Prime Minister prefers to call it plan A-plus.
It is against that background that I give a cautious welcome to the proposals in this Bill. Better late than never, better too little than nothing at all. As I understand it, the Bill aims to do three things. First, it provides for the Government to guarantee up to £40 billion or £50 billion of “nationally significant” private infrastructure investments which have to be ready to start within 12 months of the guarantee. As the Treasury explains it, the aim is,
“to kick start critical infrastructure projects that may have stalled because of adverse credit conditions”.
That is Treasury language. The guarantees might cover key project risks such as construction, performance or revenue.
Secondly, the Government will lend money directly to private investors to enable 30 public/private partnership projects worth £6 billion to go ahead in the next 12 months; I do not think that has been mentioned yet in the debate. Finally, a £5 billion export financing facility will be available later this year to overseas buyers of British capital goods; in other words, an export credit guarantee scheme of the type we are all familiar with. I would like to reinforce what the noble Lord, Lord Adonis, said. Having cancelled about £50 billion of certain public capital spending, the Government are hoping to replace it with an equivalent amount of private capital spending, much of which will never happen. That is completely illogical.
The main difference between this Bill and the British investment bank, which I have been urging, is that my bank—I call it “my bank” because I feel a certain sense of paternity in the idea, having been floating it for the last three years—would actively raise money in the private markets for its own investment projects whereas UK Guarantees, the government scheme, merely provides some finance for projects initiated by the private sector. In other words, the government scheme is still governed by the ideology that the private sector is more likely to pick winners than a state investment bank and that that is sufficient justification for waiting for the private sector to produce its projects.
Lord Peston
My Lords, the logic of what is being said is not that it is more likely to pick winners but that it already has all those winners. The only things holding them back are the risks of the projects which the taxpayer is taking over. It is a new theory to replace classical economics which—as the noble Lord well knows—says savings cause investment. Now we have loan guarantees causing investment and it is just as nonsensical as a serious piece of economics.
Lord Skidelsky
The noble Lord is quite right. The argument can be developed, but my point about picking winners and losers is that there is no empirical evidence for it being true, as a general proposition, that the state is more likely to pick losers than the private sector. We have had many examples of that not being true. The economic collapse of 2008 is a very good one.
Lord Giddens
Would the noble Lord accept that there is actually evidence that the state is quite often better? If you look at the history of energy industries and most technological innovations, they have normally been kick-started by government investment. This applies to all the major technology that has transformed our lives over the past 20 or 30 years.
Lord Skidelsky
I am happy to accept that. I was making a more modest claim.
A mere guarantee for privately initiated schemes is bound to be less successful, apart from in the efficiency of the schemes, at securing the required volume of investment than a commitment by the Government to a definite infrastructure programme. So while I wish UK Guarantees well, a certain amount of scepticism is in order.
In the final part of my speech, I want to consider what is happening to the economy. When an economy is crawling along the bottom, any small wave is likely to lift our spirits. Over the past three quarters—that is, the past nine months—the economy has shrunk by 1%. Even if, as now expected, it achieves a positive growth of about 0.8% this quarter, that still leaves it in roughly the same place as it was a year ago. Moreover if, as commentators suggest, this boost is due to the Olympics, it will be in the nature of a windfall. However much we may rejoice in the achievements of our athletes, 28 gold medals is not enough to turn the British economy around.
However, there is still a puzzle, which is that unemployment has been static in the past few months, and even falling slightly, despite the fact that output is flat and the economically active population has increased by 550,000 over the past two years. You would therefore expect unemployment to have increased. Why has it not done so? That is the puzzle. There are several possible explanations, none of them conclusive, because the facts necessary for a convincing answer are buried in a labyrinth of tricky statistics and slippery definitions. It may be that employers have been hoarding labour, but that becomes less plausible the longer the recession goes on. Part of the answer at least must be that productivity—that is, output per hour worked—has been falling. As the Guardian put it,
“it now requires many more of us to labour away to churn out the reduced volume of stuff”.
Falling productivity is just as serious a problem for the economy as rising unemployment, and a greater problem in the longer term.
The Prime Minister claims that 900,000 extra jobs have been created in the private sector over the past two years. I never know how many it is—sometimes it is 900,000 and sometimes it is 1 million; it goes up every day, but I am sticking to the 900,000 figure for the time being. That is not of course the net increase in jobs, given that 400,000 jobs have been lost in the public sector. The net increase in jobs has been 500,000. Can the Minister, the noble Lord, Lord Newby, tell us how many of the net gains in employment are full-time? Labour market statistics suggest that more than half of them are part-time or self-employed. Can the Minister also say whether those registered on government work programmes count in the Prime Minister’s extra 900,000 private sector jobs? The point is this: if a lot of the private sector job creation consists of part-time low-skilled jobs at the bottom end of the service sector, it would explain the decline in productivity that limits the rise in unemployment, but it is a poor omen for that vibrant, high-value economy that is supposed to secure our future prosperity.
I wish the Government well in these plans because I wish the country well, but we will need much more solid evidence than we have seen so far to believe that we have turned the corner and started to repair the damage of the past two and a half years.
Lord Newby
I am always in awe of the culinary skills of the noble Lord, Lord Adonis, and am extremely grateful for that way of looking at it. However, whether it is a plan, recipe, menu, or none of the above, the key thing is that, as far as risk is concerned, which was the second question that I wanted to address, the Treasury will be responsible for managing the risk and assumes the contingent liabilities. Value for money, as I said earlier, is key.
The noble Lord, Lord Giddens, asked about the pension infrastructure platform, about which I should perhaps have said more. As he may know, last week, seven pension funds announced that they would be initial subscribers to the platform. They will each invest at least £100 million. We hope that the system will be up and running early next year and that it will be the first element of a much larger fund. As to why we think that pension funds might now get involved in this kind of investment whereas they have not in the past, the answer is that, in the past, they have been able to get better returns through conventional means of investing the money. At the moment, with interest rates so low, they are getting very low returns. The other problem that they have had is that, where they have gone via private equity houses which have managed infrastructure programmes, they have often found that the programmes have not worked very well and that they have been charged an arm and a leg for it. So this is a way for the funds, with support from the Treasury, to get into what could be very important new form of investment without what they have seen as being the unreasonable cost of going down a purely private sector route.
The noble Lord also asked about the relationship between this Bill and the energy Bill. The purpose of the energy Bill is to set a framework for investment in the energy sector over the medium term. Once the energy Bill, which will come forward relatively soon, is enacted, and against the framework that that Bill sets out, people looking to invest in the energy sector can form a view about what they want to do and individual projects will be eligible for support under the Bill.
The noble Lord, Lord Skidelsky, started with three nonsenses and will not be surprised that the Government do not agree absolutely with everything that he said. I find it almost incredible to think that if the Government had not been seen to get the fiscal position under control, interest rates would not have gone up. Even if they had not gone up to the levels that they are at in Greece or Spain, a single percentage point increase in interest rates, among other things, costs mortgage holders in the UK an extra £12 billion a year and would over the course of a Parliament, with all other things being equal, cost the Government about £25 billion. These are very important considerations. Interest rates would almost certainly have been higher if we had turned on the tap.
On his proposal for a British investment bank which would raise money in the private market, the noble Lord will not be surprised to know that the Treasury view is that, if that bit of the state is raising money in the private market and conventional government borrowing is happening in the same private market at the same time, the markets will judge the pair of them together as a common pool of demand from the UK Government. Therefore, we could not segregate borrowing for a British investment bank without it having consequences for the way in which all government borrowing was viewed.
The noble Lord asked how many of the net gains in employment were self-employed or part time. There is a false assumption that working for oneself or working part time are somehow second-class things to do or things that people do not necessarily choose to do. Some people are forced to do one or the other. However, when I was made redundant in the last property crash in 1992, I in effect became self-employed by setting up my own company and it was one of the better things that I have ever done. It did not mean that I was economically out of the market or that I was not able to grow anything. Many people who become self-employed find that they are successfully self-employed. Equally, many people who work part time—and even the Guardian accepts that the figure is at least 80%—do so through choice rather than because they are forced to.
Lord Skidelsky
Would the Minister be kind enough to answer my question? What proportion of the Prime Minister’s 900,000 new jobs are part time and what proportion are full time? Further, are those employed under government work schemes included in the figure of 900,000?
Lord Newby
I am afraid that I do not have those figures to hand but I will write to the noble Lord.
The noble Baroness, Lady Wheatcroft, raised concerns about continuing the old system of PFI. Many people share her concerns about the way that PFI has worked, and in any future schemes I know that the Government will seek to avoid the problems of the past in that respect.
The noble Lord, Lord Berkeley, asked several questions, one of which concerned the criteria were for which projects come forward. As I said in my opening remarks, the five principle criteria are that the schemes be nationally or economically significant, financially credible, good value for money for the taxpayer, not solely dependent on a guarantee to proceed, and ready to start construction in 12 months. He asked whether the £50 billion affects the PSBR. The answer is that it affects the PSBR only if guarantees are called upon. My understanding is that if it is a contingent liability, this does not affect what I still think of as the PSBR.
The noble Lord, Lord Berkeley, also asked about the Thames tunnel and whether we might have an independent review. Living as I do on the Thames and being subject to many public meetings about the Thames tunnel, it seems to me that the current programme of proposals on the tunnel involves a huge amount of consultation and much discussion of alternatives. Having got this far on what seems to be an unavoidable necessity, I certainly would be extremely loath to think that we had to go back to the drawing board and start again with an independent inquiry.
Queen’s Speech
Lord Skidelsky Excerpts(11 years, 12 months ago)
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Lord Skidelsky
My Lords, Sigmund Freud identified a defence mechanism that he called denial, in which a person faced with a fact that is too uncomfortable to accept insists that it is not true, despite overwhelming evidence. A good example of denial is the Chancellor’s belief that austerity is a growth policy, despite the fact that the British economy is shrinking. Somewhat better than a state of denial is one that psychologists call cognitive dissonance, a condition of holding two contradictory beliefs at the same time. People in such a condition have a strong need to reduce the importance of one of the dissonant elements. This is more hopeful. If the Chancellor has moved from denial to cognitive dissonance, he may soon move from cognitive dissonance to the honest realisation that his policies have completely failed to revive the British economy.
He may also recognise that they are failing to solve the debt problem. Since the collateral for a country’s sovereign debt is the Government’s potential tax revenue, any policy which produces recession and unemployment automatically increases the deficit and thus adds to the debt. The national debt is projected to rise from 71% of GDP in 2010 to 84% in 2012 according to the IMF, and the deficit elimination programme stretches ever further into the future. That is the fruit of austerity. Earlier in the debate, the noble Lord, Lord Razzall, denied that austerity could be responsible for stagnation because most of the cuts are still to come. That is to miss the point. The real impact of austerity so far lies not in the actual money cuts but in the failure to uprate public spending in line with public sector salaries, which inevitably leads to job losses.
The Government still claim that the main blockage to British recovery is the eurozone financial crisis. We are being buffeted by the euro crisis, but the eurozone crisis is the inevitable result of the very policies championed by the British Chancellor at home. The only reason that austerity has not so far produced a financial crisis in this country is that behind our fiscal policy stands a central bank licensed to print money. This has been the main factor keeping the cost of British government borrowing so low. However, there is a limit to how much the central bank can do to maintain confidence if the debt continues to grow while the economy continues to shrink.
Beyond the cloisters of Whitehall, there has been a welcome change of mood music. More and more people—captains of industry no less, and not just Keynesian heretics like me—are saying that austerity is not enough. EU Commission President José Manuel Barroso talks of the need to relaunch growth in Europe. He and the new French President have endorsed a proposal to add €10 billion to the capital of the European Investment Bank. Growth is back on the agenda in Europe, but is it back on the agenda in this country despite the opening remark in the Queen’s Speech?
What would a growth policy need to be? Conventional wisdom has it that the only way to get growth is to cut taxes and red tape and get the unemployed on their bikes. I am all in favour of good supply side policies, but what the Government fail to grasp is that we have a massive problem of insufficient demand. The actual output of the economy is well below its potential output. Recovery from a slump is not just a matter of making better use of existing resources; it is about bringing into use potential resources which stand idle for lack of demand. This was the great lesson taught by Lord Keynes, a lesson which seems to have been entirely forgotten by the first-class brains in the Treasury.
If we see the problem in this way, the question of government borrowing assumes a different aspect. At present, the Government are borrowing billions of pounds a year to keep people idle. Would it not be far better to use that borrowed money to put them to work building homes, repairing creaking infrastructure and promoting the low-carbon energy economy we all want? After all, if the Government have to borrow vast sums of money—and they have to because they allowed the economy to shrink so much—why not at least borrow to create assets rather than borrow to destroy them? The longer you allow workers and plants to stay idle, the more potential output you are destroying day by day, week by week, until, in the end, the potential output of the economy will shrink to the level of its actual output. I have a question for the Minister. Does he really believe that if the public sector sheds 50% of its jobs, those dismissed workers will straight away find employment in the private sector? If not, the austerity policy is simply adding to the dole queues. That is the charge that he must face and refute if he can.
Even in Whitehall, things are stirring. The Queen’s Speech promises a Bill to set up a green investment bank to invest in the low-carbon economy. I congratulate the Business Secretary Vince Cable on his persistence in pressing the case for the green bank against Treasury objections. However, I wish Ministers would think along bolder lines. The bank’s capitalisation is too small—only £3 billion—and it will not be allowed to borrow until April 2015, subject to public sector net debt falling as a percentage of GDP, a prospect that currently looks extremely unlikely.
A practical man would ask what such a bank would invest in, and why, if there are so many investment opportunities around, they are going begging. There are two answers to the second question. First, there are large-scale projects in which the private sector will never invest on its own because the private rate of return is too distant, too modest and too uncertain. That means that, however great the social benefits, the investments will not be made except by the Government or with a government guarantee or subsidy. Most of a country’s transport infrastructure falls into this category. Secondly, there is an additional motive for an active investment policy when business confidence is shattered, as it now is. The corporate sector is sitting on almost £800 billion of cash—more than 50% of GDP. This is because when confidence in the future is low, almost all investment seems riskier for both lenders and borrowers.
Finally, what would a green investment bank invest in? It would obviously invest in carbon-reduction activities. Incidentally, the mandate of the European Investment Bank is wider than this because it includes among its objects the promotion of growth and employment potential. Whatever the bank’s scope, it is crucial that it gets a clear mandate, so that the private sector can plan its investment against a stable policy environment.
Many of us will have pet schemes to bring to the table. For example, there is the proposal of the Institute of Civil Engineers to establish regional water-transfer networks via new and existing canal systems. The Scottish Federation of Housing Associations has argued for preventive spending on social housing. Will not the Chancellor understand that we need preventive spending rather than spending prevention? The sooner that the Prime Minister and the Chancellor start investing in Britain, the better. If they continue in the spirit of denial, they will be swept from the seats of power, as Governments have been all over Europe—and they will deserve to be.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, we have had a wide-ranging and, as ever, insightful debate. I am particularly pleased to have heard the maiden speeches of the right reverend Prelate the Bishop of Durham and my noble friend Lord Ashton of Hyde. I know that the House will look forward to their future contributions if they are anything like as good as their contributions to this debate.
We have an unusual but, we have been reminded, not unprecedented amendment in the name of the noble Baroness, Lady Royall of Blaisdon. While I will respond to as many of the specific points raised in the debate as I can, I will therefore spend the bulk of my time explaining why the House should emphatically reject her somewhat misplaced amendment, which I ask her to withdraw once she has heard what I have to say. Having heard the masterly speech by my noble friend Lord Bates, I rather thought that the noble Baroness might have been minded to withdraw her amendment immediately, but I will have another go.
I welcome this opportunity to reinforce the Government’s commitment to securing our economic recovery and our determination to promote growth, create jobs, and return our country to prosperity. It is not an easy task. It is clear that your Lordships understand the difficult challenge we face to overcome the crippling legacy that was left to us by the previous Government, which included a decade of unbalanced growth that left the UK the most indebted country in the world, resulted in the most highly leveraged financial system of any major economy and meant that the UK entered the crisis with the highest structural deficit in the G7.
All that meant that when we got hit, we got hit the hardest. Our recession was among the deepest and our deficit was among the largest, which means that our challenge to deliver a sustainable recovery is among the greatest. The Government have a strategy to rid the economy of the burden of the debt left by the previous Government and to secure our stability at a time of ongoing European instability, as my noble friend Lord Higgins and other noble Lords reminded us. Our strategy puts private sector enterprise, ambition and innovation at the heart of our recovery. It has delivered over 630,000 new private sector jobs since we came into government, which is one and a half times the number of public sector jobs that have been lost.
Let me remind noble Lords that the Government came to office inheriting the largest peacetime deficit the country has ever faced and the largest forecast deficit in the G20, larger than that of many of those countries mired in the sovereign debt storm in the euro area. Two years ago, UK government bond yields were roughly equal to those in Spain and Italy. Because we took tough decisions to tackle the deficit, our rates have now fallen to near-record lows of less than 2%, while those in Spain and Italy have risen to well over 5%, a point made forcefully by my noble friend Lord MacGregor of Pulham Market. Record low interest rates help businesses to secure affordable loans, families to pay mortgages and the Government to finance the debt mountain with which we have been lumbered.
The solution to debt is not more debt. I do not need to take on the noble Lord, Lord Skidelsky, on this. The noble Lord, Lord Desai, and my noble friend Lady Wheatcroft have already done that for me. However, as my noble friend Lady Noakes pointed out, the Opposition would have us pile on yet more debt, suffer higher interest rates and place a bigger squeeze on families and living standards. Indeed, even this afternoon, the noble Baroness, Lady Royall of Blaisdon, advocated more government borrowing. Let me explain to the House that even a 1% rise in effective mortgage rates would add £12 billion a year to household mortgage payments—around £1,000 on a typical £100,000 mortgage. We should make no mistake: it is the poorest and most disadvantaged, not the wealthiest, who are hit the hardest when a country loses control of its finances.
It is fair that we tackle our debts today so that we do not burden our children tomorrow. We should also ensure that we can continue—which we can—to provide high-quality public services and support to those who need it most, and provide those public services partly though refreshed local government, as my noble friend Lord Tope reminded us a short while ago.
We cannot and will not be complacent about tackling the deficit. We are sticking to our plans. Her Majesty’s gracious Speech reaffirmed that commitment. We will not jeopardise the fiscal credibility that is critical to delivering a sustainable recovery. It is only by securing a sustainable private sector recovery that we can help to restore and improve living standards, support families and get people back into work. That is why this Government have set out ambitious plans to unleash private sector growth right across the UK. Those plans include more than 250 wide-ranging and ambitious economic reforms to lift the dead hand of the previous Government’s legacy from our businesses and entrepreneurs.
We are reducing corporation tax to 22% by 2014; cutting an uncompetitive and ineffective top rate of income tax; slashing the red tape that continues to suffocate our most entrepreneurial start-ups; overhauling our cumbersome planning rules to embed a presumption in favour of sustainable development; and setting out plans for some £250 billion of infrastructure investment, including the new green investment bank with an initial capitalisation of £3 billion. In answer to my noble friend Lady Kramer, I say that we want to get that £3 billion into real investment as soon as the large projects will permit. As my noble friend Lady Randerson said, the green investment bank is already in business; it is actively considering the first 20 proposals. Beyond that, we are helping to tackle underinvestment in renewable energy as a precursor to comprehensive electricity market reform through the energy Bill, and helping to attract the £110 billion of investment that we need in the next decade to deliver secure, low-carbon energy across the UK. That was a point made very clearly by my noble friends Lord Crickhowell, Lord Selborne and Lord Freeman. The noble Lord, Lord Rowe-Beddoe, pointed out one very challenging but potentially significant opportunity in delivering that ambition.
The Government are ensuring that our businesses have access to finance by securing £190 billion of new lending to UK companies in 2011 and providing SMEs with access to cheaper loans through the new national loan guarantee scheme. My noble friend Lord Northbrook questioned whether it was up and running. Indeed it is, as evidenced by the fact that Barclays and Lloyds have already issued bonds linked to the loans in the scheme.
As my noble friend Lord Caithness noted, securing a more resilient and sustainable financial sector through the banking reform Bill is another priority. It is a measure which, as my noble friend Lady Wilcox said earlier, will complete its passage in this Parliament. We also will increase the opportunities for businesses to capitalise on non-bank lending channels.
Across government, we are matching the endeavour of our businesses to restore growth across the UK. Through the enterprise and regulatory reform Bill, we are driving through regulatory reform, streamlining employment tribunals, boosting research and development through the catapult scheme, as the noble Lord, Lord Broers, reminded us, making it easier to do business and giving employers more confidence.
Lord Skidelsky
How long does the Minister think that it will be before sustainable recovery happens?
Lord Sassoon
My Lords, it is already in progress. The fact that, in the two years that this Government have been in office, the private sector has created twice the number of jobs that have come out of the public sector is clear evidence of that. Today, we have the numbers that show unemployment is at its lowest level in seven months. It is much higher than we would like but it is reducing. These and other evidence which noble Lords have given in the debate shows that, while there is a lot more to do, in the face of these huge headwinds from the eurozone and elsewhere sustainable recovery is under way.
One of the biggest challenges to make sure that that recovery is sustained is regulation. My noble friends Lord Ashton of Hyde, Lord Lucas and Lady Noakes, and the noble Earl, Lord Lytton, all pointed to some big challenges on the regulatory agenda. We will not shy away from them.
In my noble friend Lord Patten’s discussion of regulation, he referred to the fennel on the brochure that the Government put out. I am sorry that I have not been able to determine whether they were British or foreign fennel but, either way, making sure that they are supplied through the supermarkets on proper terms is something which the new grocery adjudicator will bring.
In the enterprise area, I can assure my noble friend Lord Tugendhat that, again, as my noble friend Lady Wilcox explained in her speech, we will introduce provisions on directors’ pay in the enterprise Bill. In another important area of enterprise, I can assure my noble friend Lord Lexden that the ministerial working group on Northern Ireland is making good progress and will report this summer.
On rural affairs, we are supporting growth across all parts of the UK. I can absolutely assure my noble friend Lord Gardiner of Kimble that we take these issues very seriously. We are committing £530 million for rural broadband deployment by 2015 and creating rural growth networks to help overcome barriers to growth, such as poor infrastructure and mobile networks. We are adopting the ecosystems approach, as my noble friend Lady Miller of Chilthorne Domer noted, and will introduce reforms in the water sector, as noted by my noble friend Lady Parminter and the noble Lord, Lord Whitty, although I note that we are urged onwards by my noble friend.
I heard very clearly what the right reverend Prelate the Bishop of Hereford said about the importance and difficulties of the agricultural sector, which was also referred to by my noble friend Lady Byford, who again linked it to the importance of the grocery adjudicator.
On transport, we are introducing a Bill by the end of 2013 to secure powers to construct and operate the next phase of the high-speed rail network from London to the West Midlands. I learnt quite a number of things in areas of transport of which I did not know the fine detail until this evening. My noble friend Lord Brougham and Vaux rightly pointed out the difficulties in motor insurance—and now I understand the role that telematics and number plate issues will have as Ministers work both on the cost of insurance and on driving out uninsured vehicles from our roads.
The noble Viscount, Lord Simon, reminded us about high-speed issues, and that is noted. My noble friend Lord Bradshaw again reminded us of some important issues in the rail freight area. My noble friend Lady Scott of Needham Market talked interestingly about the possibilities for the local enterprise partnerships to promote local roads. She got a little ahead of commitments in some areas that I could give, but she was rightly challenging and reminded us of what can and must be addressed.
The global market is changing. Unlike our predecessors, we will make sure that the UK is not cut adrift. Over the last year alone, the value of UK goods exports to India grew by 40% and to China by over 20%. As my noble friend Lord Razzall pointed out, in the first quarter of this year the UK exported more cars than it imported for the first time since 1976. That was driven by strong demand from the US, Russia and China. The opportunities of course flow in both directions. The UK is now the number one destination for inward investment from some of the world’s largest investors, including countries such as Kuwait and Qatar. The Tata-owned Jaguar Land Rover has already announced 1,000 jobs at Halewood and £1.5 billion of annual investment in new technologies and products. I was sorry to hear the noble Lord, Lord Davies of Oldham, running down the idea of foreign ownership in our car manufacturing and other areas, when we should be immensely grateful and very proud that we can attract this investment.
My noble friend Lady O’Cathain mentioned the revival of the steel industry. Just last month the Redcar steel works on Teesside kick-started steel production for the first time in two years on the back of investment from Thailand. That is what global investment is doing—securing local jobs.
So this is a comprehensive strategy to return the UK to prosperity. It will not be an easy task and I know that for many families these are tough times, an issue to which my noble friend Lord Shipley specifically referred. But we will not let our poorest and most vulnerable families bear the consequences of the Opposition’s failures when in government. That is why we secured the largest ever cash rise in the basic pension and uprated working age benefits by 5.2 %, protecting the real incomes of the poorest, and that is why we are increasing the personal allowance, reducing tax paid by the basic taxpayer by £350, lifting 2 million people out of tax altogether. It is why we are supporting our young people through the recovery. I agree very much with the noble Lord, Lord Borrie, on the importance of this. It is why we are providing more apprenticeship places than any previous Government. Four hundred and fifty thousand apprenticeships were started in 2010-11—a record in modern times. I am grateful to my noble friend Lord Addington for understanding that we are making progress in this area but that we need to address quality issues—it is not merely a numbers game. It is why we are launching a new £1 billion Youth Contract, supporting up to half a million young people into work, learning their trade, and equipping them for their future career. As John Cridland, Director-General of the CBI has said, it is a scheme that strikes at the “scourge of youth unemployment”.
In conclusion, this is a bold programme for economic reform. It is a vision to return the country to prosperity, tackling the crippling legacy of debt, restoring our competitiveness, boosting private sector growth, investing in our infrastructure and supporting families and young and vulnerable people as we recover from Labour’s economic disaster. As we have seen today, the Opposition have no credible response to the economic challenges that the country faces. Indeed, I have heard no response at all today. Whereas they borrowed their way into trouble, under the coalition we will earn our way out of it.
Banking: Lloyds and RBS Shares
Lord Skidelsky Excerpts(12 years, 10 months ago)
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Lord Sassoon
On the one hand, I might say to my noble friend that sometimes the old ideas are the best ones and it is good to dust them off. I recognise that the idea of free distribution of shares is not new but it is perfectly serious. However, the difficulties that my noble friend rightly puts up and some of the questioning from the noble Lod, Lord Barnett, are issues that must be properly considered.
Lord Skidelsky
My Lords, noble Lords will be aware that the Government have promised to set up a green bank with a capital of £3 billion. Does the noble Lord agree that a more constructive version of the Deputy Prime Minister’s suggestion might be to sell the shares in Lloyds TSB and RBS, as convenient, and use part of the cash thus raised to increase the capitalisation of the green bank? If in addition the bank was allowed to borrow, could that not be a powerful instrument for economic recovery and long-term development by mobilising shares for which there is no present business use?
Lord Sassoon
My Lords, we have been very clear about our plans for capitalising the green investment bank, as the noble Lord says, with £3 billion. I see no particular link between that and the question of disposal of the bank shares.
Lord Peston
My Lords, bearing in mind the immense damage that the Government’s fiscal policy is doing to the economy, is not the explanation of the hare-brained scheme from the leader of the Liberal Democrats simply an attempt by the Government to distract the public’s attention from that damage?
Lord Sassoon
My Lords, I do not know what constitutes language that is not permissible in this House but I do not accept one iota of that analysis. The reason why we have an enormous monetary stimulus through the interest rates—last night, 10 years were at 3.33 per cent—is precisely because we are sticking to the plan to reduce the deficit. Otherwise nothing else would be possible in terms of growth for the economy. Indeed, one of the potential downsides of handing shares out free is that it would have a negative effect on the public finances, which is one of the issues that must be considered.
Economy: Growth
Lord Skidelsky Excerpts(13 years, 1 month ago)
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Lord Skidelsky
My Lords, I listened with great interest, as I am sure we all did, to the attractive maiden speech of the noble Lord, Lord Wood of Anfield. He comes to the House from a notable academic and policy-advising background—Magdalen College Oxford, then No. 10 Downing Street. He will bring to our deliberations a much needed blend of theoretical rigour, practical experience and social passion. We got a flavour of all three in his maiden speech and it is certain that they will give distinction to his future contributions to our debates. I join other noble Lords in thanking the noble Lord, Lord Hollick, for securing this debate.
My proposition is quite simple: there is too little demand in the economy for robust growth, and the Chancellor’s policy of taking demand out of the economy is exactly the reverse of what is needed. The squeeze in public spending seems bound to stay, but there are two ways in which we can try to increase growth in the economy despite the cuts.
The first, referred to by the noble Lords, Lord Hollick and Lord Newby, is to set up a national investment bank with a mandate to invest in green projects, transport infrastructure, social housing and export-oriented SMEs. A limited fiscal commitment of, say, £10 billion over four years would allow the new bank to spend, say, £100 billion over that period with conservative gearing, provided that it was allowed to borrow. That is the key point. The Chancellor has taken a small step in that direction by giving the go-ahead to the green bank, but that will be allowed to spend only £3 billion and it cannot borrow until 2015, and even then only if the Government’s debt reduction target is being met, which I doubt will be the case. The Chancellor has lost a big opportunity to scale up the original idea. A principal merit of my scheme is that a national investment bank could create a new class of bonds, long term but with a slightly higher yield than gilts, which would suit long-term investors. It would thus be a way of mobilising pension funds for investment in the long-term future of our economy.
My second point is that we need to rebalance the economy away from financial services towards high-value manufacturing and creative services, two things mentioned by previous speakers. The banks have a key role to play in this, but for that we need radical banking reform. That has scarcely been started. I therefore support Mervyn King’s championing of a British Glass-Steagall Act to split the banking system into commercial and investment banks. We need to avoid like the plague repeating the situation when the core commercial banks were so riddled with bad bets foisted on them by their investment-banking masters that they ran out of money to lend to households and businesses—the very people requiring support in a recession. That is quite apart from the enormous loans and debts with which they have saddled the taxpayer.
This is not just a matter of rebalancing British banking to serve the needs of the economy; it is a matter of rebalancing power in the economy to serve the needs of the British people. As things stand, the banks are the permanent government of the country, whichever party is in power. Unless we can break their power, I fear that all that issues from our political processes and what we are saying in this House today will be a lot of,
“sound and fury, signifying nothing”.
Ireland: Financial Assistance
Lord Skidelsky Excerpts(13 years, 5 months ago)
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Lord Skidelsky
My Lords, perhaps I may draw the Minister's attention to Wolfgang Münchau’s statement in today's Financial Times. He wrote:
“At a time of extreme fiscal tightening, moderate monetary tightening and weak global demand, I fail to see where Ireland will grow”.
Perhaps the Minister will explain how he sees that Ireland will grow, and how its programme of accelerated fiscal austerity as a condition of the bailout will encourage growth in the Irish economy.
Lord Sassoon
My Lords, I am not going to provide a commentary on the Irish economy. As I said when I repeated the Statement, Ireland will come forward with its own budget. It is for the Irish Government to explain their own economic policies in this difficult situation, and for the conditions of the loan to be appropriate to the circumstances.
Comprehensive Spending Review
Lord Skidelsky Excerpts(13 years, 6 months ago)
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Lord Skidelsky
My Lords, it is a sign of the jittery state we are in that a slower-than-expected slowdown in the rate of growth is hailed as strong evidence of recovery. Of course it is nothing of the sort. It marks the end of a period in which the economy has been supported by fiscal policy, with some help from the depreciation of sterling. The direction of fiscal policy has now been reversed. In their recent comprehensive spending review, the coalition Government confirmed that they will embark on cuts that will withdraw between 1.5 per cent and 2.5 per cent of nominal demand from the economy every year for the next four years.
The Government’s own independent watchdog, the Office for Budget Responsibility, has estimated that every 1 per cent decline in current government spending knocks 0.6 per cent off economic growth. I have never been able to understand how cutting the budget deficit in present circumstances is supposed to help employment and growth. The noble Lord, Lord Higgins, asked a very pertinent question: what do the Government consider to be the effect of the cuts on aggregate demand? Well, he did not get an answer. We are never told what the answer is. Instead, we are assured that private spending will miraculously spring to life on a wave of confidence induced by the Government’s very announcement of the deficit plan. Well, the most recent data show that in September bank lending posted its largest drop by more than £4 billion since January. If that is an indicator of the private sector’s new appetite for spending, I must remain sceptical about the newly fashionable doctrine of contractionary fiscal expansion, as it is known; the idea that if you contract the budget deficit, the economy will expand.
The present policy bears the strong personal imprint of the Chancellor. His rhetoric prepared the ground for it; he implemented it; and his political future depends on its success. Mr Osborne is not a reluctant cutter; he is an enthusiastic cutter; he is a conviction cutter. Normally I applaud conviction politics. It is rare enough for a politician to have convictions. But it is a great shame that the Chancellor’s convictions are so little-rooted in theory or in experience.
“Even a modest dose of Keynesian spending—say, increasing it by an additional 1 per cent of GDP—is a cruise missile aimed at the heart of a recovery”,
the Chancellor said in October 2008, barely a month after the collapse of Lehman Brothers, with the global economy going into a tailspin. No wonder Vince Cable said at the time:
“George Osborne is clearly way out of his depth”.
I wonder what Vince Cable thinks now. Mr Osborne is clearly a man of ability and determination, but I have to say in all seriousness that in his present position he is a menace to the future of the economy.
The Chancellor believes that any stimulus that needs doing should be done by monetary policy. In present circumstances, that means quantitative easing, or printing money. I do not accept the argument that the last quarter’s figures make this less likely. What matters for monetary policy is the state of the economy in six months’ time, not six months ago. So I expect that in due course the Bank of England will follow the Federal Reserve Board and probably Japan’s central bank down this path. The question is: will it work?
We have the experience of last year to go by. Between March 2009 and February 2010, the Bank of England injected £200 billion of liquidity into the economy. Over the year of quantitative easing, reserve balances at the banks quadrupled but the quantity of bank lending hardly budged. The same story is told by the money supply figures. In the years leading up to the crisis, M4—the Government’s preferred measure of broad money, including bank and building society deposits—grew consistently between 6 and 9 per cent year on year. However, in the past 12 months, M4 has grown at only 1 per cent and M4 lending has fallen by 0.7 per cent, the weakest number since records began in 1998. What has happened is that the “money multiplier”—the ratio of money supply to monetary base—has continued to fall as banks absorb the influx of money into their reserves without increasing their lending.
The same story can be told in other areas. Quantitative easing failed to bring down long-term interest rates—the spread between the bank rate and the long rate hardly fell. Nor was there any evidence of the so-called wealth effect—the argument that firms use quantitative easing to buy assets and the rising asset prices enable them to raise money by issuing new shares and bonds. There was indeed a rally in the stock market in 2009 but this was accompanied by a sharp decline in company flotations. Paper wealth went up but there was no effect on corporate issues, investment and activity as in the quantitative easing storyline.
The failure of quantitative easing should come as no surprise to a Keynesian. As Keynes said, if money is the drink which stimulates the system to activity,
“there’s many a slip twixt cup and lip”.
Quantitative easing is simply the expression of the monetarist view that, if you increase liquidity, money GDP will rise proportionately after a short lag. However, it is not the printing of money that causes GDP to rise but the spending of money, and the spending of money depends not on the quantity of bank reserves but on the willingness of the private sector to borrow and the willingness of banks to lend at rates of interest at which they can borrow. However many trillions of dollars or pounds Governments pump into the economy, this will not stimulate borrowing or lending if consumer demand is not there.
Ministers are constantly exhorting banks to lend. Banks say that there are no borrowers, by which they mean borrowers at the going interest rate. However, here is a suggestion for overcoming this blockage which is consistent with the deficit reduction programme. The Government should set up a national investment bank, which they would capitalise and mandate to spend £X billion a year on investment projects at interest rates low enough to fulfil the investment mandate. We are already promised a tiny prototype of this in the proposed green investment bank. Candidates for such investment would be infrastructure projects such as the high-speed rail link mentioned by the noble Lord, road building and repairs, house construction by local authorities, or projects to do with carbon emissions—insulating houses, solar panels and so forth. Lending by the investment bank would not affect the deficit and so would not spoil Mr Osborne’s austerity story. True enough, subsidised interest rates imply a lower expected return on equity than from current lending, but a lower return is still better than no return, which is what idle capital now earns.
There may be better ways but the goal is clear: to unblock the channel of spending when orthodox fiscal and monetary policy is, for one reason or another, disabled. Unless we succeed in doing that, we will be doomed to years of interminable recession.